-----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, IcY4Lvh8o8TIl5mC7kjEfjAqVLPoIUiMOrjRk5ObdQ/qZKXrspOvmsUzSmyazlXM /WNz2zLysH0eaokNGXxMHg== 0000950123-98-003032.txt : 19980331 0000950123-98-003032.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950123-98-003032 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANOVER DIRECT INC CENTRAL INDEX KEY: 0000320333 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 138053260 STATE OF INCORPORATION: NV FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08056 FILM NUMBER: 98577101 BUSINESS ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 BUSINESS PHONE: 2018653800 MAIL ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 FORMER COMPANY: FORMER CONFORMED NAME: HORN & HARDART CO /NV/ DATE OF NAME CHANGE: 19920703 10-K405 1 HANOVER DIRECT, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997 COMMISSION FILE NUMBER 1-12082 HANOVER DIRECT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-0853260 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 1500 HARBOR BOULEVARD WEEHAWKEN, NEW JERSEY 07087 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (201) 863-7300) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED COMMON STOCK, $.66-2/3 PAR VALUE AMERICAN STOCK EXCHANGE Securities to be registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 20, 1998, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $193,819,807 (based on the closing price of the Common Stock on the American Stock Exchange on March 20, 1998). As of March 20, 1998, the registrant had 203,800,569 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Company's definitive proxy statement to be filed by the Company pursuant to Regulation 14A is incorporated into items 10, 11, 12 and 13 of Part III of this Form 10-K. 2 P A R T I ITEM 1. BUSINESS GENERAL Hanover Direct, Inc. (the "Company") is a leading specialty direct marketer with a diverse branded portfolio of home fashions, general merchandise, men's and women's apparel and gift catalogs delivered via direct mail and electronic commerce. 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 made by management of each of six brand groups -- Home Fashions - Mid-Market brands, Home Fashions-Upscale brands, General Merchandise brands, Women's Apparel brands, Men's Apparel brands and Gift brand groups each consisting of one or more catalog titles. All of these brand groups have continued to utilize the Company's common systems platform and central purchasing, telemarketing, fulfillment, distribution and administrative functions. The Company's Home Fashions-Mid-Market brands includes Domestications(R), a leading specialty home fashions catalog. The Home Fashions-Upscale brands includes The Company Store(R), a direct marketer of upscale home fashions focusing on high quality down comforters and other down and related products for the home including sheets and towels, and Kitchen & Home(R), an upscale kitchen and home product catalog. The General Merchandise brands 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 brands 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 brands 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 Gift brands includes Gump's By Mail(R), a leading upscale catalog of jewelry and luxury gifts, and Gump's, the well known retail store based in San Francisco. The Company reviews its portfolio of catalogs as well as new opportunities to acquire or develop catalogs from time to time. No catalogs were discontinued during the 1996 or 1997 fiscal years. During 1997, the Company mailed approximately 244 million catalogs. The Company maintains a proprietary customer list currently containing approximately 12 million names of customers (down from approximately 14 million names in 1996 and 18 million in 1995) who have made purchases from at least one of the Company's catalogs within the past 36 months. Over 4 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 (down from approximately 6 million names in 1996 and 7 million in 1995). 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. Actual cost savings under this plan were in excess of $60 million in 1997. 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. Richemont Finance S.A. ("Richemont Finance"), a Luxembourg public company, owns approximately 20.3% of the Company's common stock on a fully diluted basis. Richemont Finance is an affiliate of Compagnie Financiere Richemont, A.G., a Swiss public company engaged in luxury goods, tobacco and other business ("Richemont"). NAR Group Limited, a British Virgin Islands corporation (together with its affiliates, "NAR"), owns approximately 46.5% 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 Richemont. The Company is a successor in interest to The 3 Horn & Hardart Company, a restaurant company founded in 1911, and Hanover House Industries, Inc., founded in 1934. 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 brand group 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, Tweeds, Austad's, The Company Store and Improvements, to further enhance the brand identity of the catalogs. The Company's specialty catalogs typically range in size from 32 to 132 pages with six to 12 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 following is a description of the Company's core catalogs in each of the Company's six brand groups: Home Fashions - Mid-Market Brands: Domestications is a leading specialty home fashions catalog and a fashion decorating source book for today's value-oriented and style-conscious consumer. Domestications features sheets, towels, comforters, tablecloths, draperies and other items for the home, and offers coordinated decorating ideas for the home at value prices. Home Fashions-Upscale Brands: The Company Store is an upscale direct marketer of home fashions focusing on high quality down comforters and other down and related products for the home including sheets and towels. The Company Store also features designer brand name sheets, towels and other bedding accessories. Kitchen & Home features distinctive and highly functional kitchen and home products for entertaining and decorating. General Merchandise Brands: Improvements is a leading do-it-yourself home improvement catalog featuring home improvement accessories. The Safety Zone is a direct marketer of safety, protection and prevention products. Colonial Garden Kitchens features work saving and lifestyle enhancing items for the kitchen and home. Women's Apparel Brands: Silhouettes is a leading fashion authority for larger sized women specializing in casual, career and special occasion apparel for this customer's lifestyle needs. Tweeds is a European inspired women's fashion catalog featuring stylish, updated apparel uniquely designed specifically for the Tweeds customer, emphasizing the varied busy lifestyle. Men's Apparel Brands: 2 4 International Male is an authority for unique men's fashion with an international flair. Undergear is a leader in activewear, workout wear and fashion underwear for men. Austad's is a direct marketer of golf equipment and related apparel and accessories. Gift Brands: Gump's By Mail is a leading upscale catalog marketer of jewelry, luxury gifts, specialized housewares and other unique items. Gump's is the well-known San Francisco retailer. MARKETING AND DATABASE MANAGEMENT The Company maintains a proprietary customer list currently containing approximately 12 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. The Company utilizes modeling and 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 for the reduction of annual operating costs, the Company reduced catalog circulation in 1997 in an effort to 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 lists, the lists are edited using statistical segmentation tools to enhance their probable performance. Other sources of new customers include not only traditional print space advertisements and promotional inserts in outbound merchandise packages, but also Internet Web site space advertisements for catalog requests, placed on both the Company's proprietary sites and third party sites, and visitors to the Company's proprietary Internet Web sites for all of its catalogs, as well as third party Internet Web sites on which some catalogs advertise their merchandise. In addition, many of the catalogs participate in a consortium database of catalog buyers whereby new customers are obtained by the periodic submission of desired customer buying behavior and interests to the consortium and the subsequent rental of non-duplicative names from the consortium. The Company maintains an active presence on the Internet by having a commerce-enabled Web site for each one of its catalogs which offers its merchandise, takes catalog requests, and accepts orders for not only Web site merchandise but also from any print catalog already mailed. The Company also utilizes commissionable marketing opportunities available to it by posting its catalog merchandise and accepting orders on third party Web sites. The Company is about to enter the evolving field of direct response television marketing, having taken advantage of the opportunity to offer a particular catalog's merchandise on a 24-hour television shopping channel and long-form television programming. In addition, the Company has entered into an agreement to post some of its catalogs' merchandise offerings on electronic marketing channels which are not directed to residences but to airport lounges, hotel room and airplane electronic networks. 3 5 TELEMARKETING The Company receives approximately 80% of its orders through its toll-free telephone service which offers customer access seven days per week, 24 hours per day. The Company has created a telephone network to link its three primary telemarketing facilities in Hanover, Pennsylvania, LaCrosse, Wisconsin and San Diego, California. 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. The Company handled approximately 11 million telephone order and customer service calls in 1997. As part of its December 1996 plan to reduce operating costs, the Company shut down its telemarketing capacity in its Roanoke, Virginia facility in February 1997. In the first quarter of 1997, the Company entered into a call center services agreement with MCI Communications Corp. which resulted in significant cost savings for such services. See "Purchasing." The Company trains its telemarketing service representatives to be courteous, efficient and knowledgeable about the Company's products. Telemarketing service representatives generally receive 40 hours of training in selling products, services, systems and communication skills through simulated as well as actual phone calls. A substantial portion of the evaluation of telemarketing service representatives' performance is based on how well the representative meets customer service standards. While primarily trained with product knowledge to serve customers of one or more specific catalogs, telemarketing service representatives also receive cross-training that enables them to take overflow calls from other catalogs. The Company utilizes customer surveys as an important measure of customer satisfaction. DISTRIBUTION The Company presently operates three distribution centers in three principal locations: one in Roanoke, Virginia for home fashions, general merchandise 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 8.6 million packages in 1997. As part of its plan to reduce annual operating costs, the Company developed a plan to consolidate its apparel operations in Roanoke, VA and its Hanover, PA fulfillment operations into its home fashions distribution center in Roanoke, VA. The apparel operations and two of the six catalogs located in Hanover, PA were consolidated into the Roanoke home fashions distribution center in the second half of 1997. The other four catalogs are expected to be consolidated into the Roanoke home fashions distribution center by the end of 1998. 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 14% of the Company's net revenues in 1997. 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 USPS announced a proposed increase in mailing rates that will take effect in mid-1998. The Company is currently investigating ways to mitigate the effects of these expected increases. If the Company does not successfully develop any such plan, it may have a material adverse effect on its results of operations. The Company also utilizes United Parcel Service, Federal Express and other delivery services. On August 4, 1997, United Parcel Service went on strike for 16 days. This strike did not have a material effect on the Company's ability to conduct its business during this time. United Parcel Service raised its rates for domestic deliveries by 3.6% for ground rates and 3.3% for air rates effective February 7, 1998. The Company expects its actual United Parcel Service costs to exceed the stated percentage increases and is investigating alternatives to minimize this impact. The Company does not expect the increase to have a material adverse effect on its results of operations. 4 6 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 independently. Major goods and services used by the Company are purchased or leased from selected suppliers by its central buying staff. These goods and services include: paper, catalog printing and printing related services such as order forms and color separations, communication systems including telephone time and switching devices, packaging materials, expedited delivery services, computers and associated network software and hardware. The Company's telephone telemarketing costs (both inbound and outbound calls) are typically contracted for a three-year period. In the first quarter of 1997, the Company entered into a three-year call center services agreement with MCI Communications Corp. under which it obtained a material reduction in the rate which it had been paying pursuant to its then current telecommunications contract and savings with respect to certain database services which are provided to it. In that connection, the Company agreed to guarantee certain levels of call volume and the Company anticipates it will meet such targets for the first performance period. See "Telemarketing." 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 1997, paper costs approximated 6% of the Company's net revenues. The Company experienced substantial paper price increases in 1997. In spite of these increased paper prices, the Company was able to reduce its paper costs by 2% as a percentage of net revenues versus 1996 as a result of more targeted circulation strategies. The Company anticipates that any paper price increase in 1998 will not have a significant impact on its cost structure. MANAGEMENT INFORMATION SYSTEMS The Company has successfully converted all catalogs to the integrated mail order and catalog system operating on the mid-range computer systems. Additionally, there is only one remaining fulfillment center to be migrated to the newly developed warehouse management system. The migration of the Company's business applications to mid-range computers was an important part of the Company's overall systems plan which defined the long-term systems and computing strategy for the Company. The Company modified and installed, 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 Company is continuing to devote resources to improving its systems. The new software system is an on-line, real-time system which includes order processing, fulfillment, inventory management, list management and reporting. The software 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. Two catalogs were brought onto the Company's common systems platform in 1994. The Company brought eight additional catalogs onto the Company's common systems platform in 1995, one in 1996 and the balance of the catalogs onto the Company's common systems platform in 1997. As of December 27, 1997, the Company had invested approximately $18.1 million of capitalized costs in such systems and anticipates capital expenditures of approximately $.5 million to complete the conversion. Based on its preliminary study, the Company does not expect to have significant expenditures to modify its computer information systems enabling proper processing of transactions relating to the year 2000 and beyond. The Company continues to evaluate appropriate courses of corrective action, including replacement of certain systems. The Company does not expect the amounts required to be expensed over the next two years related to the year 2000 modifications to have a material effect on its 5 7 financial position or results of operations. The Company is attempting to contact vendors and others on whom it relies to assure that their systems will be timely converted. However, there can be no assurance that the systems of other companies on which the Company's systems rely also will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems. CREDIT MANAGEMENT Several of the Company's catalogs, including Domestications, International Male and Gump's by Mail, offer their own private label credit cards. 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. The Company is required to maintain certain financial covenants related to this agreement which the Company failed to maintain, but has received a waiver for the event of default at December 27, 1997. INVENTORY MANAGEMENT The Company's inventory management strategy is designed to maintain inventory levels that provide optimum in-stock positions while maximizing inventory turnover rates and minimizing the amount of unsold merchandise at the end of each season. The Company manages inventory levels by monitoring sales and fashion trends, making purchasing adjustments as necessary and by promotional sales. Additionally, the Company sells excess inventory in its special sale catalogs, its outlet stores and to jobbers. 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 1997. 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. 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 customers of the discontinued Sears catalog. The Sears Agreement was terminated by Sears in December 1996 and no catalogs were mailed by the Company in 1997. The termination of the Sears Agreement did not have a material impact on the Company's earnings for 1997. Warrants to purchase Common Stock in 1998 and 1999 conditional upon the business meeting certain criteria will not be exercisable due to the termination of the Sears Agreement. 6 8 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 other than certain receivables. At December 27, 1997, the Company had no outstanding borrowings under the revolving credit facility (excluding approximately $3.0 million of documentary and standby letters of credit) and approximately $7.9 million outstanding under the term loans, which were originally due November 1997 and were extended to November 1998. Remaining availability under the Congress facility was $29.0 million at December 27, 1997. Under the Credit Facility, the Company is required to comply with certain restrictive debt covenants including maintaining minimum levels of net worth and working capital. In December 1996, the minimum net worth covenant was lowered to $70 million. On March 26, 1997, Congress agreed to waive certain defaults and further reduce the working capital and net worth covenants for fiscal 1997 as follows:
WORKING CAPITAL (AS DEFINED) IN THE CREDIT FACILITY AMOUNT - --------------- -------------- January through May 1997 $ (5,000,000) June through November 1997 $ 0 December 1997 and thereafter $ (10,000,000)
NET WORTH AMOUNT - --------- -------------- January through May 1997 $ 14,000,000 June 1997 and thereafter $ 21,500,000
Congress also agreed at that time to amend the covenant relating to material adverse changes so that measurement thereunder would commence from December 28, 1996. The amount that can be borrowed under the Congress Facility is based on percentages of acceptable inventory and accounts receivable as reported to Congress from time to time. Congress began lowering the advance rate for inventories in November 1996 and continued to reduce it until a new inventory appraisal was completed in March 1997. The advance rate remained the same through the balance of 1997. In November 1997, a new inventory appraisal was completed and negotiations for the refinancing of the Revolving Credit Facility commenced. Under the terms of the re-negotiated Credit Facility, effective March 1998, the inventory advance rate will be increased at this time and the facility will be extended to January 31, 2001. In September 1996, IMR (an affiliate of NAR) loaned the Company $10 million as evidenced by a subordinated promissory note in the amount of $10 million (the "IMR Promissory Note"). Such loan bore interest at prime plus 1 1/2%, was due on November 14, 1996 and, if it was not repaid before May 15, 1997, was 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 was subordinate to the Credit Facility and excluded from the working capital covenant calculation. NAR applied this $10 million note to acquire $10 million of the Company's Common Stock in the 1997 Rights Offering (see "1997 Rights Offering"). In December 1996, the Company finalized its agreement (the "Reimbursement Agreement") with Richemont Finance S.A. ("Richemont") that provided the Company with up to approximately $28 million of letters of credit through Swiss Bank Corporation, New York Branch. The three letters of credit, which were to expire on February 18, 1998, carry an interest rate of 3.5% above the prime rate, currently 12.0%, payable to Richemont quarterly on amounts drawn under the letters of credit. The Company also agreed to pay a facility fee equal to 5% of the principal amount of the letters of credit as well as all other fees incurred in connection with providing the facility. 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 7 9 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 in place on December 19, 1996. In November 1997, Richemont Finance definitively agreed to extend its guarantee under the Reimbursement Agreement to March 30, 1999. As consideration for this transaction, the Company agreed to pay to Richemont Finance a fee of 4% of the principal amount of each letter of credit aggregating $1,073,483.28. The extension required the approval of Congress and Swiss Bank which approvals were obtained in February 1998, and was subject to certain other conditions. On February 18, 1998, the extension of the Richemont guarantee and the closing of this transaction were consummated. Accordingly, the expiration dates of two of the letters of credit were extended through March 30, 1999, and the letters of credit were amended to reflect the assignment of all obligations thereon from Swiss Bank, New York Branch to Swiss Bank, Stamford Branch. A substitute letter of credit having an expiration date of March 30, 1999 was issued to replace the third letter of credit. 1997 Rights Offering. The Company commenced a $50 million rights offering (the "1997 Rights Offering") on April 29, 1997. Holders of record of the Company's Common Stock, par value $.66-2/3 per share (the "Common Stock"), and Series B Convertible Additional Preferred Stock, par value $.01 and stated value $10.00 per share (the "Series B Preferred"), as of April 28, 1997, the record date, were eligible to participate in the 1997 Rights Offering. The rights were exercisable at a price of $.90 per share. Shareholders received .38 rights for each share of Common Stock held and .57 rights for each share of Series B Preferred held as of the record date. The 1997 Rights Offering expired on May 30, 1997, with 55,654,623 rights to purchase shares exercised, and it closed on June 6, 1997. Richemont Finance entered into a standby purchase agreement (the "Richemont Standby Purchase Agreement") to purchase all shares not subscribed to by shareholders of record at the subscription price. Richemont Finance purchased 40,687,970 shares in the 1997 Rights Offering and, as a result, then owned approximately 20.3% of the Company. The Company paid in cash, from the proceeds of the 1997 Rights Offering, to Richemont Finance on the closing date approximately $1.8 million which represented an amount equal to 1% of the aggregate offering price of the aggregate number of shares issuable upon closing of the 1997 Rights Offering other than with respect to the shares of Common Stock held by NAR or its affiliates plus an amount equal to one-half of one percent of the aggregate number of shares acquired by NAR upon exercise of their rights (Standby Fee) plus an amount equal to 4% of the aggregate offering price in respect to all unsubscribed shares (Take-Up Fee). In connection with the entering of the Richemont Standby Purchase Agreement, the Company named two Richemont representatives, Messrs. Jan P. du Plessis and Howard M.S. Tanner, to its Board of Directors (the "Board") and nominated a third representative to become a member of the Board, Mr. Shailesh J. Mehta, at the 1997 Annual Meeting of Shareholders. Messrs. du Plessis and Tanner filled positions vacated by the resignations of Geraldine Stutz and Jeffery R. Laikind. Mr. Mehta was nominated and elected to the Board in 1997 to fill a newly created Board position. In addition, Messrs. du Plessis and Tanner were named to the Audit, Executive and Stock Option & Executive Compensation Committees of the Board. On April 26, 1997, NAR irrevocably agreed with the Company, subject to and upon the consummation of the 1997 Rights Offering, to exercise certain of the rights distributed to it for the purchase of 11,111,111 shares of Common Stock that had an aggregate purchase price of approximately $10 million. NAR agreed to pay for and the Company agreed to accept as payment for the exercise of such rights the surrender by NAR of the principal amount due under a subordinated promissory note dated September 1996 due by the Company to Intercontinental Mining & Resources Incorporated, an affiliate of NAR ("IMR"), in the principal amount of $10 million the ("IMR Promissory Note") and cancellation thereof. 8 10 In order to facilitate vendor shipments and to permit the commencement of the Company's plan to consolidate certain of its warehouse facilities, Richemont Finance advanced $30 million as of April 23, 1997 against its commitment to purchase all of the unsubscribed shares pursuant to the Richemont Standby Purchase Agreement. The Company then executed a subordinated promissory note in the amount of $30 million to evidence this indebtedness (the "Richemont Promissory Note") which was repaid out of the proceeds of the 1997 Rights Offering. The Company issued 55,654,623 shares as a result of the 1997 Rights Offering which generated gross cash proceeds of approximately $40 million (after giving effect to the acquisition and exercise by NAR of rights having an aggregate purchase price of $10 million which were paid for by the surrender and cancellation of the IMR Promissory Note). The proceeds of the 1997 Rights Offering were used by the Company: (i) to repay the $30 million principal amount outstanding under the Richemont Promissory Note, and (ii) for working capital and general corporate purposes including repayment of amounts outstanding under the Credit Facility with Congress. Additional Investments. In November 1997, SMALLCAP World Fund, Inc. ("SMALLCAP"), a mutual fund and substantial investor in the Company, agreed to purchase 3.7 million shares of the Company's Common Stock at $1.41 per share for an aggregate purchase price of approximately $5.2 million in a private placement. This transaction was consummated on November 6, 1997. These shares are restricted and have not been registered under the Securities Act of 1933, as amended. The Company also entered into a registration rights agreement with SMALLCAP that calls for the Company to use its best efforts to effect the registration of such shares as soon as practicable after April 1, 1998 and has granted certain piggyback registration rights. The Company may delay such registration for a period of not more that ninety calendar days if, in the reasonable judgment of the Board, such filing is not in the best interests of the Company at such time. Such registration is to be effected by preparation and filing by the Company with the Securities and Exchange Commission of a registration statement on Form S-3. The Company is to pay all expenses in connection with the registration of such shares. EMPLOYEES The Company currently employs approximately 2,700 persons on a full time basis and approximately 400 persons on a part time basis. In accordance with a cost savings plan announced in December 1996, the Company eliminated 400 positions in 1997. Approximately 200 employees at one of the Company's subsidiaries are represented by a union. The Company believes its relations with its employees are good. SEASONALITY The Company has experienced substantially increased sales in the fourth quarter of each year as compared to the first three quarters, due in part to the Company mailing more catalogs in the second part of the year and decreasing apparel sales as a percentage of total sales. COMPETITION The Company believes that the principal bases upon which it competes are quality, value, service, product offerings, catalog design, convenience and efficiency. The Company's catalogs compete with other mail order catalogs, both specialty and general, and retail stores, including department stores, specialty stores and discount stores. Competitors also exist in each of the Company's catalog specialty areas of women's apparel, home fashions, general merchandise, men's apparel and gifts. A number of the Company's competitors have substantially greater financial, distribution and marketing resources than the Company. The Company is maintaining an active commerce-enabled Internet Web site presence for all of its catalogs. A substantial number of each of the Company's catalog competitors maintain an active commerce-enabled Internet Web site presence as well. Sales from the Internet for 9 11 Web site merchandisers have grown in 1997. The Company believes strongly in the future of the Internet and online commerce and has adjusted its marketing focus, resources, and manpower to that end. However, there can be no assurance that the Company will be successful in these endeavors. 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. 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. ITEM 2. PROPERTIES The Company's corporate headquarters are located in a modern 85,000 square-foot office in Weehawken, New Jersey. The facility houses merchandising and marketing personnel, catalog production personnel and corporate and administrative offices. The Weehawken facility is leased for a 15-year term expiring in 2005. The Company has subleased a portion of these premises effective April 1998 as part of its plan to further reduce costs. In addition to this office facility, the Company leases administrative facilities for men's apparel in San Diego, California, maintains 15,000 square feet of administrative facilities for the Gump's retail business in its store facility in San Francisco, California discussed below and maintains administrative facilities for the Improvements business in Beachwood, Ohio. The Company currently operates three warehouses and fulfillment facilities in three principal locations: one in Roanoke, Virginia for home fashions, apparel and general merchandise, one in Hanover, Pennsylvania for hardgoods, including sporting goods and giftware, and one in LaCrosse, Wisconsin for upscale home fashions. The Company also leased a warehouse facility of 433,000 square feet in Hanover, Pennsylvania which lease expired in May 1997. In Roanoke, Virginia, the Company owns a 530,000 square-foot home fashions distribution center. The facility became operational in the second half of 1995 and handled all of Domestications' fulfillment processing. As a result of the Company's cost reduction plan, the Company transferred during 1997 the fulfillment functions for two of the six catalogs previously fulfilled from the Hanover, Pennsylvania distribution facility as well as all the fulfillment functions handled by the now closed apparel distribution facility located in Roanoke, Virginia to the home fashions distribution center in Roanoke, Virginia. See "Distribution." The apparel distribution center in Roanoke, Virginia is a 175,000 square-foot facility which the Company leases from a partnership in which it owns a 50% interest. The Company and the partnership are currently looking for a sublessee for this now empty facility. In Hanover, Pennsylvania, the Company owns a distribution center of approximately 265,000 square feet which handles hardgoods, including sporting goods and giftware. Two of the six catalogs previously serviced by such facility were consolidated with and into the home fashions distribution center in Roanoke, Virginia in 1997 and the remaining four catalogs are expected to be consolidated with and into the Roanoke home fashions distribution center by the end of 1998. During 1998, the Company intends to use the 10 12 distribution center for third-party fulfillment and processing. The Company currently intends to vacate this facility in fiscal 1998. In LaCrosse, Wisconsin, the Company leases a warehouse and fulfillment center of 185,000 square feet under a short-term lease. The Company also owns a 150,000 square-foot home fashions manufacturing and assembly facility and a 58,000 square-foot telemarketing and customer service facility in LaCrosse, Wisconsin. In addition to the LaCrosse, Wisconsin facility, the Company utilizes portions of facilities in San Diego, California and Hanover, Pennsylvania as telemarketing and customer service facilities. Specifically, in Hanover, Pennsylvania, the Company leases a telemarketing and administrative office facility of 123,000 square feet. Renewal terms on the telemarketing center extend through 2009. The Company's principal retail operations consist of the Gump's retail store, which occupies approximately 38,600 square feet in a building in downtown San Francisco, California which is leased pursuant to a 15-year lease expiring in the year 2010 with two successive five-year renewal options. A portion of the Gump's facility, consisting of approximately 30,000 square feet, is subleased and a portion, consisting of approximately 18,800 square feet, is used for administrative offices. The Company also operates and leases 10 other retail and outlet stores at various locations. The Company leases premises in Edgewater, New Jersey which it vacated in 1995. The Company has sublet a portion of the Edgewater facility and is actively seeking to sub-lease the remainder. The Company sold its interest in a Cleveland facility in May 1997. 11 13
APPROXIMATE LOCATION(a) STATUS SQUARE FOOTAGE - -------------------------------------- ------------ -------------- WAREHOUSE AND FULFILLMENT CENTERS: Roanoke, VA Owned 530,000 Hanover, PA Leased 433,000(b) Hanover, PA Leased/Owned 265,000 LaCrosse, WI Leased 185,000 CORPORATE AND ADMINISTRATIVE OFFICES: Weehawken, NJ Leased 85,000(c) San Diego, CA Leased 30,000(d) San Francisco, CA Leased 18,800(e) Beachwood, OH Leased 7,740 TELEMARKETING AND CUSTOMER SERVICE: Hanover, PA Leased 123,000 LaCrosse, WI Owned 58,000 San Diego, CA Leased 30,000(d) RETAIL STORES: Carlsbad, CA Leased 3,455 San Francisco, CA Leased 38,600(e) San Diego, CA Leased 3,800 West Hollywood, CA Leased 3,600 Tysons Corner, VA Leased 1,700 Mayfield Heights, OH Leased 3,750 Hanover, PA Leased 24,000 Kenosha, WI Leased 4,708 LaCrosse, WI Leased 13,326 Madison, WI Leased 5,206 Oshkosh, WI Leased 2,000 MANUFACTURING AND ASSEMBLY: LaCrosse, WI Owned 150,000
(a) Does not include the leased Roanoke, Virginia facility (closed 1997 in conjunction with the consolidation of the Company's warehouse facilities) or Edgewater, New Jersey (closed 1995). (b) Lease ended in May 1997. (c) After sublease of approximately 20,000 square feet to an outside tenant effective April, 1998, approximate square footage will be reduced to 65,000 square feet of office space. (d) Telemarketing and corporate/administrative functions are all located and performed at the one facility. Square footage stated represents the entire facility. (e) Retail and office space are all located at the one facility. Square footage stated represents allocations to corporate/administrative, retail and retail storage space. 12 14 ITEM 3. LEGAL PROCEEDINGS The Company is involved in various routine lawsuits of a nature which are deemed customary and incidental to its businesses. In the opinion of management, the ultimate disposition of such actions will not have a material adverse effect on the Company's financial position or results of operations. On August 14, 1996, People's Bank brought an action in United States District Court for the District of Connecticut, Civil Action No. 396CV01572, against the Company alleging breach of contract and requesting $20,000,000 in damages. The matter was settled in January 1998 by payment of $150,000 without admission of wrongdoing. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 15 P A R T II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is traded on the American Stock Exchange (Symbol: HNV). The following table sets forth, for the periods shown, the high and low sale prices of the Common Stock reported on the American Stock Exchange Composite Tape.
HIGH LOW -------- ------- 1996 First Quarter $1-13/16 $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 1-1/8 5/8 Third Quarter 1-11/16 1-1/16 Fourth Quarter 3 1-1/4
The Company is restricted from paying dividends on its Common Stock or from acquiring its capital stock by certain debt covenants contained in agreements to which the Company is a party. As of March 11, 1998, there were approximately 4,440 holders of record of Common Stock. 14 16 ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------------------------------------------------------- The following table presents selected financial data for each of the years indicated: (in thousands, except share and per share data) 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Revenues $ 642,511 $ 768,884 $ 749,767 $ 700,314 $ 557,638 Special charges -- -- 1,563 36,724 (2,209) Depreciation and amortization 3,279 6,157 9,020 12,192 8,227 Operating (loss) income 19,076 15,975 (22,619) (94,497) (1,849) Interest expense, net 2,757 2,813 4,531 8,398 8,028 Income (loss) before extraordinary items 17,337 14,838 (28,153) (103,895) (10,876) Extraordinary items -- -- (1,837) (1,134) -- - -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) 17,337 14,838 (29,990) (105,029) (10,876) Preferred stock dividends (4,093) (135) (240) (225) (190) - -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common stockholders $ 13,244 $ 14,703 $ (30,230) $ (105,254) $ (11,066) - -------------------------------------------------------------------------------------------------------------------------------- EBITDA (earnings before interest, taxes, depreciation and amortization) $ 22,355 $ 22,132 $ (13,599) $ (82,305) $ 6,378 EBITDA before special charges $ 22,355 $ 22,132 $ (12,036) $ (45,581) $ 4,169 - -------------------------------------------------------------------------------------------------------------------------------- PER SHARE: Income (loss) before extraordinary items $ .17 $ .16 $ (.30) $ (.93) $ (.06) Extraordinary items -- -- (.02) (.01) -- - -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) - basic and diluted $ .17 $ .16 $ (.32) $ (.94) $ (.06) - -------------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding Basic 75,625,330 93,285,190 93,029,816 111,441,247 176,621,080 Diluted 77,064,131 93,285,190 93,029,816 111,441,247 176,621,080 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA (END OF PERIOD): Working capital (deficit) $ 25,180 $ 58,501 $ 28,774 $ (1,507) $ 47,570 Total assets 188,838 262,246 279,009 220,827 230,299 Total debt 36,160 37,915 62,802 65,189 38,040 Shareholders' equity 45,868 109,725 87,210 31,740 75,551 - --------------------------------------------------------------------------------------------------------------------------------
There were no cash dividends declared on the Common Stock in any of the periods. See Notes to Consolidated Financial Statements. 15 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the fiscal years indicated, the percentage relationship to revenues of certain items in the Company's Consolidated Statements of Income (Loss):
- -------------------------------------------------------------------------------- Fiscal Year 1995 1996 1997 - -------------------------------------------------------------------------------- Revenues 100.0% 100.0% 100.0% Cost of sales and operating expenses 64.5 68.4 64.2 Write-down of inventory of discontinued catalogs 1.1 .2 -- Special charges .3 5.2 (.4) Selling expenses 27.4 27.9 25.3 General and administrative expenses 8.5 10.1 9.7 Depreciation and amortization 1.2 1.7 1.5 Loss from operations (3.0) (13.5) (.3) Interest expense, net .6 1.2 1.4 Net (loss) (4.0)% (15.0)% (2.0)% - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS 1997 Compared with 1996 Net (Loss). The Company reported a net loss of $10.9 million or $(.06) per common share, compared with a net loss before an extraordinary item of $104 million, or ($.93) per common share, for 1996. The 1996 extraordinary item of $1.1 million, or ($.01) per common share relates to the early extinguishment of debt. After giving effect to the extraordinary item, the net loss for 1996 was $105 million, or ($.94) per common share. Per share amounts are expressed after deducting preferred dividends of $.2 million in both 1997 and 1996. The weighted average number of shares outstanding was 176,621,080 for the year ended December 27, 1997 compared to 111,441,247 in 1996. The increase in weighted average shares outstanding is due to two $50 million rights offerings which were completed in August 1996 and June 1997, respectively. The improved operating results in fiscal 1997 are attributed to (i) reduced circulation to prospective customers and to customers other than core customers, which resulted in decreased catalog costs, (ii) increased circulation to core customers, focusing on core products, which resulted in lower selling expenses relative to sales, (iii) reduced costs of merchandise as the Company began to realize improvements in its product offerings, (iv) reduced fixed overhead costs due to the planned relocation and consolidation of facilities, as well as the Company's cost reduction plan implemented in 1997, (v) improved liquidity, reduced backorder levels and improved inventory in-stock positions due to the Company's 1997 Rights Offering, all of which contributed to operating efficiencies, and (vi) the reversal of a portion of certain non-recurring charges accrued in the prior year. Revenues. Revenues decreased in 1997 to $557.6 million from $700.3 million in 1996, primarily as a result of a decrease in sales for discontinued catalogs of $93.8 million. Revenues from continuing catalogs decreased $48.9 million to $548.6 million from $597.5 million for the prior year. The Company's revenues for 1997 were planned at reduced levels from 1996 due to the Company's business formula of reduced circulation, reduced prospecting for most catalogs and a concentrated focus on core customers with core products. Circulation of continuing catalogs decreased 7.9% to 243.8 million in 1997. Operating Costs and Expenses. Cost of sales and operating expenses, which include fulfillment and telemarketing costs, decreased by $121 million from 1996. This decrease was primarily the result of reduced merchandise costs of $91.2 million and other cost reductions of $29.8 million for telemarketing and fulfillment activities, which are attributable to the planned sales reduction for 1997, as well as savings created by the consolidation of telemarketing and fulfillment facilities during the year. In addition, on an overall basis, the Company's margins were enhanced by improved purchasing strategies and efficiencies attained through inventory management. Selling expenses decreased $53.6 million to $141.4 million from $195 million in 1996 as a result of the reduced circulation plan implemented in 1997. The Company experienced substantial paper price increases in 1997. In spite of these increased paper prices, the Company was able to reduce its paper costs by 2% as a percentage of net revenues versus 1996 as a result of more targeted circulation strategies. General and administrative expenses decreased $16.8 million to $53.8 million in 1997. This decrease has resulted from the Company's previously announced cost reduction plan. These savings have primarily been achieved from the reduced overhead structure resulting from the reorganization of management and operations that began at the end of 1996. The Company also experienced approximately $2.9 million of decreased costs and bad debt expense associated with its private label credit program as compared with 1996. In addition, general and administrative expenses were offset by $1.3 million of income recorded in 1997 as a result of asset distributions made to the Company relating to previously written-off investment securities. The operating results for 1997 include a $2.2 million benefit relating to the reversal of a portion of the restructuring charges that were recorded in 1996. The reversal relates primarily to the Company's decision to remain in its Weehawken corporate facility. Depreciation and amortization decreased $4.0 million to $8.2 million in 1997 as a result of the Company's decision to write-off certain intangible assets and close certain of its facilities at the end of the 1996 fiscal year. (Loss) from Operations. The Company's loss from operations decreased to $1.8 million in 1997 from a loss of $94.5 million in 1996. The Company's focus on building brands with a core customer base coupled with the cost savings programs implemented in 1997, as discussed above, have resulted in an improved operating margin. Interest Expense, Net. Interest expense, net decreased $.4 million to $8.0 million in 1997, which includes amortization on debt costs paid in prior years of $2.3 million. Throughout the 1997 year, the Company maintained lower debt levels than the prior year due to better management of its working capital. This improvement was partially offset by increased amortization of debt costs related to the Company's $26.9 million letter of credit facility. Income Taxes. The Company did not record a Federal income tax provision in 1997 or 1996 based on each years' net operating losses. The Company's state tax provision was $1.0 million in 1997 and 1996. Shareholders' Equity. The number of shares of Common Stock outstanding increased by 59,107,424 in 1997 due to shares issued in connection with the Company's 1997 Rights Offering, its equity and incentive plans, and other activities. At December 27, 1997, there were 203,755,322 shares of Common Stock outstanding compared to 144,647,898 shares of Common Stock outstanding at December 28, 1996. 16 18 1996 Compared with 1995 Net (Loss). The Company reported a net loss before extraor dinary items of $103.9 million, or $(.93) per share for the year ended December 28, 1996 compared with a net loss before extraordinary items of $28.2 million, or $(.30) per share, in 1995. Including the effect of the extraordinary losses of $1.1 and $1.8 million for the early extinguishment of debt, the Company reported net losses of $105.0 million and $30.0 million, or $(.94) and $(.32) per share, for the years ended December 28, 1996 and December 30, 1995, respectively. Per share amounts are expressed after deducting preferred dividends of $.2 million in both 1996 and 1995. The weighted average number of shares outstanding was 111,441,247 for the year ended December 28, 1996 compared to 93,029,816 in 1995. During the latter part of the year, the Company completed an assessment of recoverability of long-lived assets for certain underperforming catalogs and recorded special charges of $36.7 million. These charges included a provision for the consolidation of distribution centers and relocation of facilities and severance expenses approximating $14.7 million. Also included in these charges was the write-off of certain long-lived assets that the Company's management determined were impaired of approximately $22.0 million. The net loss in 1996, after considering special charges, was primarily the result of (i) increased inventory write-downs due to the Company's inability to properly sustain its inventory position due to liquidity problems and, in certain instances, the purchase of inventory quantities in excess of demand, (ii) lower response rates as a result of increased order cancellations, (iii) increased fulfillment and telemarketing costs due to inventory handling costs associated with higher backorder levels and increased merchandise returns, and (iv) the fixed cost infrastructure which the Company's continuing catalogs could not fully absorb. Revenues. Revenues decreased 6.6% in 1996 to $700 million from $750 million in 1995. Revenues of continuing business units increased approximately 2% from $584 million in 1995 to $597 million in 1996, which was offset by a 38% decline to $103 million in revenues from discontinued catalogs. The Company circulated 332 million catalogs in 1996. Although this represents a 10% reduction from the prior year, continuing catalog circulation increased 1% from the prior year. Operating Costs and Expenses. Cost of sales and operating expenses, which include fulfillment and telemarketing costs, as a percentage of revenues increased to 68.4% in 1996 from 64.5% in 1995. This increase is primarily attributable to lower product margins due to lower recovery rates experienced from accelerated disposition of inventory as a result of poor in-stock positions resulting from liquidity problems, as well as the Company's decision to continue to reduce inventory levels. Also, inventory write-downs for continuing catalogs were $11.2 million in 1996, compared to $4.4 million in 1995, primarily for Domestications, Tweeds and Austad's. These incremental write-downs were recorded as part of the Company's plans to reduce its inventory levels and the resulting expectation of lower recovery rates. In addition, fulfillment costs were higher in 1996 as a result of increased backorder levels and operating inefficiencies for most of the year in the Company's Roanoke, Virginia fulfillment center. The write-down of inventory of discontinued catalogs was $1.1 million in 1996 compared to $8.6 million in 1995. These write-downs consisted of incremental inventory write-downs in excess of normal seasonal write-downs. During 1995, the Company discontinued six poorly performing catalogs which had incurred substantial losses and which the Company believed could not overcome increased paper and postage prices. The write-down in 1996 was recorded due to significantly lower recovery rates than previously experienced on the liquidation of inventory related to these catalogs. Special charges taken by the Company in 1996 totaled $36.7 million. These charges consist, in part, of severance ($3.2 million), facility exit/relocation costs and fixed asset write-offs ($11.5 million). These charges were recorded due to the Company's decision to move to a more streamlined infrastructure. This plan included the consolidation of several inefficient fulfillment facilities into existing underutilized facilities and the relocation of corporate offices. In addition, the Company's review of the carrying value of certain long-lived assets of Tweeds, Austad's and The Safety Zone's led to the write-off of approximately $22 million. The Company recorded special charges of approximately $1.5 million in 1995 consisting primarily of facility exit costs ($.7 million), lease termination fees ($.3 million) and severance expenses ($.5 million) in connection with the closing of some of its facilities. Selling expenses decreased $10.6 million but increased to 27.9% of revenues in 1996 from 27.4% of revenues in 1995. The total expense decreased mainly due to a 10% reduction in catalog circulation. This decrease was offset by increased catalog postage expense and lower response rates in the current year for the discontinued catalogs. This expense as a percentage of revenues increased due to lower response rates as a result of weak customer demand and increased order cancellations. Catalog postage and paper expense increased as the Company increased the number of sale pages in its catalogs which were designed to speed the sale of slow moving inventory. General and administrative expenses increased $6.5 million, or 10%, in 1996 to $70.6 million. The increase is primarily attributable to costs associated with hiring the Company's new management team and to increased bad debt expense reflecting higher losses on the Company's private label credit card. Depreciation and amortization increased $3.2 million to $12.2 million in 1996 from $9.0 million in 1995. The increase was attributable to amortization charges associated with the Roanoke, Virginia fulfillment facility, the management information system, the new Gump's retail store and the goodwill and mailing lists associated with the 1995 acquisitions that did not impact the 1995 operating results for the entire year. (Loss) from Operations. Loss from operations increased to $94.5 million in 1996 from a loss of $22.6 million in 1995. Losses from operations for discontinued catalogs decreased to $4.8 million in 1996 from $18.1 million in 1995. The increased loss from operations was mainly due to an overall erosion of the Company's product margin. This was caused by increased promotional activity and higher fulfillment costs. The Company's loss from operations was also negatively impacted by increased catalog costs due to increased catalog mailing costs, lower response rates and increased order cancellations. Interest Income (Expense). Interest expense increased approximately $3.8 million to $8.9 million in 1996 from $5.1 million in 1995. Included in interest expense is approximately $1.1 million of debt costs which were paid in prior years. The increase was due to a higher level of average borrowings outstanding under the Company's revolving credit facility in 1996 which is attributable to the Company's deteriorating financial performance in 1996 and increased demands on its working capital throughout most of the year. Interest income was $.5 million in 1996 and 1995. 17 19 Income Taxes. The Company did not record a Federal income tax provision in 1996 or 1995 based on each years' net operating losses. The Company's state tax provision was $1.0 million in 1996 and 1995. Shareholders' Equity. The number of shares of Common Stock outstanding increased by 52,111,797 in 1996 due to shares issued in connection with the Company's 1996 Rights Offering, its equity and incentive plans, the exchange of the 6% Series A Convertible Preferred Stock and other activities. At December 28, 1996, there were 144,647,898 shares of Common Stock outstanding compared to 92,536,101 shares of Common Stock outstanding at December 30, 1995. Extraordinary Items. The extraordinary loss of $1.1 million in 1996 represented a loss on the early extinguishment of debt which arose in connection with the payment of the Company's 9.25% Senior Subordinated Notes due in 1998 with proceeds from the 1996 Rights Offering. The extraordinary loss of $1.8 million in 1995 represented a loss on the early extinguishment of debt which arose in connection with the refinancing of the Company's $75 million Revolving Credit Facility and its $14 million of 9.25% Senior Subordinated Notes due 1998. LIQUIDITY AND CAPITAL RESOURCES Liquidity. The Company had $14.8 million and $5.2 million of cash and cash equivalents at December 27, 1997 and December 28, 1996, respectively. Working capital and current ratio were $47.6 million and 1.48 to 1 at December 27, 1997 versus a working capital deficit and current ratio of ($1.5) million and .99 to 1 at December 28, 1996. The primary sources of cash in 1997 were the 1997 Rights Offering, which provided $40.1 million of cash and the $5.2 million issuance of the Company's Common Stock to SMALLCAP WorldFund, Inc. in a private placement. Cash was used primarily to fund the $20.8 million reduction of accounts payable, the $13.7 million reduction and complete pay-down of the Company's revolving debt, $3.5 million of debt payments and $4.2 million of capital expenditures, primarily for construction at the Roanoke, VA distribution facility. As a result of the Company's continued operating losses in 1996, the Company experienced tightened vendor credit and increased levels of debt. Order cancellation rates increased and negatively affected initial fulfillment which resulted in an increase in split shipments and higher customer inquiry calls in 1996 and the first quarter of 1997. As a result of these factors, the Company decided in late 1996 that it was necessary to obtain relief under its Credit Facility and to investigate an equity infusion. In December 1996, the Company closed its agreement with Richemont that provided the Company with approximately $28 million of letters of credit to replace letters of credit which were issued under the Credit Facility with Congress. Although this agreement provided the Company added liquidity, its timing, on December 19, 1996, had minimal effect on reducing back orders in 1996. Therefore, these back orders carried over to the first quarter of 1997 and caused an increase in the order cancellation rates in the period. When the final financial results became known to the Company, it concluded such results would have a further negative impact on the Company's ability to conduct business on normal trade terms. Therefore, the Company decided it was necessary to obtain an additional equity infusion which would restore the Company's equity base and provide the Company with additional liquidity. On March 26, 1997, the Company announced that it intended to distribute subscription rights to subscribe for and purchase additional shares of Common Stock to holders of record of the Company's Common Stock and Series B Convertible Additional Preferred Stock. The 1997 Rights Offering expired on May 30, 1997 and closed on June 6, 1997. The 1997 Rights Offering generated gross proceeds of approximately $40 million after giving effect to the $10 million of indebtedness NAR applied to acquire its shares. Richemont purchased 40,687,970 shares of Common Stock with rights which were not subscribed for and purchased by shareholders in the 1997 Rights Offering per an agreement with the Company. On April 23, 1997, Richemont advanced $30 million against this commitment. This advance was used to repay approximately $13 million of indebtedness under the revolving line of credit, bring past due vendor accounts current and for other general corporate purposes. The Company also incurred fees of approximately $3 million in relation to the 1997 Rights Offering which were paid from such gross proceeds. The agreement by which Richemont provided the Company with a $28 million letter of credit facility was to expire in February 1998. On October 1, 1997, the Company paid down $1 million of the underlying debt, reducing the letters of credit to approximately $26.9 million. The letters of credit carry an interest rate of 3.5% above the prime rate, currently 12%. Richemont agreed to extend its guarantee to March 30, 1999. As consideration for this transaction, the Company paid to Richemont, in 1998, a fee equal to 4% of the $26.9 million outstanding letters of credit. At December 27, 1997, the Company had $5.3 million of current debt. On March 25, 1998, Congress agreed to extend the Revolving Credit Facility until January 31, 2001. In addition, the Revolving Term Notes of $7.9 million were extended to January 31, 2001. The Company will continue to make principal payments of approximately $.1 million per month. The Company had zero amounts outstanding on the Congress Credit Facility at December 27, 1997 and $13.7 million at December 28, 1996. The total amount available under the Congress Credit Facility at December 27, 1997 was $29 million. Throughout fiscal 1997, the Company implemented several initiatives to strengthen financial disciplines and account ability across its catalog brands and corporate organization. These initiatives, in addition to the Company's operating and cost reduction plan, are designed to better enable the Company to meet its operating goals through better cash control and "bottom-line" accountability. Such initiatives have begun to show positive results across the Company's infrastructure. In March 1997, the Company received waivers for events of default under the Credit Facility with Congress which existed at December 28, 1996. In addition, Congress and the Company agreed to new working capital and net worth covenants for fiscal 1997. The Company believes that the 1997 Rights Offering, together with the Credit Facility modifications and the extension of the letter of credit by Richemont has eased the vendor/credit concerns about the Company's viability. The Company's ability to continue to improve upon its prior year's performance and implement its business strategy is critical to maintaining adequate liquidity. In November 1997, the Company announced that SMALLCAP World Fund, Inc. ("SMALLCAP"), a mutual fund and substantial investor in the Company, agreed to purchase 3.7 million shares of the Company's Common Stock for an aggregate purchase price of approximately $5.2 million in a private placement. The Company experiences seasonality in its working capital requirements and fluctuations in the revolving Credit Facility with peak borrowing requirements normally occurring during the first and fourth quarters of the year. 18 20 The Company is required to maintain certain financial covenants related to the Credit Facility with Congress with which the Company is in compliance at December 27, 1997. Operating Plan. In December 1996, the Company began an operational realignment that it believes will better enable it to capitalize on its internal strengths. The Company is continuing to move to a brand structure whereby individual catalogs will be better able to manage their resources and capitalize on business opportunities. This plan provides for each catalog's management team to be responsible for its brand financial results, working capital requirements and business investment needs. The Company believes that this structure will result in better management of vendor relationships, inventories and working capital. Infrastructure Investments. The Company's plan to restructure its catalogs into distinct brands and concentrate its mailing efforts on profitable customers is expected to result in excess capacity throughout its fulfillment centers. The Company has begun the process to consolidate certain of its fulfillment operations into its home fashions distribution facility in Roanoke, VA. The consolidation will be completed in 1998. This will require a capital investment of approximately $8.0 million during 1997 and 1998, of which approximately $3.6 million was paid for in 1997. Based on preliminary study, the Company is not expected to have significant expenditures to modify its computer information systems enabling proper processing of transactions relating to the year 2000 and beyond. The Company continues to evaluate appropriate courses of corrective action, including replacement of certain systems. The Company does not expect the amounts required to be expensed over the next two years to have a material effect on its financial position or results of operations. The Company is attempting to contact vendors and others on whom it relies to assure their systems will be timely converted. However, there can be no assurance that the systems of other companies on which the Company's systems rely also will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems and its business. Effect of Inflation and Cost Increases. The Company normally experiences increased costs of sales and operating expenses as a result of the general rate of inflation and commodity price fluctuations. In 1997 paper prices increased significantly. Operating margins are generally maintained through internal cost reductions and operating efficiencies and then through selective price increases where market conditions permit. The Company's inventory is mail-order merchandise which undergoes sufficiently high turnover so that the cost of goods sold approximates replacement cost. Because sales are not dependent on a particular supplier or product brand, the Company can adjust product mix to mitigate the effects of inflation on its overall merchandise base. Paper and Postage. The Company mails its catalogs and ships most of its merchandise through the United States Postal Service (USPS), with catalog mailing and product shipment expenses representing approximately 14% of revenues in 1997. Paper costs represented approximately 6% of revenues in 1997. The Company anticipates that any paper price increase in 1998 will not have a significant impact on its cost structure. The USPS announced a proposed increase in mailing rates that will take effect in mid-1998. The Company is currently investigating ways to mitigate the effects of these expected increases. If the Company does not successfully develop any such plan, it may have a material adverse effect on the results of operations. The United Parcel Service (UPS) raised its rates for domestic deliveries by 3.6 percent for ground rates and 3.3 percent for air rates effective February 7, 1998. The Company expects its actual United Parcel Services costs to exceed the stated percentage increases and is investigating alternatives to minimize this impact. The Company does not expect the increase to have a material adverse effect on its results of operations. Cautionary Statements The following statements constitute forward looking statements which involve risks and uncertainties: "The Company is continuing to move to a brand structure whereby individual catalogs will be better able to manage their resources and capitalize on business opportunities." Based on the preliminary study, the Company is not expected to have significant expenditures to modify its computer information systems enabling proper processing of transactions relating to the year 2000 and beyond. The Company does not expect the amount required to be expensed over the next two years to have a material effect on its financial position or results of operations. The Company anticipates that any paper price increase in 1998 will not have a significant impact on its cost structure. The following are important factors, among others, that could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf, of the Company: The Company may develop a plan which fails to offset the effect of anticipated increases in its postage and UPS costs or which inadequately does so. The Company is unable to complete, substantially as scheduled, the migration of fulfillment activities for all of its catalogs to its facility in Roanoke, Va. A general reduction in the price level of some or all of the merchandise offered by the Company in its catalogs due to economic conditions in Asia and the highly competitive nature of the Company's business resulting, for example, in a decrease in the Company's margins. A reduction in consumer spending generally or specifically with respect to the types of merchandise that the Company offers in its catalogs. A general deterioration in the economic conditions in the United States leading to increased competitive activity including a business failure of a substantial size company in the retail industry, a reduction in consumer spending generally or specifically with reference to the types of merchandise that the Company offers in its catalogs. An increase in the failure rate of consumer indebtedness generally; an increase in credit sales by the Company accompanied by an increase in its bad debt experience with respect to consumer debt. 19 21 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Hanover Direct, Inc.: We have audited the accompanying consolidated balance sheets of Hanover Direct, Inc. (a Delaware corporation) and subsidiaries as of December 27, 1997 and December 28, 1996, and the related consolidated statements of income (loss), shareholders' equity and cash flows for each of the three fiscal years in the period ended December 27, 1997. 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 27, 1997 and December 28, 1996 and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 27, 1997 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 of valuation and qualifying accounts 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 New York, New York March 4, 1998 (except with respect to the matter discussed in Note 8, as to which the date is March 25, 1998). 20 22 CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------- December 28, December 27, As of December 28, 1996 and December 27, 1997 (in thousands) 1996 1997 - ------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 5,173 $ 14,758 Accounts receivable, net of allowance for doubtful accounts of $5,030 in 1996 and $3,358 in 1997 29,399 17,684 Accounts receivable under financing agreement -- 21,918 Inventories 67,610 64,330 Prepaid catalog costs 23,401 20,684 Deferred tax asset, net 3,300 3,300 Other current assets 3,148 3,083 - ------------------------------------------------------------------------------------------------------------- Total Current Assets 132,031 145,757 - ------------------------------------------------------------------------------------------------------------- Property and Equipment, at cost: Land 4,797 4,909 Buildings and building improvements 16,554 16,486 Leasehold improvements 9,956 9,040 Furniture, fixtures and equipment 36,511 47,210 Construction in progress 8,315 4,519 - ------------------------------------------------------------------------------------------------------------- 76,133 82,164 Accumulated depreciation and amortization (22,523) (29,712) - ------------------------------------------------------------------------------------------------------------- Property and Equipment, net 53,610 52,452 - ------------------------------------------------------------------------------------------------------------- Goodwill, net 17,901 17,412 Deferred tax asset, net 11,700 11,700 Other assets 5,585 2,978 - ------------------------------------------------------------------------------------------------------------- Total Assets $ 220,827 $ 230,299 - ------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current portion of long-term debt and capital lease obligations $ 11,452 $ 5,305 Accounts payable 79,587 58,799 Accrued liabilities 37,782 30,259 Customer prepayments and credits 4,717 3,824 - ------------------------------------------------------------------------------------------------------------- Total Current Liabilities 133,538 98,187 - ------------------------------------------------------------------------------------------------------------- Non-current Liabilities: Long-term debt 53,255 32,668 Obligations under receivable financing -- 21,918 Capital lease obligations 482 67 Other 1,812 1,908 - ------------------------------------------------------------------------------------------------------------- Total Non-current Liabilities 55,549 56,561 - ------------------------------------------------------------------------------------------------------------- Total Liabilities 189,087 154,748 - ------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 17) Shareholders' Equity Series B Convertible Additional Preferred Stock, $.01 par value, authorized, issued and outstanding 634,900 shares in 1996 and 1997 5,748 5,938 Common Stock, $.66 2/3 par value, authorized 225,000,000 shares; issued 145,039,915 shares in 1996 and 204,441,538 in 1997 96,693 136,294 Capital in excess of par value 270,097 285,165 Accumulated deficit (336,586) (347,652) - ------------------------------------------------------------------------------------------------------------- 35,952 79,745 - ------------------------------------------------------------------------------------------------------------- Less: Treasury stock, at cost (392,017 shares in 1996 and 686,216 shares in 1997) (813) (968) Notes receivable from sale of Common Stock (3,399) (3,226) - ------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 31,740 75,551 - ------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 220,827 $ 230,299 - -------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 21 23 CONSOLIDATED STATEMENTS OF INCOME (LOSS)
- -------------------------------------------------------------------------------------------------------- For the years ended December 30, 1995, December 28, 1996 and December 27, 1997 (In thousands, except per share amounts) 1995 1996 1997 - -------------------------------------------------------------------------------------------------------- Revenues $ 749,767 $ 700,314 $ 557,638 - -------------------------------------------------------------------------------------------------------- Operating costs and expenses: Cost of sales and operating expenses 483,493 479,155 358,219 Write-down of inventory of discontinued catalogs 8,580 1,100 -- Special charges (credit) 1,563 36,724 (2,209) Selling expenses 205,618 195,032 141,411 General and administrative expenses 64,112 70,608 53,839 Depreciation and amortization 9,020 12,192 8,227 - -------------------------------------------------------------------------------------------------------- 772,386 794,811 559,487 - -------------------------------------------------------------------------------------------------------- (Loss) from operations (22,619) (94,497) (1,849) Interest expense (5,050) (8,858) (8,028) Interest income 519 460 -- (Loss) before income taxes (27,150) (102,895) (9,877) Income tax provision 1,003 1,000 999 - -------------------------------------------------------------------------------------------------------- (Loss) before extraordinary item (28,153) (103,895) (10,876) Extraordinary item (Note 8) (1,837) (1,134) -- - -------------------------------------------------------------------------------------------------------- Net (loss) (29,990) (105,029) (10,876) Preferred stock dividends (240) (225) (190) - -------------------------------------------------------------------------------------------------------- Net (loss) applicable to Common Shareholders $ (30,230) $(105,254) $ (11,066) - -------------------------------------------------------------------------------------------------------- Net (loss) per share: Loss before extraordinary item $ (.30) $ (.93) $ (.06) - -------------------------------------------------------------------------------------------------------- Extraordinary item (.02) (.01) -- - -------------------------------------------------------------------------------------------------------- Net (loss) per share - basic and diluted $ (.32) $ (.94) $ (.06) - -------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding - basic and diluted 93,030 111,441 176,621 - --------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 22 24 CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------- For the years ended December 30, 1995, December 28, 1996, and December 27, 1997 (in thousands) 1995 1996 1997 - ------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net (loss) $ (29,990) $(105,029) $ (10,876) Adjustments to reconcile net (loss) to net cash (used) by operating activities: Depreciation and amortization including deferred fees 9,419 13,277 10,581 Provision for doubtful accounts 4,448 6,805 3,973 Provision for catalog and facility closings 10,143 14,720 (2,209) 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 -- 888 -- Other, net 76 53 -- Compensation expense related to stock options -- 540 1,800 Recovery from investments previously written off -- -- (1,274) Changes in assets and liabilities, net of effects of acquired businesses and dispositions of assets: Accounts receivable, net (6,161) (7,863) 7,742 Inventories 8,679 11,671 3,280 Prepaid catalog costs 206 13,717 2,717 Other assets (3,131) 1,332 (205) Accounts payable (8,671) (13,704) (20,788) Accrued liabilities (1,583) 679 (6,583) Customer prepayments and credits 3,134 (2,430) (893) - ------------------------------------------------------------------------------------------------------------------- Net cash (used) by operating activities (11,094) (42,210) (12,735) - ------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Acquisitions of property and equipment, net (13,686) (8,862) (4,222) Purchase of businesses (13,008) -- -- Proceeds from sales of businesses -- 1,980 -- Proceeds from investment -- 794 1,274 Other, net (1,387) -- -- - ------------------------------------------------------------------------------------------------------------------- Net cash (used) by investing activities (28,081) (6,088) (2,948) - ------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net proceeds (payments) under revolving credit facility -- 11,699 (13,710) Proceeds from issuance of debt 20,685 10,000 -- Payments of long-term debt and capital lease obligations (1,419) (17,625) (3,575) Payment of stock issuance costs -- (1,670) (3,073) Payment of debt issuance costs (2,202) (1,490) -- Proceeds from issuance of Common Stock 400 50,653 45,351 Other, net 340 (778) 275 - ------------------------------------------------------------------------------------------------------------------- Net cash (used) by financing activities 17,804 50,789 25,268 - ------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (21,371) 2,491 9,585 Cash and cash equivalents, beginning of year 24,053 2,682 5,173 - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 2,682 $ 5,173 $ 14,758 - ------------------------------------------------------------------------------------------------------------------- Supplemental cash flow disclosure: Interest paid $ 4,586 $ 7,773 $ 5,674 Income taxes paid $ 1,318 $ 1,096 $ 685 - -------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 23 25 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------- For the years ended December 30, 1995, December 28, 1996 and December 27, 1997 Preferred Stock Preferred Stock Series B, Cumulative Series A, 6.0% (in thousands, except share amounts) Shares Amount Shares Amount - ----------------------------------------------------------------------------------------------------------- Balance at January 1, 1995 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 the 6% Preferred Stock (78,300) (877) Issuances and forfeitures of Common Stock for employee stock plans - ----------------------------------------------------------------------------------------------------------- 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 Issuances and forfeitures of Common Stock for employee stock plans - ----------------------------------------------------------------------------------------------------------- Balance at December 28, 1996 634,900 $5,748 0 $ 0 - ----------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common shareholders Preferred stock dividends and accretion 190 Stock options granted Shares issued in 1997 Rights Offering, net of issue costs Issuance of Common Stock to SMALLCAP World Fund, Inc. Issuances and forfeitures of Common Stock for employee stock plans - ----------------------------------------------------------------------------------------------------------- Balance at December 27, 1997 634,900 $5,938 0 $ 0 - -----------------------------------------------------------------------------------------------------------
24 26
- -------------------------------------------------------------------------------- For the years ended December 30, 1995, December 28, 1996 and December 27, 1997 Common Stock $.66 2/3 par value Capital in Excess Accum. (in thousands, except share amounts) Shares Amount of Par Value (Deficit) - ------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1995 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 the 6% Preferred Stock 427,785 285 592 Issuances and forfeitures of Common Stock for employee stock plans 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 Issuances and forfeitures of Common Stock for employee stock plans 1,778,235 1,187 678 - ------------------------------------------------------------------------------------------------------------------- Balance at December 28, 1996 145,039,915 $ 96,693 $ 270,097 $ (336,586) - ------------------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common shareholders (11,066) Preferred stock dividends and accretion Stock options granted 2,340 Shares issued in 1997 Rights Offering, net of issue costs 55,654,623 37,103 9,958 Issuance of Common Stock to SMALLCAP World Fund, Inc. 3,700,000 2,467 2,750 Issuances and forfeitures of Common Stock for employee stock plans 47,000 31 20 - ------------------------------------------------------------------------------------------------------------------- Balance at December 27, 1997 204,441,538 $ 136,294 $ 285,165 $ (347,652) - -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- For the years ended December 30, 1995, December 28, 1996 and December 27, 1997 Notes Receivable Treasury Stock From Sale of Deferred (in thousands, except share amounts) Shares Amount Common Stock Comp. Total - ----------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1995 (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 the 6% Preferred Stock 0 Issuances and forfeitures of Common Stock for employee stock plans (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 Issuances and forfeitures of Common Stock for employee stock plans (1,376) 294 783 - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 28, 1996 (392,017) $ (813) $ (3,399) $ 0 $ 31,740 - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common shareholders $ (11,066) Preferred stock dividends and accretion 190 Stock options granted 2,340 Shares issued in 1997 Rights Offering, net of issue costs 47,061 Issuance of Common Stock to SMALLCAP World Fund, Inc. 5,217 Issuances and forfeitures of Common Stock for employee stock plans (294,199) (155) 173 69 - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 27, 1997 (686,216) $ (968) $ (3,226) $ 0 $ 75,551 - -----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 25 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND DECEMBER 27, 1997 1. BACKGROUND OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations - Hanover Direct, Inc., a Delaware corporation ("HDI"), is a leading specialty direct marketer with a diverse branded portfolio of home fashions, general merchandise, men's and women's apparel and gift catalogs, delivered via direct mail and electronic commerce. HDI also operates several retail operations in the United States which comprised approximately 5% of HDI's revenues for the year ended December 27, 1997. 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. Effective for fiscal 1997, the Company changed its fiscal year to the last Saturday in December. The years ended December 27, 1997, December 28, 1996 and December 30, 1995 were 52 week years. Had the Company not changed its year end, fiscal 1997 would have been a 53 week year and the net loss for 1997 would have increased by approximately $.6 million. 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 $139.0 million, $193.5 million and $197.3 million, respectively, in 1997, 1996 and 1995. 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. Goodwill, Net - 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 $3.5 million and $3.0 million at December 27, 1997 and December 28, 1996, respectively. Mailing Lists - The costs of acquired mailing lists are amortized over a five year period. Mailing lists, included in Other assets, amounted to $.6 million and $1.2 million at December 27, 1997 and December 28, 1996, respectively, and are carried net of accumulated amortization of $2.1 million and $1.5 million, respectively. Asset Recoverability - In accordance with Statement of Financial Accounting Standards (SFAS)No. 121, "Accounting for the Improvement of Long-lived Assets and Long-Lived Assets 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 undiscounted 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). No such adjustment was recorded in 1997. Accounting for Stock Based Compensation - The Company accounts for its stock based compensation to employees using the fair value-based method under SFAS No. 123, "Accounting for Stock-Based Compensation." Accounting for Income Taxes - The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." It requires an asset and liability approach for financial accounting and reporting for income taxes. The provision for income taxes is based on 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. Accounting for Transfers of Credit Card Receivables - The Company accounts for transfers and servicing of financial assets in accordance with SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The adoption of this statement in fiscal 1997 resulted in the recognition of approximately $21.9 million of additional accounts receivable and associated long-term debt. This adjustment was based on the terms of the Company's agreement with an unrelated third party for the sale and servicing of accounts receivable. The provisions of this pronouncement are to be applied prospectively, from January 1, 1997. Retroactive application is not permitted, however, the amount of adjustment at December 28, 1996 would have been a recognition of an additional $24.7 million in both receivables and the associated receivable financing obligation. Cash and Cash Equivalents - Cash and cash equivalents include cash and all highly liquid investments with original maturities of ninety days or less. Net (Loss) Per Share - Net (loss) per share is computed using the weighted average number of common shares outstanding in accordance with the provisions of SFAS No. 128 "Earnings Per Share". The weighted average number of shares used in the calculation for both basic and diluted net (loss) per share in 1997, 1996 and 1995 was 176,621,080, 111,441,247 and 93,029,816 shares, respectively. Diluted earnings per share equals basic earnings per share as the dilutive calculation would have an antidilutive impact as a result of the net loss incurred in each of the years 1995, 1996 and 1997. 26 28 Recently Issued Accounting Standards - In June 1997, the Financial Accounting Standards Board issued SFAS No.130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. The statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company is still assessing the impact of the adoption of this statement to the financial statements. Additionally, in June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. This statement is effective for financial statements for periods beginning after December 15, 1997 and need not be applied to interim periods in the initial year of application. Comparative information for earlier years presented is to be restated. The Company is still assessing the impact of this statement on its financial statement disclosure. Revenues - The Company recognizes revenue at the time 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 NON-CASH ACTIVITIES
- -------------------------------------------------------------------------------- (In thousands) 1995 1996 1997 - -------------------------------------------------------------------------------- Capital lease obligations $ 1,155 $ -- $ 163 Other equity issuances and exchanges $ 1,456 $ 2,855 $ 10,000 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 $ -- $ -- - --------------------------------------------------------------------------------
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 (loss) 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 was being held for sale, was written down to its estimated net realizable value as of December 28, 1996. During fiscal 1997, the Company sold this facility. 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 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 Com pany wrote-off the goodwill and mailing lists in accordance with SFAS No. 121 (Note 3). Other Investments - Other investments, which are recorded in Other assets in the accompanying consolidated balance sheets, include the following: Blue Ridge Associates - In January 1994, the Company purchased for $1.1 million a 50% interest in Blue Ridge Associates ("Blue Ridge"), a partnership which owns the apparel distribution center in Roanoke, VA. The remaining 50% interest is held an unrelated third party. This investment is accounted for by the equity method of accounting. The Company's investment in Blue Ridge was approximately $.9 million at December 27, 1997 and December 28, 1996. In December 1996, the Company decided to consolidate fulfillment and telemarketing activities handled at this facility into its home fashions distribution facility in Roanoke, VA and attempt to sublease the vacated space. The partnership is currently looking for a sub-lessee for the apparel distribution center. 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 were submitted to the Joint Committee of the IRS for approval. Due to the uncertainty that recoverability of substantially all of the remaining 27 29 investment balance was 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. In the third and fourth quarters of 1997, the Company received approximately $1.3 million related to distributions made by Regal. This amount was recorded as income and is reflected as a reduction in general and administrative expenses in the accompanying consolidated statements of income (loss). 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 agreement 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. 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 consisted of severance and facility exit/relocation costs and fixed asset write-offs related to the previously announced downsizing of the Company, as discussed in its December 1996 press release. In addition, the special charges included a write-off for impairment of long-lived assets of certain under-performing catalogs. In December 1997, the Company adjusted its previous estimates for severance, facility exit/relocation and fixed asset write-offs based upon exit plan modifications related to its Weehawken, NJ corporate facility and delays in relocating from its Hanover, PA distribution center. Such adjustments resulted in a reduction of special charges of approximately $2.2 million which consists of $.4 million in restructuring reserve reductions and $1.8 million related to the reversal of the reserve for fixed assets expected to be abandoned. 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. The Company paid approximately $2.7 million of severance during fiscal 1997 and provided approximately $.5 million for remaining severance to be paid at its Hanover, PA. distribution center. Reserves for severance costs approximated $1 million and $3.2 million at December 27, 1997 and December 28, 1996, respectively, and are included in Accrued liabilities in the accompanying consolidated balance sheet. Facility Exit/Relocation Costs and Fixed Asset Write-Offs - These costs are primarily composed of the Company's decision to sublet 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. As of December 27, 1997, the Company consolidated the Roanoke, VA apparel distribution center and relocated two of six catalogs from its Hanover, PA distribution center into its Roanoke, VA home fashion distribution center. The remaining four catalogs are expected to be relocated by the end of fiscal 1998. In addition, the Company modified its plan to vacate from its Weehawken, NJ corporate facility by agreeing to sublet a portion of the facility. Approximately $4.4 million and $6.3 million of these costs are recorded in Accrued liabilities in the accompanying consolidated balance sheets at December 27, 1997 and 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. 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 assets are deemed to be impaired if a forecast of undiscounted future operating cash flows is less than the carrying amounts. Considerable management judgment is necessary to estimate discounted future cash flows and, accordingly, actual results could vary significantly from such estimates. The Company recognized an impairment loss of approximately $22.0 million in fiscal 1996 which was primarily composed of the write-off of goodwill and mailing lists associated with Tweeds, Austad's and The Safety Zone. 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 $0.6 million, $20 million and $88 million and losses of $0.1 million, $5.1 million and $20 million in 1997, 1996 and 1995, respectively. These losses were 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. No such provision was recorded in 1997. 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. These losses represent an incremental provision in excess of the original provision included in cost of sales expense. 28 30 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 Sears Agreement was terminated by Sears in December 1996, and no catalogs were mailed by the Company in 1997. The 1997 revenues from the Sears Agreement amounted to $8.5 million which related to catalogs issued in 1996. Revenues from the Sears Agreement were $82 million and $81 million in 1996 and 1995, respectively. In conjunction with the licensing agreement the Company issued to Sears a performance warrant to purchase Common Stock in 1998 and 1999. Due to termination of the Sears agreement, the warrants will not be exercisable. 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 annual financial covenants related to this agreement and was not in compliance at December 27, 1997 and subsequently has received waivers for the default. The proceeds to the Company relating to the sale of receivables for 1997, 1996 and 1995 were $39.0 million, $39.2 million and $46.2 million, respectively. At December 27, 1997 and December 28, 1996, the uncollected balances under this program were $29.4 million and $33.5 million, respectively, of which $4.0 million and $4.8 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 at December 27, 1997 and December 28, 1996, 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. In addition, in accordance with SFAS No. 125 (Note 1), the Company has reflected approximately $21.9 million of balances transferred pursuant to the agreement with the unrelated third party as Accounts receivable under financing agreement and as a long-term obligation on the consolidated balance sheet at December 27, 1997. 7. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
- -------------------------------------------------------------------------------- December 28, December 27, 1996 1997 - -------------------------------------------------------------------------------- Restructuring $ 9,504 $ 5,424 Reserve for future sales returns 9,036 6,043 Compensation 3,968 7,189 Taxes 2,696 1,983 Reserve for repurchase of accounts receivable sold with recourse 1,389 1,397 Other 11,189 8,223 Total $37,782 $30,259 - --------------------------------------------------------------------------------
8. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
- -------------------------------------------------------------------------------- December 28, December 27, 1996 1997 - -------------------------------------------------------------------------------- Congress Facility $22,627 $ 7,917 Term Financing Facility 19,000 18,000 IMR Promissory Note 10,000 -- 6% Mortgage Notes Payable due 1998 2,969 2,787 Industrial Revenue Bonds with variable interest rates averaging 3.6% in 1996 and 4% in 1997 due 2003 8,000 8,000 7.5% Convertible Subordinate Debentures due 2007 751 751 Other 16 -- 63,363 37,455 Less: current portion 10,108 4,787 Total $53,255 $32,668 - --------------------------------------------------------------------------------
Congress Facility - The Congress Facility is comprised of a revolving line of credit of up to $65 million with a three year term expiring in November 1998 ("Congress Revolving Credit Facility") and two year term loans aggregating $10 million expiring in November 1998 ("Revolving Term Notes"). The amount that can be borrowed under the Congress Facility is based on percentages of eligible inventory and accounts receivable. The Congress Facility is secured by all assets of the Company. On March 25, 1998, the Company amended its agreement with Congress to extend the facility until January 31, 2001. In addition, the Congress Facility places limitations on the incurrence of additional indebtedness. Beginning in November 1996, Congress lowered the advance rate by which the available inventory is calculated. Pursuant to the amendment discussed above, advance rates were increased along with other modifications that increased the Company's availability under the Facility. The Congress Revolving Credit Facility, prior to the amendment, bears interest at 1.25% above CoreStates' prime rate and the Revolving Term Notes bears interest at 1.5% above CoreStates' prime rate. As amended, the Revolving Credit Facility bears interest at prime plus .5% or Eurodollar plus 2.5% and the Revolving Term Note bears interest at prime plus .75% or Eurodollar plus 2.75%. The Company is required to maintain minimum net worth and working capital throughout the terms of the agreement. The Company was in compliance with such covenants throughout fiscal 1997. At December 27, 1997 and for the remainder of the agreement, net worth and working capital are required to be $21.5 and $(10) million, respectively. The rates of interest related to the Congress Revolving Credit Facility and Revolving Term Notes at December 27, 1997 were 9.70% and 10%, respectively. As of December 27, 1997, the Company had no revolving indebtedness and $7.9 mil lion under the Revolving Term Notes. As of December 28, 1996, the Company had $13.7 million and $8.9 million under the 29 31 Congress Revolving Credit Facility and Revolving Term Notes, respectively. The face amount of unexpired documentary letters of credit at December 27, 1997 and December 28, 1996 were $3 million and $4.5 million, respectively. At December 27, 1997, availability under the Congress Facility was $29 million. 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 5.13% to 6.04% at December 27, 1997 and 5.47% to 5.73% at December 28, 1996, respectively. The Term Financing Facility was reduced by annual sinking fund payments of $1.0 million in October 1996 and 1997 and requires annual sinking fund payments of $1.0 million in October 1998 and October 1999 with this amount increasing to $1.6 million for each of the nine years thereafter. The Term Financing Facility continues to be outstanding and in effect under its original terms. 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, New York Branch 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. On October 1, 1997, the Company paid down $1 million of the underlying debt, reducing the letters of credit to approximately $26.9 million. The letters of credit were originally due on February 18, 1998, however, Richemont has extended the term through March 30, 1999 and modified the letters of credit to reflect assignment of obligations to Swiss Bank, Stamford Branch. The letters of credit carry an interest rate of 3.5% above the prime rate, currently 12%. In 1998, the Company will pay a facility fee of $1.1 million which is equal to 4% of the principle amount of 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 Congress Facility. IMR Promissory Note - In September 1996, IMR, an affiliate of NAR, loaned the Company $10 million as evidenced by a subordinated promissory note (the "IMR Promissory Note"). This loan bore interest at prime plus 1.5%, was due on November 14, 1996 and, if it was not repaid before May 15, 1997, was 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 was subordinate to the Congress Facility and was excluded from the working capital covenant calculation. NAR 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 9). 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 $2.8 million and $3.0 million at December 27, 1997 and December 28, 1996, 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 an irrevocable letter of credit in the amount of $8.6 million. The obligations are guaranteed by the Company. Extraordinary Items - The Company wrote-off approximately $1.8 million and $1.1 million of unamortized debt issuance costs as extraordinary items due to early extinguishment of debt in 1995 and 1996. General - At December 27, 1997, the aggregate annual principal and sinking fund payments required on debt instruments are as follows (in thousands): 1998 - $4,787; 1999 - $2,000; 2000 - $2,600; 2001 - $6,517; 2002 - $1,600 and thereafter - $19,951. 9. RIGHTS OFFERINGS AND ADDITIONAL INVESTMENTS 1997 Rights Offering The Company commenced a $50 million rights offering (the "1997 Rights Offering") on April 29, 1997. Holders of record of the Company's Common Stock and Series B Convertible Additional Preferred Stock as of April 28, 1997, the record date, were eligible to participate in the 1997 Rights Offering. The 1997 Rights Offering expired on May 30, 1997, with 55,654,623 rights to purchase shares exercised, and it closed on June 6, 1997. Richemont, a Luxemborg public company, entered into a standby purchase agreement to purchase all shares not subscribed for by shareholders of record at the subscription price. Richemont purchased 40,687,970 shares in the 1997 Rights Offering and, as a result, then owned approximately 20.3% of the Company. The Company paid in cash, from the proceeds of the 1997 Rights Offering, to Richemont on the closing date approximately $1.8 million, which represented an amount equal to 1% of the aggregate offering price of the aggregate number of shares issuable upon closing of the 1997 Rights Offering other than with respect to the shares of Common Stock held by NAR or its affiliates plus an amount equal to one-half of one percent of the aggregate number of shares acquired by NAR upon exercise of their rights (Standby Fee) plus an amount equal to 4% of the aggregate offering price in respect to all unsubscribed shares (Take-Up Fee). On April 26, 1997, NAR irrevocably agreed with the Company, subject to and upon the consummation of the 1997 Rights Offering, to exercise certain of the rights distributed to it for the purchase of 11,111,111 shares of Common Stock that had an aggregate purchase price of approximately $10 million. NAR agreed to pay for, and the Company agreed to accept as payment, for the exercise of such rights the surrender by NAR of the principal amount due under the IMR Promissory Note dated September 1996 in the principal amount of $10 million and cancellation thereof. In order to facilitate vendor shipments and to permit the commencement of the Company's plan to consolidate certain of its warehousing facilities, Richemont advanced $30 million as of April 23, 1997 against its commitment to purchase all of the unsubscribed shares pursuant to the standby purchase agreement. The Company executed a subordinated promissory note in the amount of $30 million to evidence this indebtedness (the "Richemont Promissory Note"). 30 32 The gross cash proceeds from the 1997 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 which were paid for by surrender and cancellation of the $10 million IMR Promissory Note) were used to repay the $30 million principal amount outstanding under the Richemont Promissory Note and the balance of the proceeds were used for working capital and general corporate purposes, including repayment of amounts outstanding under the Company's Revolving Credit Facility. 1996 Rights Offering The Company commenced its $50 million Rights Offering (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 were eligible to participate in the 1996 Rights Offering. The rights were exercisable at a price of $1.03 per share. 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 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 (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 1996 Rights Offering. The Company issued 48,748,785 shares pursuant to 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 for 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% 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. Additional Investments In November 1997, the Company announced that SMALLCAP World Fund, Inc. ("SMALLCAP"), a mutual fund and substantial investor in the Company, agreed to purchase 3.7 million shares of the Company's Common Stock at $1.41 per share, which represented fair market value, for an aggregate purchase price of approximately $5.2 million in a private placement. This transaction was consummated on November 6, 1997. These shares are restricted and will be registered under the Securities Act of 1933, as amended, pursuant to a registration rights agreement with SMALLCAP that calls for the Company to use its best efforts to effect the registration of such shares as soon as practicable after April 1, 1998 and has granted certain piggyback registration rights. The Company may delay such registration for a period of not more than ninety calendar days. Such registration shall be effected by preparation and filing by the Company with the Securities and Exchange Commission of a registration statement on Form S-3. The Company will pay all expenses in connection with the registration of such shares. 10. CAPITAL STOCK Series B Convertible Additional Preferred Stock - In February 1995, the Company issued 634,900 shares of its Class B Convertible Additional Preferred Stock ("Series B Stock") to acquire the remaining 80% of the outstanding common stock of Aegis Safety Holdings, Inc. ("Aegis"), publisher of The Safety Zone catalog. The Series B Stock has a stated value of $10 per share. Non-cumulative dividends will accrue and be paid at 5% per annum during each of the first three years after the February 1995 closing 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 1997 and 1996 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. 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 consolidated statements of income (loss) in 1997, 1996 and 1995. Warrants - The warrants outstanding at December 27, 1997 are as follows:
- -------------------------------------------------------------------------------- Warrants Issued Exercise Price Expiration 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 original terms of these warrant agreements contain certain antidilution provisions which increased, in the aggregate, the warrants by 612,755 from 5,033,735 to 5,646,490 due to the 1996 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. 31 33 General - At December 27, 1997, there were 203,755,322 shares of Common Stock and 634,900 shares of Series B Stock outstanding. Additionally, an aggregate of 20,665,576 shares of Common Stock were reserved for issuance pursuant to (i) the exercise of outstanding options, 13,081,249 (ii) the exercise of outstanding warrants, 5,646,490 and (iii) the Executive Equity Incentive Plan, 1,937,837. 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 The Company has established several stock based compensation programs for the benefit of its employees. As discussed in Note 1, the Company adopted the fair value provision of SFAS No 123. The Company has recorded compensation charges of $1.8 million and $.5 million in 1997 and 1996, respectively. 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:
- ---------------------------------------------------------------------------------------------------------------- 1995 1996 1997 - ---------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ---------------------------------------------------------------------------------------------------------------- Options outstanding, beginning of period 496,050 $ 3.60 90,000 $ 2.42 70,000 $ 2.11 Granted 70,000 $ 2.11 -- -- -- -- Exercised -- -- -- -- -- -- Forfeited (142,000) $ 3.50 -- -- (40,000) $ 2.00 Expired (334,050) $ 3.65 (20,000) $ 3.50 -- -- - ---------------------------------------------------------------------------------------------------------------- Options outstanding, end of period 90,000 $ 2.42 70,000 $ 2.11 30,000 $ 2.25 - ---------------------------------------------------------------------------------------------------------------- Options exercisable, end of period 20,000 $ 3.50 23,333 $ 2.11 20,000 $ 2.25 - ----------------------------------------------------------------------------------------------------------------
The options outstanding at December 27, 1997 have weighted average exercise prices of $2.25 with a weighted average contractual life of 2.8 years. Director's Options - 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 February 1996, four directors were granted options to purchase 5,000 shares each, at the current market price, which at the time was $1.44. These options expire in February 2001. 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 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:
- -------------------------------------------------------------------------------------------------------------------------- 1995 1996 1997 - -------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - -------------------------------------------------------------------------------------------------------------------------- Shares outstanding, beginning of period 753,830 877,163 1,062,496 Shares purchased 143,333 202,000 47,000 Shares forfeited (20,000) (16,667) -- - -------------------------------------------------------------------------------------------------------------------------- Shares outstanding, end of period 877,163 1,062,496 1,109,496 - -------------------------------------------------------------------------------------------------------------------------- Options outstanding, beginning of period 1,073,836 $2.98 1,021,170 $2.66 640,498 $1.73 - -------------------------------------------------------------------------------------------------------------------------- Granted 286,666 $2.53 350,000 $1.00 94,000 $1.00 Forfeited (339,332) $3.59 (730,672) $2.68 (70,498) $2.60 - -------------------------------------------------------------------------------------------------------------------------- Options outstanding, end of period 1,021,170 $2.66 640,498 $1.73 664,000 $1.53 - -------------------------------------------------------------------------------------------------------------------------- Options exercisable, end of period -- -- 173,832 $2.56 130,000 $2.58 - --------------------------------------------------------------------------------------------------------------------------
32 34 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 1997 and 1996: risk free interest rate of 6.06% - 6.37%, expected lives of 6 years, expected volatility of 39.07% - 40.81%, and no expected dividends. The following table summarizes information about stock options outstanding at December 27, 1997:
- ---------------------------------------------------------------------------------------------------------------- Options Options Outstanding Exercisable - ---------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Number Average Average Number Average Range of Outstanding Remaining Exercise Exercisable Exercise Exercise Prices at 12/27/97 Contractual Life Price at 12/27/97 Price - ---------------------------------------------------------------------------------------------------------------- $.69 to $1.00 444,000 4.8 $.97 -- $ -- $2.50 to $3.00 220,000 2.1 $2.62 130,000 $2.58 $.69 to $3.00 664,000 3.9 $1.52 130,000 $2.58 - ----------------------------------------------------------------------------------------------------------------
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 is payable 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 relating to differences between the exercise prices and market value of the Company's common stock on grant dates charged to expense was approximately $(.3) million and $.1 million for 1996 and 1995, respectively, net of forfeitures. No amortization was required in 1997 as all expenses associated with the applicable options were recognized as of the end of 1996 in conjunction with the vesting of the options. Changes to the notes receivable related to the Incentive Plan are as follows:
- ------------------------------------------------------------------------------- 1995 1996 1997 - ------------------------------------------------------------------------------- Notes receivable balance, beginning of period $1,522,000 $1,651,000 $1,742,000 Additions 229,000 202,000 32,000 Payments (100,000) (111,000) (40,000) Notes receivable, end of period $1,651,000 $1,742,000 $1,734,000 - -------------------------------------------------------------------------------
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. The plan was terminated on July 31, 1996 and closed to any future purchases. Under this plan, employees were given the opportunity to purchase shares of the Company's Common Stock at a 40% discount from the average market value of a share of stock over a 20-day period prior to subscription. Shares became vested over a three-year period and upon such date when a participant ceased employment, any unvested shares were forfeited. Changes in shares outstanding expressed in numbers of shares for the Investment Plan were as follows:
- -------------------------------------------------------------------------------- 1995 1996 1997 - ------------------------------------------------------------------------------- Shares outstanding, beginning of period 380,563 508,134 521,032 Shares purchased 216,931 80,550 -- Shares forfeited (89,360) (67,652) (38,261) Shares outstanding, end of period 508,134 521,032 482,771 - --------------------------------------------------------------------------------
As of December 27, 1997, a total of 69,550 of outstanding shares are scheduled to vest in February 1998 and August 1998. There are no other outstanding shares purchased under the plan which have not yet been vested. 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. 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 was 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. 33 35
- -------------------------------------------------------------------------------- 1996 1997 - -------------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price - -------------------------------------------------------------------------------- Options outstanding, beginning of period -- $ -- 3,020,000 $ 1.16 Granted 3,020,000 $ 1.16 -- $ -- Exercised -- $ -- -- $ -- Forfeited -- $ -- -- $ -- Expired -- $ -- -- $ -- Options outstanding, end of period 3,020,000 $ 1.16 3,020,000 $ 1.16 Options exercisable, end of period -- $ -- 755,000 $ 1.16 Weighted average fair value of options granted $ .77 -- - --------------------------------------------------------------------------------
The options outstanding at December 27, 1997 have an exercise price of $1.16 with a weighted average contractual life of 8.25 years. The fair value of the options granted in 1996 was estimated on the date of grant using the Black- Scholes option-pricing model with the following weighted average assumptions: risk free interest rate of 6.79%, expected lives of 9.85 years, expected volatility of 45.02% and no expected dividends. 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 in 1996. 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 1996 Rights Offering. 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 1997 - -------------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price - -------------------------------------------------------------------------------- Options outstanding, beginning of period -- $ -- 1,000,000 $ 1.16 Granted 1,000,000 $ 1.16 -- $ -- Exercised -- $ -- -- $ -- Forfeited -- $ -- -- $ -- Expired -- $ -- -- $ -- Options outstanding, end of period 1,000,000 $ 1.16 1,000,000 $ 1.16 Options exercisable, end of period -- $ -- 250,000 $ 1.16 Weighted average fair value of options granted $ 0.77 -- - --------------------------------------------------------------------------------
The options outstanding at December 27, 1997 have an exercise price of $1.16 with a weighted average contractual life of 8 years. The fair value of the options granted in 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: risk free interest rate of 6.79%, expected lives of 9.85 years, expected volatility of 45.02% and no expected dividends. 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 in 1996. 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 1996 Rights Offering. The options expire 10 years from the date of grant and will become vested upon the Company's stock price reaching a specific target 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 of the 1996 Rights Offering. 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 1997 - -------------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price - -------------------------------------------------------------------------------- Options outstanding, beginning of period -- $ -- 2,000,000 $ 1.16 Granted 2,000,000 $ 1.16 -- $ -- Exercised -- $ -- -- $ -- Forfeited -- $ -- -- $ -- Expired -- $ -- -- $ -- Options outstanding, end of period 2,000,000 $ 1.16 2,000,000 $ 1.16 Options exercisable, end of period -- $ -- -- $ 1.16 Weighted average fair value of options granted $ 0.17 -- - --------------------------------------------------------------------------------
The options outstanding at December 27, 1997 have an exercise price of $1.16 with a weighted average contractual life of 8.25 years. The fair value of the options granted in 1996 was estimated on the date of grant using the Black-Scholes option-price model utilizing a Monte Carlo simulation with the following weighted average assumptions: risk free interest rate of 6.79%, expected lives of 9.85 years, expected volatility of 45.02% and no expected dividends. The CEO Six Year Stock Option Plan - Pursuant to NAR's Six Year Stock Option Plan (the "Six Year Plan"), an option to purchase an aggregate of 250,000 shares of Common Stock was granted to the CEO by 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 1996 Rights Offering. The option is subject to antidilution provisions and due to the Company's 1996 Rights Offering was adjusted to 377,500 options. 34 36 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. Options outstanding, granted and the weighted average exercise prices are as follows:
- -------------------------------------------------------------------------------- 1996 1997 - -------------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price - -------------------------------------------------------------------------------- Options outstanding, beginning of period -- $ -- 377,500 $ 1.16 Granted 377,500 $ 1.16 -- $ -- Exercised -- $ -- -- $ -- Forfeited -- $ -- -- $ -- Expired -- $ -- -- $ -- Options outstanding, end of period 377,500 $ 1.16 377,500 $ 1.16 Options exercisable, end of period -- $ -- 377,500 $ 1.16 Weighted average fair value of options granted $ 0.60 -- - --------------------------------------------------------------------------------
The options outstanding at December 27, 1997 have an exercise price of $1.16 with a weighted average contractual life of 4.25 years. The fair value of the options granted in 1996 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: risk free interest rate of 6.42%, expected lives of 5.85 years, expected volatility of 45.02% and no expected dividends. The CEO Seven Year Stock Option Plan - Pursuant to NAR's Seven Year Stock Option Plan (the "Seven Year Plan"), an option to purchase an aggregate of 250,000 shares of Common Stock was granted to the CEO by 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 1996 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. Options outstanding, granted and the weighted average exercise prices are as follows:
- -------------------------------------------------------------------------------- 1996 1997 - -------------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price - -------------------------------------------------------------------------------- Options outstanding, beginning of period -- $ -- 377,500 $ 1.16 Granted 377,500 $ 1.16 -- $ -- Exercised -- $ -- -- $ -- Forfeited -- $ -- -- $ -- Expired -- $ -- -- $ -- Options outstanding, end of period 377,500 $ 1.16 377,500 $ 1.16 Options exercisable, end of period -- $ -- -- $ 1.16 Weighted average fair value of options granted $ 0.65 -- - --------------------------------------------------------------------------------
The options outstanding at December 27, 1997 have an exercise price of $1.16 with a weighted average contractual life of 5.25 years. The fair value of the options granted in 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: risk free interest rate of 6.53%, expected lives of 6.85 years, expected volatility of 45.02% and no expected dividends. The CEO Eight Year Stock Option Plan - Pursuant to NAR's Eight Year Stock Option Plan (the "Eight Year Plan"), an option to purchase an aggregate of 250,000 shares of Common Stock was granted to the CEO by 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 1996 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. Options outstanding, granted and the weighted average exercise prices are as follows:
- -------------------------------------------------------------------------------- 1996 1997 - -------------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price - -------------------------------------------------------------------------------- Options outstanding, beginning of period -- $ -- 377,500 $ 1.16 Granted 377,500 $ 1.16 -- $ -- Exercised -- $ -- -- $ -- Forfeited -- $ -- -- $ -- Expired -- $ -- -- $ -- Options outstanding, end of period 377,500 $ 1.16 377,500 $ 1.16 Options exercisable, end of period -- $ -- -- $ 1.16 Weighted average fair value of options granted $ 0.69 -- - --------------------------------------------------------------------------------
The options outstanding at December 27, 1997 have an exercise price of $1.16 with a weighted average contractual life of 6.25 years. 35 37 The fair value of the options granted in 1996 was 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 no expected dividends. The CEO Nine Year Stock Option Plan - Pursuant to NAR's Nine Year Stock Option Plan (the "Nine Year Plan"), an option to purchase an aggregate of 250,000 shares of common stock was granted to the CEO by 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 1996 Rights Offering. The option was 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. Options outstanding, granted and the weighted average exercise prices are as follows:
- -------------------------------------------------------------------------------- 1996 1997 - -------------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price - -------------------------------------------------------------------------------- Options outstanding, beginning of period -- $ -- 377,500 $ 1.16 Granted 377,500 $ 1.16 -- $ -- Exercised -- $ -- -- $ -- Forfeited -- $ -- -- $ -- Expired -- $ -- -- $ -- Options outstanding, end of period 377,500 $ 1.16 377,500 $ 1.16 Options exercisable, end of period -- $ -- -- $ 1.16 Weighted average fair value of options granted $ 0.74 -- - --------------------------------------------------------------------------------
The options outstanding at December 27, 1997 have an exercise price of $1.16 with a weighted average contractual life of 7.25 years. The fair value of the options granted in 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: risk free interest of 6.73%, expected lives of 8.85 years, expected volatility of 45.02% and no expected dividends. 1996 Stock Option Plan - Pursuant to the Company's 1996 Stock Option Plan (the "1996 Plan"), an aggregate of 7,000,000 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 exercise price of incentive stock options granted to an employee who owns more than 10%of the total combined voting power of all classes of stock of the Company shall be equal to 110%of the fair market value of the Company's Common Stock on the date of grant. Options granted may be performance based and all options granted must be specifically identified as incentive stock options or nonqualified options, as defined in the Internal Revenue Code. No employee may be granted stock options in excess of 500,000 shares of the Company's Common Stock and, the aggregate fair market value of Common Stock for which an employee is granted incentive stock options that first became exercisable during any given calendar year shall be limited to $100,000. To the extent such limitation is exceeded, the option shall be treated as nonqualified. Stock options may be granted for terms not to exceed 10 years and shall be exercisable in accordance with the terms and conditions specified in each option agreement. In the case of an employee who owns stock possessing more than 10%of the total combined voting power of all classes of stock, the options must become exercisable within 5 years. Payment for shares purchased upon exercise of options shall be in cash or stock of the Company. NON-PERFORMANCE BASED
- -------------------------------------------------------------------------------- 1996 1997 - -------------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price - -------------------------------------------------------------------------------- Options outstanding, beginning of period -- $ -- 1,722,500 $ 0.98 Granted 1,722,500 $ 0.98 882,500 $ 1.29 Exercised -- $ -- -- $ -- Forfeited -- $ -- (366,667) $ 1.01 Expired -- $ -- -- $ -- Options outstanding, end of period 1,722,500 $ 0.98 2,238,333 $ 1.10 Options exercisable, end of period -- $ -- 460,833 $ 0.98 Weighted average fair value of options granted $ 0.67 0.66 - --------------------------------------------------------------------------------
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 1997 and 1996: risk free interest rate of 6.21% and 6.80% respectively, expected lives of 4 and 7 years, respectively, and expected volatility of 59.40% and 45.35%, respectively, and no expected dividends. The following table summarizes information about stock options outstanding at December 27, 1997:
- ---------------------------------------------------------------------------------------------------------------- Options Options Outstanding Exercisable - ---------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Number Average Average Number Average Range of Outstanding Remaining Exercise Exercisable Exercise Exercise Prices at 12/27/97 Contractual Life Price at 12/27/97 Price - ---------------------------------------------------------------------------------------------------------------- $.69 to $1.00 1,605,833 5.9 $0.96 460,833 $0.98 $1.43 to $1.75 632,500 6.5 $1.46 -- $ -- - ---------------------------------------------------------------------------------------------------------------- $.69 to $1.75 2,238,333 6.0 $1.10 460,833 $0.98 - ----------------------------------------------------------------------------------------------------------------
36 38 PERFORMANCE BASED
- -------------------------------------------------------------------------------- 1996 1997 - -------------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price - -------------------------------------------------------------------------------- Options outstanding, beginning of period -- $ -- 1,722,500 $ 0.98 Granted 1,722,500 $ 0.98 882,500 $ 1.29 Exercised -- $ -- -- $ -- Forfeited -- $ -- (392,084) $ 1.01 Expired -- $ -- -- $ -- Options outstanding, end of period 1,722,500 $ 0.98 2,212,916 $ 1.10 Options exercisable, end of period -- $ -- 394,610 $ 0.98 Weighted average fair value of options granted $ 0.67 0.66 - --------------------------------------------------------------------------------
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 1997 and 1996: risk free interest rate of 6.21% and 6.80%, respectively, expected lives of 4 and 7 years, respectively, expected volatility of 59.40% and 45.35%, respectively, and no expected dividends. The following table summarizes information about stock options outstanding at December 27, 1997.
- ---------------------------------------------------------------------------------------------------------------- Options Options Outstanding Exercisable - ---------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Number Average Average Number Average Range of Outstanding Remaining Exercise Exercisable Exercise Exercise Prices at 12/27/97 Contractual Life Price at 12/27/97 Price - ---------------------------------------------------------------------------------------------------------------- $.69 to $1.00 1,580,416 5.9 $0.96 394,610 $0.98 $1.43 to $1.75 632,500 6.5 $1.46 -- $ -- - ---------------------------------------------------------------------------------------------------------------- $.69 to $1.75 2,212,916 6.0 $1.10 394,610 $0.98 - ----------------------------------------------------------------------------------------------------------------
OTHER STOCK AWARDS During 1997, the Company granted, and the Compensation Committee approved, nonqualified options to certain employees for the purchase of an aggregate of 1,000,000 shares of the Company's Common Stock. The options become vested over three years and expire in 2003. The options have an exercise price of $1.00 and a remaining contractual life of 5.2 years. The fair value of the options at the date of grant was estimated to be $.52 based on the following weighted average assumptions: risk free interest rate of 6.48%, expected life of 4 years, expected volatility of 59.40% and no expected dividends. 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 1997, 1996 and 1995 were approximately $.5 million, $.4 million and $.6 million, respectively. Supplemental Retirement Plan - The Supplemental Retirement Plan (the "Retirement Plan") allowed eligible employees to make contributions to a trust where the contributions were invested by the trust for each participant in a tax free money market fund. The Company made matching contributions during 1995, 1996 and 1997. Company contributions charged to expense in 1996 and 1995 amounted to approximately $.1 million and $.2 million, respectively. Expense charged in 1997 was not material. This plan was terminated in 1997. 13. INCOME TAXES At December 27, 1997, the Company had net operating loss carryforwards ("NOLs") totalling $246.7 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 - $23.1 million, 2011 - $63.1 million and 2012 - $19.1 million. The Company also has $1 million of general business tax credit carry-forwards that expire in 2000 through 2009. The Company's available NOLs for tax purposes consist of $91.4 million of NOLs subject to a $4 million annual limitation under Section 382 of the Internal Revenue Code of 1986 and $155.3 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 $63.1 million in 1996 and $19.1 million in 1997, 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 ongoing restructuring and future operating plans. For the years ended December 27, 1997 and December 28, 1996, the Company maintained its deferred tax asset of $15 million (net of a valuation allowance of $80.1 million in 1997 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. 37 39 The Company's Federal income tax provision was zero in 1995, 1996 and 1997. The Company's provision for state income taxes was $1.0 million in 1995, $1.0 million in 1996 and $1.0 million in 1997. A reconciliation of the Company's net loss for financial statement purposes to taxable loss for the years ended December 30, 1995, December 28, 1996 and December 27, 1997 is as follows (in thousands):
- -------------------------------------------------------------------------------- 1995 1996 1997 - ------------------------------------------------------------------------------- (Loss) before income taxes $ (27,150) $(102,895) $ (9,877) Extraordinary item (1,837) (1,134) -- Differences between income before taxes for financial statement purposes and taxable income: State income taxes (1,003) (1,000) (999) Differences attributable to subsidiary not included in Company's tax return (313) -- -- Permanent differences 1,147 14,917 402 Net change in temporary differences 6,048 26,983 (8,670) Taxable loss $ (23,108) $ (63,129) $ (19,144) - -------------------------------------------------------------------------------
The components of the net deferred tax asset at December 27, 1997 are as follows (in millions):
- -------------------------------------------------------------------------------- Non- Current current Total - ------------------------------------------------------------------------------- Federal tax NOL and business tax credit carry forwards 87.4 87.4 Allowance for doubtful accounts 1.2 1.2 Inventories .4 .4 Prepaid catalog costs (2.2) (2.2) Property and equipment (0.2) (0.2) Excess of net assets of acquired business (0.9) (0.9) Mailing Lists 0.8 0.8 Accrued liabilities 4.1 4.1 Customer prepayments and credits 2.1 2.1 Deferred Credits 0.4 0.4 Tax basis in net assets of discontinued operations in excess of financial statement amount 0.8 0.8 Executive Incentive Plan 0.8 0.8 Other 0.4 0.4 Deferred Tax Asset 6.4 88.7 95.1 Valuation allowance (3.1) (77.0) (80.1) 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. 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:
- -------------------------------------------------------------------------------- 1995 1996 1997 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 2.4 0.6 6.6 Net increase in (reversal of) temporary differences Depreciation and amortization 3.5 4.0 2.0 Deferred compensation 2.5 -- 11.3 Restructuring reserves -- 5.3 (23.5) Inventory 4.6 (0.4) (17.3) Prepaid catalog costs 0.4 (1.1) 9.4 Allowance for doubtful accounts 1.0 1.1 (7.8) Other (4.2) 0.3 (4.9) Tax NOLs for which no benefit could be recognized 27.0 21.1 67.9 Permanent differences 1.5 5.1 1.4 3.7)% 1.0% 10.1% - --------------------------------------------------------------------------------
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):
- -------------------------------------------------------------------------------- 1995 1996 1997 - -------------------------------------------------------------------------------- Minimum rentals $13,070 $12,931 $12,013 - --------------------------------------------------------------------------------
Future minimum lease payments under noncancelable 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 27, 1997, are as follows (in thousands):
Operating Capital Year Ending Leases Leases - -------------------------------------------------------------------------------- 1998 9,384.4 551.1 1999 7,098.9 51.2 2000 5,516.1 4.0 2001 4,755.1 4.0 2002 4,673.5 4.0 Thereafter 21,492.4 -- - -------------------------------------------------------------------------------- Total minimum lease payments 52,920.4 614.3 Less amount representing interest (a) 29.3 Present value of minimum lease payments (b) 585.0 - --------------------------------------------------------------------------------
(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 $1,344,000 and $482,000 at December 28, 1996 and $518,000 and $67,000 at December 27, 1997, respectively. 38 40 The future minimum lease payments under noncancelable leases that remain from the discontinued restaurant operations as of December 27, 1997 are as follows: 1998 - $.9 million; 1999 - $.9 million; 2000 - $.9 million; 2001 - $.8 million; 2002 - $.5 million; and thereafter $1.1 million. The above amounts exclude annual sublease income from subleases which have the same expiration as the underlying leases as follows:1998 - $1.0 million, 1999 - $ .9 million, 2000 - $.9 million, 2001 - $.7 million, 2002 - $.4 million and thereafter $.8 million. In connection with the Company's investment in Blue Ridge Associates, a subsidiary of the Company is contingently liable with respect to the lease obligation related to the apparel distribution center in Roanoke, VA. 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 perquisite provided for therein except for (a) benefits, salary and perquisite earned and accrued up to December 30, 1995, (b) salary of $500,000 through December 31, 1996, and (c) benefits including (I) continued disability and term life insurance in amounts not less than the amounts in force on the date of the Termination Agreement for a three-year period and (II) the right to continue to participate in the Company's medical plans to the extent he is eligible for up to three years from the date of the Termination Agreement. The Termination Agreement calls for Mr. Rosenfeld to serve as a Director Emeritus of the Company and allowed Mr. Rosenfeld to attend meetings of the Board of Directors and participate in Board discussions for a one-year period, but Mr. Rosenfeld had no right to vote on any matters that came before the Board of Directors. The Termination Agreement precluded 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 objective formulae or standards 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 Plan") Common Stock; an option expiring March 7, 2006 to purchase 2,000,000 shares of Common Stock (the "Closing Price Plan") 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, granted by NAR, the Company's majority shareholder (the "NAR Options"). As a result of the 1996 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 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. 16. RELATED PARTY TRANSACTIONS At December 27, 1997, current and former officers and executives of the Company owed the Company approximately $3.0 million of which approximately $1.7 million relates to receivables, excluding accrued interest, 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. An additional $1.0 million relates to a receivable, excluding accrued interest, under the Long-Term Incentive Plan for Rakesh K. Kaul. 39 41 At December 27, 1997, NAR and Richemont owned approximately 46 % and 20 % of the Company's common stock, respectively. 17. COMMITMENTS AND CONTINGENCIES The Company is involved in 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. 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 27, 1997 are as follows (in thousands): 1998 - $.4; 1999 - $.4; 2000 - $.4; 2001 - $.4; 2002 - $.3, and thereafter $.9. 18. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- -------------------------------------------------------------------------------- (in thousands, First Second Third Fourth except per share amounts) Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- 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 - basic and diluted $ (.10) $ (.13) $ (.26) $ (.37) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (in thousands, First Second Third Fourth except per share amounts) Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- 1997 Revenues $ 129,725 $ 133,750 $ 122,597 $ 171,566 Gross profit 43,663 47,210 42,228 66,318 Income (loss) from operations (4,339) (3,142) (1,677) 7,309 Net income (loss) (6,621) (5,648) (3,421) 4,814 Preferred stock dividends (48) (47) (47) (48) Net income (loss) applicable to Common Shareholders $ (6,669) $ (5,695) $ (3,468) $ 4,766 Net income (loss) per share - basic and diluted $ (.05) $ (.04) $ (.02) $ .02 - --------------------------------------------------------------------------------
40 42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 41 43 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Identification of Directors: The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed by the Company pursuant to Regulation 14A. (b) Identification of Executive Officers:
TITLE AND OTHER OFFICE HELD NAME AGE INFORMATION (a) SINCE - ---------------------------- ----- ------------------------------------------------------------- ----------- Rakesh K. Kaul 46 President, Chief Executive Officer and Director since March 1996 7, 1996. From 1995 until February, 1996, Mr. Kaul was the Vice Chairman and Chief Operating Officer of Fingerhut Companies, Inc. From January 1992 until March 1995, Mr. Kaul was also the Executive Vice President and Chief Administrative Officer of Fingerhut. Prior to January 1992, Mr. Kaul was the Senior Vice President, Strategy and Finance and a director at Shaklee Corporation. Michael Lutz 55 Executive Vice President-Chief Operating Officer since 1994 March 1998. From September 1994 to March 1998, he was Executive Vice President-Operations of the Company. Prior to September 1994, Mr. Lutz held various positions with New Hampton, Inc./Avon Direct Response. Larry J. Svoboda 49 Senior Vice President and Chief Financial Officer since 1996 September 25, 1996. From 1987 to September 1996, Mr. Svoboda was the Chief Financial Officer of the Florsheim Shoe Company. Prior to 1987, Mr. Svoboda was with the Sara Lee Corporation. Richard B. Hoffman 51 Senior Vice President and Chief Marketing Officer since 1998 March 1998. Prior to March 1998, Mr. Hoffman was engaged in private marketing consulting from March 1997. Mr. Hoffman was President and Chief Operating Officer of Jayhawk Acceptance Corporation from February 1996 to March 1997. Prior to February 1996, Mr. Hoffman was a Senior Vice President at Fingerhut Companies, Inc.
42 44
TITLE AND OTHER OFFICE HELD NAME AGE INFORMATION (a) SINCE - ---------------------------- ----- ------------------------------------------------------------- ----------- Michael D. Contino 37 Senior Vice President and Chief Information Officer since 1996 December 1996. Mr. Contino joined the Company in 1995 as Director of Computer Operations and Telecommunications. Prior to 1995, Mr. Contino was the Senior Manager of I.S. Operations at New Hampton, Inc., a subsidiary of Spiegel, Inc. Ralph Bulle 48 Senior Vice President - Human Resources since June 1996. 1996 Mr. Bulle joined the Company in 1993 as Vice President - Human Resources. Prior to 1993, Mr. Bulle was Senior Vice President - Operations & Human Resources for Seaman Furniture Company. Edward J. O'Brien 54 Senior Vice President and Treasurer since March 1991. 1991 Secretary since May 1996. Mr. O'Brien joined the Company in 1986 and was elected Vice President in 1988. William C. Kingsford 51 Vice President and Corporate Controller since May 1997. 1997 Prior to May 1997, Mr. Kingsford was Vice President and Chief Internal Auditor at Melville Corporation.
(a) All references to dates and positions held by such executive officers prior to September 1993 refer to the Company's predecessor, The Horn & Hardart Company ("H&H"). H&H merged with and into the Company in September 1993, with the Company surviving. Pursuant to the Company's By-Laws, its officers are chosen annually by the Board of Directors and hold office until their respective successors are chosen and qualified. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed by the Company pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed by the Company pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed by the Company pursuant to Regulation 14A. 43 45 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report.
PAGE NO. 1. Index to Financial Statements Report of Independent Public Accountants - Hanover Direct, Inc. and Subsidiaries Financial Statements 20 Consolidated Balance Sheets as of December 28, 1996 and December 27, 1997 21 Consolidated Statements of Income (Loss) for the years ended December 30, 1995, December 28, 1996 and December 27, 1997 22 Consolidated Statements of Cash Flows for the years ended December 30, 1995, December 28, 1996 and December 23 27, 1997 Consolidated Statements of Shareholders' Equity for the years ended December 30, 1995, December 28, 1996 and December 27, 1997 24 Notes to Consolidated Financial Statements for the years ended December 30, 1995, December 28, 1996 and December 27, 1997 26 2. Index to Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts 46 Schedules other than that listed above are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3. Exhibits The exhibits required by Item 601 of Regulation S-K filed as part of, or incorporated by reference in, this report are listed in the accompanying Exhibit Index. 47
(b) Reports on Form 8-K: Current Report on Form 8-K dated December 18, 1997 reporting pursuant to Item 8 the Company's change in fiscal year. (c) Exhibits required by Item 601 of Regulation S-K. See Exhibit Index. (d) Financial Statement Schedules See (a) 2. above. 44 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HANOVER DIRECT, INC. (registrant) Date: March 26, 1998 By: /s/ Rakesh K. Kaul ------------------ Rakesh K. Kaul President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated below. Principal Financial Officer: /s/ Larry J. Svoboda ------------------------------------- Larry J. Svoboda Senior Vice President and Chief Financial Officer Board of Directors: /s/ Ralph Destino /s/ Edmund R. Manwell ------------------------------------- ---------------------------- Ralph Destino, Director Edmund R. Manwell, Director /s/ J. David Hakman /s/ Shailesh J. Mehta ------------------------------------- ---------------------------- J. David Hakman, Director Shailesh J. Mehta, Director /s/ Rakesh K. Kaul /s/ Jan P. du Plessis ------------------------------------- ---------------------------- Rakesh K. Kaul, Director Jan P. du Plessis, Director /s/ S. Lee Kling ------------------------------------- ---------------------------- S. Lee Kling, Director Alan G. Quasha, Director /s/ Howard M.S. Tanner ------------------------------------- ---------------------------- Theodore H. Kruttschnitt, Director Howard M.S. Tanner, Director /s/ Elizabeth Valk Long /s/ Robert F. Wright ------------------------------------- ---------------------------- Elizabeth Valk Long, Director Robert F. Wright, Director Date: March 26, 1998 45 47 Schedule II Hanover Direct, Inc. VALUATION AND QUALIFYING ACCOUNTS Years Ended December 27, 1997, December 28, 1996 and December 30, 1995
Column A Column B Column C Column D Column E - ---------------------------------------------------------------------------------------------------------------------------------- Additions Balance at Charged to Charged to Beginning Costs and Other Accounts Deductions Balance at Description of Period Expenses Describe Describe End of Period - ---------------------------------------------------------------------------------------------------------------------------------- 1997: Allowance for Doubtful Accounts Receivable, Current $ 6,419,000 3,973,000 5,637,000(1) $ 4,755,000 Reserves for Discontinued Operations 1,722,000 368,000(2) 1,354,000 Restructuring Reserve 9,504,000 (400,000) 3,680,000(2) 5,424,000 Reserves for Sales Returns 9,036,000 76,507,000 79,500,000(2) 6,043,000 Deferred Tax Asset Valuation Allowance 82,600,000 (2,500,000)(4) 80,100,000 Allowance for Net Unrealized Losses on Convertible Debt Securities 1,888,000 1,888,000(1) -- - ---------------------------------------------------------------------------------------------------------------------------------- 1996: Allowance for Doubtful Accounts Receivable, Current $ 3,988,000 6,805,000 4,374,000(1) $ 6,419,000 Reserves for Discontinued Operations 1,639,000 83,000(2) 1,722,000 Restructuring Reserve 9,504,000 9,504,000 Reserves for Sales Returns 5,535,000 106,836,000 103,335,000(2) 9,036,000 Deferred Tax Asset Valuation Allowance 48,500,000 34,100,000(4) 82,600,000 Allowance for Net Unrealized Losses on Convertible Debt Securities 1,000,000 888,000 1,888,000 - ---------------------------------------------------------------------------------------------------------------------------------- 1995: Allowance for Doubtful Accounts Receivable, Current $ 3,912,000 4,796,000 42,000(3) 4,762,000(1) $ 3,988,000 Reserves for Discontinued Operations 1,668,000 29,000(2) 1,639,000 Reserves for Sales Returns 6,023,000 103,602,000 104,090,000(2) 5,535,000 Deferred Tax Asset Valuation Allowance 38,600,000 9,900,000(4) 48,500,000 Allowance for Net Unrealized Losses on Convertible Debt Securities 1,000,000 1,000,000 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Accounts written-off. (2) Utilization of reserves. (3) Represents acquired allowance for doubtful accounts receivable. (4) Represents the change in the valuation allowance offset by the change in the gross tax asset. 46 48 EXHIBIT INDEX EXHIBIT NUMBER ITEM 601 OF DESCRIPTION OF DOCUMENT AND INCORPORATION REGULATION S-K BY REFERENCE WHERE APPLICABLE 2.1 Asset Purchase Agreement dated as of December 1, 1994 among the Company, LWI Holdings, Inc., Bankers Trust Company, Leichtung, Inc. and DRI Industries, Inc. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 2.2 Stock Purchase Agreement dated as of February 16, 1995 among the Company, Hanover Holdings, Inc., Aegis Safety Holdings, Inc., F.L. Holdings, Inc., Roland A.E. Franklin, Martin E. Franklin, Jonathan Franklin, Floyd Hall, Frederick Field, Homer G. Williams, Frank Martucci, Norm Thompson Outfitters, Inc. and Capital Consultants, Inc. (as agent) (collectively, the "Aegis Sellers"). Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 2.3 Stock Purchase Agreement dated as of May 19, 1995 by and among the Company, Austad Holdings, Inc. ("AHI"), The Austad Company ("TAC"), David B. Austad ("DBA"), Denise Austad ("DA"), David Austad, as custodian ("DBAC"), Oscar Austad, Dorothy Austad, Randall Austad, Kristi Austad, Lori Miller, Robin Miller, Kerri Derenge, Sharon Stahl, Lori Miller, as custodian, Dorothy Austad, as attorney-in-fact, and Kara Miller (collectively, the "Austad Individuals"). Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 1995. 2.4 Agreement and Plan of Corporate Separation and Reorganization dated as of February 16, 1996 by and among the Company, AHI, TAC, DBA, DBAC, and DA. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 1995. 3.1 Restated Certificate of Incorporation. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 3.2 Certificate of Correction filed to correct a certain error in the Restated Certificate of Incorporation. FILED HEREWITH. 3.3 By-laws. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 27, 1997. 47 49 4.1 Warrant Agreement dated as of October 25, 1991 ("NAR Warrant") between the Company* and NAR Group Limited ("NAR") for 279,110 shares of Common Stock. Incorporated by reference to the Company's* Current Report on Form 8-K dated October 25, 1991. 4.2 Registration Rights Agreement dated as of July 8, 1991 among the Company*, NAR and Intercontinental Mining & Resources Limited ("IMR"). Incorporated by reference to the Company's* Current Report on Form 8-K Dated July 10, 1991. 4.3 Warrant Agreement dated as of January 1, 1994 between the Company and Sears Shop At Home Services, Inc. ("Sears"). Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 4.4 Registration Rights Agreement dated as of February 16, 1995 among the Company and the Aegis Sellers. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 4.5 Warrant Agreement dated as of July 8, 1991 between the Company and IMR for 1,750,000 shares of Common Stock. Incorporated by reference to the Company's Current Report on Form 8-K dated July 10, 1991. 4.6 Warrant Agreement dated as of October 25, 1991 between the Company and NAR for 931,791 shares of Common Stock. Incorporated by reference to the Company's Current Report on Form 8-K dated October 25, 1991. 4.7 Second Amendment to Warrant Agreement and Warrant Certificate for 931,791 shares of Common Stock, between the Company and NAR dated as of November 13, 1995. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 1995. 4.8 First Amendment to Warrant Agreement and Warrant Certificate for 1,750,000 shares of Common Stock, between the Company and IMR dated as of November 13, 1995. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 1995. 4.9 First Amendment to Warrant Agreement and Warrant Certificate for 279,110 shares of Common Stock, between the Company and NAR dated as of November 13, 1995. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 1995. 4.10 Second Amendment to Warrant Agreement between the Company and IMR dated as of August 23, 1996. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 4.11 Second Amendment to Warrant Agreement between the Company and NAR dated as of August 23, 1996. 50 Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 4.12 Third Amendment to Warrant Agreement between the Company and NAR dated as of August 23, 1996. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.1 Stock Option Plan, as amended. Incorporated by reference to the Company's* Annual Report on Form 10-K for the fiscal year ended December 28, 1991. 10.2 Account Purchase Agreement dated as of December 21, 1992 among the Company*, Hanover Direct Pennsylvania, Inc. ("HDPI"), Brawn of California, Inc. ("Brawn") and General Electric Capital Corporation ("GECC"). Incorporated by reference to the Company's* Annual Report on Form 10-K for the fiscal year ended December 26, 1992. 10.3 Amendment No. 1 to the Account Purchase Agreement dated as of July 12, 1993 among the Company*, HDPI, Brawn, Gump's By Mail, Gump's, Gump's Holdings and GECC. Incorporated by reference to the Company's* Current Report on Form 8-K dated July 12, 1993. 10.4 Amendment No. 2 to the Account Purchase Agreement dated as of June 1, 1995 among the Company, HDPI, Brawn, Gump's, Gump's By Mail, Gump's Holdings and GECC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 1995. 10.5 Waiver and Amendment No. 3 to the Account Purchase Agreement dated as of December 14, 1995 among the Company, HDPI, Brawn and GECC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 1995. 10.6 Amendment No. 4 to the Amended and Restated Account Purchase Agreement dated as of June 28, 1996 among the Company, HDPI, Brawn, Gump's, Gump's by Mail, Gump's Holdings and GECC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.7 Form of Stock Option Agreement between the Company* and certain Directors of the Company, as amended. Incorporated by reference to the Company's* Annual Report on Form 10-K for the fiscal year ended December 28, 1991. 10.8 Termination of Employment Agreement and Employment and Consulting Agreement dated as of December 31, 1995 between the Company and Jack E. Rosenfeld. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.9 Registration Rights Agreement between the Company and Rakesh K. Kaul, dated as of August 23, 1996. 51 Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.10 Form of Indemnification Agreement among the Company* and each of the Company's directors and executive officers. Incorporated by reference to the Company's* Current Report on Form 8-K dated October 25, 1991. 10.11 Letter Agreement dated May 5, 1989 among the Company*, Theodore H. Kruttschnitt, J. David Hakman and Edmund R. Manwell. Incorporated by reference to the Company's* Current Report on Form 8-K dated May 10, 1989. 10.12 Hanover Direct, Inc. Savings Plan as amended. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended January 1, 1994. 10.13 Restricted Stock Award Plan. Incorporated by reference to the Company's* Registration Statement on Form S-8 filed on February 24, 1993, Registration No. 33-58760. 10.14 All Employee Equity Investment Plan. Incorporated by reference to the Company's* Registration Statement on Form S-8 filed on February 24, 1993, Registration No. 33-58756. 10.15 Executive Equity Incentive Plan, as amended. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.16 Form of Supplemental Retirement Plan. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended January 1, 1994. 10.17 1996 Stock Option Plan, as amended. Incorporated by reference to the Company's 1997 Proxy Statement. 10.18 Loan and Security Agreement dated as of November 14, 1995 by and among Congress Financial Corporation ("Congress"), Hanover Direct Pennsylvania, Inc. ("HDPA"), Brawn of California, Inc. ("Brawn"), Gump's by Mail, Inc. ("Gump's by Mail"), Gump's Corp.("Gump's"), The Company Store, Inc. ("The Company Store"), Tweeds, Inc. ("Tweeds"), LWI Holdings, Inc.("LWI"), Aegis Catalog Corporation ("Aegis"), Hanover Direct Virginia, Inc. ("HDVA") and Hanover Realty Inc. ("Hanover Realty"). Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 1995. 10.19 First Amendment to Loan and Security Agreement dated as of February 22, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 52 10.20 Second Amendment to Loan and Security Agreement dated as of April 16, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.21 Third Amendment to Loan and Security Agreement dated as of May 24, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.22 Fourth Amendment to Loan and Security Agreement dated as of May 31, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.23 Fifth Amendment to Loan and Security Agreement dated as of September 11, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.24 Sixth Amendment to Loan and Security Agreement dated as of December 5, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.25 Seventh Amendment to Loan and Security Agreement dated as of December 18, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.26 Eighth Amendment to Loan and Security Agreement dated as of March 26, 1997 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad. FILED HEREWITH 10.27 Ninth Amendment to Loan and Security Agreement dated as of April 18, 1997 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad. FILED HEREWITH 10.28 Tenth Amendment to Loan and Security Agreement dated as of October 31, 1997 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The 53 Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad. FILED HEREWITH 10.29 Eleventh Amendment to Loan and Security Agreement dated as of March 25, 1998 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad. FILED HEREWITH 10.30 Subordination Agreement, dated as of November 14, 1995, among Congress, IMR, and the Trustee. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 1995. 10.31 Long-Term Incentive Plan for Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.32 Short-Term Incentive Plan for Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.33 Employment Agreement dated as of March 7, 1996 between the Company and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.34 Tandem Option Plan dated as of August 23, 1996 between the Company and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.35 Closing Price Option dated as of August 23, 1996 between the Company and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.36 Performance Price Option dated as of August 23, 1996 between the Company and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.37 Six-Year Stock Option dated as of August 23, 1996 between NAR and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.38 Seven-Year Stock Option dated as of August 23, 1996 between NAR and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.39 Eight-Year Stock Option dated as of August 23, 1996 between NAR and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 54 10.40 Nine-Year Stock Option dated as of August 23, 1996 between NAR and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.41 Letter of Credit, dated December 18, 1996, from Swiss Bank Corporation, New York Branch in favor of Fleet National Bank, as trustee. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.42 Substitute Letter of Credit, dated February 18, 1998, from Swiss Bank Corporation, Stamford Branch ("Swiss Bank") in favor of State Street Bank and Trust Company, as trustee. FILED HEREWITH. 10.43 Reimbursement Agreement, dated as of December 18, 1996, by and between Swiss Bank and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.44 First Amendment to Reimbursement Agreement, dated as of February 18, 1998, by and between Swiss Bank and the Company. FILED HEREWITH. 10.45 Hanover Indemnity Agreement, dated as of December 18, 1996, between Richemont Finance S.A. ("Richemont") and the Company, HDPI, Brawn, Gump's, Gump's by Mail, The Company Store, Tweeds, LWI, Aegis, HDVA and Hanover Realty. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.46 Subordination Agreement, dated as of December 18, 1996, between Congress and Swiss Bank. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.47 Subordination Agreement, dated as of December 18, 1996 between Congress and Richemont. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.48 Series A Note Agreement, dated as of November 9, 1994, between the Company and Norwest Bank Minnesota, N.A. ("Norwest"), as trustee. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.49 Placement Agreement, dated as of November 9, 1994, by and between the Company and NationsBank of North Carolina, N.A. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.50 Remarketing and Interest Services Agreement, dated as of November 9, 1994, by and between the Company and NationsBank of North Carolina, N.A. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 55 10.51 First Supplemental Series A Note Agreement, dated as of December 29, 1995, between the Company and Norwest. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.52 First Amendment to Placement Agreement, dated as of December 29, 1995 by and between the Company and NationsBank of North Carolina, N.A. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.53 First Amendment to Remarketing and Interest Services Agreement, dated as of December 29, 1995 by and between the Company and NationsBank of North Carolina, N.A. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.54 Second Supplemental Series A Note Agreement, dated as of December 18, 1996, between the Company and Norwest. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.55 Second Amendment to Series A Note, dated December 18, 1996 made by the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.56 Second Amendment to Placement Agreement, dated as of December 18, 1996 by and between the Company and NationsBank of North Carolina, N.A. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.57 Second Amendment to Remarketing and Interest Services Agreement, dated as of December 18, 1996 by and between the Company and NationsBank of North Carolina, N.A. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.58 Series B Note Agreement dated as of April 25, 1995, between the Company and Norwest. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.59 First Amendment to Series B Note Agreement, dated as of December 29, 1995, between the Company and Norwest. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.60 Second Amendment to Series B Note Agreement, dated as of December 18, 1996, between the Company and Norwest. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 56 10.61 Second Amendment to Series B Note, dated December 18, 1996 made by the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.62 Series B Letter of Credit, dated as of December 18, 1996, issued by Swiss Bank. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.63 Amendment to Series B Letter of Credit, dated as of February 18, 1998, between Swiss Bank and Norwest. FILED HEREWITH. 10.64 NAR Promissory Note dated as of September 11, 1996. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.65 Series A Letter of Credit, dated as of December 18, 1996, issued by Swiss Bank. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.66 Amendment to Series A Letter of Credit, dated as of February 18, 1998, between Swiss Bank and Norwest. FILED HEREWITH. 10.67 First Amendment to Series A Note, dated as of December 29, 1995 made by Hanover Direct, Inc. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.68 $10,000,000 Series B Note, dated as of April 27, 1995 and made by Hanover Direct, Inc. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.69 First Supplemental Series B Note Agreement, dated as of December 29, 1995. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.70 $10,000,000 Series A Note, dated as of November 9, 1994 and made by Hanover Direct, Inc. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.71 Stock Purchase Agreement, dated as of November 4, 1997, by and between the Company and SMALLCAP World Fund, Inc. ("SMALLCAP") FILED HEREWITH. 10.72 Registration Rights Agreement, dated as of November 4, 1997, by and between the Company and SMALLCAP. FILED HEREWITH. 57 21.1 Subsidiaries of the Registrant. FILED HEREWITH 23.1 Consent of Independent Public Accountants. FILED HEREWITH 27.1 Financial Data Schedule. **/FILED HEREWITH * Hanover Direct, Inc., a Delaware corporation, is the successor by merger to The Horn & Hardart Company and The Hanover Companies. ** EDGAR filing only. EX-3.2 2 CERTIFICATE OF CORRECTION 1 EXHIBIT 3.2 CERTIFICATE OF CORRECTION FILED TO CORRECT A CERTAIN ERROR IN THE RESTATED CERTIFICATE OF INCORPORATION OF HANOVER DIRECT, INC. FILED IN THE OFFICE OF THE SECRETARY OF STATE OF DELAWARE ON OCTOBER 31, 1996 HANOVER DIRECT, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: 1. The name of the corporation is Hanover Direct, Inc. 2. That a Restated Certificate of Incorporation was filed with the Secretary of State of Delaware on October 31, 1996 and that said Restated Certificate requires corrections as permitted by Section 103 of the General Corporation Law of the State of Delaware. 3. The inaccuracy or defect of said Restated Certificate to be corrected is as follows: The total number of shares of stock authorized and the number of shares designated as common stock are inaccurate. 4. Article Fourth of the Restated Certificate is corrected to read as follows: Line two shall be deleted in its entirety and replaced with "... Corporation shall have the authority to issue is 243,172,403 shares, of which 40,000 shares ..." Line seven shall be deleted in its entirety and replaced with "... stock, par value $0.01 per share (the "Additional Preferred Stock"), 225,000,000 shares ..." IN WITNESS WHEREOF, said HANOVER DIRECT, INC. has caused this certificate to be signed by Edward J. O'Brien, its Senior Vice President, Treasurer and Secretary, this 27th day of June, 1997. HANOVER DIRECT, INC. By: /s/ Edward J. O'Brien Edward J. O'Brien Senior Vice President, Treasurer and Secretary EX-10.26 3 EIGHTH AMENDMENT TO LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.26 EIGHTH AMENDMENT TO LOAN AND SECURITY AGREEMENT EIGHTH AMENDMENT TO LOAN AND SECURITY AGREEMENT, dated as of March 26, 1997, by and among CONGRESS FINANCIAL CORPORATION, a California corporation ("Lender"), HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania corporation ("HDPI"), BRAWN OF CALIFORNIA, INC., a California corporation ("Brawn"), GUMP'S BY MAIL, INC., a Delaware corporation ("GBM"), GUMP'S CORP., a California corporation ("Gump's"), THE COMPANY STORE, INC., a Wisconsin corporation ("TCSI"), TWEEDS, INC., a Delaware corporation ("Tweeds"), LWI HOLDINGS, INC., a Delaware corporation ("LWI"), AEGIS CATALOG CORPORATION, a Delaware corporation ("Aegis"), HANOVER DIRECT VIRGINIA INC., a Delaware corporation ("HDV"), HANOVER REALTY, INC., a Virginia corporation ("Hanover Realty"), and THE AUSTAD COMPANY, a South Dakota corporation ("Austad"; and together with HDPI, Brawn, GBM, Gump's, TCSI, Tweeds, LWI, Aegis, HDV and Hanover Realty, each individually referred to herein as a "Borrower" and collectively, "Borrowers") and HANOVER DIRECT, INC., a Delaware corporation ("Hanover"), AEGIS RETAIL CORPORATION, a Delaware corporation, AEGIS SAFETY HOLDINGS, INC., a Delaware corporation, AEGIS VENTURES, INC., a Delaware corporation, AMERICAN DOWN & TEXTILE COMPANY, a Wisconsin corporation, BRAWN WHOLESALE CORP., a California corporation, THE COMPANY FACTORY, INC., a Wisconsin corporation, THE COMPANY OFFICE, INC., a Wisconsin corporation, COMPANY STORE HOLDINGS, INC., a Delaware corporation, D.M. ADVERTISING, INC., a New Jersey corporation, GUMP'S CATALOG, INC., a Delaware corporation, GUMP'S HOLDINGS, INC., a Delaware corporation, HANOVER CASUALS, INC., a Delaware corporation, HANOVER CATALOG HOLDINGS, INC., a Delaware corporation, HANOVER FINANCE CORPORATION, a Delaware corporation, HANOVER LIST MANAGEMENT INC., a New Jersey corporation, HANOVER VENTURES, INC., a Delaware corporation, LEICHTUNG OF MICHIGAN, INC., a Michigan corporation, LWI RETAIL, INC., an Ohio corporation, SCANDIA DOWN CORPORATION, a Delaware corporation, TWEEDS OF VERMONT, INC., a Delaware corporation, YORK FULFILLMENT COMPANY, INC., a Pennsylvania corporation, and AUSTAD HOLDINGS, INC., a Delaware corporation (each individually a "Guarantor" and collectively, "Guarantors"). W I T N E S S E T H: WHEREAS, Borrowers, Guarantors and Lender entered into the Loan and Security Agreement, dated November 14, 1995, as amended by the First Amendment to Loan and Security Agreement, dated February 22, 1996, the Second Amendment to Loan and Security Agreement, dated April 16, 1996, the Third Amendment to Loan and Security Agreement, dated May 24, 1996, the Fourth Amendment to Loan and Security Agreement, dated May 31, 1996, the Fifth Amendment to Loan and Security Agreement, dated September 11, 1996, the Sixth Amendment to Loan and Security Agreement, dated as of December 5, 1996, and Seventh Amendment to Loan and Security Agreement, dated as of December 18, 1996 (the 2 "Loan Agreement"), pursuant to which Lender has made loans and advances to Borrowers; and WHEREAS, Borrowers, Guarantors and Lender wish to set forth their agreements relating to certain reductions to the Inventory Loan Formulas applicable to Eligible Inventory of Revolving Loan Borrowers; and WHEREAS, Borrowers and Guarantors have also requested that Lender waive certain Events of Default under the Loan Agreement and enter into certain amendments related thereto; and WHEREAS, the parties to the Loan Agreement desire to enter into this Eighth Amendment to Loan and Security Agreement (this "Amendment") to evidence and effectuate such amendments, waivers and agreements and certain additional amendments, to the extent set forth herein, and subject to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. (a) Additional Definitions. As used herein or in any of the other Financing Agreements, the following terms shall have the meanings given to them below, and the Loan Agreement shall be deemed and is hereby amended to include, in addition and not in limitation, the following definitions: (i) "Second Hanover Rights Offering" shall mean the proposed offering by Hanover of rights to purchase shares of common stock of Hanover for an aggregate, gross issuance price of up to $50,000,000, and the consummation of the transactions involving the exercise of such rights and the issuance of Hanover's common stock in respect of such exercise. (ii) "January 1997 Appraisal" shall mean the Appraisal prepared by Daley-Hodkin Appraisal Corporation setting forth, or setting forth information sufficient to enable Lender to determine, as of one or more dates in January 1997, the Net Orderly Liquidation Values of Eligible Inventory of Revolving Loan Borrowers, other than Gump's, and the Net GOB Value of Gump's Inventory. (b) Amendments to Definitions. Effective as of the date hereof, Section 1.143 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "1.143 [Intentionally Omitted]" (c) Interpretation. For purposes of this Amendment, unless otherwise defined herein, all capitalized terms -2- 3 used herein that are defined in the Loan Agreement, shall have the respective meanings given to such terms in the Loan Agreement. 2. Acknowledgements and Amendments regarding Inventory Loan Formulas. (a) Borrowers, Guarantors and Lender hereby acknowledge and agree that Lender has previously made certain reductions applicable during the period beginning November 15, 1996 and ending on February 13, 1997 pursuant to the exercise by Lender of its rights under the Loan Agreement, as such reductions are described in the letter, dated November 14, 1996, from Lender to Hanover re: Inventory Advance Rates, a copy of which is attached hereto as Exhibit A. (b) Notwithstanding anything to the contrary contained in the November 14, 1996 letter attached hereto as Exhibit A or in the January 1997 Appraisal, Borrowers, Guarantors and Lender agree that, effective February 14, 1997, the Inventory Loan Formulas shall be as set forth in the amendments to the Loan Agreement provided under Section 2(c) hereof. Borrowers and Guarantors hereby further acknowledge (i) the continuing rights of Lender to reduce further the Inventory Loan Formulas pursuant to the Loan Agreement, establish Availability Reserves and determine the criteria for Eligible Inventory as provided in the Loan Agreement and (ii) that nothing contained in this Amendment shall in any way limit the right of Lender at any time to make any further reductions to any of the Inventory Loan Formulas or limit or affect Lender's other rights and remedies upon an Event of Default or Incipient Default. (c) Effective as of February 14, 1997, Section 2.1(b) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(b) Revolving Inventory Loans. Subject to, and upon the terms and conditions contained herein and in the other Financing Agreements, Lender shall, from time to time, make Revolving Inventory Loans (i) to each Revolving Loan Borrower, other than Gump's and Austad's, at such Revolving Loan Borrower's request, of up to the lesser of (A) fifty-two percent (52%) of the Value of the Eligible Inventory of such Revolving Loan Borrower or (B) the Net OLV Percentage of the Value of such Eligible Inventory, and (ii) to Gump's, at its request, of up to the lesser of (A) sixty percent (60%) of the Value of Eligible Inventory of Gump's or (B) the Net GOB Percentage of the Value of Eligible Inventory of Gump's, and (iii) to Austad, at its request, of up to the lesser of (A) twenty-two (22%) of the Value of Eligible Inventory of Austad or (B) the Net OLV Percentage of the Value of such Eligible Inventory, or, in the case of Eligible Inventory described in each of clauses (b)(i), (b)(ii) or (b)(iii), such greater or -3- 4 lesser percentages thereof as Lender shall, in its sole discretion, determine from time to time (the "Inventory Loan Formulas"). Without limiting the foregoing, the fifty-two percent (52%) lending formula component referred to in clause (b)(i)(A), the sixty percent (60%) lending formula component referred to in clause (b)(ii)(A) and the twenty-two percent (22%) lending formula component referred to in clause (b)(iii)(A) may be adjusted downward by Lender based upon any adverse change, individually or in the aggregate, in the turnover of Eligible Inventory or deterioration in mix, nature or quality of Eligible Inventory in the respective categories of Eligible Inventory, and any such downward adjustment made for such reason(s) (or on the basis of the lending formula component set forth in clauses (b)(i)(B), (b)(ii)(B) or (b)(iii)(B) above) shall not be considered solely discretionary for purposes of the provision contained in the definition of Interest Rate and Section 2.7(c) hereof." 3. Waiver and Amendment regarding Material Adverse Changes. (a) Lender hereby waives any Event of Default arising under Section 7.1(i) of the Loan Agreement, as such provision was in effect through and including December 28, 1996. (b) Effective as of December 29, 1996, Section 7.1(i) of the Loan Agreement is hereby amended by deleting the phrase "after September 30, 1995" contained therein and replacing it with the phrase "after December 28, 1996." 4. Waiver and Amendment regarding Consolidated Working Capital. (a) Lender hereby waives any Event of Default arising under Section 7.1(b) of the Loan Agreement by reason of the failure of Hanover to maintain Consolidated Working Capital for Hanover and its Subsidiaries in the amount required under Section 6.19 of the Loan Agreement as of and through December 28, 1996. (b) Effective as of December 29, 1996, Section 6.19 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "6.19 Consolidated Working Capital. (a) Subject to Section 6.19(b) hereof, Hanover shall maintain Consolidated Working Capital, calculated on a consolidated basis for Hanover and its Subsidiaries, of not less than the following amounts as at the end of each of the following fiscal months: -4- 5
Period Amount ------ ------ (i) January 1997 through -$ 5,000,000 May 1997 (negative $5,000,000) (ii) June 1997 through -$10,000,000 November 1997 (negative $10,000,000) (iii) December 1997 -$20,000,000 and each fiscal (negative $20,000,000) month thereafter
(b) If Hanover consummates the Second Hanover Rights Offering or any other equity offering or equity private placement and receives net cash proceeds therefrom in an amount not less than Thirty Million Dollars ($30,000,000), then the respective amount of Consolidated Working Capital that Hanover and its Subsidiaries shall be required to maintain as at the end of the then-current fiscal month ending after receipt of such net cash proceeds and as at the end of each fiscal month thereafter shall be increased to an amount equal to Ten Million Dollars ($10,000,000) above the respective amounts otherwise provided for as at the end of each such fiscal month pursuant to Section 6.19(a) hereof." 5. Waiver and Amendment regarding Consolidated Net Worth. (a) Lender hereby waives the Event of Default arising under Section 7.1(b) of the Loan Agreement by reason of the failure of Hanover to maintain Consolidated Net Worth for Hanover and its Subsidiaries in the amount required under Section 6.20 of the Loan Agreement as of and through December 28, 1996. (b) Effective as of December 29, 1996, Section 6.20 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "6.20 Consolidated Net Worth. (a) Subject to Section 6.20(b) hereof, Hanover shall maintain Consolidated Net Worth, calculated on a consolidated basis for Hanover and its Subsidiaries, of not less than the following amounts as at the end of each of the following fiscal months:
Period Amount ------ ------ (i) January 1997 $14,000,000 through May 1997 (ii) June 1997 and $11,500,000 each fiscal month thereafter
-5- 6 (b) If Hanover consummates the Second Hanover Rights Offering or any other equity offering or equity private placement and receives net cash proceeds therefrom in an amount not less than Thirty Million Dollars ($30,000,000), then the respective amount of Consolidated Net Worth that Hanover and its Subsidiaries shall be required to maintain as at the end of the then-current fiscal month ending after receipt of such net cash proceeds and as at the end of each fiscal month thereafter shall be increased to an amount equal to Ten Million Dollars ($10,000,000) above the respective amount otherwise provided for as at the end of each such fiscal month pursuant to Section 6.20(a) hereof." 6. Second Hanover Rights Offering; Other Equity. (a) Hanover shall provide Lender not less than ten (10) Banking Days prior written notice of the scheduled consummation of the Second Hanover Rights Offering or any other equity offering or equity private placement by Hanover, together with a description of terms, amount and such other information and copies of such documents, agreements and instruments as Lender may reasonably request. Upon receipt by Hanover of the net cash proceeds of the Second Hanover Rights Offering or any such other equity offering or equity private placement, net of commissions and expenses relating thereto, Hanover shall use all such net cash proceeds, to make a capital contribution or intercompany advance to Borrowers, evidence of which Borrowers shall deliver to Lender, in form and substance satisfactory to Lender, to be, in turn, delivered to Lender for application to the outstanding balances of the Revolving Loans of such Borrowers and in such amounts as Lender shall approve in good faith. (b) After an aggregate of $50,000,000 of net proceeds have been received by Hanover from the Second Hanover Rights Offering or any other equity offering(s) or equity private placement(s) consummated by Hanover after the date hereof, of which not less than $40,000,000 in net cash proceeds shall have been received by Hanover and used and applied as provided in Section 6(a) of this Amendment, the provisions of Section 6(a) of this Amendment shall not apply to any subsequent equity offering(s) or equity private placement(s) by Hanover or the proceeds thereof (but all other applicable provisions of this Amendment, the Loan Agreement and other Financing Agreements shall continue to apply with respect thereto). (c) Supplementing the provisions of the letter agreement dated September 11, 1996 among Lender, Hanover and IMR, Lender agrees that IMR may apply all or any portion of the outstanding indebtedness evidenced by the $10,000,000 IMR Note to the purchase price of rights to purchase common stock of Hanover issued pursuant to the Second Hanover Rights Offering. Such application shall not, however, be deemed to give rise to cash proceeds for purposes of this Amendment. -6- 7 7. Amendments to Certain Termination Fee Provisions. (a) Section 9.1(a) of the Loan Agreement is hereby amended by deleting the phrase "Renewal Date four (4) years" contained therein and substituting therefor the phrase "Renewal Date to the date which is four (4) years." (b) Section 9.1(f) of the Loan Agreement is hereby amended by deleting the phrase "Termination Date" and substituting the phrase "Renewal Date" in its place. (c) Section 9.1(g) hereof is hereby deleted in its entirety and replaced with the following: "(g) [Intentionally Omitted]" 8. Waiver and Amendment Fee. (a) In addition to all other fees, charges, interest and expenses payable by Borrowers to Lender under the Loan Agreement and the other Financing Agreements, Borrowers shall pay to Lender a fee for entering into this Amendment in the amount of Two Hundred Thousand Dollars ($200,000), which fee is fully earned as of the date hereof, and shall be payable as follows: (i) One Hundred Twenty-Five Thousand Dollars ($125,000) of such fee shall be payable as of the date hereof and may be charged directly to HDPI's Revolving Loan account maintained by Lender; and (ii) subject to Section 8(b) hereof, Seventy-Five Thousand Dollars ($75,000) of such fee shall be payable on October 1, 1997. (b) Solely as an accommodation to Borrowers and Guarantors, Lender agrees to waive that portion of the fee in the amount of Seventy-Five Thousand Dollars ($75,000) otherwise payable as provided in Section 8(a)(ii) hereof; provided, that, (i) Hanover consummates the Second Hanover Rights Offering or other equity offering or equity private placement on or before September 30, 1997 and receives net cash proceeds therefrom in an amount not less than $30,000,000 that are applied in accordance with the terms and conditions of Section 6 hereof and (ii) as of the date of the receipt of such net cash proceeds and after giving effect to the transactions contemplated hereby, no Incipient Default or Event of Default exists or has occurred and is continuing. 9. Representations Warranties and Covenants. Borrowers represent, warrant and covenant with and to Lender as follows, which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof, the truth and accuracy of, or compliance with each, together with the representations, warranties and covenants in the other -7- 8 Financing Agreements, being a condition of the effectiveness of this Amendment and a continuing condition of the making or providing of any Revolving Loans or Letter of Credit Accommodations by Lender to Borrowers: (a) This Amendment has been duly authorized, executed and delivered by all necessary action of each of the Borrowers and Guarantors which is a party hereto, and is in full force and effect, and the agreements and obligations of Borrowers and Guarantors, as the case may be, contained herein constitute legal, valid and binding obligations of Borrowers and Guarantors, as the case may be, enforceable against them in accordance with their terms. (b) All of the representations and warranties set forth in the Loan Agreement as amended hereby, and the other Financing Agreements, are true and correct in all material respects after giving effect to the provisions of this Amendment, except to the extent any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such date. (c) Within thirty (30) days after the date hereof, Borrowers and Guarantors shall deliver to Lender, in form and substance satisfactory to Lender, together with all additional financing statements and third party agreements as Lender shall require with respect thereto, a complete and accurate chart, which chart shall amend, restate, and replace Exhibit C to the Loan and Security Agreement, identifying the places of business or locations of assets of each Borrower and Guarantor, including (i) the location of the chief executive office of each Borrower and Guarantor, (ii) the location of where each Borrower and Guarantor maintains its books and records pertaining to accounts, contract rights, inventory, equipment and other assets, if different from the location of its chief executive office, and the location of all other places of business and locations of inventory, equipment or other assets of each Borrower and Guarantor, indicating whether the locations are owned, leased or operated by third parties and if leased or operated by third parties, their names and addresses. (d) After giving effect to the provisions of this Amendment, no Event of Default or Incipient Default exists or has occurred and is continuing. 10. Conditions Precedent. Concurrently with the execution hereof, and as a condition to the effectiveness of this Amendment and the agreement of Lender to the modifications, waivers and amendments set forth in this Amendment, Lender shall have received an original of this Amendment, in form and substance satisfactory to Lender, duly authorized, executed and delivered by Borrowers and Guarantors. -8- 9 11. Effect of this Amendment. This Amendment constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedes all prior oral or written communications, memoranda, proposals, negotiations, discussions, term sheets and commitments with respect to the subject matter hereof. Except as expressly provided herein, no other changes or modifications to the Loan Agreement or any of the other Financing Agreements, or waivers of or consents under any provisions of any of the foregoing, are intended or implied by this Amendment, and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent that any provision of the Loan Agreement or any of the other Financing Agreements conflicts with any provision of this Amendment, the provision of this Amendment shall control. 12. Further Assurances. Borrowers and Guarantors shall execute and deliver such additional documents and take such additional action as may be reasonably requested by Lender to effectuate the provisions and purposes of this Amendment. 13. Governing Law. The rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the internal laws of the State of New York (without giving effect to principles of conflicts of laws). 14. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 15. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed on the day and year first written. CONGRESS FINANCIAL CORPORATION By:/S/ JANET S. LAST ------------------------- Title: Vice President --------------------- [SIGNATURES CONTINUE ON NEXT PAGE] -9- 10 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER DIRECT PENNSYLVANIA, INC. /s/ Edward J. O'Brien By:_________________________ Title: Vice President BRAWN OF CALIFORNIA, INC. /s/ Edward J. O'Brien By:_________________________ Title: Vice President GUMP'S BY MAIL, INC. /s/ Edward J. O'Brien By:_________________________ Title: Vice President GUMP'S CORP. /s/ Edward J. O'Brien By:_________________________ Title: Vice President THE COMPANY STORE, INC. /s/ Edward J. O'Brien By:_________________________ Title: Vice President TWEEDS, INC. /s/ Edward J. O'Brien By:_________________________ Title: Vice President LWI HOLDINGS, INC. /s/ Edward J. O'Brien By:_________________________ Title: Vice President [SIGNATURES CONTINUE ON NEXT PAGE] -10- 11 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AEGIS CATALOG CORPORATION /s/ Edward J. O'Brien By:_________________________ Title: Vice President HANOVER DIRECT VIRGINIA INC. /s/ Edward J. O'Brien By:_________________________ Title: Vice President HANOVER REALTY, INC. /s/ Edward J. O'Brien By:_________________________ Title: Vice President THE AUSTAD COMPANY /s/ Edward J. O'Brien By:_________________________ Title: Vice President By their signatures below, the undersigned Guarantors acknowledge and agree to be bound by the applicable provisions of this Amendment: HANOVER DIRECT, INC. /s/ Edward J. O'Brien By:____________________________ Title: Senior Vice President AEGIS RETAIL CORPORATION /s/ Edward J. O'Brien By:____________________________ Title: Vice President [SIGNATURES CONTINUE ON NEXT PAGE] -11- 12 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AEGIS SAFETY HOLDINGS, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President AEGIS VENTURES, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President AMERICAN DOWN & TEXTILE COMPANY /s/ Edward J. O'Brien By:____________________________ Title: Vice President BRAWN WHOLESALE CORP. /s/ Edward J. O'Brien By:____________________________ Title: Vice President THE COMPANY FACTORY, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President THE COMPANY OFFICE, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President COMPANY STORE HOLDINGS, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President [SIGNATURES CONTINUE ON NEXT PAGE] -12- 13 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] D.M. ADVERTISING, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President GUMP'S CATALOG, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President GUMP'S HOLDINGS, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President HANOVER CASUALS, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President HANOVER CATALOG HOLDINGS, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President HANOVER FINANCE CORPORATION /s/ Edward J. O'Brien By:____________________________ Title: Vice President HANOVER LIST MANAGEMENT, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President [SIGNATURES CONTINUE ON NEXT PAGE] -13- 14 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER VENTURES, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President LEICHTUNG OF MICHIGAN, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President LWI RETAIL, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President SCANDIA DOWN CORPORATION /s/ Edward J. O'Brien By:____________________________ Title: Vice President TWEEDS OF VERMONT, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President YORK FULFILLMENT COMPANY, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President AUSTAD HOLDINGS, INC. /s/ Edward J. O'Brien By:____________________________ Title: Vice President -14- 15 EXHIBIT A TO EIGHTH AMENDMENT TO LOAN AND SECURITY AGREEMENT November 14, 1996 [Congress Financial LOGO] VIA FACSIMILE Mr. Larry Svoboda Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, New Jersey 07087 Re: INVENTORY ADVANCE RATES Dear Larry: Tomorrow we will commence our inventory advance rate reductions in connection with the recent appraisal by Daley-Hodkin and in accordance with the financing agreements. The following modifications to our advance formulas will be implemented:
Inventory Category New Advance Rate Implementation - ------------------ ---------------- -------------- AUSTADS 25% 11/15/96 - Drops from 40% to 32.5% 12/16/96 - Drops from 32.5% to 25% CATALOGS OTHER THAN AUSTADS 55% 11/15/96 - Drops from 60% to 57.5% 12/16/96 - Drops from 57.5% to 55% GUMPS RETAIL 60% (No Change)
Due to the deterioration in the inventory collateral we will require another appraisal to be performed based upon inventory on hand at January 31, 1997. Until then, commencing January 15, 1997 and each 30 days thereafter, the advance rates will be further reduced by 1.5% per month pending completion of that appraisal. Larry I would have preferred to discuss the above with you rather than to inform you by letter, however, I have not been able to reach you this week. Obviously we are available to discuss your questions or comments, so please feel free to call us. Very truly yours, CONGRESS FINANCIAL CORPORATION /s/ Janet S. Last ------------------------------- Janet S. Last Vice President CONGRESS FINANCIAL OFFICES IN MAJOR CITIES THROUGHOUT THE COUNTRY A CORESTATES COMPANY EX-10.27 4 NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.27 NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT, dated as of April 18, 1997, by and among CONGRESS FINANCIAL CORPORATION, a California corporation ("Lender"), HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania corporation ("HDPI"), BRAWN OF CALIFORNIA, INC., a California corporation ("Brawn"), GUMP'S BY MAIL, INC., a Delaware corporation ("GBM"), GUMP'S CORP., a California corporation ("Gump's"), THE COMPANY STORE, INC., a Wisconsin corporation ("TCSI"), TWEEDS, INC., a Delaware corporation ("Tweeds"), LWI HOLDINGS, INC., a Delaware corporation ("LWI"), AEGIS CATALOG CORPORATION, a Delaware corporation ("Aegis"), HANOVER DIRECT VIRGINIA INC., a Delaware corporation ("HDV"), HANOVER REALTY, INC., a Virginia corporation ("Hanover Realty"), and THE AUSTAD COMPANY, a South Dakota corporation ("Austad"; and together with HDPI, Brawn, GBM, Gump's, TCSI, Tweeds, LWI, Aegis, HDV and Hanover Realty, each individually referred to herein as a "Borrower" and collectively, "Borrowers") and HANOVER DIRECT, INC., a Delaware corporation ("Hanover"), AEGIS RETAIL CORPORATION, a Delaware corporation, AEGIS SAFETY HOLDINGS, INC., a Delaware corporation, AEGIS VENTURES, INC., a Delaware corporation, AMERICAN DOWN & TEXTILE COMPANY, a Wisconsin corporation, BRAWN WHOLESALE CORP., a California corporation, THE COMPANY FACTORY, INC., a Wisconsin corporation, THE COMPANY OFFICE, INC., a Wisconsin corporation, COMPANY STORE HOLDINGS, INC., a Delaware corporation, D.M. ADVERTISING, INC., a New Jersey corporation, GUMP'S CATALOG, INC., a Delaware corporation, GUMP'S HOLDINGS, INC., a Delaware corporation, HANOVER CASUALS, INC., a Delaware corporation, HANOVER CATALOG HOLDINGS, INC., a Delaware corporation, HANOVER FINANCE CORPORATION, a Delaware corporation, HANOVER LIST MANAGEMENT INC., a New Jersey corporation, HANOVER VENTURES, INC., a Delaware corporation, LEICHTUNG OF MICHIGAN, INC., a Michigan corporation, LWI RETAIL, INC., an Ohio corporation, SCANDIA DOWN CORPORATION, a Delaware corporation, TWEEDS OF VERMONT, INC., a Delaware corporation, YORK FULFILLMENT COMPANY, INC., a Pennsylvania corporation, and AUSTAD HOLDINGS, INC., a Delaware corporation (each individually a "Guarantor" and collectively, "Guarantors"). W I T N E S S E T H: WHEREAS, Borrowers, Guarantors and Lender entered into the Loan and Security Agreement, dated November 14, 1995, as amended by the First Amendment to Loan and Security Agreement, dated February 22, 1996, the Second Amendment to Loan and Security Agreement, dated April 16, 1996, the Third Amendment to Loan and Security Agreement, dated May 24, 1996, the Fourth Amendment to Loan and Security Agreement, dated May 31, 1996, the 2 Fifth Amendment to Loan and Security Agreement, dated September 11, 1996, the Sixth Amendment to Loan and Security Agreement, dated as of December 5, 1996, the Seventh Amendment to Loan and Security Agreement, dated as of December 18, 1996, and the Eighth Amendment to Loan and Security Agreement, dated as of March 26, 1997 (the "Loan Agreement"), pursuant to which Lender has made loans and advances to Borrowers; and WHEREAS, Borrowers and Guarantors have requested that Lender enter into certain amendments to the Loan Agreement and agreements in connection with the making of a loan by Richemont to Hanover in the original principal amount of up to $30,000,000; and WHEREAS, the parties to the Loan Agreement desire to enter into this Ninth Amendment to Loan and Security Agreement (this "Amendment") to evidence and effectuate such amendments and agreements, subject to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. (a) Additional Definitions. As used herein or in any of the other Financing Agreements, the following terms shall have the meanings given to them below, and the Loan Agreement shall be deemed and is hereby amended to include, in addition and not in limitation, the following definitions: (i) "$30,000,000 Richemont Loan" shall mean the loan made on or about the date hereof by Richemont to Hanover in the original principal amount of up to $30,000,000. (ii) "$30,000,000 Richemont Note" shall mean the Promissory Note, dated as of the date hereof, by Hanover payable to Richemont in the original principal amount of up to $30,000,000 delivered to evidence the $30,000,000 Richemont Loan plus interest thereon. (b) Amendment to Definition. Section 1.23 of the Loan Agreement is hereby amended by deleting the proviso appearing at the end thereof and substituting the following proviso therefor, effective as of the date hereof: -2- 3 "; provided, however, that solely for purposes of calculating Consolidated Working Capital hereunder, the outstanding balance of the Revolving Loans and the Term Loans and the outstanding balance of the $10,000,000 IMR Note and the outstanding balance of the $30,000,000 Richemont Note shall not be considered current liabilities." (c) Interpretation. For purposes of this Amendment, unless otherwise defined herein, all capitalized terms used herein that are defined in the Loan Agreement, shall have the respective meanings given to such terms in the Loan Agreement. 2. Use of Proceeds and Repayment of Richemont Loan. (a) Hanover agrees to use all of the proceeds of the $30,000,000 Richemont Loan solely to make cash capital contributions or intercompany cash advances to Revolving Loan Borrowers and Revolving Loan Borrowers agree to use the proceeds thereof from Hanover solely for working capital or for other proper corporate purposes of Revolving Loan Borrowers not otherwise prohibited by the terms of the Loan Agreement and the other Financing Agreements. Hanover and Revolving Loan Borrowers shall arrange for the disbursement of the $30,000,000 Richemont Loan and the corresponding cash capital contributions or intercompany cash advances by Hanover to Revolving Loan Borrowers, by wire transfer(s) directly from Richemont to the Blocked Account(s) designated by Lender, for credit to the applicable Revolving Loan Borrowers' Revolving Loan accounts maintained by Lender. (b) Hanover agrees and acknowledges that Richemont's rights to payment of the $30,000,000 Richemont Loan and certain other related indebtedness and obligations shall be subordinated in favor of Lender and may only be paid by Hanover and received by Richemont as and to the extent permitted by the terms of the subordination agreement delivered pursuant to Section 4(b)(ii) hereof. (c) Hanover and the other Guarantors and Borrowers hereby acknowledge and confirm that nothing contained herein or in Sections 6.5 and 6.6 of the Loan Agreement shall be construed or interpreted to permit Revolving Loan Borrowers (i) to repay any intercompany cash advances made by Hanover to Revolving Loan Borrowers with the proceeds of the $30,000,000 Richemont Loan for the purpose of repaying the indebtedness of Hanover to Richemont or (ii) to declare or pay any dividend on account of any capital stock of Revolving Loan Borrowers evidencing any cash capital contributions by Hanover with the proceeds of the $30,000,000 Richemont Loan or to redeem, retire, -3- 4 defease, purchase or otherwise acquire for value any shares of such capital stock of Revolving Loan Borrowers. 3. Representations Warranties and Covenants. Borrowers represent, warrant and covenant with and to Lender as follows, which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof, the truth and accuracy of, or compliance with each, together with the representations, warranties and covenants in the other Financing Agreements, being a condition of the effectiveness of this Amendment and a continuing condition of the making or providing of any Revolving Loans or Letter of Credit Accommodations by Lender to Borrowers: (a) This Amendment has been duly authorized, executed and delivered by all necessary action of each of the Borrowers and Guarantors which is a party hereto, and is in full force and effect, and the agreements and obligations of Borrowers and Guarantors, as the case may be, contained herein constitute legal, valid and binding obligations of Borrowers and Guarantors, as the case may be, enforceable against them in accordance with their terms. (b) Neither the execution and delivery of the $30,000,000 Richemont Note, the making of the cash capital contributions or intercompany cash loans by Hanover to Revolving Loan Borrowers contemplated by Section 2 hereof, or any other agreements, documents or instruments in connection therewith, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof (i) has violated or shall violate any Federal or State securities laws or any other law or regulation or any order or decree of any court or governmental instrumentality in any respect, or (ii) does, or shall conflict with or result in the breach of, or constitute a default in any respect under any mortgage, deed of trust, security agreement, agreement or instrument to which Hanover or any other Guarantor or any Borrower is a party or may be bound, or (iii) does or shall violate any provision of the Certificate of Incorporation or By-Laws of Hanover of any other Guarantor or any Borrower. (c) All of the representations and warranties set forth in the Loan Agreement as amended hereby, and the other Financing Agreements, are true and correct in all material respects after giving effect to the provisions of this Amendment, except to the extent any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such date. (d) After giving effect to the provisions of this Amendment, no Event of Default or Incipient Default exists or has occurred and is continuing. -4- 5 4. Conditions Precedent. Concurrently with the execution hereof, and as a condition to the effectiveness of this Amendment and the agreement of Lender to the modifications, waivers and amendments set forth in this Amendment: (a) Lender shall have received an original of this Amendment, in form and substance satisfactory to Lender, duly authorized, executed and delivered by Borrowers and Guarantors; and (b) Lender shall have received, each in form and substance satisfactory to Lender, (i) a true and complete copy of the $30,000,000 Richemont Note and all agreements, documents and instruments relating thereto, and (ii) a written subordination agreement, dated as of the date hereof, between Richemont and Lender, as acknowledged by Hanover, pursuant to which, among other things, Richemont shall have subordinated its right to payment under the $30,000,000 Richemont Note to the prior indefeasible payment of all of the Obligations, to the extent provided therein, duly authorized, executed and delivered by Hanover and Richemont, together with an opinion of Luxembourg counsel to Richemont addressed to Lender with respect to the due authorization, execution and validity and enforceability of such subordination agreement, and as to such other matters as Lender shall reasonably require; and (iii) true and complete copies of all agreements, documents instruments evidencing the cash capital contributions or intercompany cash advances by Hanover to Revolving Loan Borrowers contemplated by Section 2 hereof. 5. Effect of this Amendment. This Amendment constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedes all prior oral or written communications, memoranda, proposals, negotiations, discussions, term sheets and commitments with respect to the subject matter hereof. Except as expressly provided herein, no other changes or modifications to the Loan Agreement or any of the other Financing Agreements, or waivers of or consents under any provisions of any of the foregoing, are intended or implied by this Amendment, and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent that any provision of the Loan Agreement or any of the other Financing Agreements conflicts with any provision of this Amendment, the provision of this Amendment shall control. -5- 6 6. Further Assurances. Borrowers and Guarantors shall execute and deliver such additional documents and take such additional action as may be reasonably requested by Lender to effectuate the provisions and purposes of this Amendment. 7. Governing Law. The rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the internal laws of the State of New York (without giving effect to principles of conflicts of laws). 8. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 9. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed on the day and year first written. CONGRESS FINANCIAL CORPORATION By:/S/ JANET S. LAST ------------------------- Title: Vice President ---------------------- HANOVER DIRECT PENNSYLVANIA, INC. By: /s/ Edward J. O'Brien ------------------------- Title: Vice President ---------------------- [SIGNATURES CONTINUE ON NEXT PAGE] -6- 7 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] BRAWN OF CALIFORNIA, INC. /s/ Edward J. O'Brien By:_________________________ Vice President Title:______________________ GUMP'S BY MAIL, INC. /s/ Edward J. O'Brien By:_________________________ Vice President Title:______________________ GUMP'S CORP. /s/ Edward J. O'Brien By:_________________________ Vice President Title:______________________ THE COMPANY STORE, INC. /s/ Edward J. O'Brien By:_________________________ Vice President Title:______________________ TWEEDS, INC. /s/ Edward J. O'Brien By:_________________________ Vice President Title:______________________ [SIGNATURES CONTINUE ON NEXT PAGE] -7- 8 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] LWI HOLDINGS, INC. /s/ Edward J. O'Brien By:_________________________ Vice President Title:______________________ AEGIS CATALOG CORPORATION /s/ Edward J. O'Brien By:_________________________ Vice President Title:______________________ HANOVER DIRECT VIRGINIA INC. /s/ Edward J. O'Brien By:_________________________ Vice President Title:______________________ HANOVER REALTY, INC. /s/ Edward J. O'Brien By:_________________________ Vice President Title:______________________ THE AUSTAD COMPANY /s/ Edward J. O'Brien By:_________________________ Vice President Title:______________________ By their signatures below, the undersigned Guarantors acknowledge and agree to be bound by the applicable provisions of this Amendment: HANOVER DIRECT, INC. /s/ Edward J. O'Brien By:____________________________ Senior Vice President Title:_________________________ [SIGNATURES CONTINUE ON NEXT PAGE] -8- 9 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AEGIS RETAIL CORPORATION /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ AEGIS SAFETY HOLDINGS, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ AEGIS VENTURES, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ AMERICAN DOWN & TEXTILE COMPANY /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ BRAWN WHOLESALE CORP. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ THE COMPANY FACTORY, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ THE COMPANY OFFICE, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ [SIGNATURES CONTINUE ON NEXT PAGE] -9- 10 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] COMPANY STORE HOLDINGS, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ D.M. ADVERTISING, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ GUMP'S CATALOG, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ GUMP'S HOLDINGS, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ HANOVER CASUALS, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ HANOVER CATALOG HOLDINGS, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ HANOVER FINANCE CORPORATION /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ [SIGNATURES CONTINUE ON NEXT PAGE] -10- 11 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER LIST MANAGEMENT, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ HANOVER VENTURES, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ LEICHTUNG OF MICHIGAN, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ LWI RETAIL, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ SCANDIA DOWN CORPORATION /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ TWEEDS OF VERMONT, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ [SIGNATURES CONTINUE ON NEXT PAGE] -11- 12 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] YORK FULFILLMENT COMPANY, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ AUSTAD HOLDINGS, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ -12- EX-10.28 5 TENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.28 TENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT AND AMENDMENT TO TERM NOTES TENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT, dated as of October 31, 1997, by and among CONGRESS FINANCIAL CORPORATION, a California corporation ("Lender"), HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania corporation ("HDPI"), BRAWN OF CALIFORNIA, INC., a California corporation ("Brawn"), GUMP'S BY MAIL, INC., a Delaware corporation ("GBM"), GUMP'S CORP., a California corporation ("Gump's"), THE COMPANY STORE, INC., a Wisconsin corporation ("TCSI"), TWEEDS, INC., a Delaware corporation ("Tweeds"), LWI HOLDINGS, INC., a Delaware corporation ("LWI"), AEGIS CATALOG CORPORATION, a Delaware corporation ("Aegis"), HANOVER DIRECT VIRGINIA INC., a Delaware corporation ("HDV"), HANOVER REALTY, INC., a Virginia corporation ("Hanover Realty"), and THE AUSTAD COMPANY, a South Dakota corporation ("Austad"; and together with HDPI, Brawn, GBM, Gump's, TCSI, Tweeds, LWI, Aegis, HDV and Hanover Realty, each individually referred to herein as a "Borrower" and collectively, "Borrowers"), and HANOVER DIRECT, INC., a Delaware corporation ("Hanover"), AEGIS RETAIL CORPORATION, a Delaware corporation, AEGIS SAFETY HOLDINGS, INC., a Delaware corporation, AEGIS VENTURES, INC., a Delaware corporation, AMERICAN DOWN & TEXTILE COMPANY, a Wisconsin corporation, BRAWN WHOLESALE CORP., a California corporation, THE COMPANY FACTORY, INC., a Wisconsin corporation, THE COMPANY OFFICE, INC., a Wisconsin corporation, COMPANY STORE HOLDINGS, INC., a Delaware corporation, D.M. ADVERTISING, INC., a New Jersey corporation, GUMP'S CATALOG, INC., a Delaware corporation, GUMP'S HOLDINGS, INC., a Delaware corporation, HANOVER CASUALS, INC., a Delaware corporation, HANOVER CATALOG HOLDINGS, INC., a Delaware corporation, HANOVER FINANCE CORPORATION, a Delaware corporation, HANOVER LIST MANAGEMENT INC., a New Jersey corporation, HANOVER VENTURES, INC., a Delaware corporation, LWI RETAIL, INC., an Ohio corporation, SCANDIA DOWN CORPORATION, a Delaware corporation, TWEEDS OF VERMONT, INC., a Delaware corporation, YORK FULFILLMENT COMPANY, INC., a Pennsylvania corporation, and AUSTAD HOLDINGS, INC., a Delaware corporation (each individually a "Guarantor" and collectively, "Guarantors"). W I T N E S S E T H: WHEREAS, Borrowers, Guarantors and Lender are parties to the Loan and Security Agreement, dated November 14, 1995, as amended by the First Amendment to Loan and Security Agreement, dated February 22, 1996 (the "First Amendment to Loan Agreement"), the Second Amendment to Loan and Security Agreement, dated April 16, 1996, the Third Amendment to Loan and Security Agreement, dated May 24, 1996, the Fourth Amendment to Loan and Security Agreement, dated May 31, 1996, the Fifth Amendment to 2 Loan and Security Agreement, dated September 11, 1996, the Sixth Amendment to Loan and Security Agreement, dated as of December 5, 1996, the Seventh Amendment to Loan and Security Agreement, dated as of December 18, 1996, the Eighth Amendment to Loan and Security Agreement, dated as of March 26, 1997, and the Ninth Amendment to Loan and Security Agreement, dated as of April 18, 1997 (as so amended, the "Loan Agreement"), pursuant to which Lender has made loans and advances to Borrowers; and WHEREAS, Borrowers and Guarantors have requested that Lender consent to, and enter into certain amendments to the Loan Agreement and agreements in connection with, certain mergers of certain former and existing Borrowers and/or Guarantors described herein and the dissolution of a former Guarantor described herein, and to extend the maturity dates and amortization schedules in respect of the outstanding Term Loans; and WHEREAS, the parties to the Loan Agreement desire to enter into this Tenth Amendment to Loan and Security Agreement (this "Amendment") to evidence and effectuate such consents, amendments and agreements, subject to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. (a) Additional Definitions. As used herein or in any of the other Financing Agreements, the following terms shall have the meanings given to them below, and the Loan Agreement shall be deemed and is hereby amended to include, in addition and not in limitation, the following definitions: (i) "Hanover Direct NJ/DM Advertising Merger" shall mean the merger of Hanover Direct New Jersey, Inc. with and into D.M. Advertising, Inc., with D.M. Advertising, Inc. as the surviving corporation. (ii) "Hanover Holdings/Aegis Holdings Merger" shall mean the merger of Hanover Holdings, Inc. with and into Aegis Safety Holdings, Inc., with Aegis Safety Holdings, Inc. as the surviving corporation. (iii) "Hanover Subsidiary Merger Agreements" shall mean, collectively, the certificates or agreements executed, delivered or filed in connection with, or otherwise evidencing, the Hanover Direct NJ/DM Advertising Merger, the Hanover Holdings/Aegis Holdings Merger, the Skandia/American Down Merger and the TW Acquisitions/Tweeds Merger, and all related -2- 3 agreements, documents and instruments, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (iv) "Leichtung of Michigan Dissolution Agreements" shall mean, collectively, the certificates or agreements executed, delivered or filed in connection with, or otherwise evidencing, the dissolution of Leichtung of Michigan, Inc., and all related agreements, documents and instruments, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (v) "Skandia/American Down Merger" shall mean the merger of Skandia Downsales, Inc. with and into American Down & Textile Company, with American Down & Textile Company as the surviving corporation. (vi) "TW Acquisitions/Tweeds Merger" shall mean the merger of TW Acquisitions, Inc. with and into Tweeds, Inc., with Tweeds, Inc. as the surviving corporation. (b) Interpretation. For purposes of this Amendment, unless otherwise defined herein, all capitalized terms used herein that are defined in the Loan Agreement, shall have the respective meanings given to such terms in the Loan Agreement. 2. Consents. (a) Mergers. Subject to the terms and conditions contained herein and in the Loan Agreement and in the other Financing Agreements, and notwithstanding anything contained in Section 6.7 of the Loan Agreement to the contrary, Lender consents to the Hanover Direct NJ/DM Advertising Merger, the TW Acquisition/Tweeds Merger, the Hanover Holdings/Aegis Holdings Merger and the Skandia/American Down Merger, each of which was effected prior to the date hereof. (b) Guarantor dissolution. Subject to the terms and conditions contained herein and in the Loan Agreement and in the other Financing Agreements, and notwithstanding anything contained in Section 6.7 of the Loan Agreement to the contrary, Lender consents to the dissolution of Leichtung of Michigan, Inc., which was effected prior to the date hereof. (c) Additional consent. Subject to the terms and conditions contained herein and in the Loan Agreement and in the other Financing Agreements, and notwithstanding anything contained in Section 5.7 of the Loan Agreement to the contrary, Lender consents to the relocation of the chief executive office -3- 4 of GBM from 135 Post Street, San Francisco, California 94108 to 1500 Harbor Boulevard, Weehawken, New Jersey 07087. 3. Acknowledgments Regarding Mergers and Dissolutions. (a) Mergers. Each of Borrowers and Guarantors hereby acknowledges, confirms and agrees that, upon the effectiveness of the mergers consented to under Section 2(a) hereof, by operation of law and this Amendment: (i) Tweeds, as the surviving corporation pursuant to the TW Acquisitions/Tweeds Merger, is now and shall continue to be directly and primarily liable in all respects for the Obligations of TW Acquisitions arising prior to the effective time of the TW Acquisitions/Tweeds Merger; (ii) American Down & Textile Company, as the surviving corporation pursuant to the Skandia/American Down Merger, is now and shall continue to be directly and primarily liable in all respects for the Obligations of Skandia Downsales, Inc. arising prior to the effective time of the Skandia/American Down Merger; (iii) D.M. Advertising, Inc., as the surviving corporation pursuant to the Hanover Direct NJ/DM Advertising Merger, is now and shall continue to be directly and primarily liable in all respects for the Obligations of Hanover Direct New Jersey, Inc. arising prior to the effective time of the Hanover Direct NJ/DM Advertising Merger; (iv) Aegis Safety Holdings, Inc., as the surviving corporation pursuant to the Hanover Holdings/Aegis Holdings Merger, is now and shall continue to be directly and primarily liable in all respects for the Obligations of Hanover Holdings, Inc. arising prior to the effective time of the Hanover Holdings/Aegis Holdings Merger; (v) Lender has and shall continue to have valid and perfected security interests, liens and rights in and to all assets and properties owned and acquired by the respective surviving corporations, including, without limitation, all assets and properties acquired pursuant to the mergers consented to under Section 2(a) hereof, and all such assets and properties shall be deemed included in the Guarantor Collateral or the Collateral, as the case may be, and such security interests, liens and rights and their perfection and priorities shall continue in all respects in full force and effect; and (vi) Without limiting the generality of the foregoing, (A) none of the mergers consented to under Section 2(a) hereof shall in any way limit, impair or adversely affect the Obligations now or hereafter owed to Lender by any existing -4- 5 or former Borrowers or Guarantors or any security interests or liens in any assets or properties securing the same, and (B) the security interests, liens and rights of Lender in and to the assets and properties of each Borrower and each Guarantor that is either the merged or the surviving corporation pursuant to the mergers consented to under Section 2(a) hereof, do and shall, upon and after the consummation of such mergers, continue to secure all Obligations to Lender of the merged corporation and of each surviving corporation, in addition to all other existing and future Obligations of such surviving corporations to Lender. (b) Guarantor dissolutions. Each of Borrowers and Guarantors hereby acknowledges, confirms and agrees that: (i) The dissolutions of those former Guarantors consented to under Section 2(b) hereof have not and shall not in any way limit, impair or adversely affect the Obligations now or hereafter owed to Lender by any continuing Borrower or Guarantor, including, without limitation, any such Obligations they have as shareholders of such dissolved Guarantors pursuant to applicable law; and (ii) Lender has and shall continue to have valid and perfected security interests, liens and rights in and to all assets and properties of each existing or former Guarantor whose dissolution has been consented to under Section 2(b) hereof. Such assets and properties shall continue to be deemed included in the Guarantor Collateral, and such security interests, liens and rights and their perfection and priorities shall continue in all respects in full force and effect. 4. Conforming Amendments to Description of Austad and Austad Holdings Collateral. (a) Austad and Lender hereby agree that the last sentence of Section 3(a) of the First Amendment to Loan Agreement appearing on page 8 thereof is hereby deleted in its entirety and replaced with the following: "Notwithstanding the foregoing, the Collateral does not include (a) the GECC Collateral owned by Austad, other than the right, title and interest of Austad in and to the GECC Reserve Balance or (b) any leasehold interests of Austad." (b) Austad Holdings and Lender hereby agree that the last sentence of Section 3(b) of the First Amendment to Loan Agreement appearing on page 10 thereof, as amended by Section 4(a) hereof, shall be deemed deleted in its entirety and replaced with the following: -5- 6 "Notwithstanding the foregoing, the Collateral does not include (a) the GECC Collateral owned by Austad Holdings, other than the right, title and interest of Austad Holdings in the GECC Reserve Balance or (b) any leasehold interest of Austad Holdings." 5. Amendments to Term Notes. (a) The Term Promissory Note, dated November 14, 1995, in the original principal sum of $4,000,000, made by HDPI to the order of Lender in order to evidence the HDPI Term Loan, is hereby amended, such that, in lieu of the final principal installment otherwise payable thereunder on November 1, 1997, the unpaid principal balance thereof, being $3,233,318 as of the date hereof, shall be payable in thirteen (13) consecutive monthly installments (or earlier as provided in the Loan Agreement or in said note) on the first day of each month commencing November 1, 1997, of which the first twelve (12) such installments shall each be in the amount of THIRTY-THREE THOUSAND THREE HUNDRED THIRTY-FOUR ($33,334) DOLLARS, and the last installment of which shall be in the amount of the entire unpaid balance of such note. Interest accrued and accruing under such note shall continue to be paid and payable as provided in such note and the Loan Agreement. Such note shall continue to be secured by the Collateral, including, without limitation, the Real Property and other property of HDPI located in Hanover, Pennsylvania, as set forth in the Open-End Fee and Leasehold Mortgage and Security Agreement dated as of November 14, 1995, made by HDPI in favor of Lender, and by all other security granted by HDPI under the other Financing Agreements. (b) The Term Promissory Note, dated November 14, 1995, in the original principal sum of $6,000,000, made by Hanover Realty to the order of Lender is hereby amended, such that, in lieu of the final principal installment otherwise payable thereunder on November 1, 1997, the unpaid principal balance thereof, being $4,850,000 as of the date hereof, shall be payable in thirteen (13) consecutive monthly installments (or earlier as provided in the Loan Agreement or in said note) on the first day of each month commencing November 1, 1997, of which the first twelve (12) such installments shall each be in the amount of FIFTY THOUSAND ($50,000) DOLLARS, and the last installment of which shall be in the amount of the entire unpaid balance of such note. Interest accrued and accruing under such note shall continue to be paid and payable as provided in such note and the Loan Agreement. Such note shall continue to be secured by the Collateral, including, without limitation, the Real Property and other property of Hanover Realty located in Roanoke, Virginia, as set forth in the Credit Line Deed of Trust, Assignment and Security Agreement dated as of November 14, 1995, made by Hanover -6- 7 Realty in favor of Lender, and by all other security granted by Hanover Realty under the other Financing Agreements. 6. Representations, Warranties and Covenants. Borrowers and Guarantors represent, warrant and covenant with and to Lender as follows, which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof, the truth and accuracy of, or compliance with each, together with the representations, warranties and covenants in the other Financing Agreements, being a condition of the effectiveness of this Amendment and a continuing condition of the making or providing of any Revolving Loans or Letter of Credit Accommodations by Lender to Borrowers: (a) This Amendment has been duly authorized, executed and delivered by all necessary action of each of the Borrowers and Guarantors which is a party hereto, and is in full force and effect, and the agreements and obligations of Borrowers and Guarantors, as the case may be, contained herein constitute legal, valid and binding obligations of Borrowers and Guarantors, as the case may be, enforceable against them in accordance with their terms. (b) Each of the mergers consented to under Section 2(a) hereof has become effective in accordance with the terms of each of the Hanover Subsidiary Merger Agreements applicable to it and of the applicable corporate statutes of the States of incorporation of Tweeds and each Guarantor that is a constituent corporation to the mergers consented to under Section 2(a) hereof. As of the date hereof, (i) Tweeds is the surviving corporation of the TW Acquisitions/Tweeds Merger, (ii) DM Advertising is the surviving corporation of the Hanover Direct NJ/DM Advertising Merger, (iii) Aegis Safety Holdings, Inc. is the surviving corporation of the Hanover Holdings/Aegis Holdings Merger, and (iv) American Down & Textile Company is the surviving corporation of the Skandia/American Down Merger. (c) Neither the consummation of the mergers, as consented to under Section 2(a) hereof, nor the dissolution of Leichtung of Michigan, Inc. as consented to under Section 2(b) hereof, nor the execution, delivery and/or filing of the Hanover Subsidiary Merger Agreements, the Leichtung of Michigan Dissolution Agreements or any other agreements, documents or instruments in connection therewith, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof has resulted in or shall result in the creation or imposition of any lien, claim, charge or incumbrance upon any of the Collateral, except in favor of Lender. (d) All actions and proceedings required by the Hanover Subsidiary Merger Agreements applicable to the mergers consented to under Section 2(a) hereof and the Leichtung of -7- 8 Michigan Dissolution Agreements, applicable law and regulation, have been taken prior to the effectiveness of such mergers and dissolutions and all transactions required thereunder have been and shall be duly and validly consummated. (e) No court of competent jurisdiction has or, prior to the effectiveness thereof, shall have issued any injunction, restraining order or other order which prohibits consummation of the mergers as consented to under Section 2(a) hereof or the dissolution of Leichtung of Michigan, Inc. as consented to under Section 2(b) hereof, and no governmental action or proceeding has been threatened or commenced seeking any injunction, restraining order or other order which seeks to void or otherwise modify the transactions described in the Hanover Subsidiary Merger Agreements or the Leichtung of Michigan Dissolution Agreements. (f) Neither the consummation of the mergers consented to under Section 2(a) hereof, nor the dissolution of Leichtung of Michigan, Inc. consented to under Section 2(b) hereof, nor the execution, delivery or filing of the Hanover Subsidiary Merger Agreements, the Leichtung of Michigan Dissolution Agreements or any other agreements, documents or instruments in connection therewith, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof (i) has violated or shall violate any Federal or State securities laws, any State corporation law, or any other law or regulation or any order or decree of any court or governmental instrumentality in any respect, or (ii) does or shall conflict with or result in the breach of, or constitute a default in any respect under any mortgage, deed of trust, security agreement, agreement or instrument to which any existing or former Guarantor or Borrower is a party or may be bound, or (iii) does or shall violate any provision of the Certificate of Incorporation or By-Laws of any Guarantor or any Borrower. (g) The aggregate amount of the actual and contingent indebtedness, liabilities and obligations, other than those owed to Lender, incurred by or relating to Leichtung of Michigan, Inc. which was dissolved as consented to under Section 2(b) hereof, does not exceed $1,000. (h) The chief executive office of GBM is 1500 Harbor Boulevard, Weehawken, New Jersey 07087. (i) All of the representations and warranties set forth in the Loan Agreement as amended hereby, and the other Financing Agreements, are true and correct in all material respects after giving effect to the provisions of this Amendment, except to the extent any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such date. -8- 9 (j) After giving effect to the provisions of this Amendment, no Event of Default or Incipient Default exists or has occurred and is continuing. (k) Within fifteen (15) days after the date hereof, Borrowers and Guarantors shall deliver and/or cause to be delivered to Lender, each in form and substance satisfactory to Lender, appropriate UCC amendments to the existing UCC financing statements filed by the Lender against (A) the merged Borrower or Guarantor changing the debtor's name and/or mailing address to that of the respective surviving corporation of the merger with such merged corporation as consented to under Section 2(a) hereof and (B) GBM changing the mailing address of GBM to 1500 Harbor Boulevard, Weehawken, New Jersey 07087. 7. Conditions Precedent. Concurrently with the execution hereof, and as a condition to the effectiveness of this Amendment and the consents hereunder and the agreement of Lender to the modifications and amendments set forth in this Amendment: (a) Lender shall have received an original of this Amendment, in form and substance satisfactory to Lender, duly authorized, executed and delivered by Borrowers and Guarantors; (b) Lender shall have received, in form and substance satisfactory to Lender, evidence that the Hanover Subsidiary Merger Agreements with respect to each of the Hanover Holdings/Aegis Holdings Merger, the Hanover Direct NJ/DM Advertising Merger, the Skandia/American Down Merger and the TW Acquisitions/Tweeds Merger (collectively, the "Consummated Subsidiary Mergers") and the Leichtung of Michigan Dissolution Agreements with respect to the dissolution of Leichtung of Michigan, Inc. have been duly executed and delivered by and to the appropriate parties thereto and the transactions contemplated under the terms of such Hanover Subsidiary Merger Agreements and Leichtung of Michigan Dissolution Agreements have been effected prior to the execution and delivery of this Amendment; and (c) Lender shall have received, in form and substance satisfactory to Lender, (i) on or before the date hereof as to the Consummated Subsidiary Mergers, evidence that the certificates of merger with respect to each of the mergers consented to under Section 2(a) hereof have been filed with the Secretary of State of the appropriate States of incorporation of each constituent corporation, and (ii) on or before the date hereof with respect to the dissolution of Leichtung of Michigan, Inc. consented to under Section 2(b) hereof, evidence that a certificate of dissolution has been issued by the Michigan Department of Consumer and Industry Services. 8. Effect of this Amendment. This Amendment constitutes the entire agreement of the parties with respect to -9- 10 the subject matter hereof, and supersedes all prior oral or written communications, memoranda, proposals, negotiations, discussions, term sheets and commitments with respect to the subject matter hereof. Except as expressly provided herein, no other changes or modifications to the Loan Agreement or any of the other Financing Agreements, or waivers of or consents under any provisions of any of the foregoing, are intended or implied by this Amendment, and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent that any provision of the Loan Agreement or any of the other Financing Agreements conflicts with any provision of this Amendment, the provision of this Amendment shall control. 9. Further Assurances. Borrowers and Guarantors shall execute and deliver such additional documents and take such additional action as may be reasonably requested by Lender to effectuate the provisions and purposes of this Amendment. 10. Governing Law. The rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the internal laws of the State of New York (without giving effect to principles of conflicts of laws). 11. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 12. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed on the day and year first written. CONGRESS FINANCIAL CORPORATION By /S/ JANET S. LAST ----------------------- Title: Vice President -------------------- [SIGNATURES CONTINUE ON NEXT PAGE] -10- 11 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER DIRECT PENNSYLVANIA, INC. By: /s/ Edward J. O'Brien ------------------------- Title: Vice President ---------------------- BRAWN OF CALIFORNIA, INC. By: /s/ Edward J. O'Brien ------------------------- Title: Vice President --------------------- GUMP'S BY MAIL, INC. By: /s/ Edward J. O'Brien ------------------------- Title: Vice President --------------------- GUMP'S CORP. By: /s/ Edward J. O'Brien ------------------------- Title: Vice President --------------------- THE COMPANY STORE, INC. By: /s/ Edward J. O'Brien ------------------------- Title: Vice President --------------------- TWEEDS, INC. By: /s/ Edward J. O'Brien ------------------------- Title: Vice President --------------------- LWI HOLDINGS, INC. By: /s/ Edward J. O'Brien ------------------------- Title: Vice President --------------------- [SIGNATURES CONTINUE ON NEXT PAGE] -11- 12 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AEGIS CATALOG CORPORATION By: /s/ Edward J. O'Brien ------------------------- Title: Vice President --------------------- HANOVER DIRECT VIRGINIA INC. By: /s/ Edward J. O'Brien ------------------------- Title: Vice President --------------------- HANOVER REALTY, INC. By: /s/ Edward J. O'Brien ------------------------- Title: Vice President --------------------- THE AUSTAD COMPANY By: /s/ Edward J. O'Brien ------------------------- Title: Vice President --------------------- By their signatures below, the undersigned Guarantors acknowledge and agree to be bound by the applicable provisions of this Amendment: HANOVER DIRECT, INC. By: /s/ Edward J. O'Brien ---------------------------- Title: Senior Vice President ------------------------- AEGIS RETAIL CORPORATION By: /s/ Edward J. O'Brien ---------------------------- Title: Vice President ------------------------- [SIGNATURES CONTINUE ON NEXT PAGE] -12- 13 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AEGIS SAFETY HOLDINGS, INC. By: /s/ Edward J. O'Brien ---------------------------- Title: Vice President ------------------------- AEGIS VENTURES, INC. By: /s/ Edward J. O'Brien ---------------------------- Title: Vice President ------------------------- AMERICAN DOWN & TEXTILE COMPANY By: /s/ Edward J. O'Brien ---------------------------- Title: Vice President ------------------------ BRAWN WHOLESALE CORP. By: /s/ Edward J. O'Brien ---------------------------- Title: Vice President ------------------------- THE COMPANY FACTORY, INC. By: /s/ Edward J. O'Brien ---------------------------- Title: Vice President ------------------------ THE COMPANY OFFICE, INC. By: /s/ Edward J. O'Brien ---------------------------- Title: Vice President ------------------------- COMPANY STORE HOLDINGS, INC. By: /s/ Edward J. O'Brien ---------------------------- Title: Vice President ------------------------- [SIGNATURES CONTINUE ON NEXT PAGE] -13- 14 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] D.M. ADVERTISING, INC. By: /s/ Edward J. O'Brien --------------------------- Title: Vice President ----------------------- GUMP'S CATALOG, INC. By: /s/ Edward J. O'Brien --------------------------- Title: Vice President ----------------------- GUMP'S HOLDINGS, INC. By: /s/ Edward J. O'Brien --------------------------- Title: Vice President ----------------------- HANOVER CASUALS, INC. By: /s/ Edward J. O'Brien --------------------------- Title: Vice President ----------------------- HANOVER CATALOG HOLDINGS, INC. By: /s/ Edward J. O'Brien --------------------------- Title: Vice President ----------------------- HANOVER FINANCE CORPORATION By: /s/ Edward J. O'Brien --------------------------- Title: Vice President ----------------------- HANOVER LIST MANAGEMENT, INC. By: /s/ Edward J. O'Brien --------------------------- Title: Vice President ----------------------- [SIGNATURES CONTINUE ON NEXT PAGE] -14- 15 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER VENTURES, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ LWI RETAIL, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ SCANDIA DOWN CORPORATION /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ TWEEDS OF VERMONT, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ YORK FULFILLMENT COMPANY, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ AUSTAD HOLDINGS, INC. /s/ Edward J. O'Brien By:____________________________ Vice President Title:_________________________ -15- EX-10.29 6 ELEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT 1 Exhibit 10.29 ELEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT ------------------------------------------------- ELEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT, dated as of March 25, 1998, by and among CONGRESS FINANCIAL CORPORATION, a California corporation ("Lender"), HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania corporation ("HDPI"), BRAWN OF CALIFORNIA, INC., a California corporation ("Brawn"), GUMP'S BY MAIL, INC., a Delaware corporation ("GBM"), GUMP'S CORP., a California corporation ("Gump's"), THE COMPANY STORE, INC., a Wisconsin corporation ("TCS"), TWEEDS, INC., a Delaware corporation ("Tweeds"), LWI HOLDINGS, INC., a Delaware corporation ("LWI"), AEGIS CATALOG CORPORATION, a Delaware corporation ("Aegis"), HANOVER DIRECT VIRGINIA INC., a Delaware corporation ("HDV"), HANOVER REALTY, INC., a Virginia corporation ("Hanover Realty"), and THE AUSTAD COMPANY, a South Dakota corporation ("Austad"; and together with HDPI, Brawn, GBM, Gump's, TCS, Tweeds, LWI, Aegis, HDV and Hanover Realty, each, individually, a "Borrower" and, collectively, "Borrowers") and HANOVER DIRECT, INC., a Delaware corporation ("Hanover"), AEGIS RETAIL CORPORATION, a Delaware corporation, AEGIS SAFETY HOLDINGS, INC., a Delaware corporation, AEGIS VENTURES, INC., a Delaware corporation, AMERICAN DOWN & TEXTILE COMPANY, a Wisconsin corporation, BRAWN WHOLESALE CORP., a California corporation, THE COMPANY FACTORY, INC., a Wisconsin corporation, THE COMPANY OFFICE, INC., a Wisconsin corporation, COMPANY STORE HOLDINGS, INC., a Delaware corporation, D.M. ADVERTISING, INC., a New Jersey corporation, GUMP'S CATALOG, INC., a Delaware corporation, GUMP'S HOLDINGS, INC., a Delaware corporation, HANOVER CASUALS, INC., a Delaware corporation, HANOVER CATALOG HOLDINGS, INC., a Delaware corporation, HANOVER FINANCE CORPORATION, a Delaware corporation, HANOVER LIST MANAGEMENT INC., a New Jersey corporation, HANOVER VENTURES, INC., a Delaware corporation, LWI RETAIL, INC., an Ohio corporation, SCANDIA DOWN CORPORATION, a Delaware corporation, TWEEDS OF VERMONT, INC., a Delaware corporation, YORK FULFILLMENT COMPANY, INC., a Pennsylvania corporation, and AUSTAD HOLDINGS, INC., a Delaware corporation (each, individually, a "Guarantor" and, collectively, "Guarantors"). W I T N E S S E T H: WHEREAS, Borrowers, Guarantors and Lender entered into the Loan and Security Agreement, dated November 14, 1995, as amended by the First Amendment to Loan and Security Agreement, dated February 22, 1996, the Second Amendment to Loan and Security Agreement, dated April 16, 1996 (the "Second Amendment to Loan Agreement"), the Third Amendment to Loan and Security Agreement, dated May 24, 1996, the Fourth Amendment to Loan and Security Agreement, dated May 31, 1996, the Fifth Amendment to Loan and Security Agreement, dated September 11, 1996, the Sixth Amendment to Loan and Security Agreement, dated as of December 5, 1996, the Seventh Amendment to Loan and Security Agreement, dated as of 2 December 18, 1996, the Eighth Amendment to Loan and Security Agreement, dated as of March 26, 1997, the Ninth Amendment to Loan and Security Agreement, dated as of April 18, 1997, and the Tenth Amendment to Loan and Security Agreement, dated as of October 31, 1997 (the "Loan Agreement"), pursuant to which Lender has made loans and advances to Borrowers; and WHEREAS, Borrowers and Guarantors have requested that Lender (a) make an additional term loan to HDPI, consolidate the principal amount of that term loan with the outstanding principal balance of the existing HDPI Term Loan, and agree to amend and restate the terms of the HDPI Term Loan as so consolidated, (b) make an additional term loan to Hanover Realty, consolidate the principal amount of that term loan with the outstanding principal balance of the existing Hanover Realty Term Loan, and agree to amend and restate the terms of the Hanover Realty Term Loan as so consolidated, (c) make available Eurodollar Rate Loans (as hereinafter defined) to Borrowers, (d) modify the Interest Rate applicable to loans, other than Eurodollar Rate Loans, (e) reduce the amount of the monthly servicing fee, the annual facility fee and the Letter of Credit Accommodation fee payable to Lender, (f) make certain revisions to the Inventory Loan Formulas, (g) make available Revolving Accounts Loans to Revolving Loan Borrowers in respect of Eligible Installment Receivables (as hereinafter defined), and (h) extend the Renewal Date to January 31, 2001; and WHEREAS, the parties to the Loan Agreement desire to enter into this Eleventh Amendment to Loan and Security Agreement (this "Amendment") to evidence and effectuate such amendments and agreements, to the extent and subject to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. ------------ (a) Additional Definitions. As used herein or in any of the other Financing Agreements, the following terms shall have the meanings given to them below, and the Loan Agreement shall be deemed and is hereby amended to include, in addition and not in limitation, the following definitions: (i) "Additional Hanover Realty Term Advance" shall have the meaning set forth in Section 3 hereof. (ii) "Additional HDPI Term Advance" shall have the meaning set forth in Section 2 hereof. - 2 - 3 (iii) "Additional Term Advance Closing Date" shall mean the date of funding of the Additional Term Advances. (iv) "Additional Term Advances" shall mean the Additional HDPI Term Advance and the Additional Hanover Realty Term Advance. (v) "Adjusted Eurodollar Rate" shall mean, with respect to each Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent) determined by dividing (A) the Eurodollar Rate for such Interest Period by (B) the percentage equal to: (1) one minus (2) the Reserve Percentage. For purposes hereof, "Reserve Percentage" shall mean the reserve percentage, expressed as a decimal, prescribed by any United States or foreign banking authority for determining the reserve requirement which is or would be applicable to deposits of United States dollars in a non-United States or an international banking office of the Reference Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate Loan made with the proceeds of such deposit, whether or not the Reference Bank actually holds or has made any such deposits or loans. The Adjusted Eurodollar Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage. (vi) "Deferred Billing Loan Formula" shall have the meaning given in Section 2.1(a)(i) of the Loan Agreement as amended hereby. (vii) "Eligible Installment Receivables" shall mean MasterCard/VISA Receivables of Installment Plan Borrowers arising from sales of merchandise offered for sale under an Installment Billing Program, and which MasterCard/VISA Receivables are and continue to be acceptable to Lender based on the criteria set forth below. In general, a MasterCard/VISA Receivable shall be an Eligible Installment Receivable if: (A) such MasterCard/VISA Receivable arises from the actual and bona fide sale and delivery to a customer by an Installment Billing Borrower in the ordinary course of business, which sale is completed in accordance with an Installment Billing Program and pursuant to the terms and provisions contained in any agreements between the Installment Billing Borrower and its customer related thereto; (B) the credit card transaction and sales records evidencing such MasterCard/VISA Receivable are submitted to Litle by the Installment Billing Borrower and/or Hanover in its capacity as its agent in accordance with the Installment Billing Agreement as in effect on the date hereof and the other Litle Agreements; - 3 - 4 (C) with respect to each such MasterCard/VISA Receivable arising under an Installment Billing Program of an Installment Billing Borrower, other than GBM, Austad or Brawn: (1) Litle remits to the Blocked Account specified by Lender, on or within three (3) business days after the date of the sale giving rise to such sale or one (1) business day after the date of submission thereof to Litle, whichever is earlier, an amount equal to the down payment payable in respect of such sale, which down payment shall be in an amount equal to at least (x) twenty-five percent (25%) of the catalog purchase price of the merchandise so sold, plus (y) all sales, excise or similar taxes and all charges for shipping and handling with respect to the merchandise so sold, and (2) Litle remits to the Blocked Account specified by Lender, an amount equal to the unpaid balance of the catalog purchase price of the merchandise so sold (the "Installment Balance") in three (3) consecutive monthly installments; provided, that, each such installment is in an amount not less than thirty-three and one-third percent (33 1/3%) of such unpaid balance and such installments are remitted by Litle no later than three (3) business days following, respectively, the thirtieth (30th), sixtieth (60th) and ninetieth (90th) days after the date of the sale giving rise to such MasterCard/VISA Receivable or one (1) business day after the respective date of submission thereof to Litle, whichever is earlier; (D) with respect to each such MasterCard/VISA Receivable arising under an Installment Billing Program of GBM or Austad: (1) Litle remits to the Blocked Account specified by Lender, on or within three (3) business days after the date of the sale giving rise to such sale an amount equal to the down payment in respect of such sale or one (1) business day after the date of submission thereof to Litle, whichever is earlier, which down payment shall be in an amount equal to at least (x) twenty percent (20%) of the catalog purchase price of the merchandise so sold, plus (y) all sales, excise or similar taxes and all charges for shipping and handling with respect to the merchandise so sold, and (2) Litle remits to the Blocked Account specified by Lender an amount equal to the unpaid balance of the catalog purchase price of the merchandise so sold in four (4) consecutive monthly installments; provided, that, each such installment payment is in an amount not less than twenty-five percent (25%) of such unpaid balance and such installments are remitted by Litle to such Blocked Account no later than three (3) business days following, respectively, the thirtieth (30th), - 4 - 5 sixtieth (60th), ninetieth (90th), and one hundred twentieth (120th) days after the date of the sale giving rise to such MasterCard/VISA Receivable or one (1) business day after the respective date of submission thereof to Litle, whichever is earlier; (E) with respect to each such MasterCard/VISA Receivable arising under an Installment Billing Program of Brawn: (1) Litle remits to the Blocked Account specified by Lender, on or within three (3) business days after the date of the sale giving rise to such sale or one (1) business day after the date of submission thereof to Litle, whichever is earlier, an amount equal to the down payment in respect of such sale, which down payment shall be in an amount equal to at least (x) thirty-three and one-third percent (33 1/3%) of the catalog purchase price of the merchandise so sold, plus (y) all sales, excise or similar taxes and all charges for shipping and handling with respect to the merchandise so sold, and (2) Litle remits to the Blocked Account specified by Lender an amount equal to the unpaid balance of the catalog purchase price of the merchandise so sold in two (2) consecutive monthly installments; provided, that, each such installment payment is in an amount not less than fifty percent (50%) of such unpaid balance and such installments are remitted by Litle to such Blocked Account no later than three (3) business days following, respectively, the thirtieth (30th) and sixtieth (60th) days after the date of the sale giving rise to such MasterCard/VISA Receivable or one (1) business day after the respective date of submission thereof to Litle, whichever is earlier; (F) Litle has not failed, for any reason, to authorize, accept or purchase any part of the customer's obligations in respect of the sale, or to remit to the Blocked Account specified by Lender, the down payment or any installment payment (or amounts equal thereto) when required hereunder with respect to such MasterCard/VISA Receivable, as provided in clauses (C)(1), (C)(2), (D)(1), (D)(2), (E)(1) or (E)(2) above, as applicable; (G) such MasterCard/VISA Receivable complies with the applicable terms and conditions contained in Section 6.12A of the Loan Agreement as amended hereby; (H) Litle has not asserted a counterclaim, defense or dispute, and does not have any right of setoff against any MasterCard/VISA Receivables, other than in respect of chargebacks for returns and customer disputes in the ordinary course of business in accordance with the terms of the Litle Agreements; - 5 - 6 (I) there are no facts, events or occurrences which would impair the validity, enforceability or collectability of any MasterCard/VISA Receivables or reduce the amount payable or delay payment by Litle or the purchase thereof; (J) such MasterCard/VISA Receivable, until purchased and paid for in full by Litle, is subject to the first priority, valid and perfected security interest of Lender and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any liens except those permitted in the Loan Agreement; (K) Lender shall have received, in form and substance reasonably satisfactory to Lender, a Third Party Credit Card Acknowledgment and a copy of the Installment Billing Agreement, upon which Lender is expressly permitted to rely, each duly authorized, executed and delivered by Litle, and no cancellation, termination, or default by Litle or Hanover or any Revolving Loan Borrower, or any suspension of Hanover or any Revolving Loan Borrower, or any institution of or increase in reserves or designation of special member status, shall have occurred under the Litle Agreements; (L) neither Litle nor any officer or employee of Litle nor the customer with respect to such MasterCard/VISA Receivable is an officer, employee or agent of or affiliated with a member of the Affiliated Borrower Group directly or indirectly by virtue of family membership, ownership, control, management or otherwise; and (M) there are no proceedings or actions which are threatened or pending against Litle which might result in any material adverse change in the financial condition of Litle or impair its ability to purchase and pay for any MasterCard/VISA Receivables. General criteria for Eligible Installment Billing Receivables may be established and revised from time to time by Lender in good faith. Any MasterCard/VISA Receivables or other Accounts of Borrowers which are not Eligible Installment Billing Receivables shall nevertheless be part of the Collateral. (viii) "Eurodollar Rate" shall mean with respect to the Interest Period for a Eurodollar Rate Loan to a Borrower, the interest rate per annum equal to the arithmetic average of the rates of interest per annum (rounded upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent) at which the Reference Bank is offered deposits of United States dollars in the London interbank market (or other Eurodollar Rate market selected by or on behalf of such Borrower and approved by Lender) on or about 9:00 a.m. (New York time) two (2) Banking Days prior to the commencement of such Interest Period in amounts substantially equal to the principal amount of the Eurodollar - 6 - 7 Rate Loans requested by and available to such Borrower in accordance with the Loan Agreement as amended hereby, with a maturity of comparable duration to the Interest Period selected by such Borrower. (ix) "Eurodollar Rate Loans" shall mean, individually and collectively, Eurodollar Rate Revolving Loans and Eurodollar Rate Term Loans. (x) "Eurodollar Rate Revolving Loans" shall mean any Revolving Loans or portion thereof on which interest is payable based on the Adjusted Eurodollar Rate in accordance with the Loan Agreement as amended hereby. (xi) "Eurodollar Rate Term Loans" shall mean any Term Loans or portion thereof on which interest is payable based on the Adjusted Eurodollar Rate in accordance with Loan Agreement as amended hereby. (xii) "Installment Billing Agreement" shall mean the letter agreement, dated on or about the date hereof, by and among Litle, Hanover and Lender with respect to Installment Billing Programs of Borrowers, as the same now exists or may hereafter be amended, modified, supplemented, extended, restated, renewed or replaced. (xiii) "Installment Billing Borrowers" shall mean, individually and collectively, each Revolving Loan Borrower who sells goods under an Installment Billing Program. (xiv) "Installment Billing Loan Formula" shall have the meaning given in Section 2.1(a)(ii) of the Loan Agreement as amended hereby. (xv) "Installment Billing Program" shall mean an installment billing program from time to time made available by a Revolving Loan Borrower to its mail order customers who wish to purchase merchandise from such Revolving Loan Borrower offered for sale in its mail order catalogs pursuant to which each of the following conditions are satisfied: (A) such Revolving Loan Borrower, or Hanover as agent for such Revolving Loan Borrower, verifies with the applicable Third Party Credit Card Issuer or its agent that (1) upon the placement of an order by such customer, such customer's bank credit card is valid, and that such customer has sufficient credit available at such time to be charged the amount of the applicable down payment as provided in subclause (B)(1), (C)(1) or (D)(1) below and (2) on or before the respective installment payment date as provided in subclause (B)(2), (C)(2) or (D)(2) below, that such customer has sufficient credit available at such times to be charged the respective installment amount as provided in those subclauses; - 7 - 8 (B) after such verification, in the case of the purchase of merchandise from such Revolving Loan Borrower, other than GBM, Austad or Brawn, such Revolving Loan Borrower submits authorized charges on such customer's credit card to Litle in the following amounts on the following dates: (1) a down payment on the date of sale in the amount equal to at least (x) twenty-five percent (25%) of the catalog purchase price of such merchandise, plus (y) all sales, excise or similar taxes and all charges for shipping and handling with respect to the merchandise so sold, and (2) the unpaid balance of the catalog purchase price with respect to such merchandise so sold in three (3) consecutive monthly charges, each such charge to be in an amount equal to not less than thirty-three and one-third percent (33 1/3%) of such unpaid balance, which charges shall be submitted on or before, respectively, thirty (30) days, sixty (60) days and ninety (90) days from the date of the sale; (C) after such verification, in the case of the purchase of merchandise from GBM or Austad, GBM or Austad submits authorized charges arising from the respective purchase of its merchandise on such customer's credit card to Litle in the following amounts on the following dates: (1) a down payment on the date of sale in an amount equal to at least (x) twenty percent (20%) of the catalog purchase price of such merchandise, plus (y) all sales, excise or similar taxes and all charges for shipping and handling with respect to the merchandise so sold, and (2) the unpaid balance of the catalog purchase price with respect to such merchandise in four (4) consecutive monthly charges, each such charge to be in an amount equal to not less than twenty-five percent (25%) of such unpaid balance, which charges shall be submitted on or before, respectively, thirty (30) days, sixty (60) days, ninety (90) days and one hundred twenty (120) days from the date of the sale; (D) after such verification, in the case of the purchase of merchandise from Brawn, Brawn submits authorized charges on such customer's credit card to Litle in the following amounts on the following dates: (1) a down payment on the date of sale in an amount equal to at least (x) thirty-three and one-third percent (33 1/3%) of the catalog purchase price of such merchandise, plus (y) all sales, excise or similar taxes and all charges for shipping and handling with respect to the merchandise so sold, and - 8 - 9 (2) the unpaid balance of the catalog purchase price with respect to such merchandise in two (2) consecutive monthly charges, each such charge to be in an amount equal to not less than fifty percent (50%) of such unpaid balance, which charges shall be submitted on or before, respectively, thirty (30) days and sixty (60) days from the date of the sale; (E) after such verification and prior to submission of the charge for the down payment, such Revolving Loan Borrower ships the Inventory purchased by such customer, together with an invoice dated the sale date; (F) such Revolving Loan Borrower completes the credit card transaction and sales records for such sale in accordance with the Litle Agreements, (G) Litle accepts the sales and charges for purchase on the dates and in the amounts set forth in clauses (B), (C) and (D) above, as applicable; and (H) Litle remits amounts equal to the down payment and each such installment payment to the Blocked Accounts in the amounts and on or within three (3) business days after the respective dates set forth in clauses (B), (C) or (D) above giving rise to such sales or one (1) business day after the respective dates of submission thereof to Litle, whichever is earlier, as applicable. (xvi) "Interest Period" shall mean, for any Eurodollar Rate Loan, a period of approximately one (1), two (2), or three (3) months duration as a Borrower or Hanover on behalf of a Borrower may elect, the exact duration to be determined in accordance with the customary practice in the applicable Eurodollar Rate market; provided, that, no Borrower or Hanover on behalf of a Borrower may elect an Interest Period that will end after the last day of the then-current term of this Agreement. (xvii) "Net Amount of Eligible Installment Billing Receivables" shall mean the gross amount of Eligible Installment Billing Receivables, less (A) discounts and fees payable by Installment Billing Borrowers to Litle or claimed by Litle with respect thereto, and (B) to the extent not included under clause (A) any prepayments, holdbacks, chargeback deposits, chargeback reserves, refund reserves, processing fees and other reserves, claims, credits (including credits for returned goods), allowances or other charges payable to or claimed by Litle. (xviii) "Original Hanover Realty Term Note" shall mean the Term Promissory Note, dated November 14, 1995, made by Hanover Realty payable to the order of Lender in the original principal amount of $6,000,000, as in effect immediately prior to - 9 - 10 the execution and delivery of the Restated Hanover Realty Term Note. (xix) "Original HDPI Term Note" shall mean the Term Promissory Note, dated November 14, 1995, made by HDPI payable to the order of Lender in the original principal amount of $4,000,000, as in effect immediately prior to the execution and delivery of the Restated HDPI Term Note. (xx) "Prime Rate Loans" shall mean, individually and collectively, the Prime Rate Revolving Loans and the Prime Rate Term Loans. (xxi) "Prime Rate Revolving Loans" shall mean any Revolving Loans or portion thereof on which interest is payable based on the Prime Rate in accordance with the Loan Agreement as amended hereby. (xxii) "Prime Rate Term Loans" shall mean any Term Loans or portion thereof on which interest is payable based on the Prime Rate in accordance with the Loan Agreement as amended hereby. (xxiii) "Reference Bank" shall mean CoreStates Bank, N.A., or such other bank as Lender may from time to time designate. (xxiv) "Restated Hanover Realty Term Note" shall mean the Amended and Restated Term Promissory Note, in the form of Exhibit B annexed hereto, appropriately completed, to be dated as of the Additional Term Advance Closing Date, to be made by Hanover Realty payable to the order of Lender in the original principal amount equal to (A) $8,800,000, minus (B) the product of $73,333 multiplied by the number of calendar months between March 1, 1998 and the first day of the month in which the Additional Term Advance Closing Date occurs, as such note exists on the date it is executed and delivered or may thereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (xxv) "Restated HDPI Term Note" shall mean the Amended and Restated Term Promissory Note, in the form of Exhibit A annexed hereto, appropriately completed, to be dated as of the Additional Term Advance Closing Date, made by HDPI payable to the order of Lender in the original principal amount equal to (A) $3,500,000, minus (B) the product of $29,167 multiplied by the number of calendar months between March 1, 1998 and the first day of the month in which the Additional Term Advance Closing Date occurs, as such note exists on the date it is executed and delivered or may thereafter be amended, modified, supplemented, extended, renewed, restated or replaced. - 10 - 11 (b) Amendments to Definitions. (i) Accounts Loan Formula. Section 1.4 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "1.4 "Accounts Loan Formula" shall mean, collectively, the Deferred Billing Loan Formula and the Installment Billing Loan Formula." (ii) Banking Day. All references to the term "Banking Day" herein and in the Loan Agreement and the other Financing Agreements shall be deemed and each such reference is hereby amended to mean any day other than a Saturday, Sunday, or other day on which commercial banks are authorized or required to close under the laws of the State of New York or the Commonwealth of Pennsylvania, and a day on which the Reference Bank and Lender are open for the transaction of business, except that if a determination of a Banking Day shall relate to any Eurodollar Rate Loans, the term Banking Day shall also exclude any day on which banks are closed for dealings in dollar deposits in the London interbank market or other applicable Eurodollar Rate market. (iii) Eligible Deferred Billing Receivables. Section 1.33 of the Loan Agreement is hereby amended by inserting between the word "Litle" and the word "with" appearing in the second line of clause (j) the following: "nor the customer". (iv) Eligible Inventory. Section 1.34 of the Loan Agreement is hereby amended by inserting between the word "materials" and the comma appearing at the end of clause (a) in the third line of the fourth sentence of that Section the following: "other than raw materials of TCS determined by Lender to be TCS Eligible Inventory". (v) HDPI Term Loan. Upon and after the Additional Term Advance Closing Date, all references to the term "HDPI Term Loan" herein and in the Loan Agreement and the other Financing Agreements shall be deemed amended to mean the outstanding Obligations owed to Lender by HDPI evidenced by the Restated HDPI Term Note. (vi) Hanover Realty Term Loan. Upon and after the Additional Term Advance Closing Date, all references to the term "Hanover Realty Term Loan" herein and in the Loan Agreement and the other Financing Agreements shall be deemed amended to mean the outstanding Obligations owed to Lender by Hanover Realty evidenced by the Restated Hanover Realty Term Note. (vii) Interest Rate. With respect to interest accruing on or after April 1, 1998, all references to the term "Interest Rate" herein and in the Loan Agreement and the other - 11 - 12 Financing Agreements shall be deemed and each such reference is hereby amended to mean (A) as to Prime Rate Revolving Loans, a rate of one-half of one percent (.5%) per annum in excess of the Prime Rate, (B) as to Prime Rate Term Loans, a rate of three-quarters of one percent (.75%) per annum in excess of the Prime Rate, (C) as to Eurodollar Rate Revolving Loans, a rate of two and one-half percent (2.5%) per annum in excess of the Adjusted Eurodollar Rate, and (D) as to Eurodollar Rate Term Loans, a rate of two and three-quarters percent (2.75%) per annum in excess of the Adjusted Eurodollar Rate (in each case under clauses (C) or (D), based on the Eurodollar Rate applicable for the Interest Period selected by or on behalf of the applicable Borrower as in effect three (3) Banking Days prior to the commencement of such Interest Period for such Eurodollar Rate Loans in accordance with the terms of the Loan Agreement as amended hereby, whether such rate is higher or lower than any rate previously quoted to or for such Borrower); provided, that, the Interest Rate, as to Prime Rate Loans and Eurodollar Rate Loans, shall mean the rate two percent (2%) per annum more than the otherwise applicable variable Interest Rate provided under clause (A), (B), (C) or (D) above (as applicable), at Lender's option, without notice, for the period from and after the date of the occurrence of any Event of Default, and for so long as such Event of Default is continuing, or after termination or non-renewal of the Loan Agreement and the other Financing Agreements. If the aggregate amount of Revolving Loans and Letter of Credit Accommodations to one or more Revolving Loan Borrowers exceeds the amounts determined by Lender to be available pursuant to the Revolving Loan Formulas, net of reserves and subject to the applicable lending sublimits as to each Revolving Loan Borrower, and subject to the Revolving Loan Limit as to all Revolving Loan Borrowers considered together, the Interest Rate, as to Prime Rate Revolving Loans and Eurodollar Rate Revolving Loans, shall mean the rate two percent (2%) per annum more than the otherwise applicable Interest Rate provided under clause (A) or (C) above (as applicable) as to the amount of any such excess(es) (whether or not such excess(es) arise or are made with or without Lender's knowledge or consent and whether made before or after an Event of Default); provided, that, if such excess(es) arise solely by reason of the exercise of Lender's discretion under the Loan Agreement to reduce the Revolving Loan Formulas in the absence of an Event of Default that is continuing, the Interest Rate, shall not be so increased as to the amount of any such excess(es) for a period of five (5) days after Lender notifies the affected Revolving Loan Borrowers of such discretionary reduction in the Revolving Loan Formulas and, at and after the expiration of such period of five (5) days, the Interest Rate, may be so increased by Lender as to the amount of any such excess(es) then remaining. (viii) Litle Agreements. Section 1.78 of the Loan Agreement is hereby amended by redesignating clause (c) as clause (d), and inserting between the comma and the redesignated clause - 12 - 13 (d) appearing in the third line of that Section a new clause (c) as follows: "(c) the Installment Billing Agreement,". (ix) MasterCard/VISA Receivables. (x) MasterCard/VISA Receivables. Section 1.82 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "1.82 "MasterCard/VISA Receivables" shall mean Third Party Credit Card Receivables that arise solely from goods sold by Revolving Loan Borrowers or Guarantors to customers who have purchased goods using a valid MasterCard or VISA bank-issued credit card, which will be processed, purchased and paid for by Litle, and, in the case of such receivables arising under a Deferred Billing Program or an Installment Billing Program, which will be processed, purchased and paid for by Litle pursuant to the applicable Deferred Billing Program or Installment Billing Program that gives rise to such receivables." (xi) Maximum Credit. Upon and after the Additional Term Advance Closing Date, Section 1.83 of the Loan Agreement shall be deemed deleted and replaced in its entirety with the following: "1.83 "Maximum Credit" shall mean the aggregate principal amount of Seventy-Five Million Dollars ($75,000,000), less payments and pre-payments made after the Additional Term Advance Closing Date in respect of the Term Loans." (xii) Mortgages. Upon and after the Additional Term Advance Closing Date, Section 1.86 of the Loan Agreement shall be deemed deleted in its entirety and replaced with the following: "1.86 "Mortgages" shall mean, individually and collectively, each of the following (as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced): (a) the Open-End Fee and Leasehold Mortgage and Security Agreement, dated as of November 14, 1995, by HDPI in favor of Lender with respect to the Real Property and related assets of HDPI located in Hanover, Pennsylvania, as amended by the Mortgage Modification Agreement, dated as of the Additional Term Advance Closing Date, between Lender and HDPI, and (b) the Deed of Trust, Assignment and Security Agreement, dated as of November 14, 1995, by Hanover Realty in favor of Lender with respect to the Real Property and related assets of Hanover Realty in Roanoke, Virginia, as - 13 - 14 amended by Amendment No. 1 to Deed of Trust, Assignment and Security Agreement, dated as of the Additional Term Advance Closing Date, between Lender and Hanover Realty." (xiii) Real Property. Section 4.1(vi) of the Loan Agreement shall be deemed deleted and the following substituted therefor "(vi) [Intentionally Deleted]; and". Section 4.1(iv) of the Loan Agreement shall remain in full force and effect. (xiv) Revolving Loan Limit. Upon and after the Additional Term Advance Closing Date, Section 1.119 of the Loan Agreement shall be deemed deleted and replaced in its entirety with the following: "1.119 "Revolving Loan Limit" shall mean, at any time the amount equal to (A) Seventy-Five Million ($75,000,000) Dollars minus (B) the sum of (i) the amount of outstanding Letter of Credit Accommodations at such time, (ii) the original principal amount of the Restated HDPI Term Note, and (iii) the original principal amount of the Restated Hanover Realty Term Note." (xv) Term Loans. Upon and after the Additional Term Advance Closing Date, all references to the "Term Loans" herein and in the Loan Agreement and the other Financing Agreements shall be deemed amended to mean, individually and collectively, the Obligations evidenced by the Restated HDPI Term Note and the Restated Hanover Realty Term Note. (xvi) TCS Eligible Inventory. Section 1.130 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "1.130 "TCS Eligible Inventory" shall mean: (A) all Inventory of TCS in the merchandise categories of comforters, blankets, sheets, towels, curtains, pillows, featherbeds, decorative home products, loungewear and outer garments offered for sale by TCS in its "The Company Store" catalog, or such other catalog created by TCS covering substantially similar merchandise which TCS has requested Lender to include in this Inventory category, and (B) raw materials of TCS used for the manufacture by TCS of finished goods described in the foregoing clause (A) that are deemed acceptable by Lender for lending purposes, but excluding work-in-process and packaging and shipping materials." (c) Interpretation. For purposes of this Amendment, unless otherwise defined herein, all capitalized terms used - 14 - 15 herein, shall have the respective meanings ascribed to them in the Loan Agreement. 2. Additional HDPI Term Advance. (a) On the date upon which all of the conditions precedent set forth in Section 20 hereof are fully satisfied, subject to the terms and conditions contained herein, Lender agrees to make an additional term loan to HDPI in the amount equal to (x) $433,352, minus (y) the product of $29,167 multiplied by the number of calendar months between March 1, 1998 and the first day of the month in which such loan is made (the "Additional HDPI Term Advance"), which loan (i) shall be consolidated with the unpaid balance of the Obligations evidenced by the Original HDPI Term Note, and (ii) as so consolidated, shall be evidenced by and be payable pursuant to the terms of the Restated HDPI Term Note, the Loan Agreement and the other Financing Agreements, and shall be secured by all of the Collateral. (b) Neither the consolidation of the Obligations evidenced by the Original HDPI Term Note with the Additional HDPI Term Advance, nor the amendment and restatement of the Original HDPI Term Note pursuant to the Restated HDPI Term Note shall, in any manner, be construed to constitute payment of, or impair, limit, cancel or extinguish, or constitute a novation in respect of, any of the Obligations evidenced by or arising under the Original HDPI Term Note or other Financing Agreements, and the liens and security interests securing such Obligations shall not in any manner be impaired, limited, terminated, waived or released. 3. Additional Hanover Realty Term Advance. (a) On the date upon which all of the conditions precedent set forth in Section 20 hereof are fully satisfied, subject to the terms and conditions contained herein, Lender agrees to make an additional term loan to Hanover Realty in the amount equal to (x) $4,200,000, minus (y) the product of $73,333 multiplied by the number of calendar months between March 1, 1998 and the first day of the month in which such loan is made (the "Additional Hanover Realty Term Advance"), which (i) shall be consolidated with the unpaid balance of the Obligations evidenced by the Original Hanover Realty Term Note, and (ii) as so consolidated, shall be evidenced by and payable pursuant to the terms of the Restated Hanover Realty Term Note, the Loan Agreement and the other Financing Agreements, and shall be secured by all of the Collateral. (b) Neither the consolidation of the Obligations evidenced by the Original Hanover Realty Term Note with the - 15 - 16 Additional Hanover Realty Term Advance, nor the amendment and restatement of the Original Hanover Realty Term Note pursuant to the Restated Hanover Realty Term Note shall, in any manner, be construed to constitute payment of, or impair, limit, cancel or extinguish, or constitute a novation in respect of, any of the Obligations evidenced by or arising under the Original Hanover Realty Term Note or other Financing Agreements, and the liens and security interests securing such Obligations shall not in any manner be impaired, limited, terminated, waived or released. (c) Hanover Realty hereby irrevocably authorizes and directs Lender, upon the Additional Term Advance Closing Date, to disburse the proceeds of the Additional Hanover Realty Term Advance to the respective Revolving Loan Borrowers in the respective amounts set forth on Exhibit C attached hereto to repay or to partially repay the outstanding amounts of intercompany loans owed by Hanover Realty to such Revolving Loan Borrowers in the amounts set forth on Exhibit C (each such disbursement, an "Intercompany Loan Repayment Amount"). Each such Revolving Loan Borrower shall, in turn, treat such disbursements by Lender of such Intercompany Loan Repayment Amounts as a payment or partial payment of the outstanding amount of intercompany loans owed by Hanover Realty to each such Revolving Loan Borrower. Each such Revolving Loan Borrower hereby irrevocable authorizes and directs Lender to then apply each such Intercompany Loan Repayment Amount to the respective Revolving Loan account of each such Revolving Loan Borrower for application to the then outstanding Obligations of each such Revolving Loan Borrower to Lender in respect of Revolving Loans. 4. Acknowledgment by Guarantors. Guarantors hereby acknowledge, confirm and agree, and Borrowers, in their capacities as guarantors with respect to the other Borrowers, hereby acknowledge, confirm and agree that their Guarantees guaranteeing the payment and performance of all Obligations of Borrowers (or the other Borrowers, as the case may be) are in full force and effect as of the date hereof, and, without the need for any further acknowledgment or any consent by Guarantors or Borrowers, upon and after the Additional Term Advance Closing Date, the "Obligations" (as such term is defined in the Guarantees) shall, without limitation, automatically extend to and cover, without limitation, the HDPI Term Loan (other than in the Guarantees delivered by HDPI itself) and the Hanover Realty Term Loan (other than in the Guarantees delivered by Hanover Realty itself), as the balances thereof are consolidated with the Additional Term Advances made to HDPI and Hanover Realty, and, as so consolidated, as the terms thereof are amended and restated pursuant to this Amendment and instruments hereunder. - 16 - 17 5. Amendments to Revolving Accounts Loans. Section 2.1(a) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(a) Revolving Accounts Loans. Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, Lender shall, from time to time, make Revolving Loans as follows: (i) to each of the Deferred Billing Borrowers, at its request, Revolving Loans of up to seventy percent (70%) of its respective Net Amounts of Eligible Deferred Billing Receivables, or such greater or lesser percentages thereof as Lender shall, in its sole discretion, determine from time to time (the "Deferred Billing Loan Formula"); provided, however, that no Revolving Loans in respect of Eligible Deferred Billing Receivables shall be made available or be permitted to remain outstanding, unless (A) Lender receives written notification from the applicable Deferred Billing Borrowers of their intention to commence or continue as to new sales one or more Deferred Billing Option Programs, which notice shall describe the program in reasonable detail and be received by Lender not less than thirty (30) days prior to the commencement of each applicable Program Quarter, and (B) with respect to each Program Quarter commencing after the first fiscal quarter of 1996, Lender determines that the Deferred Billing Borrowers meet the Accounts Loan Financial Test with respect to such Program Quarter; and (ii) to each of the Installment Billing Borrowers, at its request, of up to seventy percent (70%) of its respective Net Amounts of Eligible Installment Billing Receivables, or such greater or lesser percentages thereof as Lender shall, in its sole discretion, determine from time to time (the "Installment Billing Loan Formula"); provided, however, that no Revolving Loans in respect of Eligible Installment Billing Receivables shall be made available or be permitted to remain outstanding, unless (A) Lender receives written notification from the applicable Installment Billing Borrowers of their intention to commence or continue as to new sales one or more Installment Billing Programs, which notice shall describe the program in reasonable detail and be received by Lender not less than thirty (30) days prior to the commencement of each applicable Program Quarter, and (B) with respect to each Program Quarter commencing after the first fiscal quarter of 1998, Lender determines that the Accounts Loan Financial Test is satisfied with respect to such Program Quarter." - 17 - 18 6. Inventory Loan Formulas. Section 2.1(b) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(b) Revolving Inventory Loans. Subject to, and upon the terms and conditions contained herein and in the other Financing Agreements, Lender shall, from time to time, make Revolving Inventory Loans: (i) to each Revolving Loan Borrower, other than Gump's, and other than TCS with respect to TCS Eligible Inventory consisting of raw materials, at such Revolving Loan Borrower's request, of up to the lesser of (A) sixty-two percent (62%) of the Value of the Eligible Inventory of such Revolving Loan Borrower or (B) the Net OLV Percentage of the Value of such Eligible Inventory; and (ii) to Gump's, at its request, of up to the lesser of (A) sixty percent (60%) of the Value of Eligible Inventory of Gump's or (B) the Net GOB Percentage of the Value of Eligible Inventory of Gump's; and (iii) to TCS, at its request, of up to the lesser of (A) thirty percent (30%) of the Value of TCS Eligible Inventory consisting of raw materials or (B) the Net OLV Percentage of the Value of such Eligible Inventory; or, in the case of each of clauses (b)(i), (b)(ii), and (b)(iii), such greater or lesser percentages thereof as Lender shall, in its sole discretion, determine from time to time (the "Inventory Loan Formulas"). Without limiting the foregoing, the sixty-two percent (62%) lending formula component referred to in clause (b)(i)(A), the sixty percent (60%) lending formula component referred to in clause (b)(ii)(A), and the thirty percent (30%) lending formula component referred to in clause (b)(iii)(A) may be adjusted downward by Lender based upon any adverse change, individually or in the aggregate, in the turnover of Eligible Inventory or deterioration in mix, nature or quality of Eligible Inventory in the respective categories of Eligible Inventory, and any such downward adjustment made for such reason(s) (or on the basis of the lending formula component(s) set forth in clauses (b)(i)(B), (b)(ii)(B), or (b)(iii)(B) above) shall not be considered solely discretionary for purposes of the provision contained in the definition of Interest Rate and Section 2.7(c) hereof." 7. Revolving Accounts Loan. Section 2.2(j) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(j) Without limiting the foregoing lending sublimits, (i) the aggregate amount of Revolving Loans shall not at any one time outstanding exceed the Revolving Loan Limit for all Revolving Loan Borrowers and (ii) the aggregate amount of Revolving Accounts Loans for all Deferred Billing Borrowers and Installment Billing Borrowers shall not at any one time outstanding exceed Ten Million Dollars ($10,000,000). - 18 - 19 Lender shall have the right, from time to time, to establish and revise Revolving Accounts Loan sublimits for each Deferred Billing Borrower and each Installment Billing Borrower, within the overall Ten Million Dollar ($10,000,000) sublimit applicable to all Revolving Accounts Loans." 8. Fee for Letter of Credit Accommodations. The reference to "two percent (2%)" contained in Section 2.3(f)(ii) of the Loan Agreement is hereby deleted and replaced with the following: "one and one-half percent (1.5%)", effective with respect to fees provided under such Section accruing on or after April 1, 1998. 9. Annual Facility Fee. The reference to the amount "One Hundred Eighty-Seven Thousand Five Hundred Dollars ($187,500)" contained in Section 2.7(b) of the Loan Agreement is hereby deleted and replaced with the following amount: "One Hundred Thirty-Seven Thousand Five Hundred Dollars ($137,500)", effective with respect to the facility fees payable under such Section on November 9, 1998 or thereafter. 10. Servicing Fee. The reference to the amount "Twenty Thousand Dollars ($20,000)" contained in Section 2.7(d) of the Loan Agreement is hereby deleted and replaced with the following: "Ten Thousand Dollars ($10,000)", effective with respect to the fees payable under such Section on April 1, 1998 or thereafter. 11. Interest. Section 2.8 of the Loan Agreement is hereby deleted in its entirety and replaced with the following, effective with respect to interest accruing on or after April 1, 1998: "2.8 Interest. (a) Borrowers shall pay to Lender interest on the outstanding principal amount of the non- contingent Obligations at the Interest Rate. All interest accruing hereunder on and after the date of any Event of Default or termination or non-renewal hereof shall be payable on demand. (b) Borrowers may from time to time request that Prime Rate Loans be converted to Eurodollar Rate loans or that any existing Eurodollar Rate Loans continue for an additional Interest Period. Each such request by or on behalf of Borrowers shall specify the amount of the Prime Rate Loans which will constitute Eurodollar Rate Loans (subject to the limits set forth below) and the Interest Period to be applicable to such - 19 - 20 Eurodollar Rate Loans. Subject to the terms and conditions contained herein, three (3) Banking Days after receipt by Lender of such a request by or on behalf of Borrowers, such Prime Rate Loans shall be converted to Eurodollar Rate Loans or such Eurodollar Rate Loans shall continue, as the case may be; provided, that, (i) no Event of Default or Incipient Default exists or has occurred and is continuing, (ii) no party hereto shall have sent any notice of termination or non-renewal of this Agreement, (iii) Borrowers shall have complied with such customary procedures as are established by Lender and specified by Lender to Borrowers from time to time for requests by or on behalf of Borrowers for Eurodollar Rate Loans, (iv) no more than four (4) Interest Periods may be in effect at any one time, (v) the aggregate amount of the Eurodollar Rate Loans to a given Borrower subject to a given Interest Period must be in an amount not less than $2,000,000 or an integral multiple of $500,000 in excess thereof, (vi) the aggregate amount of the Eurodollar Rate Loans to all Borrowers subject to a given Interest Period must be in an amount not less than $5,000,000, (vii) the maximum amount of the Eurodollar Rate Loans at any time requested by or on behalf of a Borrower shall not exceed seventy-five percent (75%) of the lowest principal amount of the Revolving Loans to such Borrower plus ninety percent (90%) of the Term Loans to such Borrower which it is anticipated will be outstanding during the applicable Interest Period, as determined by Lender (but with no obligation of Lender to make such Revolving Loans or Term Loans), and (viii) Lender shall have determined that the Interest Period or Adjusted Eurodollar Rate is available to Lender through the Reference Bank and can be readily determined as of the date of the request for such Eurodollar Rate Loan by Borrowers. Any request by Borrowers to convert Prime Rate Loans to Eurodollar Rate Loans or to continue any existing Eurodollar Rate Loans shall be irrevocable. Notwithstanding anything to the contrary contained herein, Lender and the Reference Bank shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable Eurodollar Rate market to fund any Eurodollar Rate Loans, but the provisions hereof shall be deemed to apply as if Lender and the Reference Bank had purchased such deposits to fund the Eurodollar Rate Loans. (c) Any Eurodollar Rate Loans shall automatically convert to Prime Rate Loans upon the last day of the applicable Interest Period, unless Lender has received and approved a request to continue such Eurodollar Rate Loan at least three (3) Banking Days - 20 - 21 prior to such last day in accordance with the terms hereof. Any Eurodollar Rate Loans shall, at Lender's option, upon notice by Lender to Borrowers, convert to Prime Rate Loans in the event that (i) an Event of Default or Incipient Default shall exist, (ii) this Agreement shall terminate or not be renewed, or (iii) the aggregate principal amount of the Prime Rate Loans which have previously been converted to Eurodollar Rate Loans or existing Eurodollar Rate Loans continued, as the case may be, at the beginning of an Interest Period shall, at any time during such Interest Period, with respect to any Borrower, exceed either (A) the aggregate principal amount of the Revolving Loans and Term Loans then outstanding to such Borrower, or (B) the Revolving Loans then available to such Borrower under Section 2 of this Agreement, plus the then outstanding balance of the Term Loans to such Borrower. Borrowers shall pay to Lender, upon demand by Lender (or Lender may, at its option, charge any loan account of Borrowers) any amounts required to compensate Lender, the Reference Bank or any participant with Lender for any loss (including loss of anticipated profits), cost or expense incurred by such person, as a result of the conversion of Eurodollar Rate Loans to Prime Rate Loans pursuant to any of the foregoing. (d) Interest shall be payable by Borrowers to Lender monthly in arrears not later than the first day of each calendar month and shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. The interest rate on noncontingent Obligations (other than Eurodollar Rate Loans) shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate effective on the first day of the month after any change in such Prime Rate is announced based on the Prime Rate in effect on the last day of the month in which any such change occurs. In no event shall charges constituting interest payable by Borrowers to Lender exceed the maximum amount or the rate permitted under any applicable law or regulation, and if any such part or provision of this Agreement is in contravention of any such law or regulation, such part or provision shall be deemed amended to conform thereto." 12. Changes in Laws and Increased Costs of Loans. A new Section 2.12 of the Loan Agreement is hereby added immediately after Section 2.11 thereof, as follows: "2.12 Changes in Laws and Increased Costs of Loans. - 21 - 22 (a) Notwithstanding anything to the contrary contained herein, all Eurodollar Rate Loans shall, upon notice by Lender to Borrowers, convert to Prime Rate Loans in the event that (i) any change in applicable law or regulation (or the interpretation or administration thereof) shall either (A) make it unlawful for Lender, Reference Bank or any participant to make or maintain Eurodollar Rate Loans or to comply with the terms hereof in connection with the Eurodollar Rate Loans, or (B) shall result in the increase in the costs to Lender, Reference Bank or any participant of making or maintaining any Eurodollar Rate Loans by an amount deemed by Lender to be material, or (C) reduce the amounts received or receivable by Lender in respect thereof, by an amount deemed by Lender to be material or (ii) the cost to Lender, Reference Bank or any participant of making or maintaining any Eurodollar Rate Loans shall otherwise increase by an amount deemed by Lender to be material. Borrowers shall pay to Lender, upon demand by Lender (or Lender may, at its option, charge any loan account of Borrowers) any amounts required to compensate Lender, the Reference Bank or any participant with Lender for any loss (including loss of anticipated profits), cost or expense incurred by such person as a result of the foregoing, including, without limitation, any such loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such person to make or maintain the Eurodollar Rate Loans or any portion thereof. A certificate of Lender setting forth the basis for the determination of such amount necessary to compensate Lender as aforesaid shall be delivered to Borrowers and shall be conclusive, absent manifest error. (b) If any payments or prepayments in respect of the Eurodollar Rate Loans are received by Lender other than on the last day of the applicable Interest Period (whether pursuant to acceleration, upon maturity or otherwise), including any payments pursuant to the application of collections under Section 8.2(a) hereof or any other payments made with the proceeds of Collateral, Borrowers shall pay to Lender upon demand by Lender (or Lender may, at its option, charge any loan account of Borrowers) any amounts required to compensate Lender, the Reference Bank or any participant with Lender for any additional loss (including loss of anticipated profits), cost or expense incurred by such person as a result of such prepayment or payment, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds - 22 - 23 acquired by such person to make or maintain such Eurodollar Rate Loans or any portion thereof." 13. Additional Collateral Reporting. Section 6.18(a) of the Loan Agreement is hereby amended by adding new subsection (xiii) immediately after subsection (xii) as follows: "(xiii) Weekly summary reports on the Accounts of each Borrower and Guarantor under Installment Billing Programs and other installment billing Accounts of Borrowers and Guarantors and monthly agings with detail by customer with respect to all Installment Billing Program Accounts of each Borrower and Guarantor, including, as to the foregoing, the aggregate outstanding amounts, prepayments, accruals and returns and other credits." 14. Additional Accounts Covenants. (a) Subsection 6.12A(a)(iii) of the Loan Agreement is hereby amended by inserting between word "Receivables" and the period appearing in the fourth line of that Subsection the following: "or Eligible Installment Receivables". (b) Section 6.12A(b) of the Loan Agreement is hereby amended by inserting between the word "Receivable" and the period appearing in the fourth line of that Section the following: "and at any time that Inventory sold under an Installment Billing Program is returned, reclaimed or repossessed, the related Account shall not be deemed an Eligible Installment Receivable". (c) Section 6.12A of the Loan Agreement is hereby amended by adding new Section 6.12A(j) immediately following Section 6.12A(i), as follows: "(j) Each Revolving Loan Borrower shall give Lender written notice of its intention to commence or continue as to new sales any Installment Billing Program at least thirty (30) days prior to the commencement of each Program Quarter (whether or not the Accounts Loan Financial Test would be satisfied and whether or not such Revolving Loan Borrower intends to request Revolving Accounts Loans with respect to such Program.)" - 23 - 24 15. Term. (a) The first sentence of Section 9.1(a) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(a) This Agreement and the other Financing Agreements shall become effective as of the date hereof and this Agreement shall continue in full force and effect for a term ending on January 31, 2001 (the "Renewal Date"), and from year-to-year thereafter, unless sooner terminated pursuant to the terms hereof; provided, that, Lender may, at its option, extend the Renewal Date to January 31, 2002 by giving Borrowers notice on or before December 2, 2001." (b) The reference to "Termination Date" in the fourth line of Section 9.1(f) of the Loan Agreement is deleted and replaced with the words "Renewal Date"; (c) Subsections 9.1(f)(i) through (iii) of the Loan Agreement are hereby deleted in their entirety and replaced with the following, effective with respect to any termination after the date hereof: "one-half of one percent (1/2%) of the Maximum Credit, if either (i) such termination is effective on or before January 30, 2001, or (ii) if the Renewal Date is extended by Lender as provided in Section 9.1(a) hereof, such termination is effective on or before January 30, 2002; provided, however, if this Agreement and the other Financing Agreements are terminated at Borrowers' written request and such termination shall become effective within the ninety (90) day period ending on January 31, 2001 (such period, the "Refinance Period"), and provided no Event of Default or Incipient Default exists or has occurred and is continuing as of the effective date of such termination, then Borrowers shall not be obligated to pay the early termination fee otherwise payable under this Section 9.1(f) in respect of such termination. For purposes of the preceding proviso, if Lender shall have exercised or exercises its option to extend the Renewal Date to January 31, 2002 as provided in Section 9.1(a) hereof, then the Refinance Period shall be the ninety (90) day period ending on January 31, 2002, in lieu of the ninety (90) day period ending on January 31, 2001." - 24 - 25 16. Proposed Additional Borrowers. (a) Borrowers and Guarantors have preliminarily discussed with Lender a prospective corporate reorganization of certain Borrowers and, in connection therewith, Borrowers have formed the following Delaware limited liability companies (the "Proposed LLC Borrowers"): (i) Tweeds, L.L.C., (ii) The Company Store, L.L.C., (iii) Domestications, L.L.C., and (iv) Silhouettes, L.L.C. Borrowers and Guarantors represent and warrant to Lender that (a) no membership interests of the Proposed LLC Borrowers have been issued, (b) no assets or liabilities of Borrowers or Guarantors have been transferred to the Proposed LLC Borrowers, and no cash capital contributions to the Proposed LLC Borrowers have been made and (c) the proposed corporate reorganization requires the prior written consent of Lender, which consent has not been given as of the date hereof and is not being given hereby or in connection with this Amendment. (b) In order to expedite certain of the documentation that would be required in connection with the proposed reorganization should Lender provide its written consent thereto, and without limiting the other conditions, documents, agreements and instruments that Lender may require in connection therewith, each of Term Loan Borrowers shall have, pursuant to Sections 20(e) and 20(f) hereof, executed and delivered to Lender its Guarantee with respect to all Obligations of Proposed LLC Borrowers, to Lender, their liabilities under such Guarantees to be among the obligations, liabilities and indebtedness secured by the Mortgages as amended pursuant thereto and hereto. 17. Amendment Fee. In addition to all other fees, charges, interest and expenses payable by Borrowers to Lender under the Loan Agreement and the other Financing Agreements, Borrowers shall pay to Lender a fee for entering into this Agreement in the amount of $75,000, which fee is fully earned and payable as of the date hereof and may be charged directly to HDPI's Revolving Loan account maintained by Lender. 18. Representations, Warranties and Covenants. Borrowers and Guarantors represent, warrant and covenant with and to Lender as follows, which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof, the truth and accuracy of, or compliance with each, together with the representations, warranties and covenants in the other Financing Agreements, being a condition of the effectiveness of this Amendment and a continuing condition of the making or providing of any Revolving Loans or Letter of Credit Accommodations by Lender to Borrowers: - 25 - 26 (a) As of the date hereof, Brawn, Austad, GBM and HDV have an Installment Billing Program. (b) This Amendment and each other agreement or instrument to be executed and delivered by each of the Borrowers and Guarantors, as the case may be, hereunder have been duly authorized, executed and delivered by all necessary action on the part of each of the Borrowers and Guarantors which is a party hereto and thereto, and is in full force and effect as of the date hereof, and the agreements and obligations of each of the Borrowers and Guarantors, as the case may be, contained herein and therein constitute legal, valid and binding obligations of each of Borrowers and Guarantors, as the case may be, enforceable against them in accordance with their terms. (c) Neither the execution and delivery of this Amendment or any of the agreements, documents or instruments to be delivered pursuant to this Agreement (i) has violated or shall violate any Federal or State securities laws or any other law or regulation or any order or decree of any court or governmental instrumentality in any respect applicable to Borrowers or Guarantors, or (ii) does or shall conflict with or result in the breach of, or constitute a default in any respect under any mortgage, deed of trust, security agreement, agreement or instrument to which Borrowers or Guarantors is a party or may be bound, or (iii) shall violate any provision of the Certificates of Incorporation or By-Laws of Borrowers or Guarantors. (d) No action of, or filing with, or consent of any governmental or public body or authority, other than the recording of the modification agreements with respect to the Mortgages executed and delivered to Lender pursuant to this Amendment, and no approval or consent of any other party, is required to authorize, or is otherwise required in connection with, the execution, delivery and performance of this Amendment and each other agreement or instrument to be executed and delivered pursuant to this Amendment. (e) All of the representations and warranties set forth in the Loan Agreement, as amended hereby, and in the other Financing Agreements, are true and correct in all material respects after giving effect to the provisions of this Amendment, except to the extent any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such date. (f) Within fifteen (15) days after the date hereof, Borrowers and Guarantors shall deliver, or cause to be delivered, to Lender, an opinion of counsel to Borrowers and Lenders, substantially in the form of, and covering the same substantive matters in, the opinion delivered on the date hereof to Lender pursuant to Section 19(d) hereof with respect to those Borrowers - 26 - 27 and Guarantors that are incorporated in the States of New Jersey and California. (g) After giving effect to the provisions of this Amendment, no Event of Default or Incipient Default exists or has occurred and is continuing. 19. Conditions Precedent to the Amendment. Concurrently with the execution hereof (except to the extent otherwise indicated below), and as a further condition to the effectiveness of this Amendment and the agreement of Lender to the modifications and amendments set forth in this Amendment: (a) each of Borrowers and Guarantors shall have delivered to Lender an original of this Amendment, duly authorized, executed and delivered by Borrowers and Guarantors; and (b) each of Borrowers and Guarantors shall have delivered to Lender, in form and substance satisfactory to Lender, the Installment Billing Agreement, duly authorized, executed and delivered by Litle and Hanover; (c) Lender shall have received, in form and substance satisfactory to Lender, Secretary's Certificates of Directors' Resolutions with Shareholders' Consent evidencing the adoption and subsistence of corporate resolutions approving the execution, delivery and performance by Borrowers, Guarantors of this Amendment and the agreements, documents and instruments to be delivered pursuant to this Amendment; (d) Lender shall have received an opinion of counsel to Borrowers and Guarantors with respect to this Amendment and the transactions and agreements and instruments contemplated by this Amendment, and such other matters as Lender shall reasonably require, in form and substance and satisfactory to Lender; and (e) each of Borrowers and Guarantors shall deliver, or cause to be delivered, to Lender a true and correct copy of each consent, waiver or approval with respect to this Amendment or any of the instruments or agreements executed and delivered pursuant to this Amendment, that any Borrower or Guarantor obtains from any other Person, and which such consent, approval or waiver shall be in form and substance acceptable to Lender. 20. Conditions Precedent to Additional Term Advance. Each of the following shall be fully satisfied, as determined by Lender, as conditions precedent to Lender's obligations hereunder to make the Additional Term Advances: - 27 - 28 (a) Lender shall have received an original of each of the Restated HDPI Term Note and the Restated Hanover Realty Term Note, duly executed and delivered by HDPI and Hanover Realty, respectively; (b) Lender shall have received an original Mortgage Modification Agreement, dated the Additional Term Advance Closing Date, in the form annexed hereto as Exhibit D, appropriately completed, between HDPI and Lender, duly executed and delivered by HDPI; (c) Lender shall have received an original Amendment No. 1 to Deed of Trust, Assignment and Security Agreement, dated the Additional Term Advance Closing Date, appropriately completed, between Hanover Realty and Lender, in the form of Exhibit E hereto, which shall, inter alia, increase the principal amount of Obligations secured thereby to $16,000,000, plus interest, collateral preservation costs and costs and expenses of collection, duly executed and delivered by Hanover Realty; (d) Lender shall have received, in form and substance satisfactory to Lender, an original Estoppel Certificate of Landlord of Fee and Leasehold Mortgage Property, dated on or about the date hereof, by Radio Hanover, Inc. in favor of Lender, duly executed and delivered by Radio Hanover, Inc.; (e) Lender shall have received, in form and substance satisfactory to Lender, an original Guarantee by Hanover Realty in favor of Lender with respect to all Obligations to Lender of the Proposed LLC Borrowers, duly executed and delivered by Hanover Realty; (f) Lender shall have received, in form and substance satisfactory to Lender, an original Guarantee by HDPI in favor of Lender with respect to all Obligations to Lender of the Proposed LLC Borrowers, duly executed and delivered by HDPI; (g) Lender shall have received, in form and substance satisfactory to Lender, a Lease Agreement, duly executed and delivered by and between Hanover Realty and the Revolving Loan Borrowers which occupy all or any portion of the Real Property located at the fulfillment and distribution center owned by Hanover Realty in Roanoke, Virginia; (h) Lender shall have received a letter, dated on or before the Additional Term Advance Closing Date, from Thorne Consultants, Inc., addressed to Lender or upon which Lender is expressly permitted to rely, with respect to the Appraisal, dated November 5, 1997, conducted by such appraiser previously delivered to Lender, certifying that (i) the improvements with respect to the facility of Hanover Realty located in Roanoke, Virginia have been completed and (ii) the current fair market value of the Real Property owned by Hanover Realty located in - 28 - 29 Roanoke, Virginia at least Sixteen Million Two Hundred Dollars ($16,200,000); (i) Lender shall have received, in form and substance satisfactory to Lender, updated endorsements to the existing title insurance policy or a new title insurance policy issued by Lawyers Title Insurance Corporation acceptable to Lender (i) insuring the priority, amount and sufficiency of the Mortgages made by HDPI and Hanover Realty, as amended, and (ii) containing any legally available endorsements, assurances or affirmative coverage requested by Lender for protection of its interests; (j) Lender shall have received, in form and substance satisfactory to Lender, an "as built" ALTA survey showing all of the premises with respect to the Real Property covered by the Mortgage by Hanover Realty in favor of Lender, together with improvements and final certificate of occupancy issued by appropriate governmental authority; (k) Borrowers and Guarantors shall have caused to be delivered to Lender updated environmental audits of the owned Real Property of HDPI and Hanover Realty conducted by an independent environmental engineering firm acceptable to Lender, and in form, scope and methodology satisfactory to Lender, addressed to Lender or upon which Lender is expressly permitted to rely, confirming to the satisfaction of Lender and its environmental consultant, which consultant shall have reviewed such updated audits and any follow-up work requested by such consultant at Borrowers' expense, that (i) Borrowers are in compliance with all material applicable Environmental Laws and (ii) the absence of any material environmental problems. (l) Lender shall have received reports of satisfactory UCC, tax lien and judgment lien searches against Hanover Realty and HDPI in jurisdictions where their Equipment is located; (m) Lender shall have received updated evidence of insurance and loss payee endorsements required pursuant to the Loan Agreement and under the other Financing Agreements, in form and substance satisfactory to Lender, including updated certificates of insurance and such loss payee endorsements naming Lender as loss payee and additional insured, as applicable; (n) Lender shall have received an opinion of counsel to Borrowers and Guarantors with respect to the Additional Term Advances and the transactions and agreements and instruments contemplated thereby as set forth in this Amendment, and such other matters as Lender shall reasonably require, in form and substance and satisfactory to Lender; (o) All of the conditions precedent set forth in Section 19 hereof shall have been fulfilled; - 29 - 30 (p) No Event of Default or Incipient Default shall exist or have occurred and be continuing; (q) Lender shall have received not less than twenty (20) days' prior written notice of Borrowers' request that the Additional Term Advances be made in accordance herewith; and (r) All of the other conditions precedent set forth or referred to in this Section 20 shall have been fulfilled by the proposed date for the Additional Term Advance Closing Date set forth in Borrowers' notice under Section 20(q) hereof, which proposed date shall not be later than August 31, 1998. 21. Effect of this Amendment. This Amendment constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedes all prior oral or written communications, memoranda, proposals, negotiations, discussions, term sheets and commitments with respect to the subject matter hereof. Except as expressly provided herein, no other changes or modifications to the Loan Agreement or any of the other Financing Agreements, or waivers of or consents under any provisions of any of the foregoing, are intended or implied by this Amendment, and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent that any provision of the Loan Agreement or any of the other Financing Agreements conflicts with any provision of this Amendment, the provision of this Amendment shall control. 22. Further Assurances. Borrowers and Guarantors shall execute and deliver such additional documents and take such additional action as may be reasonably requested by Lender to effectuate the provisions and purposes of this Amendment. 23. Governing Law. The rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the internal laws of the State of New York (without giving effect to principles of conflicts of law). 24. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 25. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or - 30 - 31 account for more than one counterpart thereof signed by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed on the day and year first written. CONGRESS FINANCIAL CORPORATION By: /s/ Janet L. Last ---------------------------- Title: Vice President ------------------------- HANOVER DIRECT PENNSYLVANIA, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- BRAWN OF CALIFORNIA, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- GUMP'S BY MAIL, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- GUMP'S CORP. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- THE COMPANY STORE, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- [SIGNATURES CONTINUE ON NEXT PAGE] - 31 - 32 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] TWEEDS, INC. By:/s/ Edward J. O' Brien ------------------------ Title: Vice President --------------------- LWI HOLDINGS, INC. By:/s/ Edward J. O' Brien ------------------------- Title: Vice President ---------------------- AEGIS CATALOG CORPORATION By:/s/ Edward J. O' Brien ------------------------- Title: Vice President ---------------------- HANOVER DIRECT VIRGINIA INC. By:/s/ Edward J. O' Brien ------------------------- Title: Vice President ---------------------- HANOVER REALTY, INC. By:/s/ Edward J. O' Brien ------------------------- Title: Vice President ----------------------- THE AUSTAD COMPANY By:/s/ Edward J. O' Brien -------------------------- Title: Vice President ----------------------- [SIGNATURES CONTINUE ON NEXT PAGE] - 32 - 33 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] By their signatures below, the undersigned Guarantors acknowledge and agree to be bound by the applicable provisions of this Amendment: HANOVER DIRECT, INC. By:/s/ Edward J. O' Brian ---------------------------- Title: Senior Vice President ------------------------- AEGIS RETAIL CORPORATION By:/s/ Edward J. O' Brian ---------------------------- Title: Vice President ------------------------- AEGIS SAFETY HOLDINGS, INC. By:/s/ Edward J. O' Brian ---------------------------- Title: Vice President ------------------------- AEGIS VENTURES, INC. By:/s/ Edward J. O' Brian ---------------------------- Title: Vice President ------------------------- AMERICAN DOWN & TEXTILE COMPANY By:/s/ Edward J. O' Brian ---------------------------- Title: Vice President ------------------------- [SIGNATURES CONTINUE ON NEXT PAGE] - 33 - 34 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] BRAWN WHOLESALE CORP. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- THE COMPANY FACTORY, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- THE COMPANY OFFICE, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- COMPANY STORE HOLDINGS, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- D.M. ADVERTISING, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- GUMP'S CATALOG, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- GUMP'S HOLDINGS, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- [SIGNATURES CONTINUE ON NEXT PAGE] - 34 - 35 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER CASUALS, INC. By:/s/ Edward J. O' Brien --------------------------- Title: Vice President ------------------------ HANOVER CATALOG HOLDINGS, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- HANOVER FINANCE CORPORATION By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- HANOVER LIST MANAGEMENT, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President ------------------------- HANOVER VENTURES, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President -------------------------- LWI RETAIL, INC. By:/s/ Edward J. O' Brien ---------------------------- Title: Vice President -------------------------- SCANDIA DOWN CORPORATION By:/s/ Edward J. O' Brien ----------------------------- Title: Vice President -------------------------- [SIGNATURES CONTINUE ON NEXT PAGE] - 35 - 36 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] TWEEDS OF VERMONT, INC. By:/s/ Edward J. O' Brien ---------------------------- Title:Vice President ------------------------- YORK FULFILLMENT COMPANY, INC. By:/s/ Edward J. O' Brien ---------------------------- Title:Vice President ------------------------- AUSTAD HOLDINGS, INC. By:/s/ Edward J. O' Brien ---------------------------- Title:Vice President ------------------------- - 36 - 37 EXHIBIT A(1) AMENDED AND RESTATED TERM PROMISSORY NOTE $_______________ ____________, 1998 FOR VALUE RECEIVED, HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania corporation ("Debtor"), hereby unconditionally promises to pay to the order of CONGRESS FINANCIAL CORPORATION, a California corporation ("Payee"), at the offices of Payee at 1133 Avenue of the Americas, New York, New York 10036, or at such other place as to Payee or any holder hereof may from time to time designate, the principal sum of ________ ($ W) in lawful money of to United States of America and in immediately available funds, in _______ (X) consecutive monthly installments (or earlier as hereinafter provided) on the first day of each month commencing Y 1, 1998, of which the first _______ (Z) installments shall each be in the amount of TWENTY-NINE THOUSAND ONE HUNDRED SIXTY-SEVEN DOLLARS ($29,167), and the last installment shall be in to amount of the entire unpaid balance of this Note. Debtor hereby further promises to pay interest to the order of Payee on the unpaid principal balance hereof at the Interest Rate (as hereinafter defined). Such interest shall be paid in like money at said office or place from the date hereof, commencing Y 1, 1998 and on the first day of each month thereafter until the indebtedness evidenced by this Note is paid in full. Interest payable upon and after an Event of Default or termination or non-renewal of the Loan Agreement shall be payable upon demand. For purposes hereof, the following terms shall have the following meanings set forth below: - ---------- (1) Notes for Preparation: W = $3,500,000 minus the product of $29,167 multiplied by the number of calendar months between March 1,1998 and the first day of the month in which the Additional Term Advance Closing Date occurs X = 120 minus number of months between March 1, 1998 and first day of the month in which the Additional Term Advance Closing Date occurs Y = first day of the month following the month in which the Additional Term Advance Closing Date occurs Z = X-1 38 (a) "Interest Rate" shall mean, as to Prime Rate Loans, a rate of three-quarters of one percent (.75%) per annum in excess of the Prime Rate, and as to Eurodollar Rate Loans, a rate of two and three-quarters percent (2.75%) per annum in excess of the Adjusted Eurodollar Rate; provided, that, at Payee's option, the Interest Rate shall mean a rate of two and three-quarters percent (2.75%) per annum in excess of the Prime Rate as to Prime Rate Loans and a rate of four and three-quarters percent (4.75%) per annum in excess of the Adjusted Eurodollar Rate as to Eurodollar Rate Loans upon and after an Event of Default of termination or non-renewal of the Loan Agreement; (b) "Prime Rate" shall mean the rate from time to time publicly announced by CoreStates Bank, N.A., or its successors, at its office in Philadelphia, Pennsylvania, as its prime rate, whether or not such announced rate is the best rate available at such bank; (c) the term "Event of Default" shall mean an Event of Default as such term is defined in the Loan Agreement, and (d) the term "Loan Agreement" shall mean the Loan and Security Agreement, dated as of November 14, 1995, by and among Debtor, the other Borrowers (as defined therein) and Payee, as heretofore amended, and as amended by the Eleventh Amendment to Loan and Security Agreement, dated as of March ________, 1998, among Debtor, the other Borrowers, Guarantors (as defined therein) and Payee (the "Eleventh Amendment to Loan Agreement"), or as may hereafter be further amended, modified, supplemented, extended, renewed, restated or replaced. Unless otherwise defined herein, all capitalized terms used herein shall have the meanings assigned thereto in the Loan Agreement. The Interest Rate payable hereunder as to Prime Rate Loans shall increase or decrease by an amount equal to each increase or decrease, respectively, in the Prime Rate, effective on the first day of the month after any change in the Prime Rate, based on the Prime Rate in effect on the last day of the month in which any such change occurs. Interest shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. In no event shall the interest charged hereunder exceed the maximum permitted under the laws of the State of New York or other applicable law. This Note is issued pursuant to the terms and provisions of the Eleventh Amendment to Loan Agreement to evidence the HDPI Term Loan (as such term is defined in the Eleventh Amendment to Loan Agreement). This Note is secured by the Collateral described in the Loan Agreement, including, without limitation, the real property and other property of Debtor located in Hanover, Pennsylvania, as set forth in the Open-End Fee and Leasehold Mortgage and Security Agreement dated as of November 14, 1995, made by Debtor in favor of Payee, as amended by the Mortgage Modification Agreement, dated of even date herewith, between Payee and Debtor, and all notes, guarantees, security agreements and other agreements, documents and instruments now or at any time hereafter executed and/or delivered by Debtor or any other party in connection therewith (all of the foregoing, together with the Loan Agreement, as the same now exist or may hereafter be amended, modified, supplemented, -2- 39 renewed, extended, restated or replaced, being collectively referred to herein as the "Financing Agreements"), and is entitled to all of the benefits and rights thereof and of the other Financing Agreements. At the time any payment is due hereunder, at its option, Payee may charge the amount thereof to any account of Debtor or any other Borrower maintained by Payee. This Note substitutes for and replaces the Term Promissory Note, dated as of November 14, 1995, by Debtor payable to the order of Payee in the original principal amount of $4,000,000 (the "Existing Term Note"), but does not extinguish or constitute payment of, the unpaid obligations, liabilities and indebtedness evidenced through or arising thereunder or in respect thereof. This Note evidences the consolidation of the unpaid principal balance of $_______ under the Existing Term Note and the Additional HDPI Term Advance being made on the date hereof pursuant to the Eleventh Amendment to Loan Agreement. Debtor hereby acknowledges that Debtor is indebted to Payee for interest through the date hereof under the Existing Term Note and for interest accruing hereunder from and after the date hereof. Neither the amendment and restatement contained herein nor Payee's acceptance of this Note or other actions contemplated by the Loan Agreement or any of the other Financing Agreements shall, in any manner, be construed to constitute payment of, or impair, limit or extinguish the indebtedness arising under or evidenced by the Existing Term Note or constitute a novation with respect thereto and the liens and security interests securing such indebtedness shall not in any manner be impaired, limited, terminated, waived or released hereby. If any payment of principal or interest is not made when due hereunder, or if any other Event of Default shall occur for any reason, or if the Loan Agreement shall be terminated or not renewed for any reason whatsoever, then and in any such event, in addition to all rights and remedies of Payee under the Financing Agreements, applicable law or otherwise, all such rights and remedies being cumulative, not exclusive and enforceable alternatively, successively and concurrently, Payee may, at its option, declare any or all of Debtor's obligations, liabilities and indebtedness owing to Payee under the Loan Agreement and the other Financing Agreements (the "Obligations"), including, without limitation, all amounts owing under this Note, to be due and payable, whereupon the then unpaid balance hereof, together with all interest accrued thereon, shall forthwith become due and payable, together with interest accruing thereafter at the then applicable Interest Rate stated above until the indebtedness evidenced by this Note is paid in full, plus the costs and expenses of collection hereof, including, but not limited to, reasonable attorneys' fees and legal expenses. Debtor (i) waives diligence, demand, presentment, protest and notice of any kind, (ii) agrees that it will not be necessary for Payee to first institute suit in order to enforce payment of this Note and (iii) consents to any one or more extensions or postponements of time of payment, release, surrender or substitution of collateral security, or forbearance or other indulgence, without notice or consent. The pleading of any statute of limitations as a defense to any demand against Debtor is expressly hereby waived by Debtor. Upon any -3- 40 Event of Default or termination or non-renewal of the Loan Agreement, Payee shall have the right, but not the obligation to setoff against this Note all money owed by Payee to Debtor. Payee shall not be required to resort to any Collateral for payment, but may proceed against Debtor and any guarantors or endorsers hereof in such order and manner as Payee may choose. None of the rights of Payee shall be waived or diminished by any failure or delay in the exercise thereof. The validity, interpretation and enforcement of this Note and the other Financing Agreements and any dispute arising in connection herewith or therewith shall be governed by the internal laws of the State of New York (without giving effect to principles of conflicts of law). Debtor irrevocably consents and submits to the non-exclusive jurisdiction of the Supreme Court of the State of New York for New York County and the United States District Court for the Southern District of New York and waives any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this Note or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of Debtor and Payee in respect of this Note or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agrees that any dispute arising out of the relationship between Debtor and Payee or the conduct of such persons in connection with this Note or otherwise shall be heard only in the courts described above (except that Payee shall have the right to bring any action or proceeding against Debtor or its property in the courts of any other jurisdiction which Payee deems necessary or appropriate in order to realize on the Collateral or to otherwise enforce its rights against Debtor or its property). Debtor hereby waives personal service of any and all process upon it and consents that all such service of process may be made by certified mail (return receipt requested) directed to it and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at Payee's option, by service upon Debtor in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, Debtor shall appear in answer to such process, failing which Debtor shall be deemed in default and judgment may be entered by Payee against Debtor for the amount of the claim and other relief requested. DEBTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS NOTE OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS BETWEEN DEBTOR AND PAYEE IN RESPECT OF THIS NOTE OR THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. DEBTOR AGREES -4- 41 AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY. The execution and delivery of this Note has been authorized by the Board of Directors and by any necessary vote or consent of the stockholders of Debtor. Debtor hereby authorizes Payee to complete this Note in any particulars according to the terms of the loan evidenced hereby. This Note shall be binding upon the successors and assigns of Debtor and inure to the benefit of Payee and its successors, endorsees and assigns. Whenever used herein, the term "Debtor" shall be deemed to include its successors and assigns and the term "Payee" shall be deemed to include its successors, endorsees and assigns. If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions hereof shall in no way be affected thereby. ATTEST: HANOVER DIRECT PENNSYLVANIA, INC. _____________________ Secretary By:___________________________________ [Corporate Seal] Title:________________________________ -5- 42 EXHIBIT B(1) AMENDED AND RESTATED TERM PROMISSORY NOTE $_______________ ____________, 1998 FOR VALUE RECEIVED, HANOVER REALTY, INC., a Virginia corporation ("Debtor"), hereby unconditionally promises to pay to the order of CONGRESS FINANCIAL CORPORATION, a California corporation ("Payee"), at the offices of Payee at 1133 Avenue of the Americas, New York, New York 10036, or at such other place as the Payee or any holder hereof may from time to time designate, the principal sum of_____________ ($ W) in lawful money of the United States of America and in immediately available funds, in_______ (X) consecutive monthly installments (or earlier as hereinafter provided) onto first day of each month commencing Y 1, 1998, of which the first _____________ (Z) installments shall each be in the amount of SEVENTY-THREE THOUSAND THREE HUNDRED AND THIRTY-THREE DOLLARS ($73,333), and the last installment shall be in the amount of the entire unpaid balance of this Note. Debtor hereby further promises to pay interest to the order of Payee on the unpaid principal balance hereof at the Interest Rate (as hereinafter defined). Such interest shall be paid in like money at said office or place from the date hereof, commencing Y 1, 1998 and on the first day of each month thereafter until the indebtedness evidenced by this Note is paid in full. Interest payable upon and after an Event of Default or termination or non-renewal of the Loan Agreement shall be payable upon demand. For purposes hereof, the following terms shall have the following meanings set forth below: - ---------- (1) Notes for Preparation: W = $8,800,000 minus to product of $73,333 multiplied by the number of calendar months between March 1, 1998 and the first day of the month in which the Additional Term Advance Closing Date occurs X = 120 minus number of months between March 1, 1998 and first day of the month in which the Additional Term Advance Closing Date occurs Y = first day of the month following the month in which the Additional Term Advance Closing Date occurs Z = X-1 43 (a) "Interest Rate" shall mean, as to Prime Rate Loans, a rate of three-quarters of one percent (.75%) per annum in excess of the Prime Rate, and as to Eurodollar Rate Loans, a rate of two and three-quarters percent (2.75%) per annum in excess of the Adjusted Eurodollar Rate; provided, that, at Payee's option, the Interest Rate shall mean a rate of two and three-quarters percent (2.75%) per annum in excess of the Prime Rate as to Prime Rate Loans and a rate of four and three-quarters percent (4.75%) per annum in excess of the Adjusted Eurodollar Rate as to Eurodollar Rate Loans upon and after an Event of Default or termination or non-renewal of the Loan Agreement; (b) "Prime Rate" shall mean the rate from time to time publicly announced by CoreStates Bank, N.A., or its successors, at its office in Philadelphia, Pennsylvania, as its prime rate, whether or not such announced rate is the best rate available at such bank; (c) the term "Event of Default" shall mean an Event of Default as such term is defined in the Loan Agreement; and (d) the term "Loan Agreement" shall mean the Loan and Security Agreement, dated as of November 14, 1995, by and among Debtor, the other Borrowers (as defined therein) and Payee, as heretofore amended, and as amended by the Eleventh Amendment to Loan and Security Agreement, dated as of March _____________, 1998, among Debtor, the other Borrowers, Guarantors (as defined therein) and Payee (the "Eleventh Amendment to Loan Agreement"), or as may hereafter be further amended, modified, supplemented, extended, renewed, restated or replaced. Unless otherwise defined herein, all capitalized terms used herein shall have the meanings assigned thereto in the Loan Agreement. The Interest Rate payable hereunder as to Prime Rate Loans shall increase or decrease by an amount equal to each increase or decrease, respectively, in the Prime Rate, effective on the first day of the month after any change in the Prime Rate, based on the Prime Rate, in effect on the last day of the month in which any such change occurs. Interest shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. In no event shall the interest charged hereunder exceed the maximum permitted under the laws of the State of New York or other applicable law. This Note is issued pursuant to the terms and provisions of the Eleventh Amendment to Loan Agreement to evidence the Hanover Realty Term Loan (as such term is defined in the Eleventh Amendment to Loan Agreement). This Note is secured by the Collateral described in the Loan Agreement, including without limitation, the real property and other property of Debtor located in Roanoke, Virginia, as set forth in the Deed of Trust, Assignment and Security Agreement, dated as of November 14, 1995, made by Debtor for the benefit of Payee as amended by Amendment No. 1 to Deed of Trust, Assignment and Security Agreement, dated of even date herewith, between Debtor and Payee, and all notes, guarantees, security agreements and other agreements, documents and instruments now or at any time hereafter executed and/or delivered by Debtor or any other party in connection therewith (all of the foregoing, together with the Loan Agreement, as the same now exist or -2- 44 may hereafter be amended, modified, supplemented, renewed, extended, restated or replaced, being collectively referred to herein as the "Financing Agreements"), and is entitled to all of the benefits and rights thereof and of the other Financing Agreements. At the time any payment is due hereunder, at its option, Payee may charge the amount thereof to any account of Debtor or any other Borrower maintained, by Payee. This Note substitutes for and replaces the Term Promissory Note, dated November 14, 1995, by Debtor payable to the order of Payee in the original principal amount of $6,000,000 (the "Existing Term Note"), but does not extinguish or constitute payment of, the unpaid obligations, liabilities and indebtedness evidenced through or arising thereunder or in respect thereof. This Note evidences the consolidation of the unpaid principal balance of $_______ under the Existing Term Note and the Additional Hanover Realty Term Advance being made on the date hereof pursuant to the Eleventh Amendment to Loan Agreement. Debtor hereby acknowledges that Debtor is indebted to Payee for interest through the date hereof under the Existing Term Note and for interest accruing hereunder from and after the date hereof. Neither the amendment and restatement contained herein nor Payee's acceptance of this Note or other actions contemplated by the Loan Agreement or any of the other Financing Agreements shall, in any manner, be construed to constitute payment of, or impair, limit or extinguish the indebtedness arising under or evidenced by the Existing Term Note or constitute a novation with respect thereto and the liens and security interests securing such indebtedness shall not in any manner be impaired, limited, terminated, waived or released hereby. If any payment of principal or interest is not made when due hereunder, or if any other Event of Default shall occur for any reason, or if the Loan Agreement shall be terminated or not renewed for any reason whatsoever, then and in any such event, in addition to all rights and remedies of Payee under the Financing Agreements, applicable law or otherwise, all such rights and remedies being cumulative, not exclusive and enforceable alternatively, successively and concurrently, Payee may, at its option, declare any or all of Debtor's obligations, liabilities and indebtedness owing to Payee under the Loan Agreement and the other Financing Agreements (the "Obligations"), including, without limitation, all amounts owing under this Note, to be due and payable, whereupon the then unpaid balance hereof, together with all interest accrued thereon, shall forthwith become due and payable, together with interest accruing thereafter at the then applicable Interest Rate stated above until the indebtedness evidenced by this Note is paid in full, plus the costs and expenses of collection hereof, including, but not limited to, reasonable attorneys' fees and legal expenses. Debtor (i) waives diligence, demand, presentment, protest and notice of any kind, (ii) agrees that it will not be necessary for Payee to first institute suit in order to enforce payment of this Note and (iii) consents to any one or more extensions or postponements of time of payment, release, surrender or substitution of collateral security, or forbearance or other indulgence, without notice or consent. The pleading of any statute of limitations as a defense to any demand against Debtor is expressly hereby waived by Debtor. Upon any -3- 45 Event of Default or termination or non-renewal of the Loan Agreement, Payee shall have the right, but not the obligation to setoff against this Note all money owed by Payee to Debtor. Payee shall not be required to resort to any Collateral for payment, but may proceed against Debtor and any guarantors or endorsers hereof in such order and manner as Payee may choose. None of the rights of Payee shall be waived or diminished by any failure or delay in the exercise thereof. The validity, interpretation and enforcement of this Note and the other Financing Agreements and any dispute arising in connection herewith or therewith shall be governed by the internal laws of the State of New York (without giving effect to principles of conflicts of law). Debtor irrevocably consents and submits to the non-exclusive jurisdiction of the Supreme Court of the State of New York for New York County and the United States District Court for the Southern District of New York and waives any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this Note or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of Debtor and Payee in respect of this Note or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agrees that any dispute arising out of the relationship between Debtor and Payee or the conduct of such persons in connection with this Note or otherwise shall be heard only in the courts described above (except that Payee shall have the right to bring any action or proceeding against Debtor or its property in the courts of any other jurisdiction which Payee deems necessary or appropriate in order to realize on the Collateral or to otherwise enforce its rights against Debtor or its property). Debtor hereby waives personal service of any and all process upon it and consents that all such service of process may be made by certified mail (return receipt requested) directed to it and service so made shall be deemed to be completed five (5) days after the same have been so deposited in the U.S. mails, or, at Payee's option, by service upon Debtor in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, Debtor shall appear in answer to such process, failing which Debtor shall be deemed in default and judgment may be entered by Payee against Debtor for the amount of the claim and other relief requested. DEBTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS NOTE OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS BETWEEN DEBTOR AND PAYEE IN RESPECT OF THIS NOTE OR THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. DEBTOR AGREES -4- 46 AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY. The execution and delivery of this Note has been authorized by the Board of Directors and by any necessary vote or consent of the stockholders of Debtor. Debtor hereby authorizes Payee to complete this Note in any particulars according to the terms of the loan evidenced hereby. This Note shall be binding upon to successors and assigns of Debtor and inure to the benefit of Payee and its successors, endorsees and assigns. Whenever used herein, the term "Debtor" shall be deemed to include its successors and assigns and the term "Payee" shall be deemed to include its successors, endorsees and assigns. If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions hereof shall in no way be affected thereby. ATTEST: HANOVER REALTY, INC. _____________________ Secretary By:___________________________________ [Corporate Seal] Title:________________________________ -5- 47 EXHIBIT C Intercompany Loans Owed By Hanover Realty, Inc.
Revolving Loan Outstanding Amount Intercompany Loan Borrower that made of Intercompany Repayment Amount loan to Hanover Loans Realty, Inc. Hanover Direct Virginia, Inc. $7,469,519 Full Amount of Hanover Realty Term Advance
-6- 48 EXHIBIT D MODIFICATION AGREEMENT WITH RESPECT TO OPEN-END MORTGAGE THIS MODIFICATION AGREEMENT WITH RESPECT TO OPEN-END MORTGAGE ("Modification Agreement"), made as of the __ day of _______, 1998, between HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania corporation ("Mortgagor"), having an office at 101 East Kindig Lane, Hanover, Pennsylvania and CONGRESS FINANCIAL CORPORATION, a California corporation ("Mortgagee"), having an office at 1133 Avenue of the Americas, New York, New York 10036. W I T N E S S E T H: WHEREAS, Mortgagee and Mortgagor have entered into financing arrangements pursuant to which Mortgagee has made and may make loans and advances and provide other financial accommodations to Mortgagor as set forth in the Loan and Security Agreement dated as of the 14th day of November, 1995, by and between Mortgagee and Mortgagor, as amended (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement"); and WHEREAS, in order to secure all existing and future obligations, liabilities and indebtedness of Mortgagor evidenced by or arising under the Loan Agreement, up to the aggregate principal amount outstanding at any time of SEVENTY FIVE MILLION DOLLARS ($75,000,000), plus interest, costs and expenses and other amounts as provided therein, the Mortgagor executed and delivered an Open-End Fee and Leasehold Mortgage and Security Agreement, dated as of November 14, 1995 (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Mortgage"), with respect to certain property set forth on Exhibit A annexed hereto and made a part hereof (the "Mortgaged Property"), which Mortgage was recorded on November 15, 1995 in Adams County Record Book 1109 at Page 152; and WHEREAS, Mortgagee has agreed to certain amendments to the terms of the Loan Agreement, as set forth in the Eleventh Amendment to Loan and Security Agreement, dated as of March __, 1998, among Mortgagor and its affiliates and Mortgagee (the "Eleventh Amendment"), which Eleventh Amendment provides for, among other things, (i) an extension of the term for the financing arrangements between Mortgagee and Mortgagor and its affiliates, (ii) the making of a new term loan to Mortgagor by Mortgagee in the principal amount of $_______, and the consolidation of the existing balance of the Term Note referred 49 to in the Mortgage with the new term loan, to be evidenced by an Amended and Restated Term Promissory Note, as referred to below, and (iii) the execution and delivery by Mortgagor of its Guarantee and Waivers in favor of Mortgagee with respect to Silhouettes, L.L.C., The Company Store, L.L.C., Domestications, L.L.C., and Tweeds, L.L.C., newly formed affiliates of Mortgagor that may hereafter become "Borrowers" under and as defined in the Loan Agreement (such Guarantee and Waivers, collectively, the "Additional Guaranties"); and WHEREAS, the parties hereto wish to amend the Mortgage so that it conforms to the terms of the Eleventh Amendment. NOW, THEREFORE, in consideration of the above premises, Mortgagor and Mortgagee hereby agree as follows (terms which are defined in the Mortgage shall have their defined meanings when used herein, unless otherwise stated): 1. Amendment of Certain Definitions. From and after the date hereof, the following terms now contained in the Mortgage shall be amended as set forth below: (a) Any reference to the Loan Agreement in the Mortgage shall mean the Loan Agreement, as heretofore amended and as amended by the Eleventh Amendment and any other further amendment, modification, supplement, extension, renewal, restatement or replacement thereof. (b) "Term Note" shall mean the Amended and Restated Term Promissory Note, dated of even date herewith, in the original principal amount of __________________________ ($________) made by Mortgagor to the order of Mortgagee, delivered pursuant to Section 2 of the Eleventh Amendment, and any amendment, modification, supplement, extension, renewal, restatement or replacement thereof. (c) "Financing Agreements" shall include the Term Note (as defined in Section 1(b) hereof) and the Additional Guaranties. (d) Whenever the term "Guaranty" shall appear in the Mortgage in Paragraphs 1 through 36 thereof, the same shall include the Additional Guaranties in addition to the Guaranty which is described in Subparagraph (c) on Page 5 of the Mortgage. (e) "Obligations" shall include those existing and future obligations, liabilities and indebtedness of Mortgagor to Mortgagee evidenced by, arising under or in connection with (i) the Term Note (as defined in Section 1(b) hereof), and (ii) the Additional Guaranties. -2- 50 2. Amendment of Conflicts Provision. Paragraph 34 of the Mortgage entitled "Conflicts" is hereby deleted and the following Paragraph is inserted in its place and stead: "34. Conflicts. In case of any conflict between the provisions of this Mortgage relating to Equipment and the Loan Agreement with respect to the same matter, the provisions of the Loan Agreement shall control. In all other cases of conflicts between the provisions of this Mortgage and the provisions of the Loan Agreement, the provisions of this Mortgage shall control. Consistent additional provisions shall not be considered conflicting provisions for purposes of this Paragraph." 3. Ratification. Except as modified by this Modification Agreement, all other terms, conditions, covenants, representations and warranties contained in the Mortgage shall remain in full force and effect and are hereby ratified by the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Modification Agreement as of the day and year first above written. ATTEST: "MORTGAGOR" HANOVER DIRECT PENNSYLVANIA, INC. _____________________ By:___________________________ Name:_________________________ Title:________________________ "MORTGAGEE" CONGRESS FINANCIAL CORPORATION By:___________________________ Name:_________________________ Title:________________________ The precise residence address of Mortgagee is: 1133 Avenue of the Americas New York, New York 10036 _____________________________ on behalf of the Mortgagee -3- 51 STATE OF ____________ ) ) ss.: COUNTY OF ____________ ) And now this day of ________, 1998, before me a Notary Public, personally appeared ____________________________, who acknowledged himself to be the _________________________ of HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania corporation, and that he, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as such officer. _______________________________ Notary Public My Commission Expires: __________ STATE OF ____________ ) ) ss.: COUNTY OF ____________ ) And now this day of ________, 1998 before me a Notary Public, personally appeared ____________________________, who acknowledged himself to be the _________________________ of CONGRESS FINANCIAL CORPORATION, a California corporation, and that he, as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by himself as such officer. _______________________________ Notary Public My Commission Expires: __________ -4- 52 EXHIBIT E This document is intended to be recorded in the Deed Book in the Office of the Clerk of the Circuit Court of Roanoke County, Virginia PREPARED BY AND AFTER RECORDING RETURN TO: OTTERBOURG, STEINDLER, HOUSTON & ROSEN, P.C. 230 Park Avenue New York, New York 10169 Attention: Stephen B. Weissman, Esq. AMENDMENT NO. 1 TO DEED OF TRUST, ASSIGNMENT AND SECURITY AGREEMENT made by and between HANOVER REALTY, INC. as the Grantor in favor of GORDON F. RAINEY, JR. as Trustee for the benefit of CONGRESS FINANCIAL CORPORATION as the Noteholder RECORDING TAXES IN THE AMOUNT OF $22,279 WERE PAID IN CONNECTION WITH THE RECORDING OF A DEED OF TRUST, ASSIGNMENT AND SECURITY AGREEMENT ("DEED OF TRUST") DATED NOVEMBER 14, 1995 GIVEN BY GRANTOR (DEFINED HEREIN) TO TRUSTEE (DEFINED HEREIN) FOR THE BENEFIT OF NOTEHOLDER (DEFINED HEREIN) IN ROANOKE COUNTY IN ACCORDANCE WITH SECTIONS 58.1-803 AND 58.1-814 OF THE CODE OF VIRGINIA, 1950, AS AMENDED. THIS MODIFICATION AGREEMENT (DEFINED HEREIN) CONSTITUTES A MODIFICATION OF THE DEED OF TRUST AND AN INCREASE IN THE MAXIMUM AGGREGATE PRINCIPAL AMOUNT OF THE OBLIGATIONS (DEFINED HEREIN) AT ANY TIME SECURED BY THE DEED OF TRUST FROM $11,400,000 TO $16,000,000. RECORDING TAXES IN THE AMOUNT OF $7,360 ARE TENDERED HEREWITH IN CONNECTION WITH THE RECORDING OF THIS MODIFICATION AGREEMENT AND, PURSUANT TO SECTION 58.1-809 OF THE CODE OF VIRGINIA, 1950, AS AMENDED, NO OTHER OR FURTHER RECORDING TAXES SHALL BE DUE ON OR IN CONNECTION WITH THE RECORDING OF THIS MODIFICATION AGREEMENT. 53 AMENDMENT NO. 1 TO DEED OF TRUST, ASSIGNMENT AND SECURITY AGREEMENT THIS AMENDMENT NO. 1 TO DEED OF TRUST, ASSIGNMENT AND SECURITY AGREEMENT ("Modification Agreement"), made as of the __ day of __________, 1998, between HANOVER REALTY, INC., a Virginia corporation ("Grantor"), having its principal place of business at 5020 Hollins Road, Roanoke, Virginia, GORDON F. RAINEY, JR., TRUSTEE, of the City of Richmond, Virginia ("Trustee"), and CONGRESS FINANCIAL CORPORATION, a California corporation ("Noteholder"), having an office at 1133 Avenue of the Americas, New York, New York 10036. W I T N E S S E T H: WHEREAS, Noteholder and Grantor have entered into financing arrangements pursuant to which Noteholder has made and may make loans and advances and provide other financial accommodations to Grantor and its affiliates as set forth in the Loan and Security Agreement dated as of the 14th day of November, 1995, by and between Noteholder and Grantor, as amended (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement"); and WHEREAS, in order to secure all existing and future obligations, liabilities and indebtedness of Grantor evidenced by or arising under the Loan Agreement, up to the aggregate principal amount outstanding at any time of ELEVEN MILLION FOUR HUNDRED THOUSAND DOLLARS ($11,400,000), plus interest, costs and expenses and other amounts as provided therein, Grantor executed and delivered to Trustee for the benefit of Noteholder a Deed of Trust, Assignment and Security Agreement, dated as of November 14, 1995 (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Deed of Trust"), with respect to certain property set forth on Exhibit A annexed hereto and made a part hereof, which Deed of Trust was recorded on November 15, 1995 in the Clerk's Office of the Circuit Court of Roanoke County in Book 1491 at Page 00968. WHEREAS, Noteholder has agreed to certain amendments to the terms of the Loan Agreement, as set forth in the Eleventh Amendment to Loan and Security Agreement, dated as of March __, 1998, among Grantor, Grantor's affiliates and Noteholder (the "Eleventh Amendment"), which Eleventh Amendment provides for, -2- 54 among other things, (i) an extension of the term for the financing arrangements between Noteholder and Grantor and its affiliates, (ii) the making of a new term loan to Grantor by Noteholder in the principal amount of $_________, and the consolidation of the existing balance of the Term Note referred to in the Deed of Trust with the new term loan, to be evidenced by an Amended and Restated Term Promissory Note, (iii) the execution and delivery by Grantor of its Guarantee and Waivers in favor of Noteholder with respect to Silhouettes, L.L.C., The Company Store, L.L.C., Domestications, L.L.C., and Tweeds, L.L.C., newly formed affiliates, Grantor that may hereafter become "Borrowers" under and as defined in the Loan Agreement (such Guarantee and Waivers collectively, the "Additional Guaranties"), and (iv) an increase in the maximum aggregate principal amount of the Obligations (as defined in the Deed of Trust) at any time secured by the Deed of Trust from $11,400,000 to $16,000,000; and WHEREAS, the parties hereto wish to amend the Deed of Trust so that it conforms to the terms of the Eleventh Amendment. NOW, THEREFORE, in consideration of the above premises, Grantor, Trustee and Noteholder hereby agree as follows (terms which are defined in the Deed of Trust shall have their defined meanings when used herein, unless otherwise stated): 1. Amendment of Certain Definitions. From and after the date hereof, the following terms now contained in the Deed of Trust shall be amended as set forth below: (a) Any reference to the Loan Agreement in the Deed of Trust shall mean the Loan Agreement, as heretofore amended and as amended by the Eleventh Amendment and any other further amendment, modification, supplement, extension, renewal, restatement or replacement thereof. (b) "Term Note" shall mean the Amended and Restated Term Promissory Note, dated of even date herewith, in the original principal amount of __________________________ ________ Dollars ($_______) made by Grantor to the order of Noteholder, delivered pursuant to Section 3 of the Eleventh Amendment, and any amendment, modification, supplement, extension, renewal, restatement or replacement thereof. (c) "Financing Agreements" shall include the Term Note (as defined in Section 1(b) hereof) and the Additional Guaranties. (d) Whenever the term "Guaranty" shall appear in the Deed of Trust in Paragraphs 1 through 32 thereof, the same shall include the Additional Guaranties in addition to the Guaranty which is described in Subparagraph (c) on Page 5 of the Deed of Trust. -3- 55 (e) "Obligations" shall include, without limitation, those obligations, liabilities and indebtedness of Grantor to Noteholder evidenced by, arising under or in connection with (i) the Term Note (as defined in Section 1(b) hereof), and (ii) the Additional Guaranties. 2. Increase in Maximum Aggregate Principal Amount of Obligations Secured by Deed of Trust. The maximum aggregate principal amount of the Obligations which may at any time be secured by the Deed of Trust is hereby increased to Sixteen Million Dollars ($16,000,000) at any time and from time to time outstanding, or howsoever evidenced. 3. Amendment of Conflicts Provision. Paragraph 31 of the Deed of Trust entitled "Conflicts" is hereby deleted and the following Paragraph is inserted in its place and stead: "31. Conflicts. In case of any conflict between the provisions of this Deed of Trust relating to Equipment and the Loan Agreement with respect to the same matter, the provisions of the Loan Agreement shall control. In all other cases of conflicts between the provisions of this Deed of Trust and the provisions of the Loan Agreement, the provisions of this Deed of Trust shall control. Consistent additional provisions shall not be considered conflicting provisions for purposes of this Paragraph." 4. Ratification. Except as modified by this Modification Agreement, all other terms, conditions, covenants, representations and warranties contained in the Deed of Trust shall remain in full force and effect and are hereby ratified by the parties hereto. 5. Execution by Noteholder. The Noteholder joins in the execution of this Modification Agreement to evidence its knowledge and consent hereto and to instruct and authorize Trustee to execute the same. -4- 56 IN WITNESS WHEREOF, the parties hereto have executed this Modification Agreement as of the day and year first above written. "GRANTOR" HANOVER REALTY, INC. By:___________________________ Name:_________________________ Title:________________________ "TRUSTEE" ______________________________ Gordon. F. Rainey, Jr. "NOTEHOLDER" CONGRESS FINANCIAL CORPORATION By:___________________________ Name:_________________________ Title:________________________ -5- 57 STATE OF ________ COUNTY OF _______, to-wit: The foregoing instrument was acknowledged before me this ________ day of __________, 1998 in the County of _________, by ___________, as ________________of Hanover Realty, Inc., a Virginia corporation, on behalf of the Grantor. My Commission Expires: __________ _______________________ Notary Public (NOTARY SEAL) STATE OF ________ COUNTY OF _______, to-wit: The foregoing instrument was acknowledged before me this ________ day of ____________, 1998 in the County of _________, by Gordon F. Rainey, Jr. in his stated capacity. My Commission Expires: __________ _______________________ Notary Public (NOTARY SEAL) -6- 58 STATE OF ________ COUNTY OF _______, to-wit: The foregoing instrument was acknowledged before me this _______ day of ______, 1998 in the County of ________, by ______________, as _________________ of Congress Financial Corporation, a California corporation, on behalf of the Noteholder. My Commission Expires: __________ _______________________ Notary Public EX-10.42 7 SUBSTITUTE LETTER OF CREDIT 1 EXHIBIT 10.42 SWISS BANK CORPORATION, Stamford Branch 677 Washington Boulevard Stamford, Connecticut 06901-3793 Letter of Credit No. S567171 February 18, 1998 State Street Bank and Trust Company Goodwin Square 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Attention: Corporate Trust Department Re: Littlestown Industrial Development Authority Variable Rate Demand Industrial Development Revenue Refunding Bonds, 1987 Series (Hanover House Industries, Inc. MK.Project) (individually a "Bond" and collectively the "Bonds") Ladies and Gentlemen: At the request and on the instructions of our customer, Hanover Direct Pennsylvania, Inc. (formerly known as Hanover House Industries, Inc.) ("Industries"), we, the undersigned bank (the "Bank") hereby establish in your favor this direct pay Letter of Credit in the amount of $8,560,000 (the "Stated Amount"). This Letter of Credit is issued to you as successor trustee ("Trustee") under the Indenture of Trust dated as of September 1, 1987 ("Indenture"), and is for the benefit of the holders of the Bonds issued by the Littlestown Industrial Development Authority (the "Issuer") to refinance a project for Industries. This Letter of Credit No. S567171 is irrevocable during its term. The Stated Amount may be adjusted from time to time during the term hereof as more fully set forth below. You, as Trustee, are hereby irrevocably authorized to draw hereunder for account of Industries, upon the terms and conditions hereinafter set forth, an aggregate amount not exceeding the Stated Amount of which Stated Amount (a) an amount not exceeding $8,000,000 (the "Principal Portion") may be stated to be drawn upon with respect to payment of the unpaid principal amount of the Bonds and (b) an amount not exceeding $560,000 (the "Interest Portion") may be stated to be drawn upon with respect to payment of up to 210 days' of accrued interest on the Bonds on 2 or prior to their stated maturity date (the amount of such drawing with respect to accrued interest to be expressly further limited to an amount computed by you at the actual rate of interest from time to time applicable to the Bonds during the period for which such drawing is to be made but not in any event to exceed a rate of twelve percent (12%) per annum). All of the foregoing shall be effective immediately and shall expire on March 30, 1999 unless sooner terminated as provided herein or until renewed or extended as provided herein (such date, as it may sooner be terminated or as it may from time to time be extended pursuant to the terms hereof, the "Scheduled Termination Date"). All drawings under this Letter of Credit will be paid with our own funds. Funds under this Letter of Credit are available to you upon presentation by you of (a) if the drawing is under the Principal Portion, your written certificate signed by your authorized officer, appropriately completed, in the form of Schedules A, C or E hereto (the "Principal Drawing"; drawings under Schedule C or E may also be referred to as a "Purchase Drawing"); or (b) if the drawing is under the Interest Portion, your written certificate signed by your authorized officer, appropriately completed, in the form of Schedules B, D or F hereto (each an "Interest Drawing"). Presentation of such certificate(s) shall be made during our business hours on a Business Day (as hereinafter defined) at our offices located at Swiss Bank Corporation, Stamford Branch, 677 Washington Boulevard, Stamford, Connecticut 06901-3793, Attention: Mr. Joerg Rauthe, marked "Urgent" and "For Immediate Delivery", or at any other offices which may be designated by us by written notice delivered to you. We hereby agree that each certificate presented in compliance with the terms of this Letter of Credit will be duly honored by us if presented as specified on or before the expiration date hereof. If a presentation in respect of payment is made by you hereunder at or prior to 11:30 a.m., Connecticut time, on a Business Day, and provided that the documents so presented conform to the terms and conditions hereof, payment shall be made to you, or to your designee, of the amount specified, by wire transfer in immediately available funds of the Bank, not later than 3:00 p.m., Connecticut time, on the same Business Day. If a presentation in respect of payment is made by you hereunder after 11:30 a.m., Connecticut time, on a Business Day, and provided that the documents so presented conform to the terms and conditions hereof, payment shall be made to you, or your designee, of the amount specified, by wire transfer in immediately available funds, not later than 3:00 p.m., Connecticut time, on the succeeding Business Day. If requested by you, payment under this Letter of Credit will be made by deposit of immediately available funds into a designated account that you maintain with us. As used herein, "Business Day" shall mean any day other than (i) a Saturday or Sunday, (ii) a day on which commercial banks located in Stamford, Connecticut, or the city or cities in which the corporate trust office of the Trustee is located, are required or authorized by law to close or 2 3 (iii) a day on which the New York Stock Exchange is closed. Drawings in respect of payments hereunder honored by us shall not, in the aggregate, exceed the Stated Amount, as the Stated Amount may have been reinstated by us. Each drawing honored by the Bank hereunder shall pro tanto reduce the amount available under this Letter of Credit, subject to reinstatement as provided herein. Effective on the seventh Business Day following the honoring of an Interest Drawing, the Letter of Credit will be reinstated to the full amount of the Interest Portion (or such lesser amount as shall have been specified by you in the certificate most recently presented by you hereunder in the form of Schedule H hereto). The foregoing notwithstanding, the Interest Portion of this Letter of Credit shall not be reinstated if you have received notice from us in writing prior to the seventh Business Day following the day on which such drawing was honored that the Interest Portion will not be so reinstated because (a) we have not been reimbursed by Industries, Hanover Direct, Inc. (the "Company") or an Affiliate (as that term is defined in the Indenture, as such term is defined in Schedule G hereto) of either of them for such drawing, or a previous or subsequent Interest Drawing, or (b) an event of default under the Reimbursement Agreement between the Company and us dated as of December 18, 1996, as amended pursuant to that certain First Amendment to the Reimbursement Agreement dated as of February 18, 1998 (the "Reimbursement Agreement") shall have occurred and be continuing. With respect to a Principal Drawing made by presentation of a certificate in the form of Schedule C or Schedule E hereto, the Letter of Credit will be reinstated to the full amount of the Principal Portion (or such lesser amount as shall have been specified by you in the certificate most recently presented by you hereunder in the form of Schedule H hereto) effective upon reimbursement to us in full of all amounts paid by us pursuant to Principal Drawings and provided no event of default has occurred and is continuing under the Reimbursement Agreement. Only you as Trustee may make a drawing under this Letter of Credit. Upon the payment to you or to your designee of the amount specified in the certificate(s) presented hereunder, we shall be fully discharged of our obligation under this Letter of Credit with respect to such certificate(s) and we shall not thereafter be obligated to make any further payments under this Letter of Credit in respect of such certificate(s) to you or any other person who may have made to you or makes to you a demand for payment of principal of, the purchase price of, or interest on, any Bond. By paying to you an amount demanded in such certificate(s) we make no representation as to the correctness of such amount. This Letter of Credit applies only to the payment of principal of the Bonds when due, purchase price of Bonds when due 3 4 and interest accruing on the Bonds on or prior to the due date(s) of the Bonds (in whole or in part) when due, and does not apply to any interest that may accrue after any such due date. This Letter of Credit is effective and commences coverage as of February 18, 1998. Upon our receipt of the original of this Letter of Credit together with a certificate signed by your duly authorized officer, appropriately completed, in the form of Schedule H hereto and approved by Industries, the Stated Amount, Principal Portion and Interest Portion shall be immediately and automatically reduced to the amounts set forth in such certificate and we shall, at our election, either appropriately amend this Letter of Credit or issue a replacement letter of credit to evidence such reduction. Upon your receipt of a written notice from us in the form of Annex J attached hereto, the Scheduled Termination Date of this Letter of Credit in effect at the time of receipt of such notice shall be extended to the date specified in such notice for the Scheduled Termination Date as extended. Notwithstanding the foregoing, upon the earliest of (i) the Scheduled Termination Date, (ii) when all available amounts hereunder have been drawn, (iii) 15 days after the effective date of a Term Interest Rate Period (as defined in the Indenture) having a duration extending beyond the Scheduled Termination Date, (iv) 15 days after the effective date of a Term Interest Rate Period during which the Bonds may be redeemed at a premium redemption price, (v) when no Bonds are outstanding, or (vi) 15 days after our receipt of a certificate signed by your duly authorized officer, appropriately completed, in the form of Schedule G hereto, this Letter of Credit shall automatically terminate and be delivered to us for cancellation. In the event the Scheduled Termination Date of this Letter of Credit is not a Business Day, this Letter of Credit shall expire at 1:30 p.m., Stamford, Connecticut time, on the next following Business Day. TO THE EXTENT CONSISTENT WITH THE EXPRESS PROVISIONS HEREOF, THIS LETTER OF CREDIT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NO. 500, OR ANY SUCCESSOR PUBLICATION THERETO (THE "UCP") AS INTERPRETED UNDER THE LAWS OF THE STATE OF NEW YORK; PROVIDED, HOWEVER, THAT: (A) NOTWITHSTANDING THE PROVISIONS OF ARTICLE 17 OF THE UCP, IF THIS LETTER OF CREDIT EXPIRES DURING AN INTERRUPTION OF BUSINESS (AS DESCRIBED IN ARTICLE 17 OF THE UCP), WE AGREE TO EFFECT PAYMENT UNDER THIS LETTER OF CREDIT IF A DRAWING WHICH STRICTLY CONFORMS TO THE TERMS AND CONDITIONS OF THIS LETTER OF CREDIT IS MADE WITHIN FIFTEEN (15) DAYS AFTER THE RESUMPTION OF BUSINESS; (B) WE WILL NOT ACCEPT REPRODUCED DOCUMENTS AS ORIGINALS AS PROVIDED IN ARTICLE 20(b) OF THE UCP; (C) THIS LETTER OF CREDIT WILL NOT TERMINATE BECAUSE OF 4 5 A FAILURE TO MAKE ANY PERMITTED DRAWINGS HEREUNDER AS PROVIDED IN ARTICLE 41 OF THE UCP; AND (D) NOTWITHSTANDING THE PROVISIONS OF SUB-ARTICLE 48(d) OF THE UCP, THE CONSENT OF A PRIOR TRUSTEE WILL NOT BE REQUIRED IN CONNECTION WITH THE AMENDMENT OF THIS LETTER OF CREDIT FOLLOWING A TRANSFER OF SAID LETTER OF CREDIT TO ANY SUCCESSOR TRUSTEE. AS TO MATTERS NOT COVERED BY THE UCP, THIS LETTER OF CREDIT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, INCLUDING, TO THE EXTENT NOT INCONSISTENT WITH THE UCP, THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN THE STATE OF NEW YORK. Notwithstanding anything in the UCP to the contrary, this Letter of Credit is transferrable in its entirety (but not in part) and may be successively transferred upon presentation to us of this Letter of Credit accompanied by the transfer form attached hereto as Schedule I, to the transferee specified therein and upon payment to the Bank of a transfer fee in the amount of $2,500.00. All certificates presented to us in connection with any demand for payment hereunder, as well as all notices and other communications to us in respect of this Letter of Credit, shall be in writing and addressed and presented to us at our above address, and shall make specific reference to this Letter of Credit by number. The certificate(s) you are required to submit to us along with each drawing should be prepared either (i) in the form of a letter on your letterhead signed by your authorized officer or (ii) in the form of a facsimile copy of such a letter sent by one of your authorized officers to the following number, or as we shall notify you from time to time (with the original of any such certificate(s), drafts and letters to be delivered to us on the next succeeding Business Day): Telecopier No. (203) 719-4634. A drawing shall be deemed to have been presented on the date actually received by us. This Letter of Credit sets forth in full our undertaking, and such undertaking shall not be in any way modified, amended, amplified or limited by reference to any document, instrument or agreement referred to herein (including, without limitation, the Bonds and the UCP referred to herein or the Indenture), except only Schedules A through I hereto; and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement except for such Schedules. Very Truly Yours SWISS BANK CORPORATION, Stamford Branch /s/ James J. Diaz By: ________________________ 5 6 Name: James J. Diaz Title: Director Banking Finance Support, N.A. /s/ Thomas R. Salzano By: ________________________ Name: Thomas R. Salzano Title: Associate Director Banking Finance Support, N.A. 6 7 SCHEDULE A TO LETTER OF CREDIT* CERTIFICATE FOR "A DRAWING" Swiss Bank Corporation, Stamford Branch 677 Washington Boulevard Stamford, Connecticut 06901-3793 Attention: Trade Finance Operations Department [SBC-10-N] The undersigned, a duly authorized officer of STATE STREET BANK AND TRUST COMPANY, as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, Stamford Branch (the "Bank"), with reference to Irrevocable Letter of Credit No. S567171 issued by the Bank in favor of the Trustee (the "Letter of Credit") that: (1) The Trustee is the Trustee under the Indenture for the owners of the Bonds. (2) The Trustee is hereby making a Principal Drawing under the Letter of Credit with respect to $__________ to be used for the payment of principal of the Bonds in accordance with the terms and provisions of the Bonds. (3) The amount of principal of the Bonds which is due and payable and with respect to the payment of which the Trustee does not have available amounts that pursuant to Section 4.02 of the Indenture are to be applied to such payment prior to moneys drawn under the Letter of Credit is $____________, and the aggregate amount of all drawings referred to in paragraph 2 does not exceed such amount of principal. (4) The amount set forth in paragraph 2, together with the aggregate of all prior payments made pursuant to drawings under this Letter of Credit for the payment of principal of the Bonds, does not exceed $8,000,000. (5) The amount set forth in paragraph 2 does not include any amount to be used for the payment of the principal of Bonds owned by the Littlestown Industrial Development Authority, Industries, or any Affiliate (as defined in the Indenture) of either of them. (6) The amount set forth in paragraph 2 should be: ____________________ * For payment of principal of Bonds due to redemption, at maturity or acceleration of maturity. A-1 8 / / deposited into our account number _________________ maintained with you; or / / wire transferred as follows: (name of bank) (address of bank) for credit to the account of ________________________ account number ________________ Any capitalized term used herein and not defined herein shall have the same meaning herein as ascribed to it in the Letter of Credit. IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the ____ day of __________, 19____. STATE STREET BANK AND TRUST COMPANY, as Trustee By:________________________________ Title:______________________ A-2 9 SCHEDULE B TO LETTER OF CREDIT* CERTIFICATE FOR "B DRAWING" Swiss Bank Corporation, Stamford Branch 677 Washington Boulevard Stamford, Connecticut 06901-3793 Attention: Trade Finance Operations Department [SBC-10-N] The undersigned, a duly authorized officer of STATE STREET BANK AND TRUST COMPANY, as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, Stamford Branch (the "Bank"), with reference to Irrevocable letter of Credit No. S567171 issued by the Bank in favor of the Trustee (the "Letter of Credit") that: (1) The Trustee is the Trustee under the Indenture for the owners of the Bonds. (2) The Trustee is hereby making an Interest Drawing under the Letter of Credit with respect to $________________ to be used for a payment of interest on the Bonds in accordance with the terms and provisions of the Bonds. (3) The amount of interest on the Bonds that is due and payable and with respect to which the Trustee does not have available amounts that, pursuant to Section 4.02 of the Indenture, are to be applied to such payment prior to monies drawn under the Letter of Credit is $________________, and the aggregate amount of all drawings referred to in paragraph 2 does not exceed the amount of interest on the Bonds that is due and payable and does not exceed an amount equal to 210 days' accrued interest on the Bonds computed at the actual rate of interest thereon during the period for which this drawing is being made (which rate does not exceed twelve percent (12%) per annum). (4) The amount set forth in paragraph 2 of this Certificate does not exceed the amount available on the date hereof to be drawn under the Interest Portion of the Letter of Credit in respect of payment of interest accrued on the Bonds on or prior to their stated maturity date. (5) The amount set forth in paragraph 2 of this Certificate was computed in accordance with the terms and conditions of the Bonds and the Indenture and does not include any amount to be used to pay interest on Bonds owned by the Littlestown Industrial Development Authority, Industries or any Affiliate (as defined in the Indenture) of either of them. ________________________ * For payment of interest due and payable on the Bonds. B-1 10 (6) The amount set forth in paragraph 2 should be: / / deposited into our account number ______________ maintained with you; or / / wire transferred as follows: (name of bank) (address of bank) for credit to the account of ____________________________ account number _______________________ Any capitalized terms used herein and not defined herein shall have the same meaning herein as ascribed to it in the Letter of Credit. IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _____________ day of ____________________________ , 19__ . STATE STREET BANK AND TRUST COMPANY, as Trustee By:_____________________________ Title:_____________________ B-2 11 SCHEDULE C TO LETTER OF CREDIT* CERTIFICATE FOR "C DRAWING" Swiss Bank Corporation, Stamford Branch 677 Washington Boulevard Stamford, Connecticut 06901-3793 Attention: Trade Finance Operations Department [SBC-10-N] The undersigned, a duly authorized officer of STATE STREET BANK AND TRUST COMPANY, as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, Stamford Branch (the "Bank"), with reference to Irrevocable Letter of Credit No. S567171 issued by the Bank in favor of the Trustee (the "Letter of Credit") that: (1) The Trustee is the Trustee under the Indenture for the owners of the Bonds. (2) The Trustee is hereby making a Principal Drawing under the Letter of Credit with respect to $ to be used for payment of the portion of purchase price of Bonds delivered to the Trustee or Remarketing Agent (as defined in the Indenture) in accordance with Section 7 of the Bonds equal to the principal amount of such Bonds. (3) The Trustee has delivered or caused to be delivered to the Bank, as provided in the Indenture, or to its designated agent or account, a principal amount of Bonds equal to the aggregate amount stated in paragraph 2 above. (4) The amount set forth in paragraph 3 should be: / / deposited into our account number _____________ maintained with you; or / / wire transferred as follows: (name of bank) (address of bank) for credit to the account of _____________________ account number ___________________ Any capitalized term used herein and not defined herein shall have the same meaning herein as described to it in the Letter of Credit. _________________ * For payment of a portion of purchase price of Bonds corresponding to the principal amount thereof delivered to the Trustee or Remarketing Agent upon notice at least two Business Days prior to the first day of an Interest Rate Period (Put on First Day of Interest Rate Period). C-1 12 IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the ______________ day of _________________________ , 19__ . STATE STREET BANK AND TRUST COMPANY, as Trustee By:______________________________ Title:________________________ C-2 13 SCHEDULE D TO LETTER OF CREDIT* CERTIFICATE FOR "D DRAWING" Swiss Bank Corporation, Stamford Branch 677 Washington Boulevard Stamford, Connecticut 06901-3793 Attention: Trade Finance Operations Department [SBC-10-N] The undersigned, a duly authorized officer of STATE STREET BANK AND TRUST COMPANY, as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, Stamford Branch (the "Bank"), with reference to Irrevocable Letter of Credit No. S567171 issued by the Bank in favor of the Trustee (the "Letter of Credit") that: (1) The Trustee is the Trustee under the Indenture for the owners of the Bonds. (2) The Trustee is hereby making an Interest Drawing under the Letter of Credit with respect to $ to be used for payment of the portion of purchase price of Bonds delivered to the Trustee or Remarketing Agent (as defined in the Indenture) pursuant to Section 7 of the Bonds equal to the amount of accrued and unpaid interest on such Bonds to the date of purchase thereof. (3) The aggregate amount of all drawings referred to in paragraph 2 does not exceed that amount of such portion of purchase price that is due and payable and does not exceed an amount equal to 210 days' accrued interest on the Bonds computed at the actual rate of interest thereon during the period for which this drawing is being made (which rate does not exceed twelve percent (12%) per annum). (4) The amount set forth in paragraph 2 of this Certificate does not exceed the amount available on the date hereof to be drawn under the Interest Portion of the Letter of Credit in respect of payment of interest accrued on the Bonds on or prior to their stated maturity date. (5) The amount set forth in paragraph 2 of this Certificate was computed in accordance with the terms and conditions of the Bonds and the Indenture. (6) The amount set forth in paragraph 2 should be: ________________ * For payment of a portion of purchase price of Bonds delivered to the Trustee or Remarketing Agent upon notice at least two Business Days prior to the first day of an Interest Rate Period corresponding to accrued interest thereon (Put on First Day of Interest Rate Period). D-1 14 / / deposited into our account number __________________ maintained with you; or / / wire transferred as follows: (name of bank) (address of bank) for credit to the account of __________________ account number ____________________________ Any capitalized term used herein and not defined herein shall have the same meaning herein as described to it in the Letter of Credit. IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the ________________ day of ___________________________ , 19__ . STATE STREET BANK AND TRUST COMPANY, as Trustee By:____________________________ Title:______________________ D-2 15 SCHEDULE E TO LETTER OF CREDIT* CERTIFICATE FOR "E DRAWING" Swiss Bank Corporation, Stamford Branch 677 Washington Boulevard Stamford, Connecticut 06901-3793 Attention: Trade Finance Operations Department [SBC-10-N] The undersigned, a duly authorized officer of STATE STREET BANK AND TRUST COMPANY, as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, Stamford Branch (the "Bank"), with reference to Irrevocable Letter of Credit No. S567171 issued by the Bank in favor of the Trustee (the "Letter of Credit") that: (1) The Trustee is the Trustee under the Indenture for the owners of the Bonds. (2) The Trustee is hereby making a Principal Drawing under the Letter of Credit with respect to $_______________ to be used for payment of the portion of purchase price of Bonds bearing interest at a Weekly or Monthly Interest Rate delivered to the Trustee or Remarketing Agent (as defined in the Indenture) in accordance with Section 7 of the Bonds. (3) The Trustee has delivered or caused to be delivered to the Bank as provided in the Indenture, or to its designated agent or account, a principal amount of Bonds equal to the aggregate amount stated in paragraph 2 above. (4) The amount set forth in paragraph 2 should be: / / deposited into our account number ______________________ maintained with you; or / / wire transferred as follows: (name of bank) (address of bank) for credit to the account of _____________________ account number _____________________ Any capitalized term used herein and not defined herein shall have the same meaning herein as ascribed to it in the Letter of Credit. __________________ * For payment of the purchase price of Bonds corresponding to the principal amount thereof delivered to the Trustee or Remarketing Agent upon seven-days' notice (Weekly or Monthly Interest Rate Put). E-1 16 IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the ________________ day of _________________________, 19__ . STATE STREET BANK AND TRUST COMPANY, as Trustee By:_________________________ Title:___________________ E-2 17 SCHEDULE F TO LETTER OF CREDIT* CERTIFICATE FOR "F DRAWING" Swiss Bank Corporation, Stamford Branch 677 Washington Boulevard Stamford, Connecticut 06901-3793 Attention: Trade Finance Operations Department [SBC-10-N] The undersigned, a duly authorized officer of STATE STREET BANK AND TRUST COMPANY, as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, Stamford Branch (the "Bank"), with reference to Irrevocable Letter of Credit No. S567171 issued by the Bank in favor of the Trustee (the "Letter of Credit") that: (1) The Trustee is the Trustee under the Indenture for the owners of the Bonds. (2) The Trustee is hereby making an Interest Drawing under the Letter of Credit with respect to $_______________ to be used for payment of the portion of purchase price of Bonds bearing interest at a Weekly or Monthly Interest Rate delivered to the Trustee or Remarketing Agent (as defined in the Indenture) pursuant to Section 7 of the Bonds equal to the amount of accrued and unpaid interest on such Bonds to the date of purchase thereof. (3) The aggregate amount of all drawings referred to in paragraph 2 does not exceed the amount of such portion of purchase price that is due and payable and does not exceed an amount equal to 210 days' accrued interest on the Bonds computed at the actual rate of interest thereon during the period for which this drawing is being made (which rate does not exceed twelve percent (12%) per annum). (4) The amount set forth in paragraph 2 of this Certificate does not exceed the amount available on the date hereof to be drawn under the Interest Portion of the Letter of Credit in respect of payment of interest accrued on the Bonds on or prior to their stated maturity date. (5) The amount set forth in paragraph 2 of this Certificate was computed in accordance with the terms and conditions of the Bonds and the Indenture. (6) The amount set forth in paragraph 2 should be: ________________ * For payment of the portion of purchase price of Bond delivered to the Trustee or Remarketing Agent upon seven-days' notice corresponding to accrued interest thereon (Weekly or Monthly Interest Rate Put). F-1 18 / / deposited into our account number ________________ maintained with you; or / / wire transferred as follows: (name of bank) (address of bank) for credit to the account of ____________________ account number _______________________ Any capitalized term used herein and not defined herein shall have the same meaning herein as ascribed to it in the Letter of Credit. IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _________________ day of __________________________, 19__ . STATE STREET BANK AND TRUST COMPANY, as Trustee By:___________________________ Title:___________________ F-2 19 SCHEDULE G TO LETTER OF CREDIT Swiss Bank Corporation, Stamford Branch 677 Washington Boulevard Stamford, Connecticut 06901-3793 Attention: Trade Finance Operations Department [SBC-10-N] Re: Irrevocable Letter of Credit No. S567171 Ladies and Gentlemen: The undersigned, a duly authorized officer of STATE STREET BANK AND TRUST COMPANY, as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, Stamford Branch (the "Bank"), with respect to the above-referenced Letter of Credit (the "Letter of Credit") issued by the Bank in favor of the Trustee as follows: (1) The conditions precedent to the acceptances of an "Alternate Security Arrangement" set forth in Section 5.01 of the Indenture of Trust dated as of September 1, 1987, between the Littlestown Industrial Development Authority and National Westminster Bank, USA (to which the undersigned is a successor Trustee) (the "Indenture") have been satisfied, and (2) As trustee under the Indenture, the Trustee has accepted such Alternate Security Arrangement. Pursuant to the Indenture, we are delivering herewith the letter of Credit for cancellation on the 15th day from the date hereof. Very truly yours, STATE STREET BANK AND TRUST COMPANY By:______________________________ Title:_____________________ Approved: HANOVER DIRECT PENNSYLVANIA, INC. (formerly HANOVER HOUSE INDUSTRIES, INC.) By:________________________________ Title:_______________________ Date:________________________ G-1 20 SCHEDULE H TO LETTER OF CREDIT Swiss Bank Corporation, Stamford Branch 677 Washington Boulevard Stamford, Connecticut 06901-3793 Attention: Trade Finance Operations Department [SBC-10-N] Re: Irrevocable Letter of Credit No. S567171 Ladies and Gentlemen: The undersigned, a duly authorized officer of STATE STREET BANK AND TRUST COMPANY, as Trustee (the "Trustee"), hereby certifies to SWISS BANK CORPORATION, Stamford Branch (the "Bank"), with reference to Irrevocable Letter of Credit No. S567171 issued by the Bank in favor of the Trustee (the "Letter of Credit") that: (1) The Trustee is the Trustee under the Indenture for the owners of the Bonds. (2) The aggregate principal amount of the Bonds outstanding on ___________________________ is _____________________________________ . The amount equal to 210 days' accrued interest (at an assumed rate of 12% per annum) computed on the basis of a year of 360 days on the outstanding Bonds is $________________________ . (3) You are entitled to adjust the Principal Portion and Interest Portion of the Letter of Credit in accordance with paragraph 2 above. Any capitalized term used herein and not defined herein shall have the same meaning herein as ascribed to it in the Letter of Credit. H-1 21 IN WITNESS WHEREOF, the Trustee has executed and delivered this Certificate as of the _______________________ day of ___________________, 19__ . STATE STREET BANK AND TRUST COMPANY, as Trustee By:_______________________________ Title:_______________________ Approved: HANOVER DIRECT PENNSYLVANIA, INC. (formerly HANOVER HOUSE INDUSTRIES, INC.) By:____________________________________ Title:___________________________ Date:____________________________ H-2 22 SCHEDULE I TO LETTER OF CREDIT [Date] Swiss Bank Corporation, Stamford Branch 677 Washington Boulevard Stamford, Connecticut 06901-3793 Attention: Trade Finance Operations Department [SBC-10-N] Re: Irrevocable Letter of Credit No. S567171 Ladies and Gentlemen: For value received, the undersigned beneficiary hereby irrevocably transfers to (Name of Transferee) (Address) all rights of the undersigned beneficiary to draw under the above Letter of Credit in its entirety. It is hereby certified that the transferee is successor Trustee under the Indenture of Trust dated as of September 1, 1987, between National Westminster Bank USA (to which the undersigned is a successor) and the Littlestown Industrial Development Authority. By this transfer, all rights of the undersigned beneficiary in such Letter of Credit are transferred to the transferee and the transferee shall have the sole rights as beneficiary thereof, including sole rights relating to any amendments, whether increases or extensions or other amendments and whether now existing or hereafter made. All amendments are to be advised direct to the transferee without necessity of any consent of or notice to the undersigned beneficiary. The advice of such Letter of Credit is returned herewith and we ask you to endorse the transfer of the reverse thereof, and forward it directly to the transferee with your customary notice of transfer. Yours very truly, Accepted and Approved: NAME OF TRANSFEREE By:_________________________________ _________________________________ (Authorized Officer) Title:___________________________ I-1 23 ANNEX J EXTENSION OF SCHEDULED TERMINATION DATE State Street Bank and Trust Company, as Trustee Goodwin Square 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Attention: Corporate Trust Department Re: Irrevocable Letter of Credit Ref. No. S567171 For the Account of Hanover Direct, Inc. Ladies and Gentlemen: The undersigned, a duly authorized officer of Swiss Bank Corporation, Stamford Branch (the "Bank"), hereby notifies the Trustee with respect to the above-referenced Letter of Credit issued by the Bank in favor of the Trustee (the "Letter of Credit"), that the Scheduled Termination Date of the Letter of Credit heretofore in effect has been extended and that the Scheduled Termination Date as so extended is __________________. The terms used in this Certificate and not defined herein shall have the meanings given in the Letter of Credit. IN WITNESS WHEREOF, the Bank has executed and delivered this Certificate this ______________ day of ___________________________ , ____ . SWISS BANK CORPORATION, Stamford Branch By:_____________________________ [Name and Title] By:_____________________________ [Name and Title] J-1 EX-10.44 8 FIRST AMENDMENT TO REIMBURSEMENT AGREEMENT 1 EXHIBIT 10.44 FIRST AMENDMENT TO REIMBURSEMENT AGREEMENT FIRST AMENDMENT, dated as of February 18, 1998 ("First Amendment"), by and between SWISS BANK CORPORATION, a banking corporation organized under the laws of Switzerland and whose principal office is located in Basel, Switzerland, acting through its Stamford Branch and HANOVER DIRECT, INC., a Delaware corporation having its principal place of business in Weehawken, New Jersey (the "Borrower"). Capitalized terms used but not defined herein have the meanings given to them in the Reimbursement Agreement referred to below. WHEREAS, Swiss Bank Corporation, New York Branch and the Borrower were parties to that certain Reimbursement Agreement, dated as of December 18, 1996 (the "Reimbursement Agreement"); WHEREAS, Swiss Bank Corporation, New York Branch subsequently transferred all of its rights and obligations under the Reimbursement Agreement to Swiss Bank Corporation, Stamford Branch and Swiss Bank Corporation, Stamford Branch assumed all of the obligations of Swiss Bank Corporation, New York Branch under the Reimbursement Agreement; WHEREAS, Swiss Bank Corporation, Stamford Branch (hereinafter referred to as the "Bank") and the Borrower wish to amend the Reimbursement Agreement as provided herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: 1. As of the date hereof, the Reimbursement Agreement is hereby amended as follows: (a) All references throughout the Reimbursement Agreement to "Swiss Bank Corporation, New York Branch" are hereby amended to read "Swiss Bank Corporation, Stamford Branch." (b) The reference to "New York Branch" located in the seventh and eighth lines of the preamble on page 1 of the Reimbursement Agreement is hereby amended to read "Stamford Branch." (c) Section 1.01 of the Reimbursement Agreement is hereby amended by (i) adding the language ", or any substitute letter of credit that may be issued on substantially the same terms by the Bank as replacement therefor, as the same may be amended, supplemented, modified, extended or restated hereafter" prior to the semicolon at the end of the definition of "Hanover House LC", (ii) adding the language ", as the same may be amended, supplemented, modified, extended or restated hereafter" prior to the semicolon at the end of the definition of 2 "Hanover Series A Letter of Credit", (iii) adding the language ", as the same may be amended, supplemented, modified, extended or restated hereafter" prior to the semicolon at the end of the definition of "Hanover Series B Letter of Credit", (iv) deleting the language "Swiss Bank Corporation, New York Branch, 10 East 50th Street, New York, New York 10022" from the definition of "Principal Office" and substituting in its place the following language: "Swiss Bank Corporation, Stamford Branch, 677 Washington Boulevard, Stamford, Connecticut 06901-3793", and (v) adding the language ", as the same may be amended, supplemented, modified or restated hereafter" prior to the semicolon at the end of the definition of "Subordination Agreement." (d) Section 2.03 of the Reimbursement Agreement is hereby amended by eliminating the word "and" after paragraph (e), substituting a semicolon for the period at the end of paragraph (f), adding the word "and" after the semicolon at the end of paragraph (f) and adding the following paragraph after paragraph (f): (g) on or before the closing date of any extension to the scheduled Expiration Date of any Direct Pay Letter of Credit, all fees, expenses, disbursements, taxes and other charges described in Section 7.02 hereof as to which the Borrower shall have received invoices on or prior to such closing date, and such additional fees as may be agreed to by the Borrower and the Bank, to which fees no Participating Bank shall have any right, claim or interest. In the event that the scheduled Expiration Date of any Direct Pay Letter of Credit is extended pursuant to Section 2.07 hereof, the parties hereto acknowledge and agree that the Borrower shall be required to pay to the Bank all fees, charges, and expenses described in paragraphs (b) through (f) of this Section 2.03 as well as any amounts described in Section 7.02 hereof during any extension period. (e) The first paragraph following new paragraph (g) in Section 2.03 of the Reimbursement Agreement is hereby amended by deleting the word "or" in the fourth line of the paragraph and substituting a comma in its place and by adding the language "or (g)" in the fifth line of said paragraph after the "(f)" and before the words "of this Section 2.03." (f) Section 2.07 of the Reimbursement Agreement is hereby amended by (i) deleting the language "for an additional one-year period" at the end of the first sentence thereof and (ii) deleting the language "an additional one-year period" at the end of the tenth and the beginning of the eleventh lines thereof and substituting "such additional period as may be mutually agreed upon by the Bank and the Borrower" therefor. (g) Section 9.02 of the Reimbursement Agreement is hereby amended by (i) adding the language "and directing the Trustee to accelerate payment of the Bonds pursuant to Section 8.02 of the Indenture" after the word "hereunder" in the fourth line of paragraph (b) thereof and (ii) deleting the words "principal or" in the last line of paragraph (b) thereof. (h) Section 10.02 of the Reimbursement Agreement is hereby amended by deleting the address of the Bank set forth in paragraph (b) of Section 10.02 and replacing it with the following language: -2- 3 Swiss Bank Corporation 677 Washington Boulevard Stamford, Connecticut 06901-3793 Attention: Joerg Rauthe Telephone: (203) 719-3176 Telefacsimile: (203) 719-3180 2. It shall be a condition precedent to the effectiveness of this First Amendment that the Guarantor shall have provided the Bank with a guarantee of the Reimbursement Obligations of the Borrower during the term of the Direct Pay Letters of Credit, or shall have amended the Guaranty to extend its term to March 30, 1999, as applicable. 3. This First Amendment may be executed in counterparts, each of which, upon execution and delivery by the parties, shall be considered an original, and all of which, taken together, shall constitute one and the same instrument. 4. This First Amendment, and all of the obligations of the parties hereunder, shall be construed in accordance with and governed by the laws of the State of New York, without regard to the conflict of laws principles thereof. 5. From and after the date hereof, all references to the Reimbursement Agreement contained in the Reimbursement Agreement, the Loan Documents, the Hanover Indemnity Agreement and any other documents or agreements referred to in any of them, as such documents may from time to time be amended, supplemented, modified or restated, shall be deemed to be references to the Reimbursement Agreement as amended hereby. Except as specifically amended hereby, the Reimbursement Agreement shall remain in full force and effect in accordance with its terms. 6. The provisions of this First Amendment are severable, and if any clause or provision shall be held invalid and unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this First Amendment in any jurisdiction. [Signature pages follow] -3- 4 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed as of the date first above written. SWISS BANK CORPORATION, Stamford Branch By: /s/ Fran Martell ------------------------------- Name: Fran Martell Title: Associate Director Trade Finance Services By: /s/ David Kung ------------------------------- Name: /s/ David Kung Title: Associate Director Trade Finance Services HANOVER DIRECT, INC. By: /s/ Edward J. O'Brien ------------------------------- Name: Edward J. O'Brien Title: Senior Vice President -4- EX-10.63 9 AMENDMENT TO SERIES B LETTER OF CREDIT 1 EXHIBIT 10.63 AMENDMENT TO LETTER OF CREDIT NO. S567170 Amendment to Letter of Credit No. S567170 issued by Swiss Bank Corporation, New York Branch on December 18, 1996 (the "Letter of Credit") for the account of Hanover Direct, Inc., a Delaware corporation (the "Company"), in favor of Norwest Bank Minnesota, N.A., as Trustee under the Note Agreement (the "Trustee"). Terms used herein but not otherwise defined shall have the meanings ascribed to such terms in the Letter of Credit. W I T N E S S E T H: WHEREAS, Swiss Bank Corporation, New York Branch has assigned all or substantially all of its interests and obligations under the Letter of Credit to Swiss Bank Corporation, Stamford Branch and Swiss Bank Corporation, Stamford Branch has assumed all of the obligations of Swiss Bank Corporation, New York Branch under the Letter of Credit; WHEREAS, Swiss Bank Corporation, Stamford Branch has agreed to extend the Scheduled Expiration Date of the Letter of Credit from February 18, 1998 to March 30, 1999; and WHEREAS, Swiss Bank Corporation, Stamford Branch and the Trustee wish to amend the Letter of Credit as provided herein. NOW, THEREFORE, in consideration of the premises set forth herein and other valuable consideration, the parties hereto hereby agree as follows. 1. As of the date hereof, the Letter of Credit is hereby amended as follows: (a) The references throughout the Letter of Credit to Swiss Bank Corporation, New York Branch are hereby amended to refer to Swiss Bank Corporation, Stamford Branch. The parties hereto hereby agree that any references in the Letter of Credit to "the Bank" shall be deemed to be references to Swiss Bank Corporation, Stamford Branch. (b) The address "10 East 50th Street, New York, New York 10022" set forth in various places throughout the Letter of Credit and the Exhibits thereto is hereby deleted, and the following address is hereby substituted in its place: "677 Washington Boulevard, Stamford, Connecticut 06901-3793". (c) The language "(212) 574-4634 or (212) 574- 2 4757; but only after first giving telephone notice to us by contacting Ms. Virginia Gensch at the following telephone number: (212) 574-4654" is hereby deleted from the second paragraph under the section entitled "Drawing and Method of Payment" on page 2 of the Letter of Credit and the following language is substituted in its place: "(203) 719-4634 but only after first giving telephone notice to us by contacting Fran Martel at the following telephone number: (203) 719-3985". 2. Except as provided herein, the Letter of Credit shall remain in full force and effect and unaffected hereby except as the Letter of Credit shall be deemed to have been amended by the terms of this Amendment from and after the date hereof. 3. This Amendment may be executed in one or more counterparts, each of which taken together shall constitute an original and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of this 18th day of February, 1998. SWISS BANK CORPORATION, Stamford Branch By: /s/ James J. Diaz -------------------------------- Name: James J. Diaz Title: Director Banking Finance Support, N.A. By: /s/ Thomas R. Salzano -------------------------------- Name: Thomas R. Salzano Title: Associate Director Banking Finance Support, N.A. NORWEST BANK MINNESOTA, N.A., AS TRUSTEE By: /s/ Paula Hecht -------------------------------- Name: Paula Hecht Title: Corporate Trust Officer -2- EX-10.66 10 AMENDMENT TO SERIES A LETTER OF CREDIT 1 EXHIBIT 10.66 AMENDMENT TO LETTER OF CREDIT NO. S567169 Amendment to Letter of Credit No. S567169 issued by Swiss Bank Corporation, New York Branch on December 18, 1996 (the "Letter of Credit") for the account of Hanover Direct, Inc., a Delaware corporation (the "Company"), in favor of Norwest Bank Minnesota, N.A., as Trustee under the Note Agreement (the "Trustee"). Terms used herein but not otherwise defined shall have the meanings ascribed to such terms in the Letter of Credit. W I T N E S S E T H: WHEREAS, Swiss Bank Corporation, New York Branch has assigned all or substantially all of its interests and obligations under the Letter of Credit to Swiss Bank Corporation, Stamford Branch and Swiss Bank Corporation, Stamford Branch has assumed all of the obligations of Swiss Bank Corporation, New York Branch under the Letter of Credit; WHEREAS, Swiss Bank Corporation, Stamford Branch has agreed to extend the Scheduled Expiration Date of the Letter of Credit from February 18, 1998 to March 30, 1999; and WHEREAS, Swiss Bank Corporation, Stamford Branch and the Trustee wish to amend the Letter of Credit as provided herein. NOW, THEREFORE, in consideration of the premises set forth herein and other valuable consideration, the parties hereto hereby agree as follows. 1. As of the date hereof, the Letter of Credit is hereby amended as follows: (a) The references throughout the Letter of Credit to Swiss Bank Corporation, New York Branch are hereby amended to refer to Swiss Bank Corporation, Stamford Branch. The parties hereto hereby agree that any references in the Letter of Credit to "the Bank" shall be deemed to be references to Swiss Bank Corporation, Stamford Branch. (b) The address "10 East 50th Street, New York, New York 10022" set forth in various places throughout the Letter of Credit and the Exhibits thereto is hereby deleted, and the following address is hereby substituted in its place: "677 Washington Boulevard, Stamford, Connecticut 06901-3793". (c) The language "(212) 574-4634 or (212) 574- 2 4757; but only after first giving telephone notice to us by contacting Ms. Virginia Gensch at the following telephone number: (212) 574-4654" is hereby deleted from the second paragraph under the section entitled "Drawing and Method of Payment" on page 2 of the Letter of Credit and the following language is substituted in its place: "(203) 719-4634 but only after first giving telephone notice to us by contacting Fran Martel at the following telephone number: (203) 719-3985". 2. Except as provided herein, the Letter of Credit shall remain in full force and effect and unaffected hereby except as the Letter of Credit shall be deemed to have been amended by the terms of this Amendment from and after the date hereof. 3. This Amendment may be executed in one or more counterparts, each of which taken together shall constitute an original and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of this 18th day of February, 1998. SWISS BANK CORPORATION, Stamford Branch By: /s/ James J. Diaz ------------------------------------ Name: James J. Diaz Title: Director Banking Finance Support, N.A. By: /s/ Thomas R. Salzano ------------------------------------ Name: Thomas R. Salzano Title: Associate Director Banking Finance Support, N.A. NORWEST BANK MINNESOTA, N.A., AS TRUSTEE By: /s/ Paula Hecht ------------------------------------ Name: Paula Hecht Title: Corporate Trust Officer -2- EX-10.71 11 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.71 STOCK PURCHASE AGREEMENT, dated as of November 4, 1997 (this "Agreement"), between SMALLCAP WORLD FUND, INC., a Maryland corporation (the "Buyer"), and HANOVER DIRECT, INC., a Delaware corporation (the "Company"). R E C I T A L S The Company is authorized to issue 225,000,000 shares of common stock, $.66 2/3 par value (the "Common Stock"), of which 200,055,322 shares were issued and outstanding as of October 15, 1997; and The Buyer desires to acquire from the Company and the Company desires to sell to the Buyer 3,700,000 shares of Common Stock (the "Shares"), all upon the terms and subject to the conditions set forth in this Agreement. The parties hereto agree as follows: ARTICLE I TERMS OF THE TRANSACTION Section 1.01. Sale and Purchase of Shares. On the Closing Date (as hereinafter defined), the Company shall issue and sell the Shares to the Buyer by delivering to the Buyer, against payment therefor as provided in Section 1.02, certificates for the Shares registered in the name of Kane & Co. in proper form for transfer by delivery. Section 1.02. Purchase Price. The Shares shall be sold by the Company and shall be purchased by the Buyer for an aggregate purchase price of $5,217,000 (the "Purchase Price"). The Purchase Price shall be paid to the Company against delivery of the certificates representing the Shares as provided in Section 1.01 on the Closing Date, by wire transfer of immediately available funds to an account designated by the Company at least two business days before the Closing Date. Section 1.03. The Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall be held at the offices of the Company at 1500 Harbor Boulevard, Weehawken, New Jersey 07087, at 10 o'clock a.m., New York City time, on November 6, 1997, or at such other place or places as the parties hereto may agree upon or, subject to Section 6.12, such other time and date as may be mutually approved by the parties in writing, but not later than November 14, 1997 (the "Closing Date"). ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Buyer that: 2 Section 2.01. Organization and Authority. The Company is a corporation duly organized and validly existing and in good standing under the laws of the State of Delaware. The Company has all necessary corporate power to own all of its properties and assets and to carry on its business as now being conducted. The Company has the corporate power and, as of the Closing Date, will be duly authorized to sell, convey, assign and transfer the Shares as contemplated by this Agreement and to perform its obligations under this Agreement. Section 2.02. Company Capitalization. The Company has an authorized capitalization of 225,000,000 shares of Common Stock, of which 200,055,322 shares were issued and outstanding as of October 15, 1997, and 392,017 shares were held in the treasury of the Company as of December 28, 1996. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and non-assessable, and are not subject to any right of rescission, and have been offered, issued, sold and delivered by the Company in compliance with all applicable federal and state securities laws. Except as set forth on Schedule 2.02, there are no outstanding options, warrants, conversion privileges or other contractual rights or agreements for the purchase or acquisition from the Company of any shares of its capital stock. Except as set forth on Schedule 2.02, there are no existing voting trusts, voting agreements or similar agreements between the Company and any of its stockholders, nor are there any such agreements among any of the Company's officers, directors or stockholders holding in excess of 5% of the Company's outstanding voting securities. Except as set forth on Schedule 2.02, the Company's securities are not subject to any preemptive or other preferential rights under the Certificate of Incorporation of the Company or under any agreement to which the Company is a party. Section 2.03. The Shares. The Shares to be issued pursuant to this Agreement, when issued and delivered in accordance with this Agreement, will be duly and validly authorized and issued, fully paid and non-assessable and, assuming the accuracy of the Buyer's representations set forth in Section 3.02, issued in accordance with all applicable state and federal securities laws. Section 2.04. No Conflict. The execution and delivery by the Company of this Agreement does not, and the sale of the Shares by the Company and the consummation of the transactions contemplated hereby by the Company will not, conflict with, or result in any violation of or default under (with or without notice or lapse of time or both), or give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit under, any provision of the Certificate of Incorporation or By-Laws of the Company; or under the provisions of any mortgage, indenture, lease or other agreement or instrument or permit or license to which the Company is a party or by which its properties or assets are bound; or under any judgment, order, decree, statute, law, ordinance, rule or regulation of the United States or any state thereof applicable to the Company, its properties or assets, the effect of any of which would result in any material adverse change to the business, financial condition or results of operations of the Company. 2 3 Section 2.05. Litigation; Consents. (a) The Company knows of no pending or threatened action, suit, proceeding or investigation before any court or governmental body, or by any governmental agency to restrain or prevent the performance of the transactions contemplated by this Agreement, or which might affect the right of the Buyer to own the Shares. No constructive knowledge shall be attributed to the Company under this Section 2.05(a). (b) Except as otherwise referred to herein, no consent, action, approval or authorization of, or registration, declaration or filing with, any governmental department, commission, agency or other instrumentality having jurisdiction over the Company is required to be obtained by the Company to authorize the execution and delivery by the Company of this Agreement or the performance by the Company of its terms. Section 2.06. Commission Filings. All reports, forms and statements required to be filed by the Company during the period from December 28, 1996 to the date of this Agreement under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), have been duly and timely filed and were in compliance with the requirements of their respective forms. The Company has previously delivered to the Buyer copies of the Company's annual report on Form 10-K for the fiscal year ended December 28, 1996, with all amendments, all of the Company's quarterly reports on Form 10-Q and current reports on Form 8-K from December 29, 1996 to the date hereof, with all amendments (if any), the Company's annual report to stockholders for the fiscal year ended December 28, 1996, the Company's proxy statement in connection with its annual meeting of stockholders held on July 10, 1997 and all registration statements, if any, that the Company has filed with the Securities and Exchange Commission (the "Commission") in fiscal 1997. The Company has heretofore made public disclosure of such additional material information since the date of the Company's annual report on Form 10-K for the fiscal year ended December 28, 1996 as it was required to disclose pursuant to the requirements of applicable Federal and state securities and other laws and has furnished copies of such disclosure to the Buyer. The annual report on Form 10-K for the fiscal year ended December 28, 1996, as amended, and all subsequent reports on Form 10-Q and 8-K, annual reports to stockholders, proxy statements and other public disclosures as of the dates thereof or the dates made, and such other documents or information with respect to the Company, required to be supplied to the Buyer pursuant to this Agreement or supplied to the Buyer at its request by the Company or on its behalf, were or are true, correct and complete and did not or do not contain any untrue statement of a material fact and did not or do not omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3 4 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER The Buyer represents and warrants that: Section 3.01. Organization and Authority. The Buyer is a corporation duly organized and validly existing in good standing under the laws of the State of Maryland. The Buyer has the corporate power to execute, deliver and perform this Agreement. The Buyer has taken all action required by law, its Certificate of Incorporation and By-Laws, or otherwise to authorize the execution and delivery of this Agreement. The execution and delivery by the Buyer of this Agreement does not, and the consummation of the transactions contemplated hereby by the Buyer will not, violate any provision of the Certificate of Incorporation and By-Laws of the Buyer, or any provision of any agreement, instrument, order, judgment or decree to which the Buyer is a party or by which it is bound. Section 3.02. Acquisition of Shares. The Buyer is an Accredited Investor, as such term is defined in Rule 501(a)(8) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"). The Buyer, by reason of its business and financial experience (or the business and financial experience of its officers, directors or employees), has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of its investment in the Shares. The Buyer acknowledges that no representations or warranties have been made to it by the Company, any of its officers, directors or employees or anyone acting on its or their behalf, other than those contained in this Agreement, and that, in entering into this Agreement, the Buyer is not relying upon any information other than the information contained herein. The Buyer is purchasing the Shares for its own account for investment only and not with a present view to, or for sale in connection with, any distribution of the Shares. The Buyer acknowledges that the Shares have not been registered under the Securities Act and that the Shares cannot be sold, transferred or otherwise disposed of to any person or entity unless registered under the Securities Act, if such registration is required, or pursuant to an exemption therefrom applicable to such transaction. Section 3.03. Litigation; Consents. (a) The Buyer knows of no pending or threatened action, suit, proceeding or investigation before any court or governmental body, or by any governmental agency to restrain or prevent the performance of the transactions contemplated by this Agreement, or which might affect the right of the Buyer to own the Shares. No constructive knowledge shall be attributed to the Buyer under this Section 3.03(a). (b) Except as otherwise referred to herein, no consent, action, approval or authorization of, or registration, declaration or filing with, any governmental department, commission, agency or other instrumentality having jurisdiction over the Buyer is required 4 5 to be obtained by the Buyer to authorize the execution and delivery by the Buyer of this Agreement, or the performance by the Buyer of its terms. ARTICLE IV CONDITIONS TO THE BUYER'S OBLIGATIONS The obligations of the Buyer to purchase the Shares pursuant to this Agreement shall be subject to the satisfaction, at or before the Closing Date, of the following conditions (any of which may be waived, in whole or in part, in writing by the Buyer). Section 4.01. Representations and Warranties. The representations and warranties of the Company contained in this Agreement shall be true in all material respects at the Closing Date as if made again on and as of the Closing Date. The Company shall have duly performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it at or before the Closing Date. Section 4.02. Certain Documents. The Company shall have furnished the Buyer with such documents as the Buyer may reasonably request, including a registration rights agreement substantially in the form attached hereto as Exhibit A executed by the Company. Section 4.03. The Shares. The Company shall have issued and delivered to the custodian for the Buyer a certificate or certificates for the Shares, with the legend set forth in Section 6.11 hereof, in proper form for transfer by delivery. Section 4.04. No Litigation. No action, suit, proceeding or investigation shall be pending or, so far as is known to the Buyer or the Company's executive officers, be threatened before any court or governmental body, or by any governmental agency, challenging the transactions contemplated by this Agreement or seeking to restrain or prevent consummation of the transactions contemplated by this Agreement or to prohibit or limit the ability of the Buyer to exercise full rights of ownership of the Shares. ARTICLE V CONDITIONS TO THE COMPANY'S OBLIGATIONS The obligation of the Company to sell the Shares to the Buyer pursuant to this Agreement shall be subject to the satisfaction, at or before the Closing Date, of the following conditions (any of which may be waived, in whole or in part, in writing by the Company). Section 5.01. Representations and Warranties. The representations and warranties of the Buyer contained in this Agreement shall be true in all material respects at 5 6 the Closing Date as if made again on and as of the Closing Date. The Buyer shall have duly performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it at or before the Closing Date. Section 5.02. Certain Documents. The Buyer shall have furnished the Company with such documents as the Company may reasonably request. Section 5.03. Payment. The Buyer shall have paid to the Company by wire transfer on the Closing Date the amount required to be paid to the Company pursuant to Section 1.02. Section 5.04. No Litigation. No action, suit, proceeding or investigation shall be pending or, so far as is known to the Buyer or the Company's executive officers, be threatened before any court or governmental body, or by any governmental agency, challenging the transactions contemplated by this Agreement or seeking to restrain or prevent consummation of the transactions contemplated by this Agreement or to prohibit or limit the ability of the Buyer to exercise full rights of ownership of the Shares. ARTICLE VI MISCELLANEOUS Section 6.01. Covenants. The covenants of the Buyer and the Company shall continue in full force and effect after the Closing in accordance with their terms. Section 6.02. Governing Law. This Agreement shall be construed and enforced in accordance with the internal, substantive laws of the State of New York, without giving effect to the conflict of law rules thereof. Section 6.03. Notices. All notices, consents, requests, instructions, approvals and other communications provided for herein shall be deemed validly given, made or served if in writing and delivered personally (as of such delivery) or sent by certified mail (as of two days after deposit in a United States post office), postage prepaid, or by facsimile transmission (as of such transmission), addressed as follows: (a) if to the Buyer, addressed to: SMALLCAP World Fund, Inc. c/o Capital Research & Management Co. Attention: James P. Ryan, Esq. 333 South Hope Street Los Angeles, CA 90710 Telephone: (213) 486-9318 Facsimile: (213) 486-9041 6 7 (b) if to the Company, addressed to: Hanover Direct, Inc. Attention: Rakesh K. Kaul 1500 Harbor Boulevard Weehawken, N.J. 07087 Telephone: (201) 863-7300 Facsimile: (201) 392-5005 with a copy to: Brown Raysman Millstein Felder & Steiner LLP Attention: Sarah Hewitt, Esq. 120 West 45th Street New York, N.Y. 10036 Telephone: (212) 944-1515 Facsimile: (212) 840-2429 or such other address as shall be furnished in writing by either party to the other. Section 6.04. Fees and Expenses. Each party hereto shall bear its respective legal, investment banking and accounting fees and other expenses incurred with respect to this Agreement and the transactions contemplated hereby. Section 6.05. Assignment; Amendments, Waivers. (a) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, and no other person shall acquire or have any rights under or by virtue of this Agreement. (b) Neither the Buyer nor the Company shall assign any of its rights or obligations under this Agreement without the prior written consent of the other. Except as specifically referenced herein, this Agreement is being entered into solely by and for the benefit of the parties hereto and thereto and there is no intention, nor shall this Agreement have the effect, of benefiting third parties in any manner not specifically referenced herein. (c) No provision of this Agreement may be amended, modified or waived except by written agreement duly executed by each of the parties. Section 6.06. Entire Agreement. This Agreement represents the entire agreement between the parties and supersedes and cancels any prior oral or written agreement, letter of intent or understanding related to the subject matter hereof. Section 6.07. Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 7 8 Section 6.08. Counterparts. This Agreement may be executed in one or more counterparts, and shall become effective when one or more counterparts have been signed by each of the parties. Section 6.09. Severability of Provisions. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 6.10. Best Efforts. Each of the Company and the Buyer shall use its best efforts to take all actions required to ensure that the conditions to Closing set forth herein are satisfied on or before the scheduled date of such Closing. Section 6.11. Securities Act Legend. Each certificate for the Shares (and any other securities issued in respect of the Shares) shall be stamped or otherwise imprinted with a legend in substantially the following form: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT SUCH DISPOSITION MAY BE MADE WITHOUT REGISTRATION OF THE SECURITIES UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT, OR UNLESS SOLD PURSUANT TO RULE 144." Such legend shall be removed by the Company upon delivery to it of an opinion of counsel satisfactory to the Company that a registration statement under the Securities Act is at the time in effect with respect to the legended security or that such security can be freely transferred without such registration statement being in effect. Section 6.12. Termination of Agreement. This Agreement and the obligation of the Buyer to purchase, and the Company to sell, the Shares may be terminated at any time prior to the Closing Date by the mutual written consent of each of the parties hereto. IN WITNESS WHEREOF, this Stock Purchase Agreement has been duly executed by the parties hereto on the day and year first above written. 8 9 HANOVER DIRECT, INC. By /s/Larry J. Svoboda ------------------------------------ Name Larry J. Svoboda ------------------------------------ Title Senior Vice President and C.F.O. ------------------------------------ SMALLCAP WORLD FUND, INC. By /s/Vincent P. Corti ------------------------------------ Name Vincent P. Corti ------------------------------------ Title Vice President ------------------------------------ 9 10 SCHEDULE 2.02 OPTIONS, WARRANTS OR OTHER AGREEMENTS FOR THE PURCHASE OF SHARES OF COMPANY COMMON STOCK AND VOTING TRUSTS, VOTING AGREEMENTS OR OTHER SIMILAR AGREEMENTS AND PREEMPTIVE OR OTHER PREFERENTIAL RIGHTS Options and Warrants - see attached list. Conversion Privileges - Series B Convertible Additional Preferred Stock, par value $.01 per share, stated value $10 per share - outstanding shares - 634,900 convertible into shares of the Company's Common Stock in accordance with the provisions of the Company's Certificate of Incorporation, ARTICLE FOURTH, Section 6. Voting Agreements - Nomination and Standstill Agreement, by and among The Horn & Hardart Company (the Company's predecessor), Theodore H. Kruttschnitt, III, J. David Hakman and Edmund R. Manwell, dated June 10, 1989. Messrs. Kruttschnitt, Hakman and Manwell as a group own 5.0% of the outstanding shares of the Company's Common Stock as of a recent date and all three currently serve as directors of the Company. Pursuant to such agreement, the Company agreed to nominate each of Messrs. Kruttschnitt, Hakman and Manwell for election upon the expiration of their respective terms provided that Mr. Kruttschnitt continues to maintain certain specified levels of ownership of the Company's Common Stock. Preemptive or Other Preferential Rights - see attached copy of the Company's Restated Certificate of Incorporation 10 11 ATTACHMENT TO SCHEDULE 2.02 HANOVER DIRECT, INC. OPTION AND WARRANT ROLLFORWARD SEPTEMBER 27, 1997 WARRANTS Outstanding Holder September 27, 1997 - ---------------------------------------------- Total 5,646,490 =================== Note: All of the outstanding warrants are held by NAR and affiliates. OPTIONS Horn & Hardart Stock Option Plan Outstanding Holder September 27, 1997 - ---------------------------------------------- Total 30,000 =================== Hanover Direct, Inc. 1996 Stock Option Plan Total 5,425,000 =================== Various Option Plans for Rakesh Kaul Total 7,530,000 =================== Note: Future grant for R. Kaul does not appear due to uncertainty of ability to exercise. Please see attached copy of disclosure from 1997 Proxy Statement. Directors Options Total 70,000 =================== Tandem Options Total 624,000 =================== TOTAL OPTIONS 13,679,000 =================== 12 EXHIBIT A REGISTRATION RIGHTS AGREEMENT SEE EXHIBIT 10.72 FILLED HEREWITH 11 EX-10.72 12 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.72 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of November 4, 1997, between HANOVER DIRECT, INC., a Delaware corporation (the "Company"), and SMALLCAP WORLD FUND, INC., a Maryland corporation (the "Stockholder"). R E C I T A L S: A. The parties hereto are parties to a Stock Purchase Agreement, dated the date hereof (the "Purchase Agreement"). B. Pursuant to the Purchase Agreement, the Company is issuing to the Stockholder an aggregate of 3,700,000 shares of the Company's Common Stock, par value $.66 2/3 per share (the "Common Stock"). THE PARTIES AGREE AS FOLLOWS: 1. Certain Definitions. Capitalized terms used herein which are not otherwise defined herein and which are defined in, or by reference in, the Purchase Agreement shall have the meanings given therein. For the purposes of this Agreement, the following terms shall have the following meanings: "Agreement" shall mean this Registration Rights Agreement, as the same may be amended, modified or supplemented from time to time. "Demand Notice" shall have the meaning set forth in Section 2(a) hereof. "Shelf Registration" shall have the meaning set forth in Section 2(a) hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute then in effect, and a reference to a particular section thereof shall be deemed to include a reference to the comparable section, if any, of any such similar federal statute. "Holder" shall mean the Stockholder and each Person to whom Registrable Securities are transferred so long as such Person holds such Registrable Securities. "Registrable Securities" shall mean the shares of Common Stock issued pursuant to the Purchase Agreement. As to any particular Registrable Securities, once issued, such securities shall cease to be Registrable Securities when (i) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act in accordance with Section 2(c) hereof, regardless of whether such securities are actually sold pursuant to such 2 registration statement, (ii) they shall have been disposed of pursuant to rule 144 (or any successor provision) under the Securities Act, (iii) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force (and the Holder thereof shall have received an opinion of independent counsel for the Holder reasonably satisfactory to the Company to the foregoing effects), or (iv) they shall have ceased to be outstanding. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance with this Agreement, including, without limitation, (i) all SEC and National Association of Securities Dealers, Inc., American Stock Exchange or relevant stock exchange registration, listing and filing fees, (ii) all fees and expenses of complying with securities or blue sky laws (including reasonable fees and disbursements of counsel for the Company, the underwriters or the Holders in connection with blue sky qualifications of the Registrable Securities), (iii) all printing, messenger, telephone and delivery expenses and transfer taxes, (iv) the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance, (v) the reasonable fees and disbursements of one law firm retained in connection with such registration by the Holders of Registrable Securities being registered and selected by the Stockholder, (vi) any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, and (vii) the reasonable fees and expenses of any special experts retained in connection with the requested registration, but excluding underwriting discounts and commissions of underwriters, agents or dealers relating to the distribution of the Registrable Securities, if any. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute then in effect, and a reference to a particular section thereof shall be deemed to include a reference to the comparable section, if any, of any such similar federal statute. "SEC" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act or the Exchange Act or any similar federal statutes then in effect. 2. Shelf Registration. (a) Timing. As promptly as practicable after April 1, 1998, the Company will use its best efforts to effect the registration under the Securities Act of all the Registrable Securities to the extent necessary to permit the disposition (in accordance with the intended method or methods of distribution thereof as specified at the time by the Stockholder) of such Registrable Securities ("Shelf Registration"); provided, however, that the Company may delay the filing of such registration statement relating to the Registrable Securities for not more than ninety (90) calendar days following such date if, in the reasonable judgment of the Board of Directors of the Company, such filing is not in the best interests of the Company at such time. Such registration shall be effected by the preparation and filing by the Company with the SEC of a registration statement on Form S-3 or other similar form with respect to the offering and sale by the Holders - 2 - 3 of the Registrable Securities on a continuous or delayed basis in the future pursuant to Rule 415 under the Securities Act. (b) Expenses. The Company will pay all Registration Expenses in connection with a registration of Registrable Securities requested pursuant to this Section 2. (c) Effective Registration Statement. A registration pursuant to this Section 2 will be deemed to have been effected if (i) the registration statement filed in connection with such registration shall have become effective under the Securities Act and shall have remained effective until November 7, 1999 (provided that if, after such registration statement has become effective, the offering of Registrable Securities pursuant to such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court, such registration will be deemed not to have been effected), or (ii) the Company is unable to complete such registration statement because one or more Holders of Registrable Securities thus being registered failed to provide information for use in such registration statement requested reasonably and in a timely manner by the Company or because such Holders otherwise failed to do such reasonable acts and things as may be requested in writing in a timely manner by the Company to enable the Company to comply with the requirements of applicable law. (d) The Stockholder shall be entitled to request one Shelf Registration pursuant to this Agreement. No additional requests for Shelf Registrations will be required to be effected by the Company. 3. Incidental Registration. (a) Right to Include Registrable Securities. If at any time on or after April 1, 1998 and before March 31, 2000 the Company proposes to register any of its equity securities under the Securities Act (other than a registration on Form S-4 or Form S-8), whether or not for sale for its own account, it will give ten (10) days prior written notice to all Holders of Registrable Securities of its intention to do so and of such Holders' rights under this Section 3. Upon the written request of any such Holder made within twenty (20) days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such Holder and the intended method of disposition thereof), the Company will use its best efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the Holders thereof, to the extent requisite to permit the disposition (in accordance with such intended methods thereof) of the Registrable Securities so to be registered ("Incidental Registration"); provided that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company may, at its election, give written notice of such determination to each Holder of Registrable Securities and thereupon shall be relieved of its obligation to register any Registrable Securities in connection with such registration, without prejudice, however, to the rights of Holders under Section 2 herein. No registration effected under this Section 3 shall relieve the Company of its obligations to effect a registration upon - 3 - 4 request under Section 2 herein. The Company will pay all Registration Expenses in connection with the registration of Registrable Securities requested pursuant to this Section 3. (b) Priority in Incidental Registrations. If a registration pursuant to this Section 3 involves an underwritten offering and the managing underwriter advises the Company in writing that, in its opinion, the number of securities requested to be included in such registration would have an adverse effect on such offering, including the price at which such shares can be sold, the Company will include in such registration the maximum number of securities which it is so advised by such managing underwriter can be sold without such an adverse effect, allocated as follows: (A) first, all securities proposed to be registered by the Company for its own account, and (B) second, all securities requested to be included in such registration under this Section 3 and any other securities proposed to be registered by the Company other than for its own account (if necessary, allocated pro rata among all such requesting Holders on the basis of the relative number of shares of securities each such Holder has requested to be included in such registration). 4. Registration Procedures. Whenever the Company effects or causes the registration of the Registrable Securities under the Securities Act as provided in this Agreement, the Company will use its best efforts to permit the sale of such Registrable Securities in accordance with the intended method or methods of distribution thereof, and will, as expeditiously as possible: (a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, provided, however, that the Company may discontinue any registration of its securities which is being effected pursuant to Section 3 herein at any time prior to the effective date of the registration statement relating thereto; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective (i) in the case of an Incidental Registration pursuant to Section 3 hereof, until all securities registered pursuant to such registration statement have been disposed of or (ii) in the case of a Shelf Registration pursuant to Section 2 hereof, for a period not to exceed ninety (90) days from the effective date thereof, subject to the provisions of Section 2(c ) hereof, and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the Holders set forth in such registration statement; (c) furnish to the Holders such number of executed and conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits and all documents incorporated by reference therein), such number of copies - 4 - 5 of the prospectus included in such registration statement (including each preliminary prospectus and supplemental prospectus), and such other documents as the Holders may reasonably request in order to facilitate the disposition of the Registrable Securities by such Holders; (d) use its best efforts to register or qualify (and keep effective such registration or qualification) such Registrable Securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States as may be reasonably required to permit the Holders to sell the Registrable Securities or as the Holders shall reasonably request, and do any and all other acts and things which may be reasonably necessary or advisable to enable the Holders to consummate the disposition in such jurisdictions of the Registrable Securities; provided that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction where, but for the requirements of this subsection (d), it would not be obligated to be so qualified, to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction; and provided, further, that this subsection (d) shall not be construed to require the Company to register as a broker-dealer in any jurisdiction any third person to whom or through whom a Holder proposes to sell Registrable Securities; (e) immediately notify the Holders, at any time when a prospectus relating thereto is required to be delivered under the Securities Act within the appropriate period mentioned in subsection (b) of this Section 4, of the Company becoming aware that the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and at the request of the Holders promptly prepare and furnish to such Holders a reasonable number of copies of an amended or supplemented prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (f) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; (g) use its best efforts to list such Registrable Securities on the American Stock Exchange or any securities exchange on which securities of such class are then listed, if such Registrable Securities are not already so listed, and to provide a transfer agent and registrar for such Registrable Securities covered by such registration statement not later than the effective date of such registration statement; (h) enter into such agreements (including an underwriting agreement in customary form) and take such other actions as the Stockholder reasonably requests in order to expedite or facilitate the disposition of such Registrable Securities; - 5 - 6 (i) whether or not the registration relates to an underwritten offering, make such representations and warranties to the Holders and to the underwriters, if any, as are customarily made by issuers to underwriters in underwritten offerings, obtain opinions of counsel to the Company addressed to each Holder and to the underwriters, if any, covering the matters customarily covered in underwritten offerings, and obtain a "cold comfort" letter or letters and updates thereof from the Company's independent public accountants in customary form and covering matters of the type customarily covered in underwritten offerings, in each case as the underwriters or the Stockholder shall request; and (j) make available for inspection by the Holders, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant, or other agent retained by the Holders or any such underwriter, all pertinent financial and other records, pertinent corporate documents and properties of the Company, and cause all of the Company's officers, directors and employees to supply all information reasonably requested by the Holders, underwriter, attorney, accountant or agent in connection with such registration statement. The Company may require the Holders to furnish the Company such information regarding the Holders and the distribution of such securities for use in the registration statement relating to such registration as the Company may from time to time reasonably request in writing and to do such reasonable acts and things as the Company may from time to time reasonably request in writing in order to permit the Company to comply with the requirements of law. Each Holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in subsection (e) of this Section 4, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by subsection (e) of this Section 4, and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in subsection (b) of this Section 4 shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to subsection (e) of this Section 4 to and including the date when each Holder of Registrable Securities covered by such registration statement shall have received the copies of the supplemented or amended prospectus contemplated by subsection (e) of this Section 4. 5. Indemnification. - 6 - 7 (a) Indemnification by the Company. In the event of any registration of any securities of the Company under the Securities Act pursuant to Sections 2 or 3 herein, the Company will, and it hereby does, indemnify and hold harmless, to the fullest extent permitted by law, the sellers of any Registrable Securities covered by such registration statement, its directors and officers or general and limited partners (and directors and officers thereof), each person who participates as an underwriter in the offering or sale of such securities and each other person, if any, who controls such seller or any such underwriter within the meaning of the Securities Act, against any and all losses, claims, damages or liabilities, joint or several, and expenses (including legal, accounting and other expenses incurred in connection with investigation, preparation or defense of any of the foregoing, and including any amounts paid in any settlement effected with the Company's consent) to which such seller, any such director or officer or general or limited partner or any such underwriter or controlling person may become subject under the Securities Act, the Exchange Act, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (a) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary, final or supplemental prospectus contained therein, or any amendment or supplement thereto, or (b) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such seller and each such director, officer, general or limited partner, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or preparing for and defending any such loss, claim, liability, action or proceeding from time to time as such expenses are incurred; provided that the Company shall not be liable in any such case to any such person, to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or amendment or supplement thereto or in any such preliminary, final or supplemental prospectus in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such seller or underwriter specifically stating that it is for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such seller or any such director, officer, general or limited partner, underwriter or controlling person and shall survive the transfer of such securities by such seller. (b) Indemnification by the Sellers. The Company may require, as a condition to including any Registrable Securities in any registration statement filed in accordance with Section 4 herein, that the Company shall have received an undertaking reasonably satisfactory to it from the prospective sellers of such Registrable Securities (except that no such undertaking shall be required to the extent applicable law, charter documents or by-laws forbid such prospective sellers from giving such undertaking) or any underwriter, to indemnify and hold harmless (in the same manner and to the same extent as set forth in subsection (a) of this Section 5) the Company, its directors and officers signing the registration statement and its controlling persons and all other prospective sellers and their respective controlling persons with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary, final or supplemental prospectus contained therein, or any amendment or supplement, - 7 - 8 if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such sellers or underwriter specifically stating that it is for use in the final or supplemental prospectus or amendment or supplement, or a document incorporated by reference into any of the foregoing; provided in no event shall the liability of any selling Holder of Registrable Securities be greater in amount than the amount of proceeds received by such Holder upon such sale. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any other prospective sellers or any of their respective directors, officers or controlling Persons and shall survive the transfer of such securities by such sellers. (c) Notices of Claims, Etc. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Section 5, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 5, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment (which is based on the written opinion of its counsel) a conflict of interest between such indemnified and indemnifying parties exists in respect of such claim, the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof. If in an indemnified party's reasonable judgment (which is based on the written opinion of its counsel) a conflict of interest between the indemnified and indemnifying parties exists in respect of a claim or if the indemnifying party refuses to participate in and to assume the defense of any action brought against an indemnified party, the indemnified party may assume the defense of such claim or action with counsel of its choosing which shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 5. No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) Contribution. If the indemnification provided for in or pursuant to this Section 5 is due in accordance with the terms hereof but is held by a court to be unavailable or unenforceable in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party, in lieu of indemnifying such indemnified person, shall contribute to the amount paid or payable by such indemnified person as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified person on the other in connection with the statements or omissions which resulted in such losses, claims, damages, - 8 - 9 liabilities or expenses as well as any other relevant equitable considerations. The relative fault of the indemnifying party on the one hand and of the indemnified person on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified person by such persons' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. In no event shall the liability of any selling Holder of Registrable Securities be greater in amount than the amount of proceeds received by such Holder upon such sale. 6. Rule 144. The Company covenants that it will use its best efforts to file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder (or, if the Company is not required to file such reports, it will, upon the request of the Holders, make publicly available such information as necessary to permit sales pursuant to Rule 144 under the Securities Act, as amended), and it will do all such other acts and things from time to time as requested by the Holders to the extent required from time to time to enable each Holder to sell shares of Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Holder, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. 7. Public Trading Market. Until the earlier of (a) two years after the effective date of the registration statement filed pursuant to Section 2 or (b) the date on which there are no Registrable Securities, the Company shall use its best efforts to maintain a public trading market for its Common Stock. 8. Restriction on Resale. Unless otherwise agreed by the Company, until the earlier of (a) two years after the effective date of the registration statement filed pursuant to Section 2 or (b) the date on which there are no Registrable Securities, each Holder agrees that it will not resell such Registrable Securities without registration under the Securities Act, compliance with Rule 144 under the Securities Act or an opinion of counsel for such Holder, addressed to the Company, to the effect that no such registration is required. All reasonable costs, fees and expenses of counsel in connection with such opinion shall be borne by the Holder. 9. Miscellaneous. (a) Amendments and Waivers. This Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act of the Stockholder. Holders of Registrable Securities shall be bound by any consent authorized by this Section 9(a), whether or not such Registrable Securities shall have been marked to indicate such consent. - 9 - 10 (b) Successors, Assigns and Transferees. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their legal successors-in-interest, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. (c) Notices. All notices and other communications provided for hereunder shall be given and shall be effective as provided in the Purchase Agreement. (d) Descriptive Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise effect the meaning of the terms contained herein. (e) Severability. In the event that any one or more of the provisions, paragraphs, words, clauses, phrases or sentences contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of such provision, paragraph, word, clause, phrase, or sentence in every other respect and of the remaining provisions, paragraphs, words, clauses, phrases or sentences hereof shall not be in any way impaired, it being intended that all rights, powers and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. (f) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. (g) Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware. (h) Remedies. The parties hereto acknowledge that monetary damages will not be adequate compensation for any loss incurred by reason of a breach by either of them of the provisions hereof and agree, to the fullest extent permitted by law, to waive the defense of adequacy of legal remedies in any action for specific performance hereof. (i) Merger, etc. If, directly or indirectly, (i) the Company shall merge with and into, or consolidate with, any other Person, (ii) any Person shall merge with and into, or consolidate with, the Company and the Company shall be the surviving corporation of such merger or consolidation and, in connection with such merger or consolidation, all or part of the Registrable Securities shall be changed into or exchanged for stock or other securities of any other Person, then, in each such case, proper provision shall be made so that such Person shall be bound by the provisions of this Agreement and the term "Company" shall thereafter be deemed to refer to such Person. For purposes hereof, the term "Person" shall mean any individual, corporation, partnership, trust or other nongovernmental entity. (j) Legal Fees; Costs. If any party to this Agreement institutes any action or proceeding, whether before a court or arbitrator, to enforce any provision of this Agreement, the prevailing party therein shall be entitled to receive from the losing party reasonable attorneys' fees - 10 - 11 and costs incurred in such action or proceeding, whether or not such action or proceeding is prosecuted to judgment. (k) Termination. Except as otherwise provided herein, the Company's obligations under Sections 2 and 3 hereof shall terminate at the close of business on March 31, 2000, or such earlier date on which there shall be no Registrable Securities. - 11 - 12 IN WITNESS WHEREOF, each of the undersigned has caused this Registration Rights Agreement to be executed on its behalf as of the date first written above. HANOVER DIRECT, INC. By: /s/Larry J. Svoboda -------------------------------- Title: Senior Vice President and C.F.O. -------------------------------- SMALLCAP WORLD FUND, INC. By: /s/Vincent P. Corti -------------------------------- Title: Vice President -------------------------------- - 12 - 13 ATTACHMENT TO SCHEDULE 2.02 HANOVER DIRECT, INC. OPTION NAD WARRANT ROLLFORWARD SEPTEMBER 27, 1997 WARRANTS Outstanding Holder September 27, 1997 - ---------------------------------------------- Total 5,646,490 =================== Note: All of the outstanding warrants are held by NAR and affiliates. OPTIONS Horn & Hardart Stock Option Plan Outstanding Holder September 27, 1997 - ---------------------------------------------- Total 30,000 =================== Hanover Direct, Inc. 1996 Stock Option Plan Total 5,425,000 =================== Various Option Plans for Rakesh Kaul Total 7,530,000 =================== Note: Future grant for R. Kaul does not appear due to uncertainty of ability to exercise. Please see attached copy of disclosure from 1997 Proxy Statement. Directors Options Total 70,000 =================== Tandem Options Total 624,000 =================== TOTAL OPTIONS 13,679,000 =================== EX-21.1 13 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT COMPANY INCORPORATION - ------------------------------------- ------------- Angis Safety Holdings, Inc. Delaware American Down & Textile Company Wisconsin Brawn of California, Inc. California Company Store Holdings, Inc. Delaware Gump's By Mail, Inc. Delaware Gump's Corp. California Hanover Direct Pennsylvania, Inc. Pennsylvania Hanover Direct Virginia, Inc. Delaware LWI Holdings, Inc. Delaware Scandia Down Corporation Delaware Tweeds, Inc. Delaware Gumps Holdings, Inc. Delaware D.M. Advertising, Inc. New Jersey Hanover Realty, Inc. Virginia The Company Store, Inc. Wisconsin The Company Factory, Inc. Wisconsin The Company Office, Inc. Wisconsin Austad Holdings, Inc. Delaware The Austad Company South Dakota EX-23.1 14 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into The Horn & Hardart Company's (predecessor to Hanover Direct, Inc. ) previously filed Registration Statement File Nos. 33-66394, 33-58760, 33-58756, 33-58758, 33-52687, 33-52059, 33-52061, 333-3871, 333-13817, 2-94286 and 2-92383. It should be noted that we have not audited any financial statements of the company subsequent to the date of our report. ARTHUR ANDERSEN LLP New York, New York March 26, 1998 EX-27.1 15 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME FOR THE TWELEVE MONTHS ENDED DECEMBER 27, 1997 AND IS QUALIFIED IN IT ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-27-1997 DEC-27-1997 14,758 0 21,042 (3,358) 64,330 145,757 82,164 (29,712) 230,299 98,187 32,735 5,938 0 136,294 (66,681) 230,299 557,638 557,638 358,219 559,487 0 3,973 8,028 (9,877) 999 (10,876) 0 0 0 (10,876) (.06) (.06)
-----END PRIVACY-ENHANCED MESSAGE-----