-----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, WwPEgQds2vJj2YY4LabZdgNqRGL/ovBsZoabfvUebvBzgr7HpwcHdUk0TguKakTa G7wC6v9maTIU9yZzxXO1ag== 0000950123-00-004722.txt : 20000510 0000950123-00-004722.hdr.sgml : 20000510 ACCESSION NUMBER: 0000950123-00-004722 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20000325 FILED AS OF DATE: 20000509 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: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08056 FILM NUMBER: 623390 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-Q 1 HANOVER DIRECT, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 25, 2000 Commission file number 1-12082 HANOVER DIRECT, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 13-0853260 - ------------------------ --------------------------------- (State of incorporation) (IRS Employer Identification No.) 1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087 - -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (201) 863-7300 ------------------ (Telephone number) 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 --- --- Common stock, par value $.66 2/3 per share: 213,438,195 shares outstanding as of May 1, 2000. 2 HANOVER DIRECT, INC. TABLE OF CONTENTS
Part I - Financial Information Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets - March 25, 2000 and December 25, 1999.......................................... 3 Condensed Consolidated Statements of Income (Loss) - thirteen weeks ended March 25, 2000 and March 27, 1999............................................. 5 Condensed Consolidated Statements of Cash Flows - thirteen weeks ended March 25, 2000 and March 27, 1999............................................. 6 Notes to Condensed Consolidated Financial Statements............................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 16 Part II - Other Information Item 1. Legal Proceedings......................................................... 17 Item 4. Submission of Matters to a Vote of Security Holders....................... 17 Item 6. Exhibits and Reports on Form 8-K.......................................... 18 Signature.............................................................................. 19
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
MARCH 25, DECEMBER 25, 2000 1999 ----------- -------------- ASSETS Current Assets: Cash and cash equivalents $ 3,376 $ 2,849 Accounts receivable, net 26,820 29,287 Inventories 55,892 54,816 Prepaid catalog costs 24,702 20,305 Deferred tax asset, net 3,300 3,300 Other current assets 2,950 2,935 -------- -------- Total Current Assets 117,040 113,492 -------- -------- Property and equipment, at cost: Land 4,634 4,634 Buildings and building improvements 23,289 23,269 Leasehold improvements 9,687 9,491 Furniture, fixtures and equipment 55,798 53,863 Construction in progress 473 1,990 -------- -------- 93,881 93,247 Accumulated depreciation and amortization (48,586) (46,360) -------- -------- Property and equipment, net 45,295 46,887 Goodwill, net 16,205 16,336 Deferred tax asset, net 11,700 11,700 Other assets 1,824 3,004 -------- -------- Total Assets $192,064 $191,419 ======== ========
See notes to condensed consolidated financial statements. 3 4 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
MARCH 25, DECEMBER 25, 2000 1999 ----------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term borrowings $ 5,000 $ -- Current portion of long-term debt and capital lease obligations 3,707 3,257 Accounts payable 59,673 63,549 Accrued liabilities 24,317 24,284 Customer prepayments and credits 4,741 4,412 ---------- ---------- Total Current Liabilities 97,438 95,502 ---------- ---------- Non-current Liabilities: Long-term debt 50,690 39,578 Other liabilities 2,477 2,474 ---------- ---------- Total Non-current Liabilities 53,167 42,052 ---------- ---------- Total Liabilities 150,605 137,554 ---------- ---------- Shareholders' Equity: Series B Convertible Additional Preferred Stock, $10 stated value, authorized, issued and outstanding: none at March 25, 2000 and 634,900 shares at December 25, 1999 -- 6,318 Common Stock, $.66 2/3 par value, authorized 300,000,000 shares; issued 213,961,498 shares at March 25, 2000 and 211,519,511 shares at December 25,1999 142,641 141,013 Capital in excess of par value 306,907 301,088 Accumulated deficit (404,298) (390,763) ---------- ---------- 45,250 57,656 Less: Treasury stock, at cost (652,552 shares at March 25, 2000 and December 25, 1999) (1,829) (1,829) Notes receivable from sale of Common Stock (1,962) (1,962) ---------- ---------- Total Shareholders' Equity 41,459 53,865 ---------- ---------- Total Liabilities and Shareholders' Equity $ 192,064 $191,419 ========== ==========
See notes to condensed consolidated financial statements. 4 5 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
FOR THE 13 WEEKS ENDED --------------------------------- MARCH 25, MARCH 27, 2000 1999 --------- --------- Net Revenues $ 130,150 $ 127,714 --------- --------- Operating costs and expenses: Cost of sales and operating expenses 88,230 81,904 Selling expenses 31,967 31,946 General and administrative expenses 17,853 14,447 Depreciation and amortization 2,459 2,301 --------- --------- 140,509 130,598 --------- --------- (Loss) from operations (10,359) (2,884) --------- --------- Interest expense, net 3,014 1,147 --------- --------- (Loss) before income taxes (13,373) (4,031) Income tax provision 75 193 --------- --------- Net (loss) (13,448) (4,224) Preferred stock dividends 87 159 --------- --------- Net (loss) applicable to common shareholders $(13,535) $ (4,383) ========= ========= Net (loss) per share: Net (loss) per share - basic and diluted $ (.06) $ (.02) ========= ========= Weighted average common shares outstanding - basic and diluted (thousands) 211,930 210,445 ========= =========
See notes to condensed consolidated financial statements. 5 6 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS) (UNAUDITED)
FOR THE 13 WEEKS ENDED -------------------------- MARCH 25, MARCH 27, 2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $(13,448) $ (4,224) Adjustments to reconcile net (loss) to net cash (used) by operating activities: Depreciation and amortization, including deferred fees 4,143 2,616 Provision for doubtful accounts 784 807 Compensation expense related to stock options 797 799 Changes in assets and liabilities: Accounts receivable 1,683 3,023 Inventories (1,076) 5,099 Prepaid catalog costs (4,397) (5,156) Accounts payable (3,876) (20,490) Accrued liabilities 1,356 (201) Customer prepayments and credits 329 519 Other, net 26 (429) --------- --------- Net cash (used) by operating activities (13,679) (17,637) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property and equipment (623) (404) Proceeds from sale of Blue Ridge Associates 838 -- --------- --------- Net cash provided (used) by investing activities 215 (404) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under Congress revolving loan facility $ 23,252 $ 9,915 Net borrowings (payments) under Congress term loan facility 12,325 (375) Borrowings under Richemont line of credit facility 5,000 -- Redemption of Term Financing Facility (16,000) -- Redemption of Industrial Revenue Bonds (8,000) -- Payment of debt issuance costs (1,899) -- Proceeds from issuance of Common Stock 301 22 Series B Convertible Additional Preferred Stock dividends (920) -- Other, net (68) (118) --------- --------- Net cash provided by financing activities 13,991 9,444 --------- --------- Net decrease in cash and cash equivalents 527 (8,597) Cash and cash equivalents at the beginning of the year 2,849 12,207 --------- --------- Cash and cash equivalents at the end of the period $ 3,376 $ 3,610 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest $ 1,488 $ 801 ========= --------- Income taxes $ 88 $ 374 ========= ========= Non-cash investing and financing activities: Capital lease obligations $ 84 $ 82 ========= ========= Redemption of Series B Convertible Additional Preferred Stock $ 6,349 $ -- ========= =========
See notes to condensed consolidated financial statements. 6 7 HANOVER DIRECT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. Reference should be made to the annual financial statements, including the footnotes thereto, included in the Hanover Direct, Inc. (the "Company") Annual Report on Form 10-K for the fiscal year ended December 25, 1999. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all material adjustments, consisting of normal recurring accruals, necessary to present fairly the financial condition, results of operations and cash flows of the Company and its consolidated subsidiaries for the interim periods. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. Certain prior year amounts have been reclassified to conform to the current year presentation. 2. RETAINED EARNINGS RESTRICTIONS The Company is restricted from paying dividends at any time on its Common Stock or from acquiring its capital stock by certain debt covenants contained in agreements to which the Company is a party. 3. 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 Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share." As a net loss was incurred for the periods reported in the accompanying condensed consolidated statements of income (loss), the weighted average number of shares used in the calculation for both basic and diluted net loss per share excludes stock options and convertible preferred stock. 4. DISPOSITION OF BLUE RIDGE ASSOCIATES In February 2000, the Company sold its 50% partnership interest in Blue Ridge Associates ("Blue Ridge"), a partnership that owned an apparel distribution center in Roanoke, VA, to the holder, an unrelated third party, of the other 50% for $0.8 million. Since the proceeds approximated the Company's carrying value of its investment in Blue Ridge, no gain or loss on sale was recognized. 7 8 5. SEGMENT REPORTING The Company has two reportable segments according to the criteria established by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information": direct commerce and business-to-business ("B-to-B") services. The direct commerce segment is comprised of the Company's portfolio of branded specialty mail-order catalogs and connected Internet Web sites, as well as its retail operations, all of which market products directly to the consumer. Revenues for the direct commerce segment are derived primarily from the sale of merchandise through the Company's catalogs, Internet Web sites and retail outlets. Revenues for the direct commerce segment are also derived from the Company's various upsell initiatives. The B-to-B services segment represents the Company's e-commerce support and fulfillment operations. Revenues for the B-to-B services segment are derived primarily from e-commerce transaction services, such as order processing, customer care, and shipping and distribution services that are provided to both third parties and the direct commerce segment. The B-to-B services segment provides the aforementioned services to the direct commerce segment in accordance with an intercompany service agreement. The Company's management reviews income (loss) from operations to evaluate performance and allocate resources. Reportable segment data were as follows (in thousands of dollars):
RESULTS FOR THE 1ST QUARTER DIRECT B-TO-B ELIMINATIONS/ ENDED MARCH 25, 2000: COMMERCE SERVICES ALL OTHER CONSOLIDATED ---------------- ----------------- ---------------- ----------------- Revenues from External Customers $ 123,604 $ 6,546 $ -- $ 130,150 Inter-segment Revenues -- 23,098 (23,098) -- Income/ (Loss) from Operations (275) (7,773) (2,311) (10,359) Interest Income/(Expense) (1,518) (1,100) (396) (3,014) ---------------- ----------------- ---------------- ----------------- Income/ (Loss) before Income Taxes $ (1,793) $ (8,873) $ (2,707) $ (13,373) ================ ================= ================ ================= RESULTS FOR THE 1ST QUARTER ENDED MARCH 27, 1999: Revenues from External Customers $ 127,013 $ 701 $ -- $ 127,714 Inter-segment Revenues -- 25,017 (25,017) -- Income/ (Loss) from Operations 706 (3,590) -- (2,884) Interest Income/(Expense) (294) (853) -- (1,147) ---------------- ----------------- ---------------- ----------------- Income/ (Loss) before Income Taxes $ 412 $ (4,443) $ -- $ (4,031) ================ ================= ================ =================
During the first quarter of 2000, the Company, as part of its ongoing strategic initiative to reposition itself as both a specialty direct marketer and as a provider of B-to-B e-commerce transaction services, modified its business segmentation, resulting in the reclassification of certain general and administrative expenses from its direct commerce and B-to-B services segments to the corporate level. Accordingly, the Company's "Eliminations/All Other" category now includes these corporate operating expenses as well as inter-segment eliminations, and non-reportable operating segments (primarily the Company's Always in Style joint venture). Segmented income/(loss) from operations for 1999, on a pro-forma basis to reflect this modification, would have been $1.4 million for the direct commerce segment, $(3.5) million for the B-to-B services segment and $(0.8) million for all other. 8 9 6. CONVERSION OF SERIES B CONVERTIBLE ADDITIONAL PREFERRED STOCK In February 2000, all 634,900 outstanding shares of the Company's Series B Convertible Additional Preferred Stock issued in connection with the Company's 1995 acquisition of Aegis Safety Holdings Inc., publisher of The Safety Zone catalog, were redeemed via the issuance of 2,193,317 shares of the Company's Common Stock. The market value for the Company's shares on the date of redemption was $2.75 per share. Additionally, the Company made a $0.9 million payment for all unpaid cumulative preferred dividends. 7. CONTINGENCIES A class action lawsuit was commenced on March 3, 2000 entitled Edwin L. Martin v. Hanover Direct, Inc. and John Does 1 through 10, bearing case no. CJ2000-177 in the State Court of Oklahoma (District Court in and for Sequoyah County). Plaintiff commenced the action on behalf of himself and a class of persons who have at any time purchased a product from the Company and paid for an "insurance charge." The complaint sets forth claims for breach of contract, unjust enrichment, recovery of money paid absent consideration, fraud and a claim under the New Jersey Consumer Fraud Act. The complaint alleges that the Company charges its customers for delivery insurance even though, among other things, the Company's common carriers already provide insurance and the insurance charge provides no benefit to the Company's customers. Plaintiff also seeks a declaratory judgment as to the validity of the delivery insurance. The damages sought are (i) an order directing the Company to return to the plaintiff and class members the "unlawful revenue" derived from the insurance charges, (ii) declaring the rights of the parties, (iii) permanently enjoining the Company from imposing the insurance charge, (iv) awarding threefold damages of less than $75,000 per plaintiff and per class member, and (v) attorney's fees and costs. The Company has filed a motion to dismiss. At the end of January 2000, the Company received a letter from the Federal Trade Commission ("FTC") conducting an inquiry into the marketing of The Shopper's Edge club to determine whether, in connection with such marketing, any entities have engaged in (1) unfair or deceptive acts or practices in violation of Section 5 of the FTC Act and/or (2) deceptive or abusive telemarketing acts or practices in violation of the FTC's Telemarketing Sales Rule. The inquiry was undertaken pursuant to the provisions of Section 6, 9 and 10 of the FTC Act. Following such an investigation, the FTC may initiate an enforcement action if it finds "reason to believe" that the law is being violated. When there is "reason to believe" that a law violation has occurred, the FTC may issue a complaint setting forth its charges. If the respondent elects to settle charges, it may sign a consent agreement (without admitting liability) by which it consents to entry of a final order and waives all right to judicial review. If the FTC accepts such a proposed consent, it places the order on the record for sixty days of public comment before determining whether to make the order final. The Company believes that it complied with all enumerated aspects of the investigation. It has not received notice of an enforcement action or a complaint against it. 8. CHANGES IN MANAGEMENT AND EMPLOYMENT AGREEMENTS The Company entered into a new Executive Employment Agreement, dated as of March 6, 2000, with Rakesh K. Kaul, the President and Chief Executive Officer of the Company (the "Employment Agreement"). The Employment Agreement provides for a three-year evergreen term commencing on March 6, 2000, at a base salary of $597,300 per year. The base salary is subject to review on an annual basis. On each annual anniversary, the Employment Agreement will automatically be extended for an additional year unless either party has given at least 90 days prior notice of non-renewal. The Employment Agreement also provides that the Board of Directors, in its discretion, may assign Mr. Kaul to be Chief Executive Officer of erizon, Inc. under certain circumstances. 9 10 The Employment Agreement provides for Mr. Kaul's participation in the 2000 Short-Term Incentive Plan for Rakesh K. Kaul. That plan provides for an annual bonus of between 0% and 150% of Mr. Kaul's base salary, depending on the attainment of various performance objectives as determined in accordance with the objective formula or standards 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 2000 Long-Term Incentive Plan for Rakesh K. Kaul. That plan provides Mr. Kaul with an option to purchase 6% of the common stock of erizon, Inc. (with protection against dilution through erizon, Inc.'s first round of Board-approved equity, convertible debt or similar financing) at the fair market value on the date of grant, with the option vesting in equal parts over four years and expiring ten years following the date of grant (the "erizon Option"). The plan also provides for the modification to an option, granted to Mr. Kaul pursuant to a stock option agreement dated August 23, 1996 and expiring on March 7, 2006, to purchase 2,000,000 shares of Common Stock of the Company (the "Closing Price Option"). The option is now subject to a three-year vesting schedule, provided that it shall vest and become immediately exercisable upon satisfaction of the condition that the closing price of the Common Stock of the Company has attained an average of $4.50 per share during any period of 91 consecutive calendar days commencing after August 23, 1996 and ending on or before March 7, 2002. The Closing Price Option also provides that within thirty days after the Closing Price Option vests with respect to all or a portion of the shares of Common Stock underlying such option, the Company shall pay Mr. Kaul an additional cash amount equal to the number of shares of Common Stock with respect to which such option has vested on such vesting date, multiplied by the excess of (i) the lesser of the per share option price of such shares or the fair market value on such vesting date of a share of Common Stock, over (ii) $1.03. The modifications to the vesting and exercise terms of the Closing Price Option provided for within the new Employment Agreement for Rakesh K. Kaul will result in an additional charge for stock compensation expense of approximately $3.2 million over the three-year vesting period commencing March 6, 2000 or earlier upon achievement of the stock price target in the Closing Price Option. Furthermore, the Company expects additional stock compensation expense charges for the granting of the options to purchase 6% of the Common Stock of erizon, Inc. Based upon a preliminary valuation, the compensation associated with the erizon Option is estimated in the range of $3.5 million to $4.0 million, with such costs to be charged over the four-year vesting period commencing on March 6, 2000. The amounts herein are subject to adjustment based upon the final valuation of the option. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the fiscal periods indicated, the percentage relationship to revenues of certain items in the Company's Condensed Consolidated Statements of Income (Loss).
13 WEEKS ENDED ----------------------------------- MARCH 25, MARCH 27, 2000 1999 --------------- ----------- Net Revenues 100% 100% Cost of sales and operating expenses 67.8 64.1 Selling expenses 24.6 25.0 General and administrative expenses 13.7 11.3 Depreciation and amortization 1.9 1.8 (Loss) from operations (8.0) (2.2) Interest expense, net (2.3) (0.9) Net (loss) (10.3)% (3.3)%
RESULTS OF OPERATIONS - THIRTEEN-WEEKS ENDED MARCH 25, 2000 COMPARED WITH THE THIRTEEN-WEEKS ENDED MARCH 27, 1999 Net (Loss). The Company reported a net loss of $(13.4) million or $(.06) per share for the thirteen-weeks ended March 25, 2000 compared with a net loss of $(4.2) million or $(.02) per share for the comparable period last year. The per share amounts were calculated based on weighted average shares outstanding of 211,929,722 and 210,444,784 for the current and prior year periods, respectively. This increase in weighted average shares was due to the February 2000 redemption of the Company's Series B Convertible Additional Preferred Stock via the issuance of 2,193,317 shares of the Company's Common Stock as well as shares issued in connection with the Company's stock option plans. Compared to the comparable period last year, the $9.2 million increase in net loss was primarily due to: (i) higher losses resulting from the Company's e-commerce related strategic initiatives; (ii) higher personnel related expenses; and (iii) higher interest expense/debt issuance costs, partially offset by higher demand for the Company's core catalog offerings. Revenues. Revenues increased $2.4 million (1.9%) for the thirteen-week period ended March 25, 2000 to $130.1 million from $127.7 million for the comparable period in 1999. This increase was primarily due to higher revenues for the Company's core catalog offerings and revenues from the Company's third party business-to-business ("B-to-B") e-commerce services operation partly offset by 1999 revenue from the Company's discontinued catalogs. Revenues from core catalogs increased by $4.9 million (4.1%) due to higher demand for most merchandise offerings. The number of customers having made a purchase from the Company's catalogs during the 12 months preceding March 25, 2000 remained at approximately 4 million, consistent with the number at December 25, 1999, and the Company circulated approximately 71 million catalogs during the 2000 period versus approximately 69 million catalogs during the 1999 period. First quarter 1999 revenues from catalogs that were discontinued during 1999 were $8.3 million. 11 12 First quarter 2000 revenues for the Company's B-to-B e-commerce services operation increased by $5.8 million from $0.7 million in 1999 to $6.5 million for the first quarter 2000. This reflects an increase in the third party client base for the Company's Internet order processing, customer care and shipping and distribution services. Cost of Sales and Operating Expenses. Cost of sales and operating expenses increased to 67.8% of revenues for the thirteen weeks ended March 25, 2000 compared to 64.1% of revenues for the comparable period in 1999. The increase is primarily due to higher distribution and systems development costs, which include higher consulting and facility/equipment rental expenses primarily related to the Company's strategic initiative to expand the infrastructure of its B-to-B services operation, and higher postage expense. This is partially offset by a decrease in the Company's cost of merchandise, a higher percentage of which is now internationally sourced at lower costs, and the inclusion of lower margin discontinued catalogs in the 1999 results. Selling Expenses. Selling expenses decreased to 24.6% of revenues for the thirteen weeks ended March 25, 2000 from 25.0% for the comparable period in 1999, primarily due to a higher revenue base derived from the Company's B-to-B services operation as well as lower catalog preparation costs. This was partially offset by lower catalog productivity primarily due to an increase in prospecting which traditionally has lower response rates. General and Administrative Expenses. General and administrative expenses were 13.7% of revenues for the thirteen weeks ended March 25, 2000 versus 11.3% of revenues for the comparable period in 1999. The 2.4% increase reflects higher professional and consulting fees attributable to the Company's e-commerce related strategic initiatives, and higher personnel related expenses. Depreciation and Amortization. Depreciation and amortization increased to 1.9% of revenues for the thirteen weeks ended March 25, 2000 from 1.8% for the comparable period in 1999. Loss from Operations. The Company's loss from operations increased by $7.5 million to $(10.4) million for the thirteen-weeks ended March 25, 2000 from a loss of $(2.9) for the comparable period in 1999. The Company's results are comprised of the following segments: - - Direct Commerce: Loss from operations of $(0.3) million for the thirteen-weeks ended March 25, 2000 compares to income from operations of $0.7 million for the thirteen-weeks ended March 27,1999. The $1.0 million decrease is primarily due to higher merchandise postage, the introductory costs of the Turiya and Company Kids catalogs, and Internet advertising test programs, partially offset by higher demand for the Company's core catalog offerings. - - Business-to-Business ("B-to-B") Services: Loss from operations of $(7.8) million for the thirteen-weeks ended March 25, 2000 compares to a loss from operations of $(3.6) million for the thirteen-weeks ended March 27,1999. The $4.2 million increase is primarily due to higher distribution and systems development costs (including higher consulting and facility/equipment rental expenses) primarily related to the Company's strategic initiative to expand the infrastructure of its B-to-B services operation. This was partly offset by higher earnings resulting from an increase in Internet order processing, customer care and shipping and distribution services provided to the Company's expanded third party Internet client base. 12 13 - - All Other: Loss from operations of $(2.3) million for the thirteen-weeks ended March 25, 2000. This reflects the 2000 inclusion of $1.8 million of certain corporate level general and administrative expenses ($0.8 million of similar expenses were included in the direct commerce and B-to-B services segments during 1999) and 2000 losses related to the start-up of the Company's Always In Style joint venture. The 2000 general and administrative expenses include higher professional fees related to the Company's continuing strategic initiative to reposition itself as two separate business units, and higher personnel related expenses. Interest Expense, Net. Interest expense, net increased $1.9 million to $3.0 million for the thirteen weeks ended March 25, 2000 compared to the same period last year. This was due to debt issuance costs related to the March 2000 refinancing of the Company's credit facilities and higher average borrowings outstanding during 2000. Income Taxes. The Company recorded state tax provisions of $0.1 million and $0.2 million for the thirteen-week periods ended March 25, 2000 and March 27, 1999, respectively. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operations: During the thirteen weeks ended March 25, 2000, net cash used by operating activities of $13.7 million was primarily due to the funding of net losses incurred as a result of necessary spending for the continuing development and expansion of the Company's B-to-B services infrastructure. Cash was also used to fund an increase in prepaid catalog costs resulting from a planned increase in catalog circulation. Net cash provided by investing activities: During the thirteen weeks ended March 25, 2000, net cash provided by investing activities of $0.2 million was primarily due to proceeds of $0.8 million from the sale of the Company's investment in Blue Ridge Associates, partly offset by capital expenditures of $0.6 million. The capital expenditures were primarily for computer hardware and software in order to increase the functionality and capacity of the Company's integrated e-commerce systems platform. Net cash provided by financing activities: During the thirteen weeks ended March 25, 2000, net cash provided by financing activities of $14.0 million was primarily due to a net increase in total borrowings of $16.6 million. The additional borrowings were primarily used to fund the continuing development and expansion of the Company's business-to-business ("B-to-B") services operation, the payment of debt issuance costs of $1.9 million related to the March 2000 refinancing of the Company's credit facilities, and the payment of $0.9 million of cumulative dividends to the holders of the Series B Convertible Additional Preferred Stock. During March 2000, the Company utilized $24.0 million of borrowings under the amended Congress Credit Facility to reimburse UBS, AG for drawings on the letters of credit, which were due to expire on March 31, 2000, made by the trustees of the Term Financing Facility and the Industrial Revenue Bonds (see below). The Company also borrowed $5.0 million under the Richemont $25.0 million unsecured line of credit facility to fund its B-to-B services operation (see below). At March 25, 2000, the Company had $3.4 million in cash and cash equivalents compared with $2.8 million at December 25, 1999. Working capital and current ratios at March 25, 2000 were $19.6 million and 1.20 to 1 versus $18.0 million and 1.19 to 1 at December 25, 1999. 13 14 On March 24, 2000, the Company amended its credit facility with Congress Financial Corporation ("Congress") to provide the Company with a maximum credit line of up to $82.5 million (" the Congress Credit Facility"). The Congress Credit Facility, as amended, expires on January 31, 2004 and is comprised of a revolving loan facility, a $17.5 million Tranche A Term Loan and a $7.5 million Tranche B Term Loan. Total cumulative borrowings, however, are subject to limitations based upon specified percentages of eligible receivables and eligible inventory, and the Company is required to maintain $3.0 million of excess credit availability at all times. The Congress Credit Facility, as amended, is secured by all assets of the Company and places restrictions on the incurrence of additional indebtedness and on the payment of common stock dividends. Additionally, the Company is subject to certain financial covenants requiring it to maintain minimum levels of net worth and working capital, and achieve specified quarterly Earnings/(Loss) Before Interest, Taxes, Depreciation and Amortization ("EBITDA") targets. The amended Congress Credit Facility replaced the original $65.0 million revolving line of credit facility with Congress as well as the Company's $16.0 million Term Financing Facility and $8.0 million of Industrial Revenue Bonds. Both the Term Financing Facility and the Industrial Revenue Bonds were supported by letters of credit issued by UBS, AG and guaranteed by Richemont Finance SA ("Richemont"), a 48.2% beneficial owner of the Company's common stock, which letters of credit were scheduled to expire on March 31, 2000. The Company utilized $24.0 million of proceeds under the amended Congress Credit Facility to reimburse UBS, AG for drawings on the letters of credit made by the trustees of the Term Financing Facility and the Industrial Revenue Bonds, both of which were required to be redeemed upon the expiration of the letters of credit. As of March 25, 2000, the Company had $53.3 million of borrowings outstanding under the Congress Credit Facility comprised of $28.4 million under the revolving loan facility, and $17.4 million and $7.5 million of Tranche A Term Loans and Tranche B Term Loans, respectively. The Company may draw upon the Congress Credit Facility to fund working capital requirements as needed. On March 24, 2000, the Company entered into a $10.0 million unsecured line of credit facility (the "Richemont $10.0 million Line of Credit") with Richemont Finance SA ("Richemont"). The maximum amount available to be drawn under the Richemont $10.0 million Line of Credit (the "Maximum Amount") was initially $10.0 million and will be reduced on a dollar-for-dollar basis for each dollar of equity contributed to the Company or any of its subsidiaries after March 24, 2000 by Richemont or any subsidiary or affiliate of Richemont. If the excess availability under the Congress Credit Facility is less than $3.0 million, the Company will be required to borrow under the Richemont $10.0 million Line of Credit, and pay to Congress, the amount such that the excess availability under the Congress Credit Facility after the such payment will be $3.0 million. The Company may also borrow under the Richemont $10.0 million Line of Credit up to $5.0 million to pay trade creditors in the ordinary course of business. The Richemont $10.0 million Line of Credit will remain in place until the Congress Credit Facility is terminated or the Maximum Amount is reduced to zero. As of March 25, 2000, there were no borrowings outstanding under the Richemont $10.0 million Line of Credit. On March 1, 2000, the Company entered in a $25.0 million unsecured line of credit facility (the "Richemont $25.0 million Line of Credit") with Richemont to obtain the necessary funding from Richemont to continue the development and expansion of the Company's B-to-B services operation. The Richemont $25.0 million Line of Credit will mature on the earlier of December 30, 2000 or the date on which Richemont makes an equity infusion in the Company or any of the Company's subsidiaries (such earlier date, the "Maturity Date"). As of March 25, 2000, there were $5.0 million of borrowings outstanding under the Richemont $25.0 million Line of Credit. 14 15 Total cumulative borrowings, including financing under capital lease obligations as of March 25, 2000, aggregated $59.4 million, $50.7 million of which is classified as long-term. Remaining availability under the Company's credit facilities as of March 25, 2000 was $34.7 million ($38.1 million including cash on hand). The Company anticipates that it will be able to satisfy its ongoing cash requirements for the foreseeable future, primarily with cash flow from operations, supplemented by borrowings under the Congress and Richemont facilities. Events that may impact this include, but are not limited to, future events that may have the effect of reducing available cash balances (such as unexpected operating losses, or increased capital or other expenditures), as well as future circumstances that might reduce or eliminate the availability of external financing. SEASONALITY The revenues and business for both the direct commerce and B-to-B services operating segments are seasonal. The Company processes and ships more catalog orders during the 4th quarter holiday season than in any other portion of the year. Many of the Company's e-tail clients experience similar seasonal trends resulting in increased order processing during the holiday season. Accordingly, the Company, taken as a whole, recognizes a disproportionate share of annual revenue during the last three months of the year. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which the Company is required to adopt at the beginning of fiscal year 2001. SFAS No. 133 establishes new accounting and reporting standards for derivative financial instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The Company currently does not engage in derivative and hedging activities. The effect, if any, on the Company's financial statements has not yet been determined by the Company. 15 16 ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. 16 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 7. Contingencies, of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for a discussion of legal proceedings pending against the Company and its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 2000 annual meeting of stockholders was held in New York, New York on May 4, 2000. 129,401,128 shares of Common Stock, or 60.6% of the outstanding shares, were represented in person or by proxy. 1. The following twelve directors were elected to a one-year term expiring in 2001.
NUMBER OF SHARES ---------------------------------------- FOR WITHHELD ---------------------------------------- Ralph Destino 128,948,390 452,738 J. David Hakman 128,948,390 452,738 Rakesh K. Kaul 128,946,640 454,488 June R. Klein 128,948,123 453,005 Kenneth Krushel 128,948,390 452,738 Theodore H. Kruttschnitt 128,948,290 452,838 Shailesh J. Mehta 128,947,972 453,156 Jan P. du Plessis 128,948,390 452,738 Alan G. Quasha 128,948,390 452,738 Basil P. Regan 128,947,972 453,156 Howard M. S. Tanner 128,948,390 452,738 Robert F. Wright 128,948,390 452,738
2. Proposal to ratify - The 1999 Stock Option Plan for Directors: 118,202,452 shares voted in favor; 10,934,266 shares voted against; and 264,410 shares abstained. 3. Proposal to ratify - The 2000 Management Stock Option Plan: 118,972,058 shares voted in favor; 10,158,276 shares voted against; and 270,794 shares abstained. 4. Proposal to ratify - The 2000 Short-Term Incentive Plan for Rakesh K. Kaul: 126,647,099 shares voted in favor; 2,488,138 shares voted against; and 265,891 shares abstained. 5. Proposal to ratify - The 2000 Long-Term Incentive Plan for Rakesh K. Kaul: 124,848,536 shares voted in favor; 4,270,328 shares voted against; and 282,264 shares abstained. 6. Proposal to approve an amendment to the Stock Option Agreement dated August 23, 1996 with Rakesh K. Kaul: 125,889,237 shares voted in favor; 3,226,002 shares voted against; and 285,889 shares abstained. 7. The proposal to approve Arthur Andersen LLP as independent accountants for fiscal year 2000: 128,929,786 shares voted in favor; 248,836 shares voted against; and 222,506 shares abstained. 17 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Intentionally Omitted. 10.2 Unsecured Line of Credit and Promissory Note dated March 1, 2000 given by the Company to Richemont Finance, S.A. ("Richemont"). 10.3 Employment Agreement dated as of March 6, 2000 between the Company and Rakesh K. Kaul. 10.4 Fifteenth Amendment to Loan and Security Agreement dated as of March 24, 2000 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"), LWI Holdings, Inc. ("LWI"), Hanover Direct Virginia, Inc. ("HDVA"), Hanover Realty Inc. ("Hanover Realty"), The Company Store Factory, Inc., The Company Office, Inc., Keystone Internet Services, Inc., Tweeds, LLC, Silhouettes, LLC, Hanover Company Store, LLC and Domestications, LLC. 10.5 Subordination Agreement dated as of March 24, 2000, between Congress and Richemont. 10.6 Credit Agreement, dated as of March 24, 2000, by and among the Company, HDPA, Brawn, Gump's By Mail, Gump's, LWI, HDVA, Keystone Internet Services, Inc., Tweeds, LLC, Silhouettes, LLC, Hanover Company Store, LLC, Domestications, LLC and Richemont. 10.7 Subordination Agreement dated as of March 24, 2000, between Congress and Richemont. 10.8 Letter Agreement, dated as of March 24, 2000, between Richemont and Congress. 10.9 Amended and Restated Stock Option Agreement dated as of April 14, 2000 between the Company and Rakesh K. Kaul. 10.10 Stock Option Agreement dated as of April 14, 2000 between erizon, Inc. and Rakesh K. Kaul. 10.11 Hanover Direct, Inc. Key Executive Thirty-Six Month Compensation Continuation Plan. 10.12 Hanover Direct, Inc. Key Executive Twenty-Four Month Compensation Continuation Plan. 27 Financial Data Schedule. (b) Reports on Form 8-K On March 10, 2000, the Company filed a report on Form 8-K relating to the election of Basil P. Regan, a beneficial owner of approximately 20% of the Company's Common Stock, to the Company's Board of Directors. The election of Mr. Regan resulted in an increase in the number of members of the Board of Directors from 11 to 12. 18 19 SIGNATURES Pursuant to the requirements 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 By: /s/ Brian C. Harriss ------------------------------- Brian C. Harriss Senior Vice-President and Chief Financial Officer (On behalf of the Registrant and as principal financial officer) Date: May 9, 2000 19 EX-10.2 2 UNSECURED LINE OF CREDIT AND PROMISSORY NOTE 1 EXHIBIT 10.2 HANOVER DIRECT, INC. UNSECURED LINE OF CREDIT & PROMISSORY NOTE $25,000,000 New York, New York As of March 1, 2000 ALL AMOUNTS AT ANY TIME OWING BY THE MAKER OF THIS UNSECURED LINE OF CREDIT & PROMISSORY NOTE (THIS "NOTE") TO THE PAYEE HEREUNDER ARE SUBORDINATED IN RIGHT OF PAYMENT TO THE INDEFEASIBLE PAYMENT AND SATISFACTION IN FULL OF ALL PRESENT AND FUTURE OBLIGATIONS, LIABILITIES AND INDEBTEDNESS OF THE MAKER OF THIS NOTE TO CONGRESS FINANCIAL CORPORATION (AND ITS SUCCESSORS AND ASSIGNS), AS PROVIDED BY AND AS OTHERWISE SUBJECT TO THE SUBORDINATION AGREEMENT, DATED AS OF MARCH 24, 2000, BETWEEN THE PAYEE AND CONGRESS FINANCIAL CORPORATION. FOR VALUE RECEIVED, the undersigned, HANOVER DIRECT, INC., a Delaware corporation ("Borrower"), promises to pay to the order of RICHEMONT FINANCE, S.A., or its assigns ("Lender"), on or before the Maturity Date referred to below, TWENTY-FIVE MILLION DOLLARS ($25,000,000), or such lesser amount as shall then be outstanding under this Line of Credit and Promissory Note as evidenced by Lender's record of the loans made hereunder. Fees: The Borrower will pay the Lender a monthly fee of $62,500 each month in arrears from the date of the Note up to the Maturity Date (as defined below). Interest: The Borrower will pay the Lender monthly interest at a rate of 0.583% on the average monthly balance outstanding in arrears. All outstanding principal, fees and interest not previously paid shall be due and payable in full on the date (the "Maturity Date") which is the earlier to occur of December 30, 2000 and the date on which Lender makes an equity infusion in Borrower or any of Borrower's subsidiaries. Principal, fees and interest on this Note are payable in lawful currency of the United States of America to the Lender at its principal office at 35 Boulevard, Prince Henri, L1724 Luxemborg, or as such other place as may be designated by Lender, in same day funds. A. REPRESENTATIONS AND WARRANTIES 1. Borrower is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Borrower has the corporate power and authority to execute and deliver this Note and to perform its obligations hereunder. 2 2. This Note has been duly authorized by all necessary corporate action on the part of Borrower, and this Note constitutes a legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3. The execution, delivery and performance by Borrower of this Note will not (i) violate, or result in the creation of any lien in respect of any property of Borrower under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or instrument by which Borrower is bound, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or governmental authority applicable to Borrower or (iii) violate any provision of any statute or other rule or regulation of any governmental authority applicable to Borrower. 4. No approval, consent, waiver, authorization, registration, declaration or filing by, from or with any governmental authority or other person or entity is required in connection with the execution, delivery or performance by Borrower of this Note. B. COVENANTS 1. Borrower shall at all times maintain its corporate existence and shall not merge or consolidate with any other entity (unless Borrower shall be the survivor) without Lender's consent. 2. Borrower shall provide to Lender such information about its assets, liabilities and business as Lender shall from time to time reasonably request, including, without limitation, financial statements of Borrower and its subsidiaries. C. EVENTS OF DEFAULT An "Event of Default" shall exist under this Note if any of the following conditions or events shall occur and be continuing: (a) Borrower defaults in the payment of any principal, fees or interest on this Note when the same becomes due and payable, whether at maturity or by declaration or otherwise; or 2 3 (b) Borrower defaults in the performance of any other obligation hereunder or any representation or warranty made by Borrower in this Note proves to have been false or incorrect in any material respect on the date as of which made; or (c) Borrower (i) is unable to pay, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or (d) A court or governmental authority of competent jurisdiction enters an order appointing, without consent by Borrower, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of Borrower, or any such petition shall be filed against Borrower. Upon the occurrence of an Event of Default, Lender may, at its option, declare the entire unpaid principal balance of, and all accrued fees and interest on, this Note to be immediately due and payable. If an Event of Default described in paragraph (c) or (d) above has occurred, this Note shall automatically become immediately due and payable. Upon this Note becoming due and payable, whether automatically or by declaration, this Note will forthwith mature and the entire unpaid principal amount hereof, plus all accrued and unpaid interest hereon, shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. D. MANDATORY REDUCTION; CONVERSION The amount Lender is required to lend to Borrower under this Note prior to the Maturity Date (the "Commitment Amount") is initially $25,000,000 and is subject to reduction in accordance with the following sentence. The Commitment Amount shall be reduced at the times of any rights offering by 3 4 Borrower, Hanover Brands, Inc. or erizon, inc. or any other equity offering(s) or equity private placement(s) of Capital Stock (as defined in the Credit Agreement) of any such companies after March 24, 2000 which offering or placement may take the form, in whole or in part, of a conversion of outstanding indebtedness under this Note to an Equity Interest (as defined in the Credit Agreement) of a Borrower or Guarantor (each, as defined in the Credit Agreement). The Commitment Amount shall be reduced by the net cash proceeds of such offering or placement, to the extent that such net cash proceeds are not required to reduce the Commitment Amount (as defined in the Credit Agreement) pursuant to Section 2.6 of the Credit Agreement, plus the dollar amount of such indebtedness converted. The "Credit Agreement" is that certain Credit Agreement among Borrower, certain affiliates of Borrower and Lender dated as of March 24, 2000, as amended from time to time. The contribution for an Equity Interest (as defined in the Credit Agreement) by the Lender may be contributed, at the Lender's option, by conversion of all or a designated portion of the principal amount of all advances made under the Note and then outstanding into such Equity Interest. E. GENERAL In addition to the foregoing, Lender may proceed to protect and enforce its rights hereunder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or by law or otherwise. Lender or its assignee may assign this Note to any person or entity without Borrower's consent. Lender or its assignee shall be entitled to apply this Note in payment of the price payable in respect of any equity infusion by Lender in erizon. Failure of Lender to exercise any of its rights and remedies shall not constitute a waiver of the right to exercise the same at that or any other time. All rights and remedies of Lender shall be cumulative to the full extent permitted by law. The invalidity or unenforceability of any provision of this Note shall not impair the validity or enforceability of any other provision of this Note. This Note and the rights of Lender hereunder are subject to the terms of a Subordination Agreement between Lender and its subsidiaries and Congress Financial Corporation. 4 5 THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PROVISIONS. Accepted and Agreed to: By Hanover Direct, Inc. Name: /s/ Brian C. Harriss Print Name: Brian C. Harriss Title: SVP & CFO By Richemont Finance S.A. Name: /s/ Jan P. duPlessis Print Name: Jan P. duPlessis Title: Director Name: /s/ Alan Grieve Print Name: Alan Grieve Title: Director 5 EX-10.3 3 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of March 6, 2000 between HANOVER DIRECT, INC., a Delaware corporation (the "Company"), and Rakesh K. Kaul (the "Executive"). WHEREAS, Company desires to continue retaining the services of Executive and Executive desires to continue providing services to Company; WHEREAS, Company and Executive desire to formalize the terms and conditions of Executive's continued employment with Company. NOW, THEREFORE, in consideration of the promises and the mutual covenants and agreements set forth herein, the Company and the Executive agree as follows: 1. TERM. The employment of Executive by Company shall be for a period of thirty-six (36) months commencing on the date of this Agreement (the "Employment Period"). On the first annual anniversary of the date of this Agreement, and on each annual anniversary thereafter, the Employment Period shall be extended by twelve (12) months unless, at least ninety (90) days prior to such annual anniversary, either party has delivered to the other party written notice that the period of employment will terminate at the expiration of the then existing Employment Period, including any previous extensions. 2. DUTIES. During the Employment Period, Executive shall continue to serve as Chief Executive Officer of Company and maintain his current offices at each of its wholly-owned subsidiaries. During the Employment Period, Executive shall continue to serve as a member of the Company's Board of Directors. Executive shall have the full authority customary to a Chief Executive Officer's office to manage the Company, subject to the policies and direction of the Board. The Executive shall devote his full working time and effort during the Employment Period exclusively to the performance of his duties hereunder and to the furtherance of the best interests of the Company. During the Employment Period, the Executive shall not undertake any business or professional activity except for the benefit of the Company or engage in any business or profession other than the rendition of management services for and on behalf of the Company and the performance of the other duties herein prescribed unless the Company shall consent thereto in advance in writing. Nothing in this Section 2 shall be interpreted as precluding the Executive from acting as a volunteer for, or serving on the boards of, non-profit corporations or trusts. Notwithstanding the foregoing, during the Employment Period and subject to the same terms and conditions of this Agreement, the Board of Directors may at its discretion assign Executive to be Chief Executive Officer solely of erizon, Inc. provided that (a) the Company's stock in or the assets of Hanover Brands, Inc. have been sold, assigned or otherwise transferred; and (b) erizon, Inc. is a public company at the 1 2 time of such assignment or, if not, erizon, Inc. is using its best efforts to cause it to become a public company within 180 days of such assignment. In the event of such assignment, (i) Executive shall have the full authority customary to a chief executive officer's office to manage erizon, Inc. subject to the policies and direction of its Board of Directors; (ii) Executive shall be appointed to the Executive Committee of the Company's Board of Directors; and (iii) Executive shall report directly to the Board of Directors of erizon, Inc. In the event of Executive's assignment to erizon, Inc., erizon, Inc. shall assume all of the Company's obligations hereunder. Until the conditions set forth in (a) and (b) of this Section 2 have been met, Executive agrees that, at the request of the Board of Directors of the Company in its sole discretion, he shall serve as Chief Executive Officer of both the Company and erizon, Inc. under the terms set forth in this Agreement. 3. SALARY. As compensation for his services hereunder, the Company shall continue to pay the Executive a base salary at the annual rate of $597,300 ("Base Salary"), payable in accordance with the regular payroll procedures of the Company. Such Base Salary shall be subject to annual review, but shall not be decreased below $597,300. 4. 2000 SHORT-TERM INCENTIVE PLAN. During the Term, the Executive shall participate in the Short-Term Incentive Plan for Rakesh K. Kaul (the "2000 Short-Term Plan"), attached hereto as EXHIBIT 1, subject to shareholder approval of such plan. 5. 2000 LONG-TERM INCENTIVE PLAN. (a) During the Term, the Executive shall participate in the 2000 Long-Term Incentive Plan for Rakesh K. Kaul (the "2000 Long-Term Plan"), attached hereto as EXHIBIT 2, subject to shareholder approval of such plan. (b) Except as provided in Section 5 of the erizon Option Agreement (Attachment A to Exhibit 2 hereto), the Executive agrees that there will be no disposition of all or any part of shares of common stock of the Company or erizon, Inc. (collectively "Common Stock"), or of any interest or interests therein, unless and until such disposition has been registered under the Securities Act of 1933, as amended (the "Act"), or the Company or erizon, Inc. receives an opinion of its counsel that registration under the Act is not required in connection with such disposition. The Executive agrees that unless such shares have been registered under the Act, the certificate or certificates to be issued representing shares of Common Stock acquired pursuant to this Section 5 will conspicuously bear a legend substantially as follows: The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares have been acquired for investment and may not be sold. transferred, pledged, hypothecated, or otherwise disposed of in the absence of an effective registration statement for the shares under the Securities Act of 1933 or an opinion of counsel to the company that registration is not required under said Act. 2 3 Notwithstanding the foregoing, Company agrees as follows: (i) All shares underlying the Option provided for in the erizon Option Agreement (Attachment A to Exhibit 2 hereto), shall be registered within ninety (90) days of erizon, Inc. becoming eligible to use an S-8 or other similar form; and (ii) All shares underlying the Option provided for in the Amended and Restated Closing Price Option Agreement (Attachment B to Exhibit 2 hereto) as well as any shares underlying options previously granted to Executive by the Company, shall be registered within ninety (90) days of the execution of this Agreement. (c) The Company shall grant the Executive "piggyback" rights and a demand registration right with respect to shares of Common Stock acquired pursuant to this Section 5, as set forth in a Registration Rights Agreement in substantially the form set forth in EXHIBIT 3. (d) Within 30 days after each date as of which any stock option granted under Section 5 of the 2000 Long-Term Plan (regarding the Closing Price Option) vests with respect to all or a portion of the shares of Common Stock of the Company covered by such option, the Company shall pay the Executive an additional cash amount equal to the number of shares of Common Stock with respect to which such option became vested on such vesting date multiplied by the excess of (i) the lesser of the option price of such option or the fair market value on such vesting date of a share of Common Stock, over (ii) $1.03. (e) An assignment of Executive to erizon, Inc. as provided for in Section 2 of this Agreement shall not constitute a termination of Executive's employment within the meaning of the 2000 Long-Term Plan or Attachment A and B thereto or within the meaning of the agreements set forth in Section 10 of this Agreement. 6. BENEFIT PLANS. During the Term, the Executive (and, to the extent provided under the terms of such plans, members of his family) shall be eligible to participate in the Company's medical, dental, life insurance, and retirement plans offered to senior executives ("Benefits"), subject to the terms of such plans as are in effect from time to time and provided that nothing herein shall obligate Company to adopt any particular plans nor maintain any such plans. 7. TERMINATION OF EMPLOYMENT. In the event of a termination of the Executive's employment during the Employment Period except in connection with or following a Change of Control as such term is defined in the Hanover Direct, Inc. Key Executive Thirty-Six Month Compensation Continuation Plan ("Change of Control Plan"), he shall be entitled to compensation and benefits on and after the date of such termination only as provided in this Section 7, the 2000 Short-Term Plan and the 2000 Long-Term Plan and under the terms of any prior agreement still in effect on the date of 3 4 termination as set forth in Section 10, or pursuant to the terms of any benefit plan maintained by Company and in which Executive is a participant or a beneficiary at the time of his termination. An assignment of Executive to erizon, Inc. as provided for in Section 2 of this Agreement shall not constitute a termination of employment within the meaning of this Section 7. (a) In the event of a termination of Executive's employment for Cause during the Employment Period, Executive's Base Salary, entitlement to a short-term bonus under the 2000 Short-Term Plan and Benefits shall cease as of the date of termination. The Executive shall be entitled to receive, to the extent not previously paid, Base Salary through the date of termination and any short-term bonus that is payable pursuant to the 2000 Short-Term Plan for the year preceding the year of termination, but shall not be entitled to any bonus for the year in which such termination occurs. (b) In the event of a termination of the Executive's employment during the Employment Period by Company without Cause or by Executive within ninety (90) days of an occurrence constituting Good Reason, Executive shall be entitled as a severance benefit for a 24-month period commencing on the date of such termination to (i) a continuation of his Base Salary (at the rate in effect immediately prior to such termination), payable in monthly installments, (ii) continued participation in the Benefit plans of Company to the same extent and on the same term as he participated immediately prior to the date of termination and consistent with the terms of such plans, (iii) an amount equal to two times the greater of (x) a short term bonus calculated pursuant to the 2000 Short-Term Plan as if Company had met 100% of its target for the year of termination or (y) the average of the short-term bonus amounts paid or payable to Executive pursuant to the 2000 Short-Term Plan for the two years preceding the year of termination, payable in 24 monthly installments; (iv) to the extent not previously paid, the short-term bonus payable pursuant to the 2000 Short-Term Plan for the year preceding the year of termination, and (v) for the year of termination a short-term bonus calculated pursuant to the 2000 Short-Term Plan as if the Company had met 100% of its target for such year, but pro-rated to reflect the portion of such year during which the Executive was employed payable within thirty (30) days of the termination date. (c) In the event of a termination of the Executive's employment during the Employment Period due to the death or Disability of Executive, Executive's Base Salary and Benefits shall cease as of the date of termination. The Executive (or, in the event of his death, his estate) shall be entitled to receive, to the extent not previously paid, the short-term bonus payable pursuant to the 2000 Short-Term Plan for the year preceding the year of termination and for the year of termination a short-term bonus calculated pursuant to the 2000 Short-Term Plan as if the Company had met 100% of its target for such year, but pro-rated to reflect the portion of such year during which the Executive was employed payable within thirty (30) days of the termination date. In addition, if Executive is terminated due to death or Disability, Company will provide disability and life insurance to Executive or, if applicable, his estate pursuant to the terms of the applicable plans. 4 5 (d) For purposes of this Agreement, the term Cause shall mean (i) misappropriating any funds or property of the Company, (ii) attempting to obtain any personal profit from any transaction in which the Executive has an interest that is adverse to the interest of the Company, other than a transaction disclosed to and approved by the Company, (iii) the Executive's willful and continuing neglect or refusal to perform his duties pursuant to this Agreement which is not remedied promptly by Executive after receipt of written notice thereof given by Company, (iv) the commission by the Executive of any material act of misconduct or dishonesty or any wrongful act which has a direct, substantial and adverse effect on the Company's business or reputation, or (v) Executive's conviction of a felony. (e) For purposes of this Agreement, the term Good Reason shall mean (i) the assignment to Executive of any duties inconsistent in any respect with Executive's position (including status, offices, titles and reporting requirements), authority or duties or responsibilities as contemplated by Section 2 of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial or inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by the Executive and also excluding Company's exercise of its discretion to reassign Executive as provided for in Section 2 of this Agreement; (ii) any failure of the Company to comply with any of the provisions of Sections 3, 4, 5 or 6 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by the Executive; (iii) a relocation of the Executive's principal office and/or Company's headquarters to a location that is more than fifty (50) miles from its present location without the Executive's prior written consent; (iv) any purported termination by the Company of Executive's employment other than as expressly permitted by this Agreement; or (v) either (a) the Company or (b) erizon, Inc. (if Executive has been assigned to erizon, Inc. as provided for in Section 2), has ceased to be a public company and has become a private company, provided that Good Reason shall not exist if this change was the result of a buyout by the then existing principal shareholders or management group and Executive was a principal shareholder or member of such management group. (f) For purposes of this Agreement, the term Disability shall mean the inability of Executive to perform the essential duties of his position on a full-time basis for a period of 180 days (whether or not consecutively) out of 365 days as a result of incapacity due to mental or physical illness. (g) In order to be eligible for the payments and benefits as set forth in Section 7(b), (i) Executive must execute and deliver to Company a general release in favor of the Company, excepting statutory contribution and indemnity rights to which Executive is entitled, and (ii) must be and remain in material compliance with his obligations under the Non-Competition and Confidentiality Agreement. 5 6 Except as expressly provided for in this Section 7(g), in the event Company deems that Executive has breached the obligations set forth in the Non-Competition and Confidentiality Agreement attached as Exhibit 4 in a material respect, the payments and benefits provided for in Section 7(b) shall continue until such time as there has been a Final Determination that Executive has materially breached the Non-Competition and Confidentiality Agreement. In the event of a Final Determination that Executive has materially breached the Non-Competition and Confidentiality Agreement, all payments and benefits under Section 7(b) shall cease immediately and Executive shall reimburse the Company for all payments and the value of the benefits provided to Executive under Section 7(b), with interest calculated at the Prime Rate as announced in the eastern edition of the Wall Street Journal on the last business day immediately preceding the Final Determination, from the date the breach occurred, or if continuing in nature the date such breach commenced, through the date of the Final Determination. Notwithstanding the foregoing, in the event Company deems that Executive has breached Section 5 of the Non-Competition and Confidentiality Agreement in a material respect, the Company may at its discretion cease making the payments and providing the benefits as set forth in Section 7(b) until a Final Determination. In the event of a Final Determination that Executive did not breach Section 5 of the Confidentiality and Non-Competition Agreement in a material respect, the Company shall pay to Executive an amount equal to the payments and the value of the benefits to which Executive was entitled under Section 7(b), with interest calculated at the Prime Rate as announced in the eastern edition of the Wall Street Journal on the last business day immediately preceding the Final Determination, from the date such payments and benefits ceased through the date of the Final Determination. As used herein, a "Final Determination" shall mean (i) a judgment of any court, if no appeal is pending from such judgment and if the time to appeal therefrom has elapsed, (ii) a determination by an arbitrator in any arbitration proceedings, if there is not pending any motion to set aside such determination and if the time within which to move to set aside such determination has elapsed, or (iii) a written acknowledgement signed by Executive. 8. COVENANTS OF THE EXECUTIVE. Executive's continued employment is conditioned upon his execution of the Non-Competition and Confidentiality Agreement attached as EXHIBIT 4. 9. SEVERABILITY. If any term or provision of this Agreement shall be determined to be invalid or unenforceable to any extent or in any application, the remainder of this Agreement, and the remainder of such term or provision except to such extent or in such application, shall not be affected thereby, and each term and provision of this Agreement shall be enforced to the fullest extent and in the broadest application permitted by law. 6 7 10. ENTIRE AGREEMENT. This Agreement and attachments hereto constitute the entire Agreement between the parties pertaining to the subject matter contained herein and supersede all prior and contemporaneous agreements, representations and understandings of the parties with respect to the subject matter hereof, including without limitation, the Employment Agreement, dated as of March 6, 1996, between the Company and Executive and the Closing Price Option, dated as of August 23, 1996, between the Company and Executive. Notwithstanding the foregoing, this Agreement shall have no effect on and shall not supercede the following agreements: Registration Rights Agreement, dated as of August 23, 1996, between the Company and Executive; Tandem Loan in the principal amount of $1,047,562, payable to the Company; Tax Note due August 23, 2001 in the principal amount of $211,729, payable to the Company; Pledge Agreement, dated as of August 23, 1996, from the Executive to and for the benefit of the Company; Tandem Option Agreement, dated as of August 23, 1996 between the Company and Executive; Performance Year Option Agreement, dated as of August 23, 1996, between the Company and Executive; Six-Year Stock Option Agreement, dated as of August 23, 1996, between NAR Group and Executive; Seven-Year Stock Option Agreement dated as of August 23, 1996; Eight-Year Stock Option Agreement, dated as of August 23, 1996, between NAR and Executive; Nine-Year Stock Option Agreement, dated as of August 23, 1996, between NAR and Executive. No provision of this Agreement may be altered or waived except in a writing executed by both parties hereto. 11. BINDING EFFECT AND ASSIGNABILITY. The rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company. The rights and obligations of the Executive hereunder may not be assigned or alienated by the Executive. 12. ATTORNEY'S FEES. Company shall pay Executive's reasonable legal fees in full in the event that he must seek legal counsel to enforce any of his rights under this Agreement, provided that before he retains legal counsel he must notify the Company of any alleged failure to abide by the terms of this Agreement and, to the extent the matter is subject to cure, provide the Company with a reasonable opportunity to cure. 13. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the internal substantive laws of the State of New Jersey without giving effect to the conflict of law rules thereof. 14. 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. 7 8 IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the day and year first above written. HANOVER DIRECT, INC. /s/ Ralph Bulle ---------------------------------- By: Ralph Bulle Title: Senior Vice President /s/ Curt Johnson ---------------------------------- By: Curt Johnson Title: Senior Vice President /s/ Rakesh K. Kaul ---------------------------------- Rakesh K. Kaul 8 EX-10.4 4 FIFTEENTH AMENDMENT TO LOAN & SECURITY AGREEMENT 1 EXHIBIT 10.4 FIFTEENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS FIFTEENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT, dated as of March 24, 2000, is entered into by and among CONGRESS FINANCIAL CORPORATION, a Delaware 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"), LWI HOLDINGS, INC., a Delaware corporation ("LWI"), HANOVER DIRECT VIRGINIA INC., a Delaware corporation ("HDV"), HANOVER REALTY, INC., a Virginia corporation ("Hanover Realty"), THE COMPANY STORE FACTORY, INC., a Delaware corporation ("TCS Factory"), THE COMPANY OFFICE, INC., a Delaware corporation ("TCS Office"), TWEEDS, LLC, a Delaware limited liability company ("Tweeds LLC"), SILHOUETTES, LLC, a Delaware limited liability company ("Silhouettes LLC"), HANOVER COMPANY STORE, LLC, a Delaware limited liability company ("HCS LLC"), DOMESTICATIONS, LLC, a Delaware limited liability company ("Domestications LLC"; and together with HDPI, Brawn, GBM, Gump's, LWI, HDV, Hanover Realty, TCS Factory, TCS Office, Tweeds LLC, Silhouettes and HCS LLC, each individually referred to herein as an "Existing Borrower" and collectively, as "Existing Borrowers"), and HANOVER DIRECT, INC., a Delaware corporation, ("Hanover"), AMERICAN DOWN & TEXTILE COMPANY, a Wisconsin corporation ("American Down"), D.M. ADVERTISING, INC., a New Jersey corporation ("DM Advertising"), SCANDIA DOWN CORPORATION, a Delaware corporation ("Scandia"), YORK FULFILLMENT COMPANY, INC., a Pennsylvania corporation ("York Fulfillment"), KEYSTONE LIQUIDATIONS, INC., a Delaware Corporation, formerly known as Tweeds of Vermont, Inc., HANOVER HOME FASHIONS GROUP, LLC, a Delaware limited liability company ("HHFG LLC"), KITCHEN & HOME, LLC, a Delaware limited liability company ("Kitchen & Home, LLC"), DOMESTICATIONS KITCHEN & GARDEN, LLC, a Delaware limited liability company ("Domestications K&G, LLC"), ENCORE CATALOG, LLC, a Delaware limited liability company ("Encore LLC"), CLEARANCE WORLD OUTLETS, LLC, a Delaware limited liability company ("Clearance World"), SCANDIA DOWN, LLC, a Delaware limited liability company ("Scandia Down, LLC"), ERIZON, INC., a Delaware corporation ("erizon, inc."), HANOVER BRANDS, INC., a Delaware corporation ("Hanover Brands"), ERIZON.COM, INC., a Delaware corporation ("erizon.com"), LACROSSE FULFILLMENT, LLC, a Delaware limited liability company ("LaCrosse, LLC"), SAN DIEGO TELEMARKETING, LLC, a Delaware limited liability company ("San Diego LLC"; each individually a "Guarantor" and collectively "Guarantor" and KEYSTONE INTERNET SERVICES, INC. ("Keystone Internet"). Each Existing Borrower, together with Keystone Internet shall hereinafter be referred to individually as a "Borrower" and collectively as "Borrowers". W I T N E S S E T H: WHEREAS, Existing 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 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 2 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 ("Seventh Amendment to Loan Agreement"), 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, the Tenth Amendment to Loan and Security Agreement, dated as of October 31, 1997, the Eleventh Amendment to Loan and Security Agreement, dated as of March 25, 1998, the Twelfth Amendment to Loan and Security Agreement, dated as of September 30, 1998, the Thirteenth Amendment to Loan and Security Agreement, dated as of September 30, 1998, Fourteenth Amendment to Loan and Security Agreement, dated as of February 28, 2000 (as so amended, the "Loan Agreement"), pursuant to which Lender has made loans and advances to Existing Borrowers; and WHEREAS, Existing Borrowers and Guarantors have requested that Keystone Internet become a Revolving Loan Borrower pursuant to the terms and conditions of the Loan Agreement, as amended hereby; and WHEREAS, Borrowers and Guarantors have requested that Lender, among other things (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 an additional term loan to TCS Factory, consolidate the principal amount of that term loan with the outstanding principal balance of the existing TCS Factory Term Loan, and agree to amend and restate the terms of the TCS Factory Term Loan as so consolidated, (d) make an additional term loan to TCS Office, consolidate the principal amount of that term loan with the outstanding principal balance of the existing TCS Office Term Loan, and agree to amend and restate the terms of the TCS Office Term Loan as so consolidated, (e) make an additional term loan to the Tranche B Term Loan Borrowers (as hereinafter defined) in the aggregate amount of $7,500,000, (f) make available Revolving Accounts Loans to certain Revolving Loan Borrowers in respect of Eligible Credit Card Receivables (as hereinafter defined) and of Eligible Fulfillment Contract Receivables, and (g) extend the Renewal Date to January 31, 2004; and WHEREAS, the parties to the Loan Agreement desire to enter into this Fifteenth Amendment to Loan and Security Agreement (this "Amendment") to evidence and effectuate such consents, amendments and agreements, and certain other amendments to the Financing Agreements relating thereto, in each case subject to the terms and conditions and to the extent 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 -2- 3 Agreement shall be deemed and is hereby amended to include, in addition and not in limitation, the following definitions: (i) "Capital Expenditures" shall mean (A) all expenditures for any fixed or capital assets or improvements, for all replacements, substitutions or additions thereto, which should be capitalized on a balance sheet in accordance with GAAP, whether acquired by way of purchase, capital or finance lease, increase product service charges, offset items or otherwise, plus (B) to the extent not included in clause (A), any expenditures for any fixed or capital assets or improvements in connection with the acquisition, construction, expansion or improvement of any present or future fulfillment center or warehouse facility owned, leased or otherwise used by Borrowers or Guarantors. (ii) "Consolidated Net Income" shall mean, with respect to any Person and its Subsidiaries for any period, the aggregate of the net income (loss) of such Person and its Subsidiaries, on a consolidated basis, for such period (excluding to the extent included therein any extraordinary and/or unusual and non-recurring gains) after deducting all charges which should be deducted before arriving at the net income (loss) for such period and, without duplication, after deducting the Provision for Taxes for such period, all as determined in accordance with GAAP; provided, that, (A) the net income of any Person that is not a wholly-owned Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid or payable to such Person or a wholly-owned Subsidiary of such Person; (B) except to the extent included pursuant to the foregoing clause, the net income of any Person accrued prior to the date it becomes a wholly-owned Subsidiary of such Person or is merged into or consolidated with such Person or any of its wholly-owned Subsidiaries or that Person's assets are acquired by such Person or by its wholly-owned Subsidiaries shall be excluded; and (C) the net income (if positive) of any wholly-owned Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such wholly-owned Subsidiary to such Person or to any other wholly-owned Subsidiary of such Person is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such wholly-owned Subsidiary shall be excluded. For the purposes of this definition, (1) net income excludes any gain (or loss) together with any related Provision for Taxes for such gain (or loss) realized upon the sale or other disposition of any assets that are not sold in the ordinary course of business (including, without limitation, dispositions pursuant to sale and leaseback transactions) or of any Capital Stock of such Person or a Subsidiary of such Person and any net income realized or loss incurred as a result of changes in accounting principles or the application thereof to such Person, (2) the term "Provision for Taxes" shall mean an amount equal to all taxes imposed on or measured by net income, whether Federal, State, Provincial, county or local, and whether foreign or domestic, that are paid or payable by any Person in respect of any period in accordance with GAAP, and (3) the term "Capital Stock" shall mean, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated) of such Person's capital stock at any time outstanding, and any and all rights, warrants or options exchangeable for or convertible into such capital stock (but excluding any debt security that is exchangeable for or convertible into such capital stock). (iii) "Credit Card Processor" shall mean any servicing or processing agent or any factor or financial intermediary who facilitates, services, processes or manages the credit authorization, billing transfer and/or payment procedures with respect to any of any Borrower's sales -3- 4 transactions involving credit card or debit card purchases by customers using credit cards or debit cards issued by any Credit Card Issuer, and shall include, without limitation, Paymentech and Capital One. (iv) "EBITDA" shall mean, as to any Person and its Subsidiaries, with respect to any period, an amount equal to: (A) the Consolidated Net Income of such Person and its Subsidiaries for such period determined in accordance with GAAP, plus (B) depreciation, amortization and other non-cash charges (including, but not limited to, imputed interest and deferred compensation) for such period (to the extent deducted in the computation of Consolidated Net Income of such Person), all in accordance with GAAP, plus (1) Interest Expense for such period (to the extent deducted in the computation of Consolidated Net Income of such Person), plus (2) charges for Federal, State, local and foreign income taxes for such period (to the extent deducted in the computation of Consolidated Net Income of such Person). (v) "Eligible Credit Card Receivables" shall mean Credit Card Receivables of Revolving Loan Borrowers which are and continue to be acceptable to Lender based on the criteria set forth below. In general, Credit Card Receivables shall be Eligible Credit Card Receivables if: (A) such Credit Card Receivables arise from the actual and bona fide sale and delivery of goods or rendition of services by such Revolving Loan Borrower in the ordinary course of the business of such Revolving Loan Borrower, which transactions are completed in accordance with the terms and provisions contained in any documents binding on such Revolving Loan Borrower or the other party or parties related thereto; (B) such Credit Card Receivables are not past due pursuant to the terms set forth in the Credit Card Agreements with the Credit Card Issuer or Credit Card Processor of the credit card or debit card used in the purchase giving rise to such Credit Card Receivables; (C) such Credit Card Receivables are neither Deferred Billing Receivables nor Installment Billing Receivables; (D) such Credit Card Receivables comply with the applicable terms and conditions contained in Section 6.12A of the Loan Agreement; (E) the chief executive office of the Credit Card Issuer or Credit Card Processor with respect to such Credit Card Receivables is located in the United States of America; (F) the Credit Card Issuer or Credit Card Processor with respect to such Credit Card Receivables has not asserted a counterclaim, defense or dispute and does not have, and does not engage in transactions which may give rise to, any right of setoff against such Credit Card Receivables (other than transactions in the ordinary course of the business of such Revolving Loan Borrower) and such Credit Card Issuer or Credit Card Processor has not setoff against amounts otherwise payable by such Credit Card Issuer or Credit Card Processor to such Revolving Loan Borrower for the purpose of establishing a reserve or collateral for obligations of such Revolving Loan Borrower to such Credit Card Issuer or Credit Card Processor; -4- 5 (G) there are no facts, events or occurrences which would impair the validity, enforceability or collectability of such Credit Card Receivables or reduce the amount payable or delay payment thereunder; (H) such Credit Card Receivables are subject to the first priority, valid and perfected security interest of Lender and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any liens except those permitted in the Loan Agreement; (I) Lender shall have received, in form and substance satisfactory to Lender, a Credit Card Acknowledgment duly authorized, executed and delivered by the Credit Card Issuer or Credit Card Processor for the credit card or debit card used in the sale which gave rise to such Credit Card Receivable, such Credit Card Acknowledgment shall be in full force and effect and the Credit Card Issuer or Credit Card Processor party thereto shall have complied with the terms thereof; (J) there are no proceedings or actions which are threatened or pending against the Credit Card Issuers or Credit Card Processors with respect to such Credit Card Receivables which might result in any material adverse change in the financial condition of any such Credit Card Issuer or Credit Card Processor; (K) such Credit Card Receivables are owed by Credit Card Issuers or Credit Card Processors deemed creditworthy at all times by Lender; (L) no default or event of default has occurred under the Credit Card Agreement of such Revolving Loan Borrower with the Credit Card Issuer or Credit Card Processor who has issued the credit card or debit card or handles payments under the credit card or debit card used in the sale which gave rise to such Credit Card Receivables, which default gives such Credit Card Issuer or Credit Card Processor the right to cease or suspend payments to such Revolving Loan Borrower, and no event shall have occurred which gives such Credit Card Issuer or Credit Card Processor the right to setoff against amounts otherwise payable to such Revolving Loan Borrower (other than for then current fees and chargebacks consistent with the current practices of such Credit Card Issuer or Credit Card Processor) or the right to establish reserves or establish or demand collateral and such Credit Card Agreements are otherwise in full force and effect; and (M) the Credit Card Issuer or Credit Card Processor has not sent any notice of default and/or notice of its intention to cease or suspend payments to Hanover or any Revolving Loan Borrower in respect of such Credit Card Receivables or to establish reserves or cash collateral for obligations of Hanover or any Revolving Loan Borrower to such Credit Card Issuer or Credit Card Processor. General criteria for Eligible Credit Card Receivables may be established and revised from time to time by Lender in its discretion. Any Credit Card Receivables which are not Eligible Credit Card Receivables shall nevertheless be part of the Collateral. (vi) "Eligible Fulfillment Contract Receivables" shall mean Fulfillment Contract Receivables created by Fulfillment Contract Borrowers which are and continue to be -5- 6 acceptable to Lender based on the criteria set forth below. In general, Fulfillment Contract Receivables shall be Eligible Fulfillment Contract Receivables if: (A) such Fulfillment Contract Receivables arise from the actual and bona fide sale and delivery of goods by such Fulfillment Contract Borrowers or rendition of services by Borrower in the ordinary course of its business which transactions are completed in accordance with the terms and provisions contained in any documents related thereto; (B) such Fulfillment Contract Receivables are not unpaid more than the sixty (60) days after the original maturity date of the invoice therefor or more than ninety (90) days after the date of the original invoice for them; (C) such Fulfillment Contract Receivables comply with the terms and conditions contained in Section 6.12A of the Loan Agreement; (D) such Fulfillment Contract Receivables do not arise from sales on consignment, guaranteed sale, sale and return, sale on approval, or other terms under which payment by the account debtor may be conditional or contingent; (E) the chief executive office of the account debtor with respect to such Fulfillment Contract Receivables is located in the United States of America or Canada; (F) such Fulfillment Contract Receivables do not consist of progress billings (such that the obligation of the account debtors with respect to such Fulfillment Contract Receivables is conditioned upon such Fulfillment Contract Borrower's satisfactory completion of any further performance under the agreement giving rise thereto), bill and hold invoices or retainage invoices; (G) the account debtor with respect to such Fulfillment Contract Receivables has not asserted a counterclaim, defense or dispute and does not have, and does not engage in transactions which may give rise to, any right of setoff or recoupment against such Fulfillment Contract Receivables (but the portion of the Fulfillment Contract Receivables of such account debtor in excess of the amount at any time and from time to time owed by such Fulfillment Contract Borrower to such account debtor or claimed owed by such account debtor may be deemed Eligible Fulfillment Contract Receivables); (H) there are no facts, events or occurrences which would impair the validity, enforceability or collectability of such Fulfillment Contract Receivables or reduce the amount payable or delay payment thereunder; (I) such Fulfillment Contract Receivables are subject to the first priority, valid and perfected security interest of Lender and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any liens except those permitted in the Loan Agreement; -6- 7 (J) neither the account debtor nor any officer or employee of the account debtor with respect to such Fulfillment Contract Receivables is an officer, employee, agent or other Affiliate of such Fulfillment Contract Borrower; (K) the account debtors with respect to such Fulfillment Contract Receivables are not any foreign government, the United States of America, any State, political subdivision, department, agency or instrumentality thereof, unless, if the account debtor is the United States of America, any State, political subdivision, department, agency or instrumentality thereof, upon Lender's request, the Federal Assignment of Claims Act of 1940, as amended or any similar State or local law, if applicable, has been complied with in a manner satisfactory to Lender; (L) there are no proceedings or actions which are threatened or pending against the account debtors with respect to such Fulfillment Contract Receivables which might result in any material adverse change in any such account debtor's financial condition; (M) such Fulfillment Contract Receivables of a single account debtor, other than KB Kids.com, LLC or its affiliates do not constitute more than ten (10%) percent of all otherwise Eligible Fulfillment Contract Receivables (but the portion of the Fulfillment Contract Receivables not in excess of such percentage may be deemed Eligible Fulfillment Contract Receivables ); (N) such Fulfillment Contract Receivables of KB Kids.com, LLC or its affiliates do not constitute more than fifty (50%) percent of all otherwise Eligible Fulfillment Contract Receivables (but the portion of the Fulfillment Contract Receivables not in excess of such percentage may be deemed Eligible Fulfillment Contract Receivables ); (O) such Fulfillment Contract Receivables are not owed by an Fulfillment Contract Receivables debtor who has Accounts unpaid more sixty (60) days after the original maturity date of the invoice therefor or more than ninety (90) days after the original invoice date for them which constitute more than fifty (50%) percent of the total Fulfillment Contract Receivables of such account debtor; (P) such Fulfillment Contract Receivables are owed by account debtors whose total indebtedness to such Fulfillment Contract Borrower does not exceed the credit limit with respect to such account debtors as determined by such Fulfillment Contract Borrower from time to time and as is reasonably acceptable to Lender (but the portion of the Fulfillment Contract Receivables not in excess of such credit limit may be deemed Eligible Fulfillment Contract Receivables); and (Q) such Fulfillment Contract Receivables are owed by account debtors deemed creditworthy at all times by such Fulfillment Contract Borrower consistent with its current practice and who are reasonably acceptable to Lender. General criteria for Eligible Fulfillment Contract Receivables may be established and revised from time to time by Lender in good faith based on an event, condition or other circumstance arising after the date hereof, or existing on the date hereof to the extent Lender has no written notice thereof from Fulfillment Contract Borrowers, which adversely affects or could reasonably be expected to -7- 8 adversely affect the Fulfillment Contract Receivables in the good faith determination of Lender. Any Fulfillment Contract Receivables which are not Eligible Fulfillment Contract Receivables shall nevertheless be part of the Collateral. (vii) "Excess Loan Availability" shall mean, at any time, the amount, if any, as determined by Lender, by which: (A) the amount of the Revolving Loans determined by Lender to be available to Revolving Loan Borrowers pursuant to the Revolving Loan Formulas (but not to exceed (1) in the case of each Revolving Loan Borrower, the applicable lending sublimits under the Loan Agreement and the other Financing Agreements, or (2) in the case of Revolving Loan Borrowers considered together, the Revolving Loan Limit) exceeds (B) the sum of (1) the amount of all outstanding and unpaid Obligations of Revolving Loan Borrowers, plus (2) the aggregate amount of all reserves established by Lender under the Loan Agreement and the other Financing Agreements. (viii) "Fulfillment Contract Borrower" shall mean Keystone Internet and such other Revolving Loan Borrowers acceptable to Lender that may provide fulfillment services pursuant to Fulfillment Contracts. (ix) "Fulfillment Contract Receivables" shall mean all present and future rights of a Fulfillment Contract Borrower to payment for goods sold or services performed pursuant to Fulfillment Contracts. (x) "Fulfillment Contract" shall mean an agreement between a Fulfillment Contract Borrower and a third party pursuant to which a Fulfillment Contract Borrower, among other things, will provide telemarketing, fulfillment and other services, including, without limitation, processing orders of customers of such third party, and warehousing and shipping merchandise of such third party to customers, which agreements include, without limitation, the agreements listed on Schedule A hereto. (xi) "Interest Expense" shall mean, for any period, as to any Person and its Subsidiaries, all of the following as determined in accordance with GAAP: (A) total interest expense, whether paid or accrued (including the interest component of Capitalized Lease Obligations for such period), including, without limitation, all bank fees, commissions, discounts and other fees and charges owed with respect to letters of credit, banker's acceptances or similar instruments, but excluding (1) amortization of discount and amortization of deferred financing fees and closing costs, (2) interest paid in property other than cash and (3) any other interest expense not payable in cash, minus (B) any net payments received during such period as interest income received in respect of its investments in cash and cash equivalents. -8- 9 (xii) "Net Amount of Eligible Credit Card Receivables" shall mean the gross amount of Eligible Credit Card Receivables, less discounts, fees and chargebacks and other amounts payable by Revolving Loan Borrowers to Credit Card Issuers or Credit Card Processors. (xiii) "Net Amount of Eligible Fulfillment Contract Receivables" shall mean the aggregate amount of regularly scheduled payments due to the Fulfillment Contract Borrower under the terms of the Fulfillment Contract giving rise to such Eligible Fulfillment Contract Receivables, exclusive of any amounts otherwise payable by such Fulfillment Contract Borrower in connection with the Fulfillment Contract and of any discounts, prepayments, fees, claims, credits and allowances of any nature at any time issued, owing or granted with respect to such Fulfillment Contract. (xiv) "Restated TCS Factory Term Note" shall mean the Amended and Restated Term Promissory Note, dated as of the date hereof, made by TCS Factory payable to the order of Lender in the original principal amount of $2,790,000, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (xv) "Restated TCS Office Term Note" shall mean the Amended and Restated Term Promissory Note, dated as of the date hereof, made by TCS Office payable to the order of Lender in the original principal amount of $945,000, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (xvi) "Richemont Credit Facilities" shall mean the credit facilities of Richemont made available to Hanover and Borrowers and Guarantors evidenced by the Richemont $10,000,000 Credit Agreements and the Richemont $25,000,000 Credit Agreements. (xvii) "Richemont $10,000,000 Call Agreement" shall mean the letter agreement, dated as of the date hereof, between Lender and Richemont, acknowledged by Hanover and Borrowers, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (xviii) "Richemont $10,000,000 Credit Agreements" shall mean the unsecured credit facility provided by Richemont to Hanover and Borrowers in the principal amount of up to $10,000,000 as set forth in the Revolving Loan Agreement, dated as of the date hereof, between Hanover and Richemont, and any notes, agreements, documents and instruments executed or delivered in connection therewith, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (xix) "Richemont $25,000,000 Credit Agreements" shall mean the unsecured credit facility provided by Richemont to Hanover in the principal amount of up to $25,000,000 as set forth in the Unsecured Line of Credit & Promissory Note, dated March 1, 2000, between Hanover and Richemont, and any agreements, documents and instruments executed or delivered in connection therewith, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (xx) "Second Restated Hanover Realty Term Note" shall mean the Second Amended and Restated Term Promissory Note, dated as of the date hereof, by Hanover Realty -9- 10 payable to the order of Lender in the original principal amount of $10,200,000, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (xxi) "Second Restated HDPI Term Note" shall mean the Second Amended and Restated Term Promissory Note, dated as of the date hereof, made by HDPI payable to the order of Lender in the original principal amount of $3,600,000, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (xxii) "Tranche B Term Loan Borrowers" shall mean HDPI, Brawn, GBM, Gump's, LWI, HDV, Hanover Realty, Tweeds LLC, Silhouettes LLC, Domestications LLC, HCS LLC, TCS Factory, TCS Office and Keystone Internet. (xxiii) "Tranche B Term Loan Participant" shall mean Ableco Finance LLC, a Delaware limited liability company, and its successors and assigns. (xxiv) "Tranche B Term Loan Participation Agreement" means the Participation Agreement between Participant and Lender, dated on or about the date hereof, as from time to time amended, extended, renewed, restated, supplemented or replaced. (xxv) "Tranche B Term Note" shall mean the Tranche B Term Promissory Note, dated as of the date hereof, made by the Tranche B Term Loan Borrowers payable to the order of Lender in the original principal amount of $7,500,000, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (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, the Installment Billing Loan Formula, the Credit Card Receivable Loan Formula and the Fulfillment Contract Receivable Loan Formula." (ii) Credit Card Acknowledgments. All references to the term "Third Party Credit Card Acknowledgment" in the Loan Agreement and the other Financing Agreements are hereby deleted and replaced with the term "Credit Card Acknowledgments" which shall mean, individually and collectively, the agreements by Credit Card Issuers or Credit Card Processors who are parties to Credit Card Agreements in favor of Lender acknowledging Lender's first priority security interest in the monies due and to become due to Borrowers (including, without limitation, credits and reserves) under the Credit Card Agreements, and agreeing to transfer all such amounts to the Blocked Accounts, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (iii) Credit Card Agreements. All references to the term "Third Party Credit Card Agreements" in the Loan Agreement and the other Financing Agreements are hereby -10- 11 deleted and replaced with the term "Credit Card Agreements" which mean all agreements now or hereafter entered into by a Borrower with any Credit Card Issuer or any Credit Card Processor, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (iv) Credit Card Issuer. All references to the term "Third Party Credit Card Issuer" in the Loan Agreement and the other Financing Agreements are hereby deleted and replaced with the term "Credit Card Issuer" which shall mean any person (other than Borrower) who issues or whose members issue credit cards, including, without limitation, MasterCard or VISA bank credit or debit cards or other bank credit or debit cards issued through MasterCard International, Inc., Visa, U.S.A., Inc. or Visa International and American Express, Discover, Diners Club, Carte Blanche and other non-bank credit or debit cards, including, without limitation, credit or debit cards issued by or through American Express Travel Related Services Company, Inc. and Novus Services, Inc. (v) Credit Card Receivables. All references to the term "Third Party Credit Card Receivables" in the Loan Agreement and the other Financing Agreements is hereby deleted and replaced with the term "Credit Card Receivables" which shall mean, collectively, all present and future rights of Borrower to payment from any Credit Card Issuer, Credit Card Processor, including, without limitation, all MasterCard/VISA Receivables or other third party arising from sales of goods or rendition of services to customers who have purchased such goods or services using a credit or debit card and all present and future rights of Borrower to payment from any Credit Card Issuer, Credit Card Processor or other third party in connection with the sale or transfer of Accounts arising pursuant to the sale of goods or rendition of services to customers who have purchased such goods or services using a credit card or a debit card, including, but not limited to, all amounts at any time due or to become due from any Credit Card Issuer or Credit Card Processor under the Credit Card Agreements or otherwise. (vi) Interest Rate. With respect to interest accruing on or after April 1, 2000 all references to the term "Interest Rate" in the Loan Agreement and the other 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 the Tranche B Term Loan, a rate of four and one quarter percent (4 1/4%) per annum in excess of the Prime Rate, but in no event less than thirteen percent (13%), (D) 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 (E) as to Eurodollar Rate Term Loans, a rate of three and one-half (3.5%) 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), (D) or (E) 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 -11- 12 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 (D) 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. (vii) Maximum Credit. 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 $82,500,000, less payments and pre-payments made in respect of the Tranche A Term Loans and the Tranche B Term Loan." (viii) Mortgages. 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 June 26, 1998, and the Second Mortgage Modification Agreement, dated as of the date hereof, (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 amended by Amendment No. 1 to Deed of Trust, Assignment and Security Agreement, dated as of June 26, 1998, and Amendment No. 2 to Deed of Trust, Assignment and Security Agreement, dated as of the date hereof, (c) the Mortgage and Security Agreement, dated as of September 30, 1998, by TCS Factory in favor of Lender with respect to the Real Property and related assets of TCS Factory located at 2929 Airport Road, La Crosse, Wisconsin, as amended by the Mortgage Modification Agreement, dated as of the date hereof and (d) the Mortgage and Security Agreement, dated as of September 30, 1998, by TCS Office in favor of Lender with respect to the Real Property and related assets of TCS Office located at 455 Park Plaza Drive, La Crosse, -12- 13 Wisconsin, as amended by the Mortgage Modification Agreement, dated as of the date hereof ." (ix) Participants. The term "Participant" contained in the Loan Agreement and the other Financing Agreements is hereby amended to include, in addition and not in limitation, the Tranche B Term Loan Participant. (x) Revolving Loan Borrowers. Section 1.117 of the Loan Agreement shall be deemed deleted in its entirety and replaced with the following: "1.117 "Revolving Loan Borrowers" shall mean, individually and collectively, HDPI, Brawn, GBM, Gump's, Tweeds LLC, Silhouettes LLC, HCS LLC, Domestications LLC, HDV, LWI and Keystone Internet." (xi) Revolving Loan Limit. 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) $82,500,000 minus (b) the sum of (i) the amount of outstanding Letter of Credit Accommodations at such time, (ii) the original principal amount of all of the Tranche A Term Loans, and (iii) the original principal amount of the Tranche B Term Loan." (xii) Tranche A Term Loans. All references to the "Term Loans" herein and in the Loan Agreement and the other Financing Agreements are hereby redesignated "Tranche A Term Loans" and shall be deemed amended to mean, individually and collectively, the Obligations evidenced by the Second Restated HDPI Term Note, the Second Restated Hanover Realty Term Note, the Restated TCS Factory Term Note and the Restated TCS Office Term Note. (c) Interpretation. All capitalized terms used herein and not defined herein shall have the meanings given to such terms in the Loan Agreement. 2. Assumption of Obligations; Amendments to Guarantees and Financing Agreements; (d) Keystone Internet hereby expressly (i) assumes and agrees to be directly liable to Lender, jointly and severally with the other Borrowers, for all Obligations under, contained in, or arising out of the Loan Agreement and the other Financing Agreements applicable to all Borrowers and as applied to Keystone Internet as a Borrower and Guarantor, (ii) agrees to perform, comply with and be bound by all terms, conditions and covenants of the Loan Agreement and the other Financing Agreements applicable to all Borrowers and as applied to Keystone Internet as a Borrower and Guarantor, with the same force and effect as if Keystone Internet had originally executed and been an original Borrower and Guarantor party signatory to the Loan Agreement and the other Financing Agreements, and (iii) agrees that Lender shall have all rights, remedies and interests, including security interests in and to the Collateral granted pursuant to the Loan Agreement and the other Financing Agreements, with respect to Keystone Internet and its properties and assets with the same force and effect as Lender has with respect to the other Borrowers and their respective assets and -13- 14 properties as if Keystone Internet had originally executed and had been an original Borrower and Guarantor party signatory to the Loan Agreement and the other Financing Agreements. (e) Each of the respective Guarantee and Waivers, dated November 14, 1995, made by the Existing Borrowers as of that date in their capacities as Guarantors, as heretofore amended (collectively, the "Borrower Guarantees") shall be deemed further amended to include Keystone Internet as an additional Guarantor party signatory thereto. Keystone Internet hereby expressly (i) assumes and agrees to be directly liable to Lender, jointly and severally with the other Borrowers signatories thereto and the Guarantors, for all Obligations as defined in the Borrower Guarantees, (ii) agrees to perform, comply with and be bound by all terms, conditions and covenants of the Borrower Guarantees with the same force and effect as if Keystone Internet had originally executed and been an original party signatory to each of the Borrower Guarantees, and (iii) agrees that Lender shall have all rights, remedies and interests with respect to Keystone Internet and its properties under the Borrower Guarantees with the same force and effect as if Keystone Internet had originally executed and been an original party signatory to each of the Borrower Guarantees. (f) Keystone Internet, in its capacity as Guarantor, hereby expressly and specifically ratifies, restates and confirms the terms and conditions of the Guarantee and Waiver, dated as of September 30, 1998, by Keystone Internet and the other Guarantor parties thereto in favor of Lender and its liability for all of the Obligations (as defined in such Guarantee), and all other obligations, liabilities, agreements and covenants in respect of the Existing Borrowers thereunder. 3. Tranche A Term Loans. (g) Restated HDPI Term Loan. (i) HDPI hereby acknowledges, confirms and agrees that as of the date hereof and immediately before giving effect to this Amendment, HDPI is indebted to Lender for the Obligations evidenced by the Restated HDPI Term Note in the principal amount of $3,600,000 (the "Existing HDPI Term Loan"), plus accrued fees and interest thereon. On the date hereof, subject to the terms and conditions contained herein, Lender is making an additional term loan to HDPI in the amount of $800,000, which, together with the Existing HDPI Term Loan Balance, shall be consolidated and evidenced by and be due and payable pursuant to the terms of the Second Restated HDPI Term Note. (ii) The Second Restated HDPI Term Note shall (i) supersede, amend and restate the Restated HDPI Term Note in its entirety and (ii) be secured by all of the Collateral. (iii) The amendment and restatement contained herein and in the Second Restated HDPI Term Note, shall not, 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 Financing Agreements, and the liens and security interests securing such Obligations shall not in any manner be impaired, limited, terminated, waived or released. (h) Restated Hanover Realty Term Loan. -14- 15 (i) Hanover Realty hereby acknowledges, confirms and agrees that as of the date hereof and immediately before giving effect to this Amendment, Hanover Realty is indebted to Lender for the Obligations evidenced by the Restated Hanover Realty Term Note in the principal amount of $10,200,000 (the "Existing Hanover Realty Term Loan"), plus accrued fees and interest thereon. On the date hereof, subject to the terms and conditions contained herein, Lender is making an additional term loan to Hanover Realty in the amount of $3,160,000, which, together with the Existing Hanover Realty Term Loan Balance, shall be consolidated and evidenced by and be due and payable pursuant to the terms of the Second Restated Hanover Realty Term Note. (ii) The Second Restated Hanover Realty Term Note shall (i) supersede, amend and restate the Restated Hanover Realty Term Note in its entirety and (ii) be secured by all of the Collateral. (iii) The amendment and restatement contained herein and in the Second Restated Hanover Realty Term Note, shall not, 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 Financing Agreements, and the liens and security interests securing such Obligations shall not in any manner be impaired, limited, terminated, waived or released. (i) Restated TCS Factory Term Loan. (i) TCS Factory hereby acknowledges, confirms and agrees that as of the date hereof and immediately before giving effect to this Amendment, TCS Factory is indebted to Lender for the Obligations evidenced by the TCS Factory Term Note in the principal amount of $2,790,000 (the "Existing TCS Factory Term Loan"), plus accrued fees and interest thereon. On the date hereof, subject to the terms and conditions contained herein, Lender is making an additional term loan to TCS Factory in the amount of $1,073,000, which, together with the Existing TCS Factory Term Loan Balance, shall be consolidated and evidenced by and be due and payable pursuant to the terms of the Restated TCS Factory Term Note. (ii) The Restated TCS Factory Term Note shall (i) supersede, amend and restate the TCS Factory Term Note in its entirety and (ii) be secured by all of the Collateral. (iii) The amendment and restatement contained herein and in the Restated TCS Factory Term Note, shall not, 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 Financing Agreements, and the liens and security interests securing such Obligations shall not in any manner be impaired, limited, terminated, waived or released. (j) Restated TCS Office Term Loan. (i) TCS Office hereby acknowledges, confirms and agrees that as of the date hereof and immediately before giving effect to this Amendment, TCS Office is indebted to Lender for the Obligations evidenced by the TCS Office Term Note in the principal amount of $945,000 (the "Existing TCS Office Term Loan"), plus accrued fees and interest thereon. On the -15- 16 date hereof, subject to the terms and conditions contained herein, Lender is making an additional term loan to TCS Office in the amount of $344,000, which, together with the Existing TCS Office Term Loan Balance, shall be consolidated and evidenced by and be due and payable pursuant to the terms of the Restated TCS Office Term Note. (ii) The Restated TCS Office Term Note shall (i) supersede, amend and restate the TCS Office Term Note in its entirety and (ii) be secured by all of the Collateral. (iii) The amendment and restatement contained herein and in the Restated TCS Office Term Note, shall not, 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 Financing Agreements, and the liens and security interests securing such Obligations shall not in any manner be impaired, limited, terminated, waived or released. 4. Tranche B Term Loan. (k) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, Lender shall, contemporaneously herewith, make a term loan to the Tranche B Term Loan Borrowers in the principal amount of $7,500,000 (the "Tranche B Term Loan"). The Tranche B Term Loan is (i) evidenced by the Tranche B Term Note in such original principal amount duly executed and delivered by the Tranche B Term Loan Borrowers to Lender concurrently herewith; (ii) to be repaid, together with interest and other amounts, in accordance with this Agreement, the Tranche B Term Note, and the other Financing Agreements; and (iii) secured by all of the Collateral; (l) All Obligations in respect of the Tranche B Term Loan shall be due and payable upon the earlier of (i) the termination of the Loan Agreement and the other Financing Agreements or (ii) March 24, 2003. 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 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; -16- 17 (ii) to each of the Installment Billing Borrowers, at its request, Revolving Loans 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 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; (iii) to each of the Revolving Loan Borrowers, at its request, Revolving Loans of up to seventy percent (70%) of its respective Net Amounts of Eligible Credit Card Receivables, or such greater or lesser percentages thereof as Lender shall, in its sole discretion, determine from time to time (the "Credit Card Receivable Loan Formula"); and (iv) to each of the Fulfillment Contract Borrowers, at its request, Revolving Loans of up to eighty percent (80%) of its respective Net Amounts of Eligible Fulfillment Contract Receivables, or such greater or lesser percentages thereof as Lender shall, in its sole discretion, determine from time to time (the "Fulfillment Contract Receivable Loan Formula")." 6. Revolving Accounts Loans. 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, Installment Billing Borrowers, Fulfillment Contract Borrowers and any other applicable Revolving Loan Borrowers shall not at any one time outstanding exceed $15,000,000. Lender shall have the right, from time to time, to establish and revise Revolving Accounts Loan sublimits for each Deferred Billing Borrower, Installment Billing Borrower, Fulfillment Contract Borrower and each other applicable Revolving Loan Borrower within the overall $15,000,000 sublimit applicable to all Revolving Accounts Loans." 7. Additional Condition Precedent to Revolving Loans. A new Section 3.3 of the Loan Agreement is hereby added immediately after Section 3.2 as follows: "3.3 Minimum Excess Loan Availability Requirement. Each Revolving Loan and each Letter of Credit Accommodation to be made on March __, 2000 and thereafter is subject to the prior or contemporaneous satisfaction of the additional condition precedent (which may be waived, in whole or in part, only by Lender in writing) that, as of the date of any such request for a Revolving Loan or Letter of Credit Accommodation, the sum, as determined by Lender, of Excess Loan Availability of Revolving Loans Borrowers plus the undrawn amounts under the Richemont $10,000,000 Credit Agreements shall be not less than $3,000,000 after giving effect to such Revolving Loan or Letter of Credit Accommodation." -17- 18 8. Fees. 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 the following additional fees: (m) Closing Fee. Borrowers shall pay to Lender, contemporaneously herewith, a closing fee in the amount of $1,250,000, which fee is fully earned as of the date hereof; provided, that Borrowers shall be entitled to a credit of $250,000 against such closing fee in respect of the commitment fee paid by Hanover in consideration of the issuance of the Commitment Letter, dated March 9, 2000, among Borrowers, Guarantors and Lender. (n) Tranche B Closing Fee. Tranche B Term Loan Borrowers shall pay to Lender, contemporaneously herewith, a closing fee in the amount of $150,000, which fee is fully earned as of the date hereof and may be charged into the loan account of any Tranche B Term Loan Borrower. (o) Tranche B Facility Fees. Borrowers shall pay to Lender an annual facility fee in respect of the Tranche B Term Loan of $75,000, for each year or part thereof during the Term of the Loan Agreement, which fee shall be fully earned and payable on each anniversary date of the Loan Agreement during the Term and for so long thereafter as any of the Obligations are outstanding and may be charged into the loan account of any Tranche B Term Loan Borrower. 9. No Prepayments of Tranche A and Tranche B Term Loans. Section 2.9(c) of the Loan Agreement is hereby deleted and replaced with the following: "[(c) Intentionally Omitted]" 10. Indebtedness. (p) Effective on the effectiveness of this Amendment, (i) Section 6.3(h) of the Loan Agreement is hereby deleted and such Indebtedness of Borrowers to UBS shall no longer be permitted other than obligations and liabilities under the UBS Agreements that expressly survive the termination thereof; provided, that, all such Indebtedness shall be subordinated in right of payment of Lender to receive the prior indefeasible payment in full of all Obligation as provided in Section 6.3(h) hereof remain subject to the terms and conditions of the Subordination Agreement, dated December 18, 1996, between Richemont and the Borrower and Guarantor parties thereto and (ii) Section 3 of the Seventh Amendment to Loan Agreement is hereby deleted and such contingent Indebtedness of Borrowers to UBS shall no longer be permitted other than obligations and liabilities under the UBS Agreements that expressly survive the termination thereof; provided, that, all such Indebtedness shall remain shall be subordinated in right of payment of Lender to receive the prior indefeasible payment in full of all Obligation as provided in Section 6.3(h) hereof remain subject to the terms and conditions of the Subordination Agreement, dated December 18, 1996. (q) Section 6.3 of the Loan Agreement is hereby amended by deleting the word "and" appearing at the end of Section 6.3(g), replacing the period with a semicolon and the word "and" appearing at the end of Section 6.3(h) and adding new Sections 6.3(i) and (j) immediately thereafter, as follows: -18- 19 "(i) unsecured Indebtedness of Borrowers and Guarantors to Richemont evidenced by the Richemont $10,000,000 Credit Agreements; provided, that, each of the following conditions are satisfied as determined by Lender: (i) if at any time Excess Loan Availability, as determined by Lender, is less than $3,000,000, Lender shall have the right to request and Richemont shall be obligated to remit proceeds of amounts that otherwise would be available under the Richemont $10,000,000 Credit Agreements directly to the Blocked Account as provided by the Richemont $10,000,000 Call Agreement to repay Obligations in an amount sufficient in Lender's discretion, such that Excess Loan Availability shall, after application of such payments to the Obligations, be at least $3,000,000; (ii) such Indebtedness and related obligations are subject to, and subordinated in right of payment to, the prior right of Lender to receive the prior indefeasible payment in full of the Obligations in accordance with the terms and conditions of the written subordination agreement, dated March 24, 2000, between Lender and Richemont related to such Indebtedness; (iii) Borrowers and Guarantors shall not, directly or indirectly, make any payments or prepayments of principal or interest in respect of such Indebtedness, or any expenses related thereto, except, that, (A) Borrowers and Guarantors may make regularly scheduled payments of interest to Richemont when due and a facility fee each month in the amount of $79,200 so long as no Event of Default or Incipient Default exists or has occurred and is continuing and (B) Borrowers and Guarantors may make from time to time payments of principal to Richemont in respect of such Indebtedness; provided, that, as to any such payment, each of the following conditions shall have been satisfied as determined by Lender: (1) Lender shall have received not less than five (5) Business Days' prior written notice of the intention of Borrowers or Guarantors to make such payment, which written notice shall set forth the amount of the payment intended to be made, the then current outstanding amount of principal and such other information with respect thereto as Lender may reasonably request, (2) as of the date of and after giving effect to any such payment, the Excess Availability of Borrowers on such date and for each of the immediately preceding thirty (30) consecutive days shall have been not less than $5,000,000, and (3) as of the date of any such payment and after giving effect thereto, no Event of Default or Incipient Default shall exist or have occurred and be continuing; (iv) Borrowers and Guarantors shall not, directly or indirectly, (A) amend, modify, alter or change the terms of the arrangements or any agreements with respect to such Indebtedness, or (B) redeem, retire, defease, purchase or otherwise acquire any such Indebtedness or set aside or otherwise deposit or invest any sums for such purpose, other than through the exercise by Richemont of the right to convert all or any part of such Indebtedness to common stock in accordance with the terms and conditions of the Richemont $10,000,000 Credit Agreements as in effect on the date of execution and delivery thereof and the written subordination agreement referred to in Section 6.3(i) hereof; -19- 20 and (v) Borrowers and Guarantors shall furnish to Lender all notices, demands or other materials in connection with such Indebtedness promptly after the receipt thereof by them or currently with the sending thereof by them or on their behalf, as the case may be; and (j) unsecured Indebtedness of Borrowers and Guarantors to Richemont evidenced by the Richemont $25,000,000 Credit Agreements; provided, that, each of the following conditions are satisfied as determined by Lender: (i) such Indebtedness and related obligations are subject to, and subordinated in right of payment to, the prior right of Lender to receive the prior indefeasible payment in full of the Obligations in accordance with the terms and conditions of the written subordination agreement, dated March 24, 2000, between Lender and Richemont related to such Indebtedness; (ii) Borrowers and Guarantors shall not, directly or indirectly, make any payments or prepayments of principal or interest in respect of such Indebtedness, or any expenses related thereto, except, that, Borrowers and Guarantors may make regularly scheduled payments of interest to Richemont when due and a facility fee each month in the amount of $62,500 so long as no Event of Default or Incipient Default exists or has occurred and is continuing; (iii) Borrowers and Guarantors shall not, directly or indirectly, (A) amend, modify, alter or change the terms of the arrangements or any agreements with respect to such Indebtedness, or (B) redeem, retire, defease, purchase or otherwise acquire any such Indebtedness or set aside or otherwise deposit or invest any sums for such purpose, other than through the exercise by Richemont of the right to convert all or any part of such Indebtedness to common stock in accordance with the terms and conditions of the Richemont $25,000,000 Credit Agreements as in effect on the date of execution and delivery thereof and the written subordination agreement referred to in Section 6.3(j) hereof; and (v) Borrowers and Guarantors shall furnish to Lender all notices, demands or other materials in connection with such Indebtedness promptly after the receipt thereof by them or currently with the sending thereof by them or on their behalf, as the case may be." 11. Additional Collateral Reporting. Section 6.18(a) of the Loan Agreement is hereby amended by adding new subsections (xiv) and (xv) immediately after subsection (xiii) as follows: "(xiv) Weekly (or more frequently if requested by Lender) reports on the Accounts of each Borrower and Guarantor in respect of Credit Card Receivables, including, without limitation, Accounts in respect of Deferred Billing Option Programs and Installment Billing Programs and other deferred billing and installment billing Accounts of Borrowers and Guarantors and monthly agings with respect to all other Accounts of each Borrower and -20- 21 Guarantor, including, as to the foregoing, the aggregate outstanding amounts, prepayments, accruals and returns and other credits. (xv) Weekly (or more frequently if requested by Lender), a schedule of all sales made, credits and collections on the Accounts of each Borrower and Guarantor in respect of all Fulfillment Contract Receivables of Borrowers and Guarantors and monthly agings with detail by each account debtors party to any Fulfillment Contracts of such Borrowers and all Fulfillment Contract Receivables of each Borrower and Guarantor, including, as to the foregoing, the aggregate outstanding amounts, prepayments, accruals and returns and other credits. (xvi) Borrowers shall upon the request of Lender furnish or cause to be furnished to Lender copies of all Fulfillment Contracts." 12. 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 Credit Card Receivables and all Eligible Fulfillment Contract Receivables". (b) As of the date hereof, all of the Fulfillment Contracts of Fulfillment Contracts Borrowers are set forth on Schedule A hereto. Borrowers shall furnish, or cause to be furnished, to Lender upon the execution and delivery of any Fulfillment Contract entered into by Fulfillment Contract Borrower, a true, correct and complete copy of such Fulfillment Contract. 13. Consolidated Working Capital. Section 6.19 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "6.19 Consolidated Working Capital. (a) 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: Period Amount (i) January 1997 through ($5,000,000) March 1997 (ii) April 1997 through ($-0-) November 1997 (iii) December 1997 ($10,000,000)" March 2000 -21- 22 (b) Hanover shall, commencing with the fiscal month ending April 2000 and for each fiscal month thereafter in any fiscal year thereafter, 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 such fiscal month for each such fiscal: Period Amount April $20,000,000 May $20,000,000 June $20,000,000 July $20,000,000 August $20,000,000 September $20,000,000 October $20,000,000 November $20,000,000 December $20,000,000 January $12,500,000 February $12,500,000 March $20,000,000" 14. Consolidated Net Worth. Section 6.20 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "6.20 Consolidated Net Worth. (a) 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 March 1997 (ii) April 1997 through $21,500,000 March 2000 (b) Hanover shall commencing with the fiscal month ending April 2000 and for each fiscal month thereafter in any fiscal year thereafter, 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 such fiscal month for each such fiscal: Period Amount April $34,000,000 -22- 23 May $34,000,000 June $34,000,000 July $30,000,000 August $30,000,000 September $30,000,000 October $30,000,000 November $30,000,000 December $37,500,000 January $37,500,000 February $37,500,000 March $34,000,000" 15. Capital Expenditures. A new Section 6.30 of the Loan Agreement is hereby added at the end of Section 6.29 as follows: "6.30 Capital Expenditures. Hanover and its Subsidiaries shall not, directly or indirectly, in any fiscal year of Hanover and its Subsidiaries make any Capital Expenditures of an aggregate amount not to exceed $5,000,000, plus the amount of any cash proceeds obtained by Hanover and its Subsidiaries from the sale of any Capital Stock or from subordinated indebtedness under the Richemont Credit Facilities other than proceeds of loans under the Richemont $10,000,000 Credit Agreements, in each case, to the extent permitted hereunder." 16. EBITDA. A new Section 6.31 of the Loan Agreement is hereby added at the end of Section 6.30 as follows: "6.31 EBITDA. (a) Hanover and its Subsidiaries shall not, as to any fiscal quarter commencing on April 1, 2000, permit EBITDA of Hanover and its Subsidiaries commencing on the first day of each fiscal quarter of Hanover and its Subsidiaries and ending on the last day of the applicable fiscal quarter set forth below on a cumulative nine month year-to-date ("YTD") basis beginning April 1, 2000 through and including December 31, 2000, to be less than the respective amount set forth below opposite such fiscal quarter end YTD period: Fiscal Quarter End YTD Periods Cumulative for Fiscal Year 2000 Minimum EBITDA (i) April 1 through June 30 ($1,250,000) (ii) April 1 through ($1,250,000) September 30 (iii) April through $7,527,000 December 31 -23- 24 (b) Hanover and its Subsidiaries shall not, as to any fiscal quarter during the fiscal year 2001 of Hanover and its Subsidiaries, permit EBITDA of Hanover and its Subsidiaries commencing on the first day of such fiscal year and ending on the last day of the applicable fiscal quarter set forth below on a cumulative year-to-date basis ("YTD"), to be less than the respective amount set forth below opposite such fiscal quarter end YTD period: Fiscal Quarter End YTD Periods Cumulative for Fiscal Year 2001 Minimum EBITDA (i) January 1 through ($ 1,000,000) March 31 (ii) January 1 through $ 2,525,000 June 30 (iii) January 1 through $ 5,555,000 September 30 (iv) January 1 through $17,812,000 December 31 (c) Hanover and its Subsidiaries shall not, as to any fiscal quarter during the fiscal year 2002 of Hanover and its Subsidiaries, permit EBITDA of Hanover and its Subsidiaries commencing on the first day of such fiscal year and ending on the last day of the applicable fiscal quarter set forth below on a cumulative year-to-date basis ("YTD"), to be less than the respective amount set forth below opposite such fiscal quarter end YTD period: Fiscal Quarter End YTD Periods Cumulative for Fiscal Year 2002 Minimum EBITDA (i) January 1 through ($ 1,000,000) March 31, 2002 (ii) January 1 through $ 2,525,000 June 30, 2002 (iii) January 1 through $ 5,555,000 September 30, 2002 (iv) January 1 through $17,812,000 December 31, 2002 (d) Hanover and its Subsidiaries shall not, as to the first fiscal quarter during the fiscal year 2003 of Hanover and its Subsidiaries, permit EBITDA of Hanover and its Subsidiaries commencing on the first day of such fiscal year and ending on the last day of the first fiscal quarter set forth below on a cumulative year- -24- 25 to-date basis ("YTD"), to be less than the respective amount set forth below opposite such fiscal quarter end YTD period: Fiscal Quarter End YTD Periods Cumulative for Fiscal Year 2002 Minimum EBITDA (i) January 1 through ($ 1,000,000) March 31, 2003 (e) provided, that, as to any applicable period in Section 6.31(a), (b), (c) or (d) , to the extent that Hanover and Borrowers shall have received any cash proceeds from the sale of any Capital Stock or from the proceeds of loans in respect of any subordinated indebtedness under the Richemont Credit Facilities other than proceeds of loans under the Richemont $10,000,000 Credit Agreements, in each case, to the extent permitted hereunder, then the amount of such cash proceeds shall be added back to EBITDA for purposes of determining cumulative EBITDA for the applicable period and for each subsequent quarterly period during the then-current fiscal year." 17. Excess Loan Availability Test. A new Section 6.32 of the Loan Agreement is hereby added at the end of Section 6.31 as follows: "6.32 Excess Loan Availability. (a) If at any time no amounts are available under the Richemont $10,000,000 Credit Agreements or the Richemont $10,000,000 Credit Agreements have been terminated or not renewed, Borrowers shall at all times thereafter maintain Excess Loan Availability of not less $3,000,000. (b) Upon receipt of any amounts remitted to Lender under the Richemont Credit Facilities or the Richemont $10,000,000 Call Agreement as provided hereunder, Lender may, at its option, either (i) apply such amounts to the repayment of the Obligations in such order and manner as Lender may determine subject to the right of Lender to establish a reserve against the Revolving Loans and Letter of Credit Accommodations available under the lending formulas in an amount equal to the amounts received pursuant to the Richemont Credit Facility or the Richemont $10,000,000 Call Agreement or (ii) hold any or all of the funds received by Lender pursuant to any of the loans as cash collateral, on terms and conditions acceptable to Lender. In such event Borrowers shall execute and deliver to Lender such other agreements with respect thereto as Lender may require. Borrowers do not have and shall not have any property or other interest in any of the loans under the Richemont $10,000,000 Credit Facilities or any amounts under the Richemont $10,000,000 Call Agreement. This Section 6.31(b) shall survive the repayment of the Obligations and the termination or non-renewal of this Agreement." -25- 26 18. Additional Events of Default. Section 7.1 of the Loan Agreement is hereby amended by replacing the period appearing at the end of Section 7.1(j) with a semicolon and the word "and" and adding a new Section 7.1(k) as follows: "(k) Richemont shall send notice that the Richemont $10,000,000 Call Agreement shall otherwise not be extended or renewed or shall cease to be in full force and effect except in accordance with their terms or shall be void or invalid or Richemont shall fail to make any advances under the Richemont Credit Facilities or remit any amounts to Lender pursuant to the Richemont $10,000,000 Call Agreement, as the case may be, in accordance with their terms, or deny it has any further liability or obligation thereunder or shall revoke, terminate or purport to revoke or terminate any of Richemont Credit Facilities or the Richemont $10,000,000 Call Agreement, or any injunctive relief or restraining order is sought or granted which does or would, if granted, limit or impair the right of Lender to request that payments be made pursuant to the Richemont $10,000,000 Call Agreement in accordance with the terms or retain any funds remitted to Lender thereunder, as the case may be." 19. 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, 2004 (the "Renewal Date"), and from year-to-year thereafter, unless sooner terminated pursuant to the terms hereof." (b) The first sentence of Section 9.1(f) of the Loan Agreement is hereby deleted and replaced with the following, effective with respect to any termination after the date hereof: "(f) If Lender terminates this Agreement or the other Financing Agreements after the occurrence and during the continuance of an Event of Default or at the request of Borrowers prior to the Renewal Date, in view of the impracticality and extreme difficulty of ascertaining actual damages, and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result thereof, Borrowers hereby agree to pay to Lender, upon the effective date of such termination, a fee (the "Early Termination Fee") in an amount equal to one-half of one percent ( 1/2%) of the Maximum Credit, if such termination is effective on or before January 30, 2004." 20. Costs and Expenses. Section 9.9 of the Loan Agreement is hereby amended by adding between the word "hereunder" and the comma appearing in the fifth line up from the last line of that Section, the following: "including, without limitation, the right to demand payment of all costs and expenses in connection with this Agreement and the other Financing Agreements, as provided by Section 9.2 hereof,". -26- 27 21. Use of Proceeds. Borrowers shall use the initial proceeds of the Revolving Loans, the additional advances of the Tranche A Term Loans and the Tranche B Term Loan provided by Lender hereunder only for: (a) payments to each of the other persons listed in the disbursement direction letter furnished by Borrowers to Lender on or about the date hereof, and (b) costs, expenses and fees in connection with the preparation, negotiation, execution and delivery of this Amendment and the other Financing Agreements. All other Loans made or Letter of Credit Accommodations provided by Lender to Borrowers pursuant to the provisions hereof shall be used by Borrowers only for general operating, working capital and other proper corporate purposes of Borrowers not otherwise prohibited by the terms of the Loan Agreement. 22. Exhibits. (a) Exhibits A, B-3, B-4, E, G, H-1, H-2 and H-3 to the Loan Agreement are hereby deleted in their entirety and replaced with the information set forth on Exhibits A, B, C, D, F, G, H and I hereto. (b) Exhibit F to the Loan Agreement is hereby amended to include, in addition and not in limitation, the information set forth on Exhibit E attached hereto. 23. 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 and each other agreement or instrument to be executed and delivered by each Borrower and/or Guarantor hereunder have been duly authorized, executed and delivered by all necessary action on the part of each of Borrower and each Guarantor which is a party hereto and thereto and, if necessary, their respective stockholders (with respect to any corporation) or members (with respect to any limited liability company), and is in full force and effect as of the date hereof, as the case may be, and the agreements and obligations of each Borrower and/or Guarantor, as the case may be, contained herein and therein constitute legal, valid and binding obligations of each Borrower and/or Guarantor, as the case may be, enforceable against them in accordance with their terms. (b) Each of the Richemont $10,000,000 Credit Agreements and the Richemont $25,000,000 Credit Agreements (i) has been duly authorized, executed and delivered by all necessary action on the part of each of Borrowers and Guarantors, and, if necessary, their respective stockholders (with respect to any corporation) or members (with respect to any limited liability company), and (ii) is in full force and effect as of the date hereof, as the case may be. The agreements and obligations of each of each Borrower and Guarantor under the Richemont $10,000,000 Credit Agreements and the Richemont $25,000,000 Credit Agreements constitute legal, valid and binding obligations of each Borrower and/or Guarantor, as the case may be, enforceable against them in accordance with terms. Borrowers and Guarantors have delivered, or cause to be -27- 28 delivered to Lender, true, correct and complete copies of each of the Richemont $10,000,000 Credit Agreements and the Richemont $25,000,000 Credit Agreements (c) Neither the execution and delivery of this Amendment or any of the agreements, documents or instruments to be delivered pursuant to this Agreement 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 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 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) Neither the execution and delivery of the Richemont $10,000,000 Credit Agreements and the Richemont $25,000,000 Credit 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 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 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 does or shall violate any provision of the Certificate of Incorporation or By-Laws of Hanover of any other Guarantor or any Borrower. (f) 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. (g) All necessary amendments, supplements and agreements have been executed and delivered, and all necessary actions required by the Series A Note Agreements the Series B note Agreements and the Littlestown IDB Agreements have been taken in accordance with the Series A Note Agreements, the Series B Note Agreements and the Littlestown IDB Agreements, as the case may be, in connection with the transactions contemplated by this Amendment. All notices, supplements and disclosure documents required to be delivered to any trustee or other person under the Series A Note Agreements, the Series B Note Agreements and the Littlestown IDB Agreements in connection with the transactions contemplated by this Amendment, have been timely delivered. (h) All of the obligations, liabilities and indebtedness arising under each of the UBS Agreements, the Richemont Reimbursement Agreement, the Series A Note Agreements, the -28- 29 Series B Note Agreements, and the Littlestown IDB Agreements after giving effect to the transactions contemplated by this Amendment, shall have been indefeasibly discharged and paid in full, other than (i) non-material liabilities that may be owed to the remarketing agent under the Series A Note Agreements and the Series B Note Agreements and to the Littlestown Industrial Development Authority under the Littlestown IDB Agreements and (ii) the liabilities and obligations under any such agreements that by their terms expressly survive the termination thereof. All agreements, documents and instruments in respect of the UBS Agreements, the Richemont Reimbursement Agreement, the Series A Note Agreements, the Series B Note Agreements and the Littlestown IDB Agreements have been terminated in accordance with their terms as amended, modified or supplemented through the date hereof. (i) Neither the redemption of any of the Littlestown Bonds nor the repurchase of any of the Series A Notes or the Series B Notes, nor the termination of the UBS Agreements and the cancellation of any of the UBS Letters of Credit, nor any other agreements, documents or instruments in connection therewith, nor the consummation of such transactions, nor compliance with the provisions thereof has violated or shall violate any Federal or State securities laws or any other law or regulation or, to the knowledge of Borrowers or Guarantors, any order or decree of any court or governmental instrumentality in any respect, or 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 Guarantor or any Borrower is a party or may be bound, or does or shall violate any provision of the Certificate of Incorporation or By-Laws of any Borrower or any Guarantor. (j) After giving effect to the provisions of this Amendment, no Event of Default or Incipient Default exists or has occurred and is continuing. 24. Conditions Precedent. Concurrently with the execution and delivery 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) Lender shall have received an executed original or executed original counterparts of this Amendment, as the case may be, duly authorized, executed and delivered by Borrowers and Guarantors; (b) Each of Borrowers and Guarantors shall have delivered to Lender, in form and substance satisfactory to Lender, each of the following agreements to which it is a party, duly authorized, executed and delivered: (i) Guarantee and Waiver by Guarantors, other than Borrowers and Hanover, in favor of Lender with respect to the Obligations of Keystone Internet; and (ii) Guarantee and Waiver by Borrowers in favor of Lender with respect to the Obligations of Keystone Internet; (iii) Guarantee and Waiver by Hanover in favor of Lender with respect to the Obligations of Keystone Internet; -29- 30 (iv) Blocked Account Agreements by and among The First National Bank of Maryland, Borrowers, certain Guarantors and Lender providing for the establishment of a Blocked Account for Keystone Internet; (v) each of the Second Restated HDPI Term Note, the Second Restated Hanover Realty Term Note, the Restated TCS Factory Term Note, the Restated TCS Office Term Note and the Tranche B Term Note; and (vi) original Second Mortgage Modification Agreement between HDPI and Lender, an original Amendment No. 2 to the Deed of Trust, Assignment and Security Agreement between Hanover Realty and Lender, Mortgage Modification Agreement, between TCS Factory and Lender, and Mortgage Modification Agreement, between TCS Office and Lender; (c) 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 (vii) insuring the priority, amount and sufficiency of each of the Mortgages made by HDPI, Hanover Realty, TCS Factory and TCS Office, as amended, and (viii) containing any legally available endorsements, assurance or affirmative coverage requested by Lender for protection of its interests; (d) Lender shall have received, in form and substance satisfactory to Lender, the Tranche B Term Loan Participation Agreement; (e) Lender shall have received, in form and substance satisfactory to Lender, from the appraisal firms that have conducted the appraisals of the Real Property and Equipment, addressed to Lender or upon which Lender is expressly permitted to rely with respect to each such Appraisal; (f) Lender shall have received, in form and substance satisfactory to Lender, all releases, terminations and such other documents as Lender may request to evidence and effectuate the termination (ix) of each of the UBS Letters of Credit and the UBS Agreements, (x) of the Richemont Guaranty and the Hanover Reimbursement Agreement, and (xi) of the Series A Note Agreements and the Series B Note Agreements, respectively, and evidence that all obligations have been paid in full with respect thereto, other than obligations and liabilities under such agreements that by their terms expressly survive the termination thereof; (g) Lender shall have received, each in form and substance satisfactory to Lender, (xii) a true and complete copy of all of the Richemont Credit Facility agreements, documents and instruments related thereto, (xiii) the Richemont $10,000,000 Call Agreement, (xiv) written subordination agreement, dated as of the date hereof, between Richemont, and Lender, pursuant to which, among other things, Richemont shall have subordinated its right to payment under the Richemont $10,000,000 Credit Agreements to the prior indefeasible payment in full of all of the Obligations, to the extent provided therein, and (xv) written subordination agreement, dated as of the date hereof, between Richemont, and Lender, pursuant to which, among other things, Richemont shall have subordinated its right to payment under the Richemont $25,000,000 Credit Agreements to the prior indefeasible payment in full of all of the Obligations, to the extent provided therein, each duly authorized, executed and delivered by Hanover and Richemont; -30- 31 (h) Lender shall have received, in form and substance satisfactory to Lender, evidence of the adoption and subsistence of authorizing resolutions of Richemont approving the execution, delivery and performance by Richemont of such Subordination Agreement and an opinion of Luxembourg counsel to Richemont addressed to Lender with respect to the due authorization, execution, validity and enforceability of such Subordination Agreement, and as to such other matters as Lender shall reasonably require. (i) Borrowers and Guarantors shall have duly executed and delivered to Lender such UCC financing statements and other documents and instruments which Lender in its sole discretion has determined are necessary to perfect the security interests of Lender in all Collateral now or hereafter owned Borrowers and Guarantors; (j) Each of the Keystone Internet, Tranche A Term Loan Borrowers and the Tranche B Term Loan Borrowers shall have delivered to Lender evidence, as of the most recent practicable date, that it is duly qualified and in good standing in each jurisdiction set forth in Exhibit A annexed hereto; (k) Lender shall have received, in form and substance satisfactory to Lender, Secretary's or Assistant 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 and the other Guarantors that are corporations of this Amendment and the agreements, documents and instruments to be delivered pursuant to this Amendment; (l) Lender shall have received an opinion of counsel to Borrowers and other Guarantors with respect to the transactions contemplated by this Amendment and such other matters as Lender shall reasonably request, addressed to Lender, in form and substance and satisfactory to Lender; and (m) each of Borrowers and Guarantors shall deliver, or cause to be delivered, to Lender a true and correct copy of any consent, waiver or approval to or of this Amendment, which any Borrower or Guarantor is required to obtain from any other Person, and such consent, approval or waiver shall be in a form reasonably acceptable to Lender. 25. 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. -31- 32 26. 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. 27. 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). 28. 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. 29. 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. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -32- 33 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 Last ------------------------------ Title: Vice President --------------------------- HANOVER DIRECT PENNSYLVANIA, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- BRAWN OF CALIFORNIA, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- GUMP'S BY MAIL, INC. By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- GUMP'S CORP. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- LWI HOLDINGS, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- [SIGNATURES CONTINUE ON NEXT PAGE] -33- 34 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER DIRECT VIRGINIA INC. By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- HANOVER REALTY, INC. By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- THE COMPANY STORE FACTORY, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- THE COMPANY OFFICE, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- KEYSTONE INTERNET SERVICES, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- [SIGNATURES CONTINUE ON NEXT PAGE] -34- 35 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] TWEEDS, LLC By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- SILHOUETTES, LLC By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- HANOVER COMPANY STORE, LLC By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- DOMESTICATIONS, LLC By: /s/ Brian C. Harriss ------------------------------ 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/ Brian C. Harriss ------------------------------ Title: Senior Vice President --------------------------- [SIGNATURES CONTINUE ON NEXT PAGE] -35- 36 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AMERICAN DOWN & TEXTILE COMPANY By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- D.M. ADVERTISING, INC. By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- LWI RETAIL, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- SCANDIA DOWN CORPORATION By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- KEYSTONE LIQUIDATIONS, INC. By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- YORK FULFILLMENT COMPANY, INC. By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- [SIGNATURES CONTINUE ON NEXT PAGE] -36- 37 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER HOME FASHIONS GROUP, LLC By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- KITCHEN & HOME, LLC By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- DOMESTICATIONS KITCHEN & GARDEN, LLC By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- ENCORE CATALOG, LLC By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- CLEARANCE WORLD OUTLETS, LLC By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- [SIGNATURES CONTINUE ON NEXT PAGE] -37- 38 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] SANDIA DOWN, LLC By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- ERIZON, INC. By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- HANOVER BRANDS, INC. By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- ERIZON.COM, INC. By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- LA CROSSE FULFILLMENT, LLC By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- SAN DIEGO TELEMARKETING, LLC By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- 38 EX-10.5 5 SUBORDINATION AGREEMENT 1 EXHIBIT 10.5 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT ("Subordination Agreement"), dated as of March 24, 2000, is by and between CONGRESS FINANCIAL CORPORATION, a Delaware corporation ("Senior Creditor", as hereinafter further defined), and RICHEMONT FINANCE S.A., a societe anonyme organized under the laws of the Grand Duchy of Luxembourg ("Junior Creditor", as hereinafter further defined). Senior Creditor and Junior Creditor are sometimes individually referred to herein as "Creditor" and collectively as "Creditors." W I T N E S S E T H: WHEREAS, Junior Creditor has made a loan in the original principal amount of up to $25,000,000 to Hanover Direct, Inc. ("Debtor", as hereinafter defined), which loan is and shall be unsecured; and WHEREAS, Senior Creditor has entered into financing arrangements with Debtor and certain of its subsidiaries, pursuant to which Senior Creditor has, upon certain terms and conditions, made loans and provided other financial accommodations to certain subsidiaries of Debtor, guaranteed by Debtor and certain subsidiaries of Debtor, secured by substantially all of the assets and properties of Debtor and of such borrower subsidiaries and guarantor subsidiaries of Debtor; and WHEREAS, in order to induce Senior Creditor to continue the financing arrangements with Debtor and certain subsidiaries of Debtor, Junior Creditor has agreed to the subordination in favor of Senior Creditor as provided herein of its right to payment of the existing and future obligations of Debtor to Junior Creditor arising in connection with a loan of up to $25,000,000 to Debtor to the prior indefeasible payment of the existing and future obligations of Debtor to Senior Creditor under the Senior Creditor Agreements, and related matters as set forth below; NOW THEREFORE, in consideration of the mutual benefits accruing to Creditors hereunder and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby agree as follows: 1. DEFINITIONS As used above and in this Subordination Agreement, the following terms shall have the meanings ascribed to them below: 2 1.1 "Agreements" shall mean, individually and collectively, the Senior Creditor Agreements and the Junior Creditor Agreements. 1.2 "Banking Day" shall mean any day, other than Saturday or Sunday, when Senior Creditor and commercial banks are open in New York, New York and Europe. 1.3 "Creditors" shall mean, individually and collectively, Senior Creditor and Junior Creditor and their respective successors and assigns. 1.4 "Debtor" shall mean Hanover Direct, Inc., a Delaware corporation, and its successors and assigns, including, without limitation, a receiver, trustee, or debtor-in-possession on behalf of any such person or on behalf of any such successor or assign. 1.5 "Event of Default" shall have the meaning given in the Loan Agreement. 1.6 "Incipient Default" shall have the meaning given in the Loan Agreement. 1.7 "Excess Loan Availability" shall have the meaning given in the Loan Agreement. 1.8 "Insolvency Proceeding" shall have the meaning given in Section 2.3 hereof. 1.9 "Junior Creditor" shall mean Richemont Finance S.A., a societe anonyme organized under the laws of the Grand Duchy of Luxembourg, and its successors and assigns. 1.10 "Junior Creditor Agreements" shall mean, individually and collectively, the "Hanover Direct, Inc. - Unsecured Line of Credit & Promissory Note", dated March 1, 2000, by and between Debtor and Junior Creditor in the original principal amount of up to $25,000,000, and all agreements, documents and instruments at any time executed and/or delivered by Debtor or any other person to, with or in favor of Junior Creditor in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.11 "Junior Debt" shall mean all obligations, liabilities and indebtedness of every kind, nature and description owing by Debtor to Junior Creditor under the Junior Creditor Agreements, including principal, interest, charges, fees, premiums, indemnities and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, arising under or evidenced by or in connection with the Junior Creditor Agreements, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of the Junior Creditor Agreements or after the commencement of any case with respect to Debtor under the U.S. Bankruptcy Code or any similar statute (and including, without limitation, any principal, interest, fees, costs, expenses and other amounts, whether or not such amounts are allowable in whole or in part, in any such case or similar proceeding), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, - 2 - 3 secured or unsecured, and whether arising directly, or by way of subrogation, contribution, reimbursement, indemnification, exoneration or otherwise, or howsoever acquired by Junior Creditor in connection with the Junior Creditor Agreements. 1.12 "Person" or "person" shall mean any individual, sole proprietorship, partnership, corporation (including, without limitation, any corporation which elects subchapter S status under the Internal Revenue Code of 1986, as amended), business trust, unincorporated association, joint stock company, trust, joint venture, limited liability company, limited liability partnership, or other entity or any government or any agency or instrumentality or political subdivision thereof. 1.13 "Senior Creditor" shall mean Congress Financial Corporation, a Delaware corporation, and its successors and assigns. 1.14 "Senior Creditor Agreements" shall mean, individually and collectively, the Loan and Security Agreement, dated November 14, 1995, by and among Senior Creditor, Debtor and certain subsidiaries of Debtor, as amended through the Fifteenth Amendment to Loan and Security Agreement, dated as of the date hereof (the "Loan Agreement"), any related guarantees by Debtor in favor of Lender, any related security agreements, by Debtor in favor of Senior Creditor and all agreements, documents and instruments at any time executed and/or delivered by Debtor or any other person to, with or in favor of Senior Creditor in connection therewith or related thereto, as all of the foregoing now exist or, subject to the terms and conditions contained in this Subordination Agreement, as may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.15 "Senior Debt" shall mean all obligations, liabilities and indebtedness of every kind, nature and description owing by Debtor or any other Subsidiary of Debtor to Senior Creditor and/or its affiliates, or participants, including principal, interest, charges, fees, premiums, indemnities and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, owing in connection with the Senior Creditor Agreements, whether now existing or hereafter arising, whether arising before, during or after the initial or, subject to the terms and conditions contained in this Subordination Agreement, any renewal term of the Senior Creditor Agreements or after the commencement of any case with respect to Debtor under the U.S. Bankruptcy Code or any similar statute (and including, without limitation, any principal, interest, fees, costs, expenses and other amounts, whether or not such amounts are allowable either in whole or in part, in any such case or similar proceeding), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and whether arising directly, or by way of subrogation, contribution, reimbursement, indemnification, exoneration or otherwise, or howsoever acquired by Senior Creditor in connection with the Senior Creditor Agreements. 1.16 All terms used herein which are defined in the Uniform Commercial Code as in effect in the State of New York, unless otherwise defined herein shall have the meanings set forth - 3 - 4 therein. All references to any term in the plural shall include the singular and all references to any term in the singular shall include the plural. 2. SUBORDINATION OF JUNIOR DEBT 2.1 Subordination. Except as specifically set forth in Section 2.2 hereof, Junior Creditor hereby subordinates its right to payment and satisfaction of the Junior Debt, and the payment and satisfaction thereof, directly or indirectly, by any means whatsoever, is hereby deferred, to the prior indefeasible payment and satisfaction in full of all Senior Debt. 2.2 Permitted Payments. Senior Creditor hereby agrees that, notwithstanding anything to the contrary contained in Section 2.1 hereof, (a) unless and until Senior Creditor sends written notice to Junior Creditor of the occurrence of an Event of Default or Incipient Default under the Senior Creditor Agreements, Debtor may make and Junior Creditor may receive and retain from Debtor, regularly scheduled payments of interest in respect of the Junior Debt and of a monthly fee in the amount of $62,500, in each case as provided by the Junior Creditor Agreements as in effect on the date hereof; and (b) Debtor may make, and Junior Creditor may receive and retain, payments by Debtor to Junior Creditor of the Junior Debt solely out of cash proceeds pursuant to a rights offering by Hanover Direct, Inc., Hanover Brands, Inc. or erizon, inc. or any other equity offering(s) or equity private placement(s) of capital stock of Hanover Direct, Inc, Hanover Brands, Inc. or erizon, inc. and Junior Creditor may convert the then outstanding amount of Junior Debt for capital stock of Hanover Direct, Inc. or Hanover Brands, Inc. or erizon, inc.; provided, that, (i) Senior Creditor has received not less than fifteen (15) Banking Days prior written notice from Debtor of the intention to make such payment out of cash proceeds of such rights offering or other equity offering or such conversion of the Junior Debt to capital stock, (ii) such capital stock consists of ordinary common stock as in effect on the date hereof or of other capital shares if consented to by Senior Creditor, which consent shall not be unreasonably withheld in Senior Creditor's good faith judgment. To the extent any such cash proceeds of any such equity offering or conversion of Junior Debt permitted hereby reduces the amount of any commitment to advance funds pursuant to the Junior Creditor Agreements, any such net cash proceeds or conversion shall not also reduce the amount of any commitment to advance funds pursuant to the Richemont $10,000,000 Credit Agreements as such term is defined in the Senior Creditor Agreements. 2.3 Distributions. (a) In the event of any distribution, division, or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of Debtor or the proceeds thereof to the creditors of Debtor or readjustment of the obligations and indebtedness of Debtor, whether by reason of liquidation, bankruptcy, arrangement, receivership, - 4 - 5 assignment for the benefit of creditors, marshalling of assets of Debtor or any other action or proceeding involving the readjustment of all or any part of indebtedness of Debtor or the application of the assets of Debtor to the payment or liquidation thereof (each of the foregoing, an "Insolvency Proceeding"), or upon the dissolution or other winding up of Debtor's business, or upon the sale of all or substantially all of Debtor's assets, then, and in any such event, (i) Senior Creditor shall first receive indefeasible payment in full in cash of all of the Senior Debt prior to the payment of all or any part of the Junior Debt, and (ii) Senior Creditor shall be entitled to receive any payment or distribution of any kind or character, whether in cash, securities or other property, which is payable or deliverable in respect of any or all of the Junior Debt. (b) In order to enable Senior Creditor to enforce its rights under Section 2.3(a) hereof, Senior Creditor is hereby irrevocably authorized and empowered (in its own name or in the name of Junior Creditor or otherwise), but shall have no obligation, to enforce claims comprising any of the Junior Debt by proof of debt, proof of claim, suit or otherwise and take generally any action which Junior Creditor might otherwise be entitled to take, as Senior Creditor may deem necessary or advisable for the enforcement of its rights or interests hereunder. (c) To the extent necessary for Senior Creditor to realize the benefits of the subordination of the Junior Debt provided for herein (including the right to receive any and all payments and distributions which might otherwise be payable or deliverable with respect to the Junior Debt in any Insolvency Proceeding or otherwise), Junior Creditor shall execute and deliver to Senior Creditor such instruments or documents (together with such assignments or endorsements as Senior Creditor shall deem necessary), as may be reasonably requested by Senior Creditor. 2.4 Payments Received by Junior Creditor. Except for payments received by Junior Creditor as provided in Section 2.2 hereof, should any payment or distribution or security or instrument or proceeds thereof be received by the Junior Creditor in respect of the Junior Debt, Junior Creditor shall receive and hold the same in trust, as trustee, for the benefit of Senior Creditor, segregated from other funds and property of Junior Creditor and shall forthwith deliver the same to Senior Creditor (together with any endorsement or assignment of Junior Creditor where necessary), for application to any of the Senior Debt. In the event of the failure of Junior Creditor to make any such endorsement or assignment to Senior Creditor, Senior Creditor, or any of its officers or employees, are hereby irrevocably authorized on behalf of Junior Creditor to make the same. 2.5 Instrument Legend and Notation. Any instrument at any time evidencing the Junior Debt, or any portion thereof, shall be permanently marked on its face with a legend conspicuously indicating that payment thereof is subordinate in right of payment to the Senior Debt and subject to the terms and conditions of this Subordination Agreement, and (a) after being so marked certified copies thereof shall be delivered to Senior Creditor and (b) the original of any such instrument shall be immediately delivered to Senior Creditor upon Senior Creditor's request, at any time on or after the commencement of an Insolvency Proceeding. In the event - 5 - 6 any legend or endorsement is omitted, Senior Creditor, or any of its officers or employees, are hereby irrevocably authorized on behalf of Junior Creditor to make the same. No specific legend, further assignment or endorsement or delivery of notes, guarantees or instruments shall be necessary to subject any Junior Debt to the subordination thereof contained in this Agreement. 3. COVENANTS, REPRESENTATIONS AND WARRANTIES 3.1 Additional Covenants. Junior Creditor and Debtor agree in favor of Senior Creditor that: (a) Except as specifically set forth in Section 2.2 hereof, Debtor shall not, directly or indirectly, make and Junior Creditor shall not, directly or indirectly, accept or receive any payment of or any prepayment or any payment pursuant to acceleration or claims of breach or any payment to acquire Junior Debt or otherwise in respect of any Junior Debt; (b) notwithstanding any rights or remedies available to it under the Junior Creditor Agreements, applicable law or otherwise, Junior Creditor shall not, directly or indirectly, (i) seek to collect from Debtor any of the Junior Debt or exercise any of its rights or remedies upon a default or event of default by Debtor under the Junior Creditor Agreements or otherwise or (ii) commence any action or proceeding against Debtor or Debtor's properties under the U.S. Bankruptcy Code or any state insolvency law or any similar present or future statute, law or regulation or any proceedings for voluntary liquidation, dissolution or other winding up of Debtor's business, or the appointment of any trustee, receiver or liquidator for Debtor or any part of Debtor's properties or any assignment for the benefit of creditors or any marshalling of assets of Debtor or (iii) take any other action against Debtor or Debtor's properties in respect of the Junior Debt; (c) Debtor shall not grant to Junior Creditor and Junior Creditor shall not acquire any security interest, lien, claim or encumbrance on any assets or properties of Debtor, and Junior Creditor shall not acquire any guarantees or other agreements under which any person, other than Debtor, is or may become obligated, directly or indirectly, for all or any portion of the Junior Debt; (d) Junior Creditor and Debtor shall not amend, modify, alter or change in any material respect the terms of any arrangements related to the Junior Debt; (e) Junior Creditor shall not sell, assign, pledge, encumber or otherwise dispose of any of the Junior Debt, or subordinate any of the Junior Debt to any indebtedness of Debtors other than the Senior Debt, without the prior written consent of Senior Creditor, which consent shall not be unreasonably withheld in Senior Creditor's good faith determination; - 6 - 7 (f) Junior Creditor and Debtor shall, at any time or times upon the request of Senior Creditor, promptly furnish to Senior Creditor a true, correct and complete statement of the outstanding Junior Debt; and (g) Junior Creditor and Debtor shall execute and deliver to Senior Creditor such additional agreements, documents and instruments and take such further actions as may be reasonably necessary or desirable in the opinion of Senior Creditor to effectuate the provisions and purposes of this Subordination Agreement. 3.2 Additional Representations and Warranties. Junior Creditor and Debtor represent and warrant to Senior Creditor that: (a) as of the date hereof, the total principal amount of the Junior Debt outstanding is $5,000,000; (b) Junior Creditor has no security interest, lien, claim or encumbrance on any assets and properties of Debtor and the Junior Debt is unsecured; (c) as of the date hereof, no default or event of default, or event which with notice or passage of time or both would constitute an event of default, exists or has occurred under the Junior Creditor Agreements; (d) Junior Creditor is the exclusive legal and beneficial owner of all of the Junior Debt; (e) none of the Junior Debt is subject to any lien, security interest, financing statements, subordination, assignment or other claim, except in favor of Senior Creditor; and (f) this Subordination Agreement constitutes the legal, valid and binding obligations of Junior Creditor, enforceable in accordance with its terms. 3.3 Waivers. Notice of acceptance hereof, the making of loans, advances and extensions of credit or other financial accommodations to, and the incurring of any expenses by or in respect of, Debtor or its subsidiaries by Senior Creditor, and presentment, demand, protest, notice of protest, notice of nonpayment or default and all other notices to which Junior Creditor and Debtor are or may be entitled are hereby waived (except as expressly provided for herein or as to Debtor, in the Senior Creditor Agreements). Junior Creditor also waives notice of, and hereby consents to, (a) subject to the terms and conditions contained in this Subordination Agreement, any amendment, modification, supplement, renewal, restatement or extensions of time of payment of or increase or decrease in the amount of any of the Senior Debt or to the Senior Creditor Agreements or any collateral at any time granted to or held by Senior Creditor, (b) the taking, exchange, surrender and releasing of collateral at any time granted to or held by Senior Creditor or guarantees now or at any time held by or available to Senior Creditor for the - 7 - 8 Senior Debt or any other person at any time liable for or in respect of the Senior Debt, (c) the exercise of, or refraining from the exercise of any rights against Debtor or any other obligor or any collateral at any time granted to or held by Senior Creditor, (d) the settlement, compromise or release of, or the waiver of any default with respect to, any of the Senior Debt, and/or (e) Senior Creditor's election, in any proceeding instituted under the U.S. Bankruptcy Code of the application of Section 1111(b)(2) of the U.S. Bankruptcy Code. Any of the foregoing shall not, in any manner, affect the terms hereof or impair the obligations of Junior Creditor hereunder. All of the Senior Debt shall be deemed to have been made or incurred in reliance upon this Subordination Agreement. 3.4 Subrogation; Marshalling. Junior Creditor shall not be subrogated to, or be entitled to any assignment of any Senior Debt or Junior Debt or of any collateral for or guarantees or evidence of any thereof until all of the Senior Debt is indefeasibly paid and satisfied in full. Junior Creditor hereby waives any and all rights to have any collateral or any part thereof granted to or held by Senior Creditor marshalled upon any foreclosure or other disposition of such collateral by Senior Creditor or Debtor with the consent of Senior Creditor. When the Senior Debt shall have been indefeasibly paid in full and discharged and all the Senior Creditor Agreements have been terminated, the Junior Creditor shall, to the extent permitted by law, be subrogated to the rights of the Senior Creditor to receive payments or distribution of assets in respect of the Junior Debt. 3.5 No Offset. In the event Junior Creditor at any time incurs any obligation to pay money to Debtor, Junior Creditor hereby irrevocably agrees that it shall pay such obligation in cash or cash equivalents in accordance with the terms of the contract governing such obligation and shall not deduct from or setoff against any amounts owed by Junior Creditor to Debtor in connection with any such transaction any amounts the Junior Creditor claims are due to it with respect to the Junior Debt. 3.6 Certain Amendments to Senior Creditor Agreements. Senior Creditor shall not make loans or advances to Debtors under the Loan Agreement that would result in the Senior Debt to be greater than $90,000,000 outstanding at any one time and Senior Creditor shall not extend the Renewal Date (as such term is defined in the Loan Agreement) beyond six (6) months without the prior written consent of Junior Creditor; provided, that, if the Junior Creditor Agreements are terminated to the extent provided herein, this Section 3.6 shall automatically and without further action by the parties hereto shall no longer be deemed to apply and have no further force and effect. 4. MISCELLANEOUS 4.1 Amendments. Any waiver, permit, consent or approval by either Creditor of or under any provision, condition or covenant to this Subordination Agreement must be in writing and shall be effective only to the extent it is set forth in writing and as to the specific facts or - 8 - 9 circumstances covered thereby. Any amendment of this Subordination Agreement must be in writing and signed by each of the parties to be bound thereby. 4.2 Successors and Assigns. (a) This Subordination Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of each of Creditors and its respective successors, participants and assigns. (b) Senior Creditor reserves the right to grant participations in, or otherwise sell, assign, transfer or negotiate all or any part of, or any interest in, the Senior Debt and the collateral securing same; provided, that, Junior Creditor shall not be obligated to give any notices to or otherwise in any manner deal directly with any participant in the Senior Debt and no participant shall be entitled to any rights or benefits under this Subordination Agreement except through Senior Creditor. In connection with any participation or other transfer or assignment, Senior Creditor (i) may disclose to such assignee, participant or other transferee or assignee all documents and information which Senior Creditor now or hereafter may have relating to the Senior Debt or any collateral and (ii) shall disclose to such participant or other transferee or assignee the existence and terms and conditions of this Subordination Agreement. (c) In connection with any assignment or transfer of any or all of the Senior Debt, or any or all rights of Senior Creditor in any of the property of Debtor or its subsidiaries (other than pursuant to a participation), Junior Creditor agrees to execute and deliver an agreement containing terms substantially identical to those contained herein in favor of any such assignee or transferee and, in addition, will execute and deliver an agreement containing terms substantially identical to those contained herein in favor of any third person who succeeds to or replaces any or all of Senior Creditor's financing of certain subsidiaries of Debtor, whether such successor financing or replacement occurs by transfer, assignment, "takeout" or any other means. 4.3 Insolvency. This Subordination Agreement shall be applicable both before and after the filing of any petition by or against Debtor or any of its subsidiaries under the U.S. Bankruptcy Code and all converted or succeeding cases in respect thereof, and all references herein to Debtor or any of Debtor's subsidiaries shall be deemed to apply to a trustee for Debtor or any of its subsidiaries, as well as to Debtor or any of its subsidiaries as debtor-in-possession. The relative rights of Senior Creditor and Junior Creditor to repayment of the Senior Debt and the Junior Debt, respectively, and in or to any distributions from or in respect of Debtor or any proceeds of Debtor's property and assets, shall continue after the filing thereof on the same basis as prior to the date of the petition, subject to any court order approving the financing of, or use of cash collateral by, Debtor or any of its subsidiaries as debtor-in-possession. 4.4 Bankruptcy Financing. If Debtor or any of its subsidiaries shall become subject to a proceeding under the U.S. Bankruptcy Code and if Senior Creditor desires to permit the use of cash collateral or to provide financing to Debtor or any of its subsidiaries under either Section - 9 - 10 363 or Section 364 of the U.S. Bankruptcy Code, Junior Creditor agrees as follows: (a) adequate notice to Junior Creditor (if required) shall have been provided for such financing or use of cash collateral if Junior Creditor receives notice two (2) business days prior to the entry of the order approving such financing or use of cash collateral and (b) no objection will be raised by Junior Creditor to any such use of cash collateral or financing. For purposes of this Section, notice of a proposed financing or use of cash collateral shall be deemed given when given in the manner prescribed by Section 4.5 hereof to Junior Creditor. 4.5 Notices. All notices, requests and demands to or upon the respective parties hereto shall be in writing and shall be deemed to have been duly given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next business day, one (1) business day after sending; and if mailed by certified mail, return receipt requested, five (5) days after mailing. All notices, requests and demands are to be given or made to the respective parties at their addresses set forth below (or to such other addresses as either party may designate by notice in accordance with the provisions of this Section: To Senior Creditor: Congress Financial Corporation 1133 Avenue of the Americas New York, New York 10036 Attention: Mr. Laurence S. Forte Telecopier: 212-545-4283 Phone: 212-545-4280 To Junior Creditor: Richemont Finance S.A. 35 Boulevard Prince Henri L 1724 Luxembourg Attention: Mr. J. Alan Grieve Telecopier: 011-4141-711-7138 Phone: 011-4141-710-3322 with a copy to: Robert P. Wessely, Esq. Dorsey & Whitney 250 Park Avenue New York, New York 10036 Telecopier: (212) 953-7201 Phone: (212) 415-9200 Either Creditor may change the address(es) to which all notices, requests and other communications are to be sent by giving written notice of such address change to the other Creditor in conformity with this Section 4.5, but such change shall not be effective until notice of such change has been received by the other Creditor. - 10 - 11 4.6 Counterparts. This Subordination Agreement may be executed in any number of counterparts, each of which shall be an original with the same force and effect as if the signatures thereto and hereto were upon the same instrument. 4.7 Governing Law. The validity, construction and effect of this Subordination Agreement shall be governed by the laws of the State of New York (without giving effect to principles of conflicts of laws). 4.8 Consent to Jurisdiction; Waiver of Jury Trial. Each of the parties hereto hereby irrevocably consents 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 trial by jury in any action or proceeding with respect to this Subordination Agreement. 4.9 Complete Agreement. (a) This written Subordination Agreement is intended by the parties as a final expression of their agreement and is intended as a complete statement of the terms and conditions of their agreement. (b) The obligations of Junior Creditor under this Subordination Agreement are in addition to, and in no way limited by the terms of the Subordination Agreement, dated as of the date hereof, between Junior Creditor and Senior Creditor, as acknowledged by Debtor and certain direct and indirect subsidiaries of Debtor in respect of the Richemont $10,000,000 Credit Agreements as such term is defined in the Loan Agreement, nor shall any of the terms thereof be limited or affected by the terms of this Subordination Agreement. (c) The obligations of Junior Creditor under this Subordination Agreement are in addition to, and in no way limited by the terms of any other subordination agreement, heretofore entered into between Junior Creditor and Senior Creditor, as acknowledged by Debtor and/or certain of its subsidiaries and affiliates, nor shall any of the terms of any such subordination agreement be limited or affected by the terms of this Subordination Agreement. 4.10 No Third Parties Benefitted. This Subordination Agreement is solely for the benefit of the Creditors and their respective successors, participants and assigns, and no other person shall have any right, benefit, priority or interest under, or because of the existence of, this Subordination Agreement. 4.11 Disclosures, Non-Reliance. Each Creditor has the means to, and shall in the future remain, fully informed as to the financial condition and other affairs of Debtor and neither Creditor shall have any obligation or duty to disclose any such information to any other Creditor. Except as expressly set forth in this Subordination Agreement, the parties hereto have not otherwise made to each other nor do they hereby make to each other any warranties, express or implied, nor do they assume any liability to each other with respect to: (a) the enforceability, validity, value or collectability of any of the Junior Debt or the Senior Debt or any collateral or guarantee which may have been granted to any of them in connection therewith, (b) Debtor's title - 11 - 12 to or right to any of Debtor's assets and properties or (c) any other matter except as expressly set forth in this Subordination Agreement. 4.12 Term. This Subordination Agreement is a continuing agreement and shall remain in full force and effect until the indefeasible satisfaction in full of all Senior Debt and the termination of the financing arrangements among Senior Creditor, Debtor and certain subsidiaries of Debtor. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] - 12 - 13 IN WITNESS WHEREOF, the parties have caused this Subordination Agreement to be duly executed as of the day and year first above written. CONGRESS FINANCIAL CORPORATION By: /s/ Janet Last -------------------------- Title: Vice President ----------------------- RICHEMONT FINANCE S.A. By: /s/ Jan P. du Plessis -------------------------- Title: Director ----------------------- By: /s/ Alan Grieve -------------------------- Title: Director ----------------------- - 13 - 14 ACKNOWLEDGMENT The undersigned hereby acknowledges and agrees to the foregoing terms and provisions. By its signature below, the undersigned agrees that it shall, together with its successors and assigns, be bound by the provisions hereof. The undersigned acknowledges and agrees that: (i) although it may sign this Subordination Agreement, it is not a party hereto and does not and shall not receive any right, benefit, priority or interest under or because of the existence of the foregoing Subordination Agreement, (ii) in the event of a breach by the undersigned of any of the terms and provisions contained in the foregoing Subordination Agreement, such a breach shall constitute an "Event of Default" as defined in and under the Senior Creditor Agreements, and (iii) it shall execute and deliver such additional documents and take such additional action as may be necessary in the opinion of either Creditor to effectuate the provisions and purposes of the foregoing Subordination Agreement. HANOVER DIRECT, INC. By: /s/ Brian C. Harriss -------------------------- Title: SVP & CFO ----------------------- - 14 - EX-10.6 6 CREDIT AGREEMENT 1 Exhibit 10.6 CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of March 24, 2000, is by and between HANOVER DIRECT, INC., a corporation organized under the laws of the State of Delaware ("Hanover"), 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"), Tweeds, LLC, a Delaware limited liability company ("Tweed's LLC"), Silhouettes, LLC, a Delaware limited liability company ("Silhouettes LLC"), Hanover Company Store, LLC, a Delaware limited liability company ("HCS LLC"), Domestications, LLC, a Delaware limited liability company ("Domestications LLC"), Hanover Direct Virginia Inc., a Delaware corporation ("HDV"), LWI Holdings, Inc., a Delaware corporation ("LWI"), and Keystone Internet Services, Inc., a Delaware corporation ("Keystone Internet" which, collectively with Hanover, HDPI, Brawn, GBM, Gump's, Tweed's LLC, Silhouettes LLC, HCS LLC, Domesticiations LLC, and HDV, are collectively referred to herein as the "Borrowers" and each individually, a "Borrower") and RICHEMONT FINANCE S.A., a societe anonyme organized under the laws of the Grand Duchy of Luxembourg (the "Lender"). ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.1 Defined Terms. As used in this Agreement the following terms shall have the following respective meanings: "Advance": As defined in Section 2.1. "Business Day": Any day (other than a Saturday, Sunday or legal holiday in the State of New York or in Luxembourg) on which banks are permitted to be open in the State of New York and in Europe. "Call Agreement": The letter agreement dated as of the date hereof between the Lender and the Senior Lender, and agreed to and acknowledged by the Borrowers, as the same may be amended, modified, supplemented or restated from time to time. "Capital Stock": (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalent (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of profits and losses of, or distributions of assets of, the issuing Person. 2 "Closing Date": Any Business Day selected by the Borrowers for the making of the initial Advance hereunder; provided that all the conditions precedent to the obligation of the Lender to make the initial Advance, as set forth in Article III, have been, or, on such Closing Date, will be, satisfied. The Borrowers shall give the Lender not less than one Business Day's prior notice of the day selected as the Closing Date. "Commitment": The obligation of the Lender to make Advances to or for the account of a Borrower in an aggregate principal amount outstanding at any time not to exceed the Commitment Amount upon the terms and subject to the conditions and limitations of this Agreement. "Commitment Amount": $10,000,000, as the same may be reduced from time to time pursuant to Section 2.6 hereof. "Commitment Fees": As defined in Section 2.7. "Default": Any event which, with the giving of notice (whether such notice is required under Section 7.1, or under some other provision of this Agreement, or otherwise) or lapse of time, or both, would constitute an Event of Default. "Equity Interests": Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Excess Loan Availability": As defined in the Senior Credit Agreement. "Existing Note": The Unsecured Line of Credit and Promissory Note dated March 1, 2000, made by Hanover in favor of the Lender, in the principal amount of $25,000,000, as said note may be amended, supplemented or restated from time to time. "Event of Default": Any event described in Section 7.1. "GAAP": Generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of any date of determination. "Guarantees": The Guarantees, as defined in the Senior Credit Agreement. 2 3 "Guarantors": The Guarantors as defined in the Senior Credit Agreement. "Lien": With respect to any Person, any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of each lessor under any capitalized lease), in, of or on any assets or properties of such Person, now owned or hereafter acquired, whether arising by agreement or operation of law. "Loan Document": This Agreement, the Note, the Existing Note, the Call Agreement and the Subordination Agreements. "Maturity Date": The earlier of (a) the date on which the revolving loan facility under the Senior Credit Agreement is terminated and all obligations of the Borrowers thereunder have been fully paid, and (b) the date on which the Commitment Amount is reduced to ZERO. "Note": As defined in Section 2.3. "Person": Any natural person, corporation, partnership, limited partnership, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. "Revolving Loan Advances": As defined in Section 2.1. "Senior Credit Agreement": The Loan and Security Agreement dated as of November 14, 1995, among the Borrowers, certain Affiliates of the Borrowers and the Lender, as amended and supplemented 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, 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, the Ninth Amendment to Loan and Security Agreement, dated as of April 18, 1997, the Tenth Amendment to Loan and Security Agreement, dated as of October 31, 1997, the Eleventh Amendment to Loan and Security Agreement, dated as of March 25, 1998, the Twelfth Amendment to Loan and Security Agreement, dated as of September 30, 1998, the Thirteenth Amendment to Loan and Security Agreement, dated as of September 30, 1998, Fourteenth Amendment to Loan and Security Agreement, dated as of February 28, 2000, and the Fifteenth Amendment to Loan and Security Agreement dated as of March 24, 2000. 3 4 "Senior Lender": Congress Financial Corporation, a Delaware corporation, and its successors and assigns under the Senior Credit Agreement. "Senior Lender Advances": As defined in Section 2.1. "Subordination Agreements": Collectively, the $10,000,000 Subordination Agreement and the $25,000,000 Subordination Agreement. "Subsidiary": Any corporation or other entity of which securities or other ownership interests having ordinary voting power for the election of a majority of the board of directors or other Persons performing similar functions are owned by the Borrower either directly or through one or more Subsidiaries. "$10,000,000 Subordination Agreement": The Subordination Agreement dated as of the date hereof between the Lender and the Senior Lender, and acknowledged by the Borrowers, providing for, among other things, subordinating certain payments under this Credit Agreement, as the same may be amended, modified or supplemented from time to time. "$25,000,000 Subordination Agreement": The Subordination Agreement dated as of the date hereof between the Lender and the Senior Lender, and acknowledged by the Borrowers, providing for, among other things, subordinating certain payments under the Existing Note, as the same may be amended, modified or supplemented from time to time. "Trade Payables Sublimit": At any time, the lesser of (i) $5,000,000 and (ii) the Commitment Amount less $3,000,000. Section 1.2 Accounting Terms and Calculations. Except as may be expressly provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. Section 1.3 Other Definitional Terms, Terms of Construction. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections, Exhibits, Schedules and the like references are to Sections, Exhibits, Schedules and the like of this Agreement unless otherwise expressly provided. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." Unless the context in which used herein otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or." All incorporations by reference of covenants, terms, definitions or other provisions from other agreements are incorporated into this Agreement as if such provisions were fully set forth herein, and include all necessary definitions and related provisions from such other agreements. All covenants, terms, definitions and other provisions from other agreements incorporated into this Agreement by reference shall survive any 4 5 termination of such other agreements until the obligations of the Borrowers under this Agreement and the Note are irrevocably paid in full and the Commitment is terminated. ARTICLE II TERMS OF LENDING Section 2.1 The Revolving Commitment. On the terms and subject to the conditions hereof, the Lender agrees to make advances (each an "Advance"), (a) to the Borrowers on a revolving basis ("Revolving Loan Advances"), and (b) to the Senior Lender for the account of the Borrowers in accordance with the Call Agreement and Section 2.2(b) hereof ("Senior Lender Advances"), at any time and from time to time from the Closing Date to the Maturity Date. Until the Maturity Date, (i) the Borrower may borrow, repay and reborrow Revolving Loan Advances in accordance with the provisions hereof, and (ii) the Senior Lender may request payment of Senior Lender Advances for the account of the Borrowers under the Call Agreement, provided that the unpaid aggregate principal amount of all outstanding Advances shall not at any time exceed the Commitment Amount at such time. Section 2.2 Procedure for Advances. (a) Procedure for Revolving Loan Advances. Any request by the Borrowers for an Advance shall be in writing or by telephone and must be given so as to be received by the Lender not later than 12:00 Noon (New York City time) on the Business Day prior to requested Advance date. Each request for a Revolving Loan Advance shall be irrevocable and shall be deemed a representation by the Borrowers that on the requested Advance date and after giving effect to such Advance the applicable conditions specified in Article III have been and will continue be satisfied. Each request for an Advance shall specify (i) the requested Advance date (which must be a Business Day) and (ii) the amount of such Advance. Unless the Lender determines that any applicable condition specified in Article III has not been satisfied, the Lender will make available to the Borrower or its designee at the Lender's principal office (or if the $10,000,000 Subordination Agreement is in effect, by wire transfer to the Senior Lender in accordance with such Subordination Agreement), in immediately available funds not later than 3:00 p.m. (New York City time) on the requested Advance date the amount of the requested Advance. (b) Procedures for Senior Lender Advances. Requests by the Senior Lender for an Advance for the account of the Borrowers shall be given in the manner provided for in the Call Agreement, which the Borrowers hereby approve and authorize. Unless the Lender determines that the requested Senior Loan Advance either (i) does not meet the requirements of the Call Agreement, or (ii) exceeds the Commitment Amount then available to be advanced, the Lender will make the requested Senior Lender Advance to the Senior Lender. In the event the requested Senior Lender Advance exceeds then available Commitment Amount, the Lender will make an Advance to the Senior Lender only in the amount of the then available Commitment Amount. 5 6 In no event will outstanding Advances at any time exceed the Available Commitment Amount. The Borrowers are jointly and severally liable to the Lender to reimburse the Lender for any and all Senior Lender Advances and interest thereon, as if such Advances were made directly to the Borrowers as a Revolving Loan Advance hereunder. Section 2.3 The Note. The Advances (including the Borrowers' reimbursement obligations with respect to any Senior Loan Advances) shall be evidenced by a single promissory note of the Borrowers (the "Note"), substantially in the form of Exhibit 2.3 hereto, in the amount of the Commitment Amount originally in effect. The Lender shall enter in its ledgers and records the amount of each Advance made and the payments made thereon, and the Lender is authorized by the Borrower to enter on a schedule attached to the Note a record of such Advances and payments. Section 2.4 Interest Rates, Interest Payments and Default Interest. Interest shall accrue and be payable at a rate equal to 0.125% of the average monthly unpaid balance of the Note during such month; provided, however, that upon the happening of any Event of Default, then, at the option of the Lender, the Note shall thereafter bear interest at the rate specified above, plus 2% per annum. Interest shall be payable monthly in arrears on the last day of each month and upon final payment of the Note. Section 2.5 Repayment and Prepayment. Principal of the Note shall be payable in full on the Maturity Date. The Borrowers may prepay the Note, in whole or in part, at any time, without premium or penalty provided that, so long as the Call Agreement or the $10,000,000 Subordination Agreement is in effect, the Borrowers shall accompany such optional repayment with a certificate stating that (a) no "Default" or "Event of Default" (as such terms are defined in the Senior Credit Agreement) under the Senior Credit Agreement has occurred and is continuing, and (b) for the 30 consecutive day period preceding the date of such optional prepayment, Excess Loan Availability was not less than $5,000,000. Amounts so optionally prepaid under this Section will increase the Commitment Amount and may be reborrowed as Revolving Loan Advances or be available for advance to the Senior Lender as Senior Lender Advances, upon the terms and subject to the conditions and limitations of this Agreement. Principal of this Note is subject to mandatory prepayment, which amounts may not be reborrowed, upon mandatory reduction of the Commitment Amount pursuant to Section 2.6. Section 2.6 Reduction of Commitment Amount. (a) Mandatory Reduction. The Commitment Amount shall be reduced at the times of any rights offering by Hanover, Hanover Brands, Inc. or erizon, inc. or any other equity offering(s) or equity private placement(s) of Capital Stock of any of such companies after the Closing Date which offering or placement may take the form, in whole or in part, of a conversion of outstanding Indebtedness under this Agreement to an Equity Interest of a Borrower or 6 7 Guarantor. The Commitment Amount shall be reduced by the net cash proceeds of such offering or placement plus the dollar amount of such Indebtedness converted. (b) Mandatory Prepayment Upon Reduction of Commitment Amount. Upon any reduction in the Commitment Amount pursuant to this Section 2.6, the Borrowers shall pay to the Lender the amount, if any, by which the aggregate unpaid principal amount of the Note exceeds the Commitment Amount as so reduced. Amounts so paid cannot be reborrowed. The Borrowers may, at any time, upon not less than 3 Business Days prior written notice to the Lender, terminate the Commitment in its entirety provided that the Senior Credit Agreement is terminated and all obligations of the Borrowers thereunder have been paid. Upon termination of the Commitment pursuant to this Section, the Borrowers shall pay to the Lender all unpaid obligations of the Borrowers to the Lender hereunder. Section 2.7 Commitment Fee. The Borrowers shall pay to the Lender monthly fees (the "Commitment Fees") in an amount equal to $79,200 per month, payable monthly in arrears on the last day of each month and on the Maturity Date. Section 2.8 Computation. Interest on the Note shall be computed on the basis of actual days elapsed and a year of 360 days. Section 2.9 Use of Proceeds. The proceeds of Revolving Loan Advances shall be used for working capital by the payment of trade creditors in the ordinary course of business, not to exceed the Trade Payables Sublimit; the proceeds of Advances may be used to make payments on the Senior Credit Agreement in accordance with the provisions of the Call Agreement and the Senior Credit Agreement. Section 2.10 Conversion. The contribution of cash for an Equity Interest by the Lender may be contributed, at the Lender's option, by conversion of all or a designated portion of the principal amount of all Advances made under the Note and then outstanding into such Equity Interest. ARTICLE III CONDITIONS PRECEDENT Section 3.1 Conditions of Initial Advance. The obligation of the Lender to make the initial Advance hereunder shall be subject to the prior or simultaneous fulfillment of each of the following conditions: (a) Documents. The Lender shall have received the following: (i) The Note executed by a duly authorized officer (or officers) of each Borrower and dated the Closing Date. 7 8 (ii) A copy of the corporate or limited liability company resolutions of each Borrower authorizing the execution, delivery and performance of the Loan Documents and containing an incumbency certificate showing the names and titles, and bearing the signatures of, the officers of such Borrower authorized to execute the Loan Documents, certified as of the Closing Date by the Secretary or an Assistant Secretary of each such Borrower. (iii) A copy of the articles of incorporation or limited liability company agreement of each Borrower with all amendments thereto, certified by the appropriate governmental official of the jurisdiction of its incorporation or formation as of a current date. (iv) A certificate of good standing for each Borrower in the jurisdiction of its incorporation or formation, certified by the appropriate governmental officials as of a current date. (v) A copy of the bylaws of each corporate Borrower, certified as of the Closing Date by the Secretary or an Assistant Secretary of such Borrower. (vi) The opinion of counsel to the Borrowers covering such matters as the Lender may reasonably request. (vii) Copies of the fully executed Senior Credit Agreement and all related documents, certified as of the Closing Date by the Secretary or an Assistant Secretary of Hanover. (b) Other Matters. All organizational and legal proceedings relating to the Borrowers and all instruments and agreements in connection with the transactions contemplated by this Agreement shall be satisfactory in scope, form and substance to the Lender and its counsel, and the Lender shall have received all information and copies of all documents, including records of corporate proceedings, which it may reasonably have requested in connection therewith, such documents where appropriate to be certified by proper Borrower or governmental authorities. (c) Fees and Expenses. The Lender shall have received all fees and other amounts due and payable by the Borrowers on or prior to the Closing Date, including the reasonable fees and expenses of counsel to the Lender payable pursuant to Section 8.2. Section 3.2 Conditions Precedent to all Advances. The Lender shall not have any obligation to make any Revolving Loan Advance (including Advances after the initial Advance) hereunder unless all representations and warranties of the Borrowers made in this Agreement remain true and correct and no Default or Event of Default exists. The Lender shall not have any 8 9 obligation to make any Senior Lender Advance hereunder or under the Call Agreement unless the Senior Lender has strictly complied with the requirements of the Call Agreement. Section 3.3 Obligations Absolute. The obligations of the Borrowers under this Agreement shall be absolute, unconditional and irrevocable, and shall not be subject to any right of setoff or counterclaim and shall be paid or performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including, without limitation, the following circumstances: (a) any lack of validity or enforceability of the Call Agreement, the Subordination Agreements, the Senior Credit Agreement or any other related document; (b) any amendment or waiver of any provision of all or any of the Loan Documents or the Senior Credit Agreement; (c) the existence of any claim, setoff, defense or other rights which the Borrowers or any of them may have at any time against the Senior Lender or the Lender (other than the defense of payment to the Lender in accordance with the terms of this Agreement)or any other Person, whether in connection with this Agreement, the Loan Documents, the Senior Credit Agreement or any transaction contemplated thereby; (d) any request for payment, demand, statement, certification, determination, calculation or any other document presented to the Lender under the Call Agreement or the Subordination Agreement or otherwise proving to be false, forged, fraudulent, invalid, unauthorized or insufficient in any respect, or any statement therein being untrue or inaccurate in any respect whatsoever; (e) payment by the Lender under the Call Agreement upon a request therefor which does not comply with the terms of the Call Agreement or the Subordination Agreements. ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS Each Borrower represents, warrants and covenants to the 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 and warranties and covenants in the other Loan Documents and in the Senior Credit Agreement (which are hereby incorporated herein, as if fully set forth herein, and if the Senior Credit Agreement is terminated, shall continue in the form immediately prior to such termination) are conditions to the effectiveness of this Agreement and all Advances: Section 4.1 Organization, Standing, Etc. Such Borrower is a corporation or limited liability company (as applicable) duly incorporated or organized and validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has all requisite corporate or limited liability company power and authority to carry on its business as now conducted, to enter into this Agreement and to issue the Note and to perform its obligations hereunder and thereunder. This Agreement, the Note and each other Loan Document have been duly authorized by all necessary corporate or limited liability company action and when executed and delivered will be the legal and binding obligations of such Borrower. The execution and 9 10 delivery of this Agreement, the Note and the other Loan Documents will not violate such Borrower's organizational documents or any law applicable to such Borrower. No governmental consent or exemption is required in connection with such Borrower's execution and delivery of this Agreement and the Note. Section 4.2 Financial Statements and No Material Adverse Change. The Borrowers' audited consolidated financial statements as at December 31, 1999, as heretofore furnished to the Lender, have been prepared in accordance with GAAP. The Borrowers have no material obligation or liability not disclosed in such financial statements, and there has been no material adverse change in the condition of the Borrowers since the dates of such financial statements. Section 4.3 Year 2000. The Borrowers have reviewed and assessed their business operations and computer systems and applications to address the Ayear 2000 problem (that is, that computer applications and equipment used by the Borrowers, directly or indirectly through third parties, may have been or may be unable to properly perform date-sensitive functions before, during and after January 1, 2000). The Borrowers represent and warrant that the year 2000 problem has not resulted in and will not result in a material adverse change in the Borrowers' business condition (financial or otherwise), operations, properties or prospects or ability to repay the Lender. The Borrowers agree that this representation and warranty will be true and correct on and shall be deemed made by the Borrowers on each date a Borrower requests any Advance under this Agreement or the Note or delivers any information to the Lender. The Borrowers will promptly deliver to the Lender such information relating to this representation and warranty as the Lender requests from time to time. Section 4.4 Financial Statements, Reports and Notices. The Borrowers will furnish to the Lender each of the financial statements, reports, certificates and notices required to be furnished to the Senior Lender under the Senior Credit Agreement, by the times and in the forms (except addressed to and for the benefit of the Lender) required to be delivered to the Senior Lender. Section 4.5 Inspection. The Borrowers will permit any Person designated by the Lender to visit and inspect any of the properties, books and financial records of the Borrowers, to examine and to make copies of the books of accounts and other financial records of the Borrowers, and to discuss the affairs, finances and accounts of the Borrowers with officers at such reasonable times and intervals as the Lender may designate. Section 4.6 Payment. The Borrowers shall cause the net proceeds of any rights offering or equity offering or private placement referred to in Section 2.6(a) to be paid directly into the Payment Account, as defined in the Call Agreement. ARTICLE V 10 11 EVENTS OF DEFAULT AND REMEDIES Section 5.1 Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default: (a) Any Borrower shall fail to make when due, whether by acceleration or otherwise, any payment of principal of or interest on the Note or any other obligations of the Borrower to the Lender pursuant to this Agreement. (b) Any representation, warranty or statement of fact made by or on behalf of a Borrower in this Agreement or by or on behalf of a Borrower in any certificate, statement, report or document herewith or hereafter furnished to the Lender at any time is false or misleading in any material respect. (c) Any Borrower shall breach any of the terms, covenants, conditions or provisions of this Agreement, any supplement hereto or any other agreement between Lender and any Borrower or Subsidiary, including any of the other Loan Documents or any other default or Event of Default occurs or exists under any of the foregoing. (d) Any Borrower or any other Person at any time liable on or in respect of the obligations under this Agreement shall default in the payment of an amount greater than Two Hundred Fifty Thousand Dollars ($250,000), individually or in the aggregate, at any time due or any Indebtedness at any time owing to any Person other than Lender or in the performance of any other terms or covenants or any evidence of same or other agreement relating thereto or securing same, or with respect to any material contract, lease (other than leases under which Hanover, as successor to The Horn & Hardart Company, is the sole obligor relating to property not used in the business of Borrowers), license or other obligation owed to any Person other than Lender, which default continues for more than the applicable cure period, if any, with respect thereto, but in no event more than thirty (30) days after the occurrence of any such default. (e) Any Borrower or any Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars ($250,000), shall become insolvent, fail to meet its debts as they mature, call a meeting of creditors or have a creditors' committee appointed, make an assignment for the benefit of creditors, commence or have commenced against it any action or proceeding for relief under the U.S. Bankruptcy Code or any other bankruptcy law or similar statute or statutes providing for reorganization, adjustment of debts, liquidation or dissolution (except in the case of any such action or proceeding commenced against any Borrower or any Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars ($250,000), such action or proceeding is dismissed within thirty (30) days from the date such action or proceeding was commenced, unless such Borrower or Guarantor against whom such action was brought shall acquiesce to the relief sought or such relief sought is sooner granted; provided, however, that during such thirty (30) day period Lender shall have no obligation to make or provide any Advances, except 11 12 pursuant to the Call Agreement, or if any Borrower or any Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars ($250,000) suspends or discontinues doing business for any reason (other than as permitted in Section 6.7 hereof), or if a receiver, custodian or trustee of any kind is appointed for any Borrower or any Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars ($250,000) or any of their respective properties. (f) One (1) or more judgments, decrees or orders for the payment of damages in an amount greater than Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate at any time shall be issued by one or more courts, governmental agencies, administrative tribunals or other bodies having jurisdiction against any Borrower or any Guarantor with assets greater than Two Hundred Fifty Thousand Dollars ($250,000) and a stay of execution thereof shall not be procured within thirty (30) days after the date of entry thereof, or such judgment(s), decree(s) or order(s) shall not be fully bonded within such period of thirty (30) days, unless sooner enforced. (g) Any guarantor of any of the obligations of the Borrowers under this Agreement shall seek to revoke its guaranty or any such guaranty shall become unenforceable for any reason. (h) Any default shall occur under the Existing Note. (i) Any "Event of Default" (as defined in the Senior Credit Agreement) shall occur under the Senior Credit Agreement. Section 5.2 Remedies. Except as provided for in the Call Agreement and the $10,000,000 Subordination Agreement, (a) any Event of Default described in Sections 5.1 (e), (f) or (g) shall occur with respect to a Borrower or a Subsidiary, the Commitment shall automatically terminate and the Note and all other obligations of the Borrowers to the Lender under this Agreement shall automatically become immediately due and payable, or (b) any other Event of Default shall occur and be continuing, then the Lender may (i) declare the Commitment terminated, whereupon the Commitment shall terminate, and (ii) declare the Note and all other obligations of the Borrowers to the Lender under this Agreement to be forthwith due and payable, whereupon the same shall immediately become due and payable, in each case without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything in this Agreement or in the Note to the contrary notwithstanding. Upon the occurrence of any of the events described in clauses (a) or (b) of the preceding sentence the Lender may exercise all rights and remedies under this Agreement, the Note and any related agreements and under any applicable law. Section 5.3 Offset. In addition to the remedies set forth in Section 5.2, upon the occurrence of any Event of Default and thereafter while the same be continuing, the Borrowers hereby irrevocably authorize the Lender to set off all sums owing by the Borrowers to the Lender 12 13 against all deposits and credits of the Borrowers or any of them, with, and any and all claims of the Borrowers against, the Lender. Section 5.4 Subordination Agreement. Anything to the contrary contained in this Article V notwithstanding, as long as the $10,000,000 Subordination Agreement and the Call Agreement are in effect, the provisions of the $10,000,000 Subordination Agreement and the Call Agreement shall govern the Lender's rights to exercise remedies hereunder. ARTICLE VI MISCELLANEOUS Section 6.1 Modifications. Notwithstanding any provisions to the contrary herein, any term of this Agreement may be amended with the written consent of the Borrowers; provided that no amendment, modification or waiver of any provision of this Agreement or consent to any departure by a Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such amendment, modifications, waiver or consent shall be effective only in the specific instance and for the purpose for which given. Section 6.2 Costs and Expenses. Whether or not the transactions contemplated hereby are consummated, the Borrowers agree to reimburse the Lender upon demand for all reasonable out-of-pocket expenses paid or incurred by the Lender (including filing and recording costs and fees and expenses of counsel to the Lender) in connection with the negotiation, preparation, approval, review, execution, delivery, amendment, modification, interpretation, collection and enforcement of this Agreement or any other Loan Document and the Existing Note. The obligations of the Borrowers under this Section shall survive any termination of this Agreement. Section 6.3 Waivers, etc. No failure on the part of the Lender or the holder of the Note to exercise and no delay in exercising any power or right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The rights and remedies of the Lender hereunder are cumulative and not exclusive of any right or remedy the Lender otherwise has. Section 6.4 Notices. Except when telephonic notice is expressly authorized by this Agreement, any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, telegram, telex, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telegram, telex 13 14 or facsimile transmission, from the first Business Day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed; provided, however, that any notice to the Lender under Article II hereof shall be deemed to have been given only when received by the Lender. Section 6.5 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that a Borrower may not assign its rights or delegate its obligations hereunder without the prior written consent of the Lender. SECTION 6.6 GOVERNING LAW AND CONSTRUCTION. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF. SECTION 6.7 CONSENT TO JURISDICTION. AT THE OPTION OF THE LENDER, THIS AGREEMENT AND THE NOTE MAY BE ENFORCED IN ANY FEDERAL COURT OR NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK; AND THE BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT ANY BORROWER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE LENDER AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. SECTION 6.8 WAIVER OF JURY TRIAL. EACH OF THE BORROWERS AND THE LENDER IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTE AND ANY OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. Section 6.9 Captions. The captions or headings herein and any table of contents hereto are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Agreement. Section 6.10 Entire Agreement. This Agreement and the other Loan Documents embody the entire agreement and understanding between the Borrowers and the Lender with 14 15 respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. Section 6.11 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and either of the parties hereto may execute this Agreement by signing any such counterpart. Section 6.12 Joint and Several Obligations; Terms with Respect to Guaranteed Obligations. Each Borrower shall be jointly and severally liable for the obligations arising in connection with Advances, and the obligations arising in connection with Advances made to or for the account of the other Borrowers; provided, however, that if it is at any time determined that any Borrower is liable as a guarantor (and not jointly and severally) with respect to such obligations arising in connection with Advances made to or for the account of the other Borrowers (the "Guaranteed Obligations"), each Borrower hereby agrees to the following terms: (a) Obligations Absolute. No act or thing need occur to establish the liability of each Borrower for its Guaranteed Obligations, and no act or thing, except full payment and discharge of all such Guaranteed Obligations, shall in any way exonerate such Borrower or modify, reduce, limit or release the liability of such Borrower for its Guaranteed Obligations. The obligations of each Borrower for its Guaranteed Obligations shall be absolute, unconditional, and irrevocable, and shall not be subject to any right of setoff or counterclaim by such Borrower. (b) Continuing Guaranty. Each Borrower shall be liable for its Guaranteed Obligations, plus accrued interest thereon and all attorneys' fees, collection costs and enforcement expenses referable thereto. Guaranteed Obligations may be created and continued in any amount without affecting or impairing the liability of such Borrower therefor. No notice of such Guaranteed Obligations already or hereafter contracted or acquired by the Lender, or any renewal or extension of any thereof need be given to such Borrower and none of the foregoing acts shall release such Borrower from liability hereunder. The agreement of each Borrower pursuant to this Agreement with respect to its Guaranteed Obligations is an absolute, unconditional and continuing guaranty of payment of such Guaranteed Obligations and shall continue to be in force and be binding upon such Borrower until such Guaranteed Obligations are paid in full and this Agreement is terminated, and the Lender may continue, at any time and without notice to such Borrower, to extend credit or other financial accommodations and loan monies to or for the benefit of the other Borrowers on the faith thereof. Each Borrower hereby waives, to the fullest extent permitted by law, any right it may have to revoke or terminate its guaranty of the Guaranteed Obligations before the Guaranteed Obligations are paid in full and this Agreement is terminated. In the event any Borrower shall have any right under applicable law to otherwise terminate or revoke its guaranty of the Guaranteed Obligations which cannot be waived, such termination or revocation shall not be effective until written notice of such termination or revocation, signed by such Borrower, is actually received by the Lender's officer responsible for such matters. Any notice of termination or revocation described above shall not 15 16 affect such Borrower's guaranty of the Guaranteed Obligations in relation to (i) any of the Guaranteed Obligations that arose prior to receipt thereof or (ii) any of the Guaranteed Obligations created after receipt thereof, if such Guaranteed Obligations were incurred either through loans by the Lender or letters of credit issued by the Lender pursuant to its existing financing arrangements with the other Borrowers, including, without limitation, advances, readvances or letters of credit in an aggregate outstanding amount not to exceed the aggregate amount of the Revolving Commitment as of the time such notice of termination or revocation was received, including, but not limited, to all protective advances, costs, expenses, and attorneys' and paralegals' fees, whensoever made, advanced or incurred by the Lender in connection with the Guaranteed Obligations. If, in reliance on any Borrower's guaranty of its Guaranteed Obligations, the Lender makes loans or other advances to or for the benefit of the other Borrower or takes other action under this Agreement after such aforesaid termination or revocation by the undersigned but prior to the receipt by the Lender of said written notice as set forth above, the rights of the Lender shall be the same as if such termination or revocation had not occurred. (c) Other Transactions. Whether or not any existing relationship between the Borrowers has been changed or ended, the Lender may, but shall not be obligated to, enter into transactions resulting in the creation or continuance of other obligations of any Borrower to the Lender, without consent or approval by the other Borrowers and without notice to the other Borrowers, and all such obligations shall be guaranteed by virtue of this Agreement. The liability of the Borrowers under this Agreement with respect to the Guaranteed Obligations shall not be affected or impaired by any of the following acts or things (which the Lender is expressly authorized to do, omit or suffer from time to time, without notice to or approval by the Borrowers): (i) any acceptance of collateral security, other guarantors, accommodation parties or sureties for any or all Guaranteed Obligations; (ii) any one or more extensions or renewals of Guaranteed Obligations (whether or not for longer than the original period) or any modification of the interest rates, maturities or other contractual terms applicable to any Guaranteed Obligations; (iii) any waiver or indulgence granted to the other Borrowers, any delay or lack of diligence in the enforcement of Guaranteed Obligations, or any failure to institute proceedings, file a claim, give any required notices or otherwise protect any Guaranteed Obligations; (iv) any full or partial release of, settlement with, or agreement not to sue, any other Borrower or any other guarantor or other person liable in respect of any Guaranteed Obligations; (v) any discharge of any evidence of Guaranteed Obligations or the acceptance of any instrument in renewal thereof or substitution therefor; (vi) any failure to obtain collateral security for Guaranteed Obligations, or to see to the proper or sufficient creation and perfection thereof, or to establish the priority thereof, or to protect, ensure, or enforce any collateral security, or any modification, substitution, discharge, impairment or loss of any collateral security; (vii) any foreclosure or enforcement of any collateral security; (viii) any transfer of any Guaranteed Obligations or any evidence thereof; (ix) any order of application of any payments or credits upon Guaranteed Obligations; (x) any release of any collateral security for Guaranteed Obligations; (xi) any amendment to or modification of, any agreement between the Lender and any other Borrower, or 16 17 any waiver of compliance by any other Borrower with the terms thereof; and (xii) any election by the Lender under Section 1111(b) of the United States Bankruptcy Code. (d) Waivers of Defenses and Rights. Each Borrower waives any and all defenses, claims and discharges of the other Borrowers, or any other obligor, pertaining to the Guaranteed Obligations, except the defense of discharge by payment in full. Without limiting the generality of the foregoing, no Borrower will assert, plead or enforce against the Lender any defense of waiver, release, discharge in bankruptcy, statute of limitations, res judicata, statute of frauds, anti-deficiency statute, fraud, usury, illegality or unenforceability which may be available to any other Borrower or any other person liable in respect of any Guaranteed Obligations, or any setoff available against the Lender to any other Borrower or any such other person, whether or not on account of a related transaction. Each Borrower waives presentment, demand for payment, notice of dishonor or nonpayment, and protest of any instrument evidencing Guaranteed Obligations. Each Borrower agrees that its liability under this Agreement for the Guaranteed Obligations shall be primary and direct, and that the Lender shall not be required first to resort for payment of the Guaranteed Obligations to the other Borrower or other persons or their properties, or first to enforce, realize upon or exhaust any collateral security for the Guaranteed Obligations, or to commence any action or obtain any judgment against any other Borrower or against any such collateral security or to pursue any other right or remedy the Lender may have against any other Borrower before enforcing the liability of such Borrower for the Guaranteed Obligations under this Agreement. (e) Approval of Credit. Each of the Borrowers has, independently and without reliance upon the Lender or the directors, officers, agents or employees of the Lender, and instead in reliance upon information furnished by the other Borrowers and upon such other information as such Borrower deemed appropriate, made its own independent credit analysis and decision to guaranty the obligations of the other Borrowers pursuant to this Agreement. (f) Waiver of Subrogation. Each Borrower expressly waives any and all rights of subrogation, reimbursement, indemnity, exoneration, contribution or any other claim which it may now or hereafter have against the other Borrowers, any endorser or any other guarantor of all or any part of the Guaranteed Obligations, and each Borrower hereby waives any benefit of, and any right to participate in, any security or collateral given to the Lender to secure payment of the Guaranteed Obligations or any other liability of the other Borrowers to the Lender. Each Borrower further agrees that any and all claims it may have against the other Borrowers, any endorser or any other guarantor of all or any part of the Guaranteed Obligations or against any of their respective properties, whether arising by reason of any payment by such Borrower to the Lender pursuant to the provisions hereof or otherwise, is hereby waived. Section 6.13 Indemnification. Each Borrower hereby jointly and severally indemnified and holds harmless the Lender from and against any and all claims, damages, losses, liabilities, reasonable costs or expenses whatsoever (including attorneys fees) which the Lender may incur 17 18 (or which may be claimed against the Lender by any Person whatsoever) by reason of or in connection with the execution and delivery or assignment or transfer of, or payment or failure to make payment under , the Call Agreement or the Subordination Agreements; provided that the Borrowers shall not be required to indemnify the Lender for any claims , damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by the wilful misconduct or gross negligence of the Lender. Nothing in this Section 6.13 is intended to limit the obligations of the Borrowers to pay or reimburse the Lender otherwise contained in this Agreement. Section 6.14 Liability of the Lender. As between the Lender and the Borrowers, the Borrowers assume all risks of the acts or omissions of the Senior Lenders with respect to its use of the Call Agreement. Neither the Lender nor any of its affiliates, or officers or directors, shall be liable or responsible for: (a) the use which may be made of the proceeds of any Advance by the Borrowers or the Senior Lender or any other Person or for any acts or omissions of the Senior Lender in connection therewith; (b) the validity, sufficiency or genuineness of any notices, demands, requests, statements, certificates or documents even if such communications or documents should in fact rove to be in any or all respects invalid, insufficient, fraudulent or forged; or (c) any other circumstances whatsoever in making or failing to make payment under the Call Agreement, except only that the Borrowers shall have a claim against the Bank , and the Lender shall be liable to the Borrowers, to the extent but only to the extent of any direct, as opposed to consequential damages suffered by the Borrowers or any of them which the Borrowers prove, by clear and convincing evidence, were caused by the Lender's willful misconduct or gross negligence in determining whether under the Call Agreement the terms of the Call Agreement were satisfied by the Senior Lender. In furtherance and not in limitation of the foregoing, the Lender may accept communications and documents from the Senior Lender that appear to be in order, and may assume that the statements made thereunder are accurate, without responsibility for further investigation (and without notice to or consent by the Borrowers). 18 19 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. Address: HANOVER DIRECT, INC. 1500 Harbor Boulevard Weehawken, New Jersey 07087 By /s/ Brian C. Harris ----------------------------------- Fax: -------------------------------- Title Senior Vice President -------------------------------- Address: HANOVER DIRECT PENNSYLVANIA, INC. 500 Harbor Boulevard Weehawken, New Jersey 07087 By /s/ Brian C. Harris ----------------------------------- Fax: -------------------------------- Title Vice President -------------------------------- Address: BRAWN OF CALIFORNIA, INC. 741 "F" Street San Diego, California By /s/ Brian C. Harriss ----------------------------------- Fax: -------------------------------- Title Vice President -------------------------------- 19 20 Address: GUMPS BY MAIL, INC. 1500 Harbor Boulevard Weehawken, New Jersey 07087 By /s/ Brian C. Harriss ----------------------------------- Fax: -------------------------------- Title Vice President -------------------------------- Address: GUMP'S CORP. 135 Post Street San Francisco, California By /s/ Brian C. Harriss ----------------------------------- Fax: -------------------------------- Title Vice President -------------------------------- Address: TWEEDS, LLC 1500 Harbor Boulevard Weehawken, New Jersey 07087 By /s/ Brian Harriss ----------------------------------- Fax: -------------------------------- Title Vice President -------------------------------- 20 21 Address: SILHOUETTES, LLC 1500 Harbor Boulevard Weehawken, New Jersey 07087 By /s/ Brian C. Harriss ----------------------------------- Fax: -------------------------------- Title Vice President -------------------------------- Address: HANOVER COMPANY STORE, LLC 1500 Harbor Boulevard Weehawken, New Jersey 07087 By /s/ Brian C. Harriss ----------------------------------- Fax: -------------------------------- Title Vice President -------------------------------- Address: DOMESTICATIONS, LLC 1500 Harbor Boulevard Weehawken, New Jersey 07087 By /s/ Brian C. Harriss ----------------------------------- Fax: -------------------------------- Title Vice President -------------------------------- 21 22 Address: HANOVER DIRECT VIRGINIA INC. 1500 Harbor Boulevard Weehawken, New Jersey 07087 By /s/ Brian C. Harriss ----------------------------------- Fax: -------------------------------- Title Vice President -------------------------------- Address: LWI HOLDINGS, INC. 23297 Commerce Pkwy Beachwood, Ohio By /s/ Brian C. Harriss ----------------------------------- Fax: -------------------------------- Title Vice President -------------------------------- Address: KEYSTONE INTERNET SERVICES, INC. 1500 Harbor Boulevard Weehawken, New Jersey 07087 By /s/ Brian C. Harriss ----------------------------------- Fax: -------------------------------- Title Vice President -------------------------------- 22 23 RICHEMONT FINANCE S.A. By /s/ Jan du Plessis ------------------------------------ Print Name Jan du Plessis -------------------------- Title Director ------------------------------- By /s/ Alan Grieve ------------------------------------ Print Name Alan Grieve -------------------------- Title Director ------------------------------- Lender's Address: Richemont Finance, S.A. 35 Boulevard, Prince Henri L1724 Luxembourg Attention: General Manager Fax : 011-352 22 42 19 Phone: 011 352 22 42 10 with a copy to: Richemont Finance S.A. Rigistrasse 2 Zug 6300 Switzerland Attention: Mr. J. Alan Grieve Fax: 011-4141-711-7138 Phone: 011-4141-710-3322 23 EX-10.7 7 SUBORDINATION AGREEMENT 1 Exhibit 10.7 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT ("Subordination Agreement"), dated as of March 24, 2000, is by and between CONGRESS FINANCIAL CORPORATION, a Delaware corporation ("Senior Creditor", as hereinafter further defined), and RICHEMONT FINANCE S.A., a societe anonyme organized under the laws of the Grand Duchy of Luxembourg ("Junior Creditor", as hereinafter further defined). Senior Creditor and Junior Creditor are sometimes individually referred to herein as "Creditor" and collectively as "Creditors." W I T N E S S E T H: WHEREAS, Junior Creditor has or is about to enter into financing arrangements pursuant to which Junior Creditor may make loans and advances to certain direct and indirect subsidiaries of Hanover Direct, Inc. ("Debtor", as hereinafter defined) of up to $10,000,000, which loans are and shall be unsecured; and WHEREAS, Senior Creditor has entered into financing arrangements with Debtor and certain of its subsidiaries, pursuant to which Senior Creditor has, upon certain terms and conditions, made loans and provided other financial accommodations to certain subsidiaries of Debtor, guaranteed by Debtor and certain subsidiaries of Debtor, secured by substantially all of the assets and properties of Hanover and of such borrower subsidiaries and guarantor subsidiaries of Debtor; and WHEREAS, in order to induce Senior Creditor to continue the financing arrangements with Debtor and certain subsidiaries of Debtor, Junior Creditor has agreed to the subordination in favor of Senior Creditor as provided herein of its right to payment of the existing and future obligations of Debtor to Junior Creditor arising in connection with the revolving credit facility in the amount of up to $10,000,000 to the prior indefeasible payment of the existing and future obligations of Debtor to Senior Creditor under the Senior Creditor Agreements, and related matters as set forth below; NOW THEREFORE, in consideration of the mutual benefits accruing to Creditors hereunder and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby agree as follows: 1. DEFINITIONS As used above and in this Subordination Agreement, the following terms shall have the meanings ascribed to them below: 2 1.1 "Agreements" shall mean, individually and collectively, the Senior Creditor Agreements and the Junior Creditor Agreements. 1.2 "Banking Day" shall mean any day, other than Saturday or Sunday, when Senior Creditor and commercial banks are open in New York, New York and Europe. 1.3 "Creditors" shall mean, individually and collectively, Senior Creditor and Junior Creditor and their respective successors and assigns. 1.4 "Debtor" shall mean, individually and collectively, Hanover Direct, Inc., a Delaware corporation, Hanover Direct Pennsylvania, Inc., a Pennsylvania corporation, Brawn Of California, Inc., a California corporation, Gump's By Mail, Inc., a Delaware corporation, Gump's Corp., a California corporation, LWI Holdings, Inc., a Delaware corporation, Hanover Direct Virginia Inc., a Delaware corporation, Hanover Realty, Inc., a Virginia corporation, The Company Store Factory, Inc., a Delaware corporation, The Company Office, Inc., a Delaware corporation, Tweeds, LLC, a Delaware limited liability company, Silhouettes, LLC, a Delaware limited liability company, Hanover Company Store, LLC, a Delaware limited liability company, Domestications, LLC, a Delaware limited liability company, and Keystone Internet Services, Inc., a Delaware corporation, and each of their respective successors and assigns, including, without limitation, a receiver, trustee, or debtor-in-possession on behalf of any such person or on behalf of any such successor or assign. 1.5 "Event of Default" shall have the meaning given in the Loan Agreement. 1.6 "Incipient Default" shall have the meaning given in the Loan Agreement. 1.7 "Excess Loan Availability" shall have the meaning given in the Loan Agreement. 1.8 "Insolvency Proceeding" shall have the meaning given in Section 2.3 hereof. 1.9 "Junior Creditor" shall mean Richemont Finance S.A., a societe anonyme organized under the laws of the Grand Duchy of Luxembourg, and its successors and assigns. 1.10 "Junior Creditor Agreements" shall mean, individually and collectively, the Credit Agreement, dated as of the date hereof, among Junior Creditor and Debtor the Revolving Credit Note, dated as of the date hereof, by Debtor payable to the order of Junior Creditor in the principal amount of up to $10,000,000, and all agreements, documents and instruments at any time executed and/or delivered by Debtor or any other person to, with or in favor of Junior Creditor in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.11 "Junior Debt" shall mean all obligations, liabilities and indebtedness of every kind, nature and description owing by Debtor to Junior Creditor under the Junior Creditor Agreements, including principal, interest, charges, fees, premiums, indemnities and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, arising under or -2- 3 evidenced by or in connection with the Junior Creditor Agreements, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of the Junior Creditor Agreements or after the commencement of any case with respect to Debtor under the U.S. Bankruptcy Code or any similar statute (and including, without limitation, any principal, interest, fees, costs, expenses and other amounts, whether or not such amounts are allowable in whole or in part, in any such case or similar proceeding), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and whether arising directly, or by way of subrogation, contribution, reimbursement, indemnification, exoneration or otherwise, or howsoever acquired by Junior Creditor in connection with the Junior Creditor Agreements. 1.12 "Payment Account" shall have the meaning given in the Richmont $10,000,000 Call Agreement. 1.13 "Person" or "person" shall mean any individual, sole proprietorship, partnership, corporation (including, without limitation, any corporation which elects subchapter S status under the Internal Revenue Code of 1986, as amended), business trust, unincorporated association, joint stock company, trust, joint venture, limited liability company, limited liability partnership, or other entity or any government or any agency or instrumentality or political subdivision thereof. 1.14 "Richemont $10,000,000 Call Agreement" shall mean the letter agreement, dated as of the date hereof, between Senior Creditor and Junior Creditor, acknowledged by Debtors, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.15 "Senior Creditor" shall mean Congress Financial Corporation, a Delaware corporation, and its successors and assigns. 1.16 "Senior Creditor Agreements" shall mean, individually and collectively, the Loan and Security Agreement, dated November 14, 1995, by and among Senior Creditor, Debtor and certain subsidiaries of Debtor, as amended through the Fifteenth Amendment to Loan and Security Agreement, dated as of the date hereof (the "Loan Agreement"), the Richemont $10,000,000 Call Agreement, any related guarantees by Debtor in favor of Senior Creditor, any security agreements by Hanover in favor of Senior Creditor and all agreements, documents and instruments at any time executed and/or delivered by Debtor or any other person to, with or in favor of Senior Creditor in connection therewith or related thereto, as all of the foregoing now exist or, subject to the terms and conditions contained in this Subordination Agreement, as may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.17 "Senior Debt" shall mean all obligations, liabilities and indebtedness of every kind, nature and description owing by Debtor or any other subsidiary of Debtor to Senior Creditor and/or its affiliates, or participants, including principal, interest, charges, fees, premiums, indemnities and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, owing in connection with the Senior Creditor Agreements, whether now existing or -3- 4 hereafter arising, whether arising before, during or after the initial or, subject to the terms and conditions contained in this Subordination Agreement, any renewal term of the Senior Creditor Agreements or after the commencement of any case with respect to Debtor under the U.S. Bankruptcy Code or any similar statute (and including, without limitation, any principal, interest, fees, costs, expenses and other amounts, whether or not such amounts are allowable either in whole or in part, in any such case or similar proceeding), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and whether arising directly, or by way of subrogation, contribution, reimbursement, indemnification, exoneration or otherwise, or howsoever acquired by Senior Creditor in connection with the Senior Creditor Agreements. 1.18 All terms used herein which are defined in the Uniform Commercial Code as in effect in the State of New York, unless otherwise defined herein shall have the meanings set forth therein. All references to any term in the plural shall include the singular and all references to any term in the singular shall include the plural. 2. SUBORDINATION OF JUNIOR DEBT 2.1 Subordination. Except as specifically set forth in Section 2.2 hereof, Junior Creditor hereby subordinates its right to payment and satisfaction of the Junior Debt, and the payment and satisfaction thereof, directly or indirectly, by any means whatsoever, is hereby deferred, to the prior indefeasible payment and satisfaction in full of all Senior Debt. 2.2 Permitted Payments. Senior Creditor hereby agrees that, notwithstanding anything to the contrary contained in Section 2.1 hereof, (a) unless and until Senior Creditor sends written notice to Junior Creditor of the occurrence and continuance of an Event of Default or Incipient Default under the Senior Creditor Agreements: (i) Debtor may make and Junior Creditor may receive and retain from Debtor, from time to time payments of principal to Junior Creditor in respect of the Junior Debt; provided, that, as to any such payment, each of the following conditions shall have been satisfied as determined by Senior Creditor: (A) Senior Creditor shall have received not less than five (5) Banking Days' prior written notice of the intention of Debtors to make such payment, which written notice shall set forth the amount of the payment intended to be made, the then current outstanding amount of principal and such other information with respect thereto as Senior Creditor may reasonably request, (B) as of the date of and after giving effect to any such payment, the Excess Availability on such date and for each of the immediately preceding thirty (30) consecutive days shall have been not less than $5,000,000; and (ii) Debtor may make and Junior Creditor may receive and retain from Debtor regularly scheduled payments of interest and of a monthly fee in the amount of $79,200 as provided by the Junior Creditor Agreements as in effect on the date hereof; and -4- 5 (b) Debtor may make, and Junior Creditor may receive and retain, payments by Debtor to Junior Creditor of the Junior Debt solely out of cash proceeds pursuant to a rights offering by Hanover Direct, Inc., Harvard Brands, Inc. or erizon, inc. or any other equity offering(s) or equity private placement(s) of capital stock of Hanover Direct, Inc, Hanover Brands, Inc. or erizon, inc. and Junior Creditor may convert the then outstanding amount of Junior Debt for capital stock of Hanover Direct, Inc. or Hanover Brands or erizon, inc.; provided, that, (i) Senior Creditor has received not less than fifteen (15) Banking Days prior written notice from Debtor of the intention to make such payment out of cash proceeds of such rights offering or other equity offering or such conversion of the Junior Debt to capital stock, (ii) such capital stock consists of ordinary common stock as in effect on the date hereof or of other capital shares if consented to by Senior Creditor, which consent shall not be unreasonably withheld in Senior Creditor's good faith judgment. To the extent any such cash proceeds of any such equity offering or conversion of Junior Debt permitted hereby reduces the amount of any commitment to advance funds pursuant to the Junior Creditor Agreements, any such net cash proceeds or conversion shall not also reduce the amount of any commitment to advance funds pursuant to the Richemont $25,000,000 Credit Agreements as such term is defined in the Senior Creditor Agreements. 2.3 Distributions. (a) In the event of any distribution, division, or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of Debtor or the proceeds thereof to the creditors of Debtor or readjustment of the obligations and indebtedness of Debtor, whether by reason of liquidation, bankruptcy, arrangement, receivership, assignment for the benefit of creditors, marshalling of assets of Debtor or any other action or proceeding involving the readjustment of all or any part of indebtedness of Debtor or the application of the assets of Debtor to the payment or liquidation thereof (each of the foregoing, an "Insolvency Proceeding"), or upon the dissolution or other winding up of Debtor's business, or upon the sale of all or substantially all of Debtor's assets, then, and in any such event, (i) Senior Creditor shall first receive indefeasible payment in full in cash of all of the Senior Debt prior to the payment of all or any part of the Junior Debt, and (ii) Senior Creditor shall be entitled to receive any payment or distribution of any kind or character, whether in cash, securities or other property, which is payable or deliverable in respect of any or all of the Junior Debt. (b) In order to enable Senior Creditor to enforce its rights under Section 2.3(a) hereof, Senior Creditor is hereby irrevocably authorized and empowered (in its own name or in the name of Junior Creditor or otherwise), but shall have no obligation, to enforce claims comprising any of the Junior Debt by proof of debt, proof of claim, suit or otherwise and take generally any action which Junior Creditor might otherwise be entitled to take, as Senior Creditor may deem necessary or advisable for the enforcement of its rights or interests hereunder. (c) To the extent necessary for Senior Creditor to realize the benefits of the subordination of the Junior Debt provided for herein (including the right to receive any and all payments and distributions which might otherwise be payable or deliverable with respect to the Junior Debt in any Insolvency Proceeding or otherwise), Junior Creditor shall execute and -5- 6 deliver to Senior Creditor such instruments or documents (together with such assignments or endorsements as Senior Creditor shall deem necessary), as may be reasonably requested by Senior Creditor. 2.4 Payments Received by Junior Creditor. Except for payments received by Junior Creditor as provided in Section 2.2 hereof, should any payment or distribution or security or instrument or proceeds thereof be received by the Junior Creditor in respect of the Junior Debt, Junior Creditor shall receive and hold the same in trust, as trustee, for the benefit of Senior Creditor, segregated from other funds and property of Junior Creditor and shall forthwith deliver the same to Senior Creditor (together with any endorsement or assignment of Junior Creditor where necessary), for application to any of the Senior Debt. In the event of the failure of Junior Creditor to make any such endorsement or assignment to Senior Creditor, Senior Creditor, or any of its officers or employees, are hereby irrevocably authorized on behalf of Junior Creditor to make the same. 2.5 Instrument Legend and Notation. Any instrument at any time evidencing the Junior Debt, or any portion thereof, shall be permanently marked on its face with a legend conspicuously indicating that payment thereof is subordinate in right of payment to the Senior Debt and subject to the terms and conditions of this Subordination Agreement, and (a) after being so marked certified copies thereof shall be delivered to Senior Creditor and (b) the original of any such instrument shall be immediately delivered to Senior Creditor upon Senior Creditor's request, at any time on or after the commencement of an Insolvency Proceeding. In the event any legend or endorsement is omitted, Senior Creditor, or any of its officers or employees, are hereby irrevocably authorized on behalf of Junior Creditor to make the same. No specific legend, further assignment or endorsement or delivery of notes, guarantees or instruments shall be necessary to subject any Junior Debt to the subordination thereof contained in this Agreement. 2.6 Reduction in Credit Limit of Junior Creditor Agreements. Junior Creditor may reduce the maximum credit available to Debtor under the Junior Credit Agreements equal to the amount of net cash proceeds received by Senior Creditor by reason of equity contribution(s) to Debtor or conversions of Junior Debt into capital stock of Hanover Direct, Inc., Hanover Brands, Inc. and erizon, inc. so long as each of the following conditions shall have been satisfied as determined by Senior Creditor: (a) Senior Creditor shall have received not less than fifteen (15) Banking Days' prior written notice of the intention of Richemont to effect any such reduction in such maximum credit and to make any such cash equity contribution or conversion, together with the terms and conditions of such cash equity contribution or conversion; (b) such cash equity contributions or conversions shall be in the form of capital stock consisting of ordinary common stock as in effect on the date hereof or of other capital stock if consented to by Senior Creditor, which consent shall not be unreasonably withheld in Senior Creditor's good faith judgment; and -6- 7 (c) any net proceeds of such cash equity contribution shall be remitted directly to the Payment Account. 3. COVENANTS, REPRESENTATIONS AND WARRANTIES 3.1 Additional Covenants. Junior Creditor and Debtor agree in favor of Senior Creditor that: (a) Except as specifically set forth in Section 2.2 hereof, Debtor shall not, directly or indirectly, make and Junior Creditor shall not, directly or indirectly, accept or receive any payment of or any prepayment or any payment pursuant to acceleration or claims of breach or any payment to acquire Junior Debt or otherwise in respect of any Junior Debt; (b) notwithstanding any rights or remedies available to it under the Junior Creditor Agreements, applicable law or otherwise, Junior Creditor shall not, directly or indirectly, (i) seek to collect from Debtor any of the Junior Debt or exercise any of its rights or remedies upon a default or event of default by Debtor under the Junior Creditor Agreements or otherwise or (ii) commence any action or proceeding against Debtor or Debtor's properties under the U.S. Bankruptcy Code or any state insolvency law or any similar present or future statute, law or regulation or any proceedings for voluntary liquidation, dissolution or other winding up of Debtor's business, or the appointment of any trustee, receiver or liquidator for Debtor or any part of Debtor's properties or any assignment for the benefit of creditors or any marshalling of assets of Debtor or (iii) take any other action against Debtor or Debtor's properties in respect of the Junior Debt; (c) Debtor shall not grant to Junior Creditor and Junior Creditor shall not acquire any security interest, lien, claim or encumbrance on any assets or properties of Debtor, and Junior Creditor shall not acquire any guarantees or other agreements under which any person, other than Debtor, is or may become obligated, directly or indirectly, for all or any portion of the Junior Debt; (d) Junior Creditor and Debtor shall not amend, modify, alter or change in any material respect the terms of any arrangements related to the Junior Debt; (e) Junior Creditor shall not sell, assign, pledge, encumber or otherwise dispose of any of the Junior Debt, or subordinate any of the Junior Debt to any indebtedness of Debtors other than the Senior Debt, without the prior written consent of Senior Creditor, which consent shall not be unreasonably withheld in Senior Creditor's good faith determination; (f) Junior Creditor and Debtor shall, at any time or times upon the request of Senior Creditor, promptly furnish to Senior Creditor a true, correct and complete statement of the outstanding Junior Debt; and (g) Junior Creditor and Debtor shall execute and deliver to Senior Creditor such additional agreements, documents and instruments and take such further actions as may be -7- 8 reasonably necessary or desirable in the opinion of Senior Creditor to effectuate the provisions and purposes of this Subordination Agreement. 3.2 Additional Representations and Warranties. Junior Creditor and Debtor represent and warrant to Senior Creditor that: (a) as of the date hereof, the total principal amount of the Junior Debt outstanding is $-0-; (b) Junior Creditor has no security interest, lien, claim or encumbrance on any assets and properties of Debtor and the Junior Debt is unsecured; (c) as of the date hereof, no default or event of default, or event which with notice or passage of time or both would constitute an event of default exists or has occurred under the Junior Creditor Agreements; (d) Junior Creditor is the exclusive legal and beneficial owner of all of the Junior Debt; (e) none of the Junior Debt is subject to any lien, security interest, financing statements, subordination, assignment or other claim, except in favor of Senior Creditor; and (f) this Subordination Agreement constitutes the legal, valid and binding obligations of Junior Creditor, enforceable in accordance with its terms. 3.3 Waivers. Notice of acceptance hereof, the making of loans, advances and extensions of credit or other financial accommodations to, and the incurring of any expenses by or in respect of, Debtor or its subsidiaries by Senior Creditor, and presentment, demand, protest, notice of protest, notice of nonpayment or default and all other notices to which Junior Creditor and Debtor are or may be entitled are hereby waived (except as expressly provided for herein or as to Debtor, in the Senior Creditor Agreements). Junior Creditor also waives notice of, and hereby consents to, (a) subject to the terms and conditions contained in this Subordination Agreement, any amendment, modification, supplement, renewal, restatement or extensions of time of payment of or increase or decrease in the amount of any of the Senior Debt or to the Senior Creditor Agreements or any collateral at any time granted to or held by Senior Creditor, (b) the taking, exchange, surrender and releasing of collateral at any time granted to or held by Senior Creditor or guarantees now or at any time held by or available to Senior Creditor for the Senior Debt or any other person at any time liable for or in respect of the Senior Debt, (c) the exercise of, or refraining from the exercise of any rights against Debtor or any other obligor or any collateral at any time granted to or held by Senior Creditor, (d) the settlement, compromise or release of, or the waiver of any default with respect to, any of the Senior Debt, and/or (e) Senior Creditor's election, in any proceeding instituted under the U.S. Bankruptcy Code of the application of Section 1111(b)(2) of the U.S. Bankruptcy Code. Any of the foregoing shall not, in any manner, affect the terms hereof or impair the obligations of Junior Creditor hereunder. All -8- 9 of the Senior Debt shall be deemed to have been made or incurred in reliance upon this Subordination Agreement. 3.4 Subrogation; Marshalling. Junior Creditor shall not be subrogated to, or be entitled to any assignment of any Senior Debt or Junior Debt or of any collateral for or guarantees or evidence of any thereof until all of the Senior Debt is indefeasibly paid and satisfied in full. Junior Creditor hereby waives any and all rights to have any collateral or any part thereof granted to or held by Senior Creditor marshalled upon any foreclosure or other disposition of such collateral by Senior Creditor or Debtor with the consent of Senior Creditor. When the Senior Debt shall have been indefeasibly paid in full and discharged and all the Senior Creditor Agreements have been terminated, to the extent permitted by law, the Junior Creditor shall, to the extent permitted by law, be subrogated to the rights of the Senior Creditor to receive payments or distribution of assets in respect of the Junior Debt. 3.5 No Offset. In the event Junior Creditor at any time incurs any obligation to pay money to Debtor, Junior Creditor hereby irrevocably agrees that it shall pay such obligation in cash or cash equivalents in accordance with the terms of the contract governing such obligation and shall not deduct from or setoff against any amounts owed by Junior Creditor to Debtor in connection with any such transaction any amounts the Junior Creditor claims are due to it with respect to the Junior Debt. 3.6 Certain Amendments to Senior Creditor Agreements. Senior Creditor shall not make loans or advances to Debtors under the Loan Agreement that would result in the Senior Debt to be greater than $90,000,000 outstanding at any one time and Senior Creditor shall not extend the Renewal Date (as such term is defined in the Loan Agreement) beyond six (6) months without the prior written consent of Junior Creditor; provided, that, if the Junior Creditor Agreements are terminated to the extent provided herein, this Section 3.6 shall automatically and without further action by the parties hereto shall no longer be deemed to apply and have no further force and effect. 4. MISCELLANEOUS 4.1 Amendments. Any waiver, permit, consent or approval by either Creditor of or under any provision, condition or covenant to this Subordination Agreement must be in writing and shall be effective only to the extent it is set forth in writing and as to the specific facts or circumstances covered thereby. Any amendment of this Subordination Agreement must be in writing and signed by each of the parties to be bound thereby. 4.2 Successors and Assigns. (a) This Subordination Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of each of Creditors and its respective successors, participants and assigns. -9- 10 (b) Senior Creditor reserves the right to grant participations in, or otherwise sell, assign, transfer or negotiate all or any part of, or any interest in, the Senior Debt and the collateral securing same; provided, that, Junior Creditor shall not be obligated to give any notices to or otherwise in any manner deal directly with any participant in the Senior Debt and no participant shall be entitled to any rights or benefits under this Subordination Agreement except through Senior Creditor. In connection with any participation or other transfer or assignment, Senior Creditor (i) may disclose to such assignee, participant or other transferee or assignee all documents and information which Senior Creditor now or hereafter may have relating to the Senior Debt or any collateral and (ii) shall disclose to such participant or other transferee or assignee the existence and terms and conditions of this Subordination Agreement. (c) In connection with any assignment or transfer of any or all of the Senior Debt, or any or all rights of Senior Creditor in any of the property of Debtor or its subsidiaries (other than pursuant to a participation), Junior Creditor agrees to execute and deliver an agreement containing terms substantially identical to those contained herein in favor of any such assignee or transferee and, in addition, will execute and deliver an agreement containing terms substantially identical to those contained herein in favor of any third person who succeeds to or replaces any or all of Senior Creditor's financing of certain subsidiaries of Debtor, whether such successor financing or replacement occurs by transfer, assignment, "takeout" or any other means. 4.3 Insolvency. This Subordination Agreement shall be applicable both before and after the filing of any petition by or against Debtor or any of its subsidiaries under the U.S. Bankruptcy Code and all converted or succeeding cases in respect thereof, and all references herein to Debtor or any of Debtor's subsidiaries shall be deemed to apply to a trustee for Debtor or any of its subsidiaries, as well as to Debtor or any of its subsidiaries as debtor-in-possession. The relative rights of Senior Creditor and Junior Creditor to repayment of the Senior Debt and the Junior Debt, respectively, and in or to any distributions from or in respect of Debtor or any proceeds of Debtor's property and assets, shall continue after the filing thereof on the same basis as prior to the date of the petition, subject to any court order approving the financing of, or use of cash collateral by, Debtor or any of its subsidiaries as debtor-in-possession. 4.4 Bankruptcy Financing. If Debtor or any of its subsidiaries shall become subject to a proceeding under the U.S. Bankruptcy Code and if Senior Creditor desires to permit the use of cash collateral or to provide financing to Debtor or any of its subsidiaries under either Section 363 or Section 364 of the U.S. Bankruptcy Code, Junior Creditor agrees as follows: (a) adequate notice to Junior Creditor (if required) shall have been provided for such financing or use of cash collateral if Junior Creditor receives notice two (2) business days prior to the entry of the order approving such financing or use of cash collateral and (b) no objection will be raised by Junior Creditor to any such use of cash collateral or financing. For purposes of this Section, notice of a proposed financing or use of cash collateral shall be deemed given when given in the manner prescribed by Section 4.5 hereof to Junior Creditor. 4.5 Notices. All notices, requests and demands to or upon the respective parties hereto shall be in writing and shall be deemed to have been duly given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon -10- 11 sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next business day, one (1) business day after sending; and if mailed by certified mail, return receipt requested, five (5) days after mailing. All notices, requests and demands are to be given or made to the respective parties at their addresses set forth below (or to such other addresses as either party may designate by notice in accordance with the provisions of this Section: To Senior Creditor: Congress Financial Corporation 1133 Avenue of the Americas New York, New York 10036 Attention: Mr. Laurence S. Forte Telecopier: 212-545-4283 Phone: 212-0545-4280 To Junior Creditor: Richemont Finance S.A. 35 Boulevard Prince Henri L 1724 Luxembourg Attention: Mr. J. Alan Grieve Telecopier: 011-4141-711-7138 Phone: 011-4141-710-3322 with a copy to: Robert P. Wessely, Esq. Dorsey & Whitney 250 Park Avenue New York, New York 10036 Telecopier: (212) 953-7201 Phone: (212) 415-9200 Either Creditor may change the address(es) to which all notices, requests and other communications are to be sent by giving written notice of such address change to the other Creditor in conformity with this Section 4.5, but such change shall not be effective until notice of such change has been received by the other Creditor. 4.6 Counterparts. This Subordination Agreement may be executed in any number of counterparts, each of which shall be an original with the same force and effect as if the signatures thereto and hereto were upon the same instrument. 4.7 Governing Law. The validity, construction and effect of this Subordination Agreement shall be governed by the laws of the State of New York (without giving effect to principles of conflicts of laws). 4.8 Consent to Jurisdiction; Waiver of Jury Trial. Each of the parties hereto hereby irrevocably consents 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 trial by jury in any action or proceeding with respect to this Subordination Agreement. -11- 12 4.9 Complete Agreement. (a) This written Subordination Agreement is intended by the parties as a final expression of their agreement and is intended as a complete statement of the terms and conditions of their agreement. (b) The obligations of Junior Creditor under this Subordination Agreement are in addition to, and in no way limited by the terms of the Subordination Agreement, dated as of the date hereof, between Junior Creditor and Senior Creditor, as acknowledged by Debtor and certain direct and indirect subsidiaries of Debtor in respect of the Richemont $25,000,000 Credit Agreements as such term is defined in the Loan Agreement, nor shall any of the terms thereof be limited or affected by the terms of this Subordination Agreement. (c) The obligations of Junior Creditor under this Subordination Agreement are in addition to, and in no way limited by the terms of any other subordination agreement, heretofore entered into between Junior Creditor and Senior Creditor, as acknowledged by Debtor and/or certain of its subsidiaries and affiliates, nor shall any of the terms of any such subordination agreement be limited or affected by the terms of this Subordination Agreement. 4.10 No Third Parties Benefitted. This Subordination Agreement is solely for the benefit of the Creditors and their respective successors, participants and assigns, and no other person shall have any right, benefit, priority or interest under, or because of the existence of, this Subordination Agreement. 4.11 Disclosures, Non-Reliance. Each Creditor has the means to, and shall in the future remain, fully informed as to the financial condition and other affairs of Debtor and neither Creditor shall have any obligation or duty to disclose any such information to any other Creditor. Except as expressly set forth in this Subordination Agreement, the parties hereto have not otherwise made to each other nor do they hereby make to each other any warranties, express or implied, nor do they assume any liability to each other with respect to: (a) the enforceability, validity, value or collectability of any of the Junior Debt or the Senior Debt or any collateral or guarantee which may have been granted to any of them in connection therewith, (b) Debtor's title to or right to any of Debtor's assets and properties or (c) any other matter except as expressly set forth in this Subordination Agreement. 4.12 Term. This Subordination Agreement is a continuing agreement and shall remain in full force and effect until the indefeasible satisfaction in full of all Senior Debt and the termination of the financing arrangements among Senior Creditor, Debtor and certain subsidiaries of Debtor. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -12- 13 IN WITNESS WHEREOF, the parties have caused this Subordination Agreement to be duly executed as of the day and year first above written. CONGRESS FINANCIAL CORPORATION By: /s/ Janet Last --------------------------- Title: Vice President RICHEMONT FINANCE S.A. By: /s/ Jan P. du Plessis --------------------------- Title: Director By: /s/ Alan Grieve --------------------------- Title: Director -13- 14 ACKNOWLEDGMENT The undersigned hereby acknowledges and agrees to the foregoing terms and provisions. By its signature below, the undersigned agrees that it shall, together with its successors and assigns, be bound by the provisions hereof. The undersigned acknowledges and agrees that: (i) although it may sign this Subordination Agreement, it is not a party hereto and does not and shall not receive any right, benefit, priority or interest under or because of the existence of the foregoing Subordination Agreement, (ii) in the event of a breach by the undersigned of any of the terms and provisions contained in the foregoing Subordination Agreement, such a breach shall constitute an "Event of Default" as defined in and under the Senior Creditor Agreements, and (iii) it shall execute and deliver such additional documents and take such additional action as may be necessary in the opinion of either Creditor to effectuate the provisions and purposes of the foregoing Subordination Agreement. HANOVER DIRECT, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Senior Vice President --------------------------- HANOVER DIRECT PENNSYLVANIA, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- BRAWN OF CALIFORNIA, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President --------------------------- GUMP'S BY MAIL, INC. By: /s/ Brian C. Harriss ------------------------------ Title: President --------------------------- [SIGNATURES CONTINUED ON NEXT PAGE] -14- 15 [SIGNATURES CONTINUED FROM PRIOR PAGE] GUMP'S CORP. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President -------------------------- LWI HOLDINGS, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President -------------------------- HANOVER DIRECT VIRGINIA INC. By: /s/ Brian C. Harriss ------------------------------ Title: President -------------------------- TWEEDS, LLC By: /s/ Brian C. Harriss ------------------------------ Title: Vice President -------------------------- SILHOUETTES, LLC By: /s/ Brian C. Harriss ------------------------------ Title: Vice President -------------------------- HANOVER COMPANY STORE, LLC By: /s/ Brian C. Harriss ------------------------------ Title: Vice President -------------------------- DOMESTICATIONS, LLC By: /s/ Brian C. Harriss ------------------------------ Title: President -------------------------- [SIGNATURES CONTINUED ON NEXT PAGE] -15- 16 [SIGNATURES CONTINUED FROM PRIOR PAGE] HANOVER REALTY, INC. By: /s/ Brian C. Harriss ------------------------------ Title: President -------------------------- THE COMPANY STORE FACTORY, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President -------------------------- THE COMPANY OFFICE, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President -------------------------- KEYSTONE INTERNET SERVICES, INC. By: /s/ Brian C. Harriss ------------------------------ Title: Vice President -------------------------- -16- EX-10.8 8 LETTER AGREEMENT 1 EXHIBIT 10.8 RICHEMONT FINANCE S.A. 35 Boulevard Prince Henri L1724 Luxembourg As of March 24, 2000 Congress Financial Corporation, 1133 Avenue of the Americas New York, New York 10036 Re: Unsecured Line of Credit in the Maximum Amount of $10,000,000 Ladies and Gentlemen: Congress Financial Corporation ("Lender") has entered into financing arrangements with Hanover Direct Pennsylvania, Inc., Brawn of California, Inc., Gump's By Mail, Inc., Gump's Corp., LWI Holdings, Inc., Hanover Direct Virginia Inc., Hanover Realty, Inc., Tweeds, LLC, Silhouettes, LLC, Hanover Company Store, LLC, Domestications, LLC, The Company Store Factory, Inc., The Company Office, Inc. and Keystone Internet Services, Inc. (each individually, a "Borrower" and collectively, "Borrowers") pursuant to which Lender may make loans and provide other financial accommodations to Borrowers in accordance with the terms and conditions of the Loan and Security Agreement, dated November 14, 1995, by and among Lender, Borrowers and Hanover Direct, Inc. ("Hanover") and certain of Hanover's other subsidiaries (collectively, together with Hanover, "Guarantors"), as amended through the Fifteenth Amendment to Loan and Security Agreement (the "Fifteenth Agreement to Loan Agreement"), dated as of the date hereof (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement"), and other agreements, documents and instruments referred to therein or at any time executed and/or delivered in connection therewith or related thereto, including, but not limited to, this letter agreement (all of the foregoing, together with the Loan Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, being collectively referred to herein as the "Financing Agreements"). All capitalized terms used herein. unless otherwise defined herein, shall have the meanings given to such terms in the Loan Agreement. In order to induce Lender to enter into the Fifteenth Amendment to Loan Agreement and the other Financing Agreements related thereto and in consideration of the Loans and Letter of Credit Accommodations to be provided by Lender to Borrowers pursuant thereto, the parties hereto agree as follows: 1. Excess Availability Covenant Payments. (a) If at any time Excess Loan Availability, as determined by Lender, is less than $3,000,000 under the Loan Agreement, upon receipt of notice from Lender as provided in 2 Section 1(b) hereof, Richemont hereby agrees for the account of Borrowers to pay Lender in immediately available funds amounts requested by Lender in writing, as to which the Lender certifies to Richemont as being the amount necessary to repay the Obligations in an amount sufficient in Lender's discretion so that Excess Loan Availability shall, after application of such payments, be $3,000,000; provided, that, Richemont shall not be required to make any such payments that would result in the total outstanding amount of principal under the Richemont $10,000,000 Credit Agreements to exceed the maximum credit availability then in effect as set forth in the Richemont $10,000,000 Credit Agreements and the Richemont $10,000,000 Subordination Agreement. Lender agrees upon the written request of Borrowers to provide, at Borrower's sole cost and expense, a copy to Borrowers of each notice so provided to Richemont, but the failure of the Lender to so provide such copy to Borrowers shall not relieve Richemont of its obligations to make payments to Lender hereunder. (b) All amounts payable by Richemont to Lender hereunder shall be paid within one (1) Banking Day after Lender gives telephonic notice (during business hours, Luxembourg time) and sends written notice via telecopier to Richemont. Such amounts shall be sent by wire transfer, in immediately available funds only to the following account, or such other account as Lender may direct in writing from time to time (the "Payment Account") : Chase Manhattan Bank, N.A. 4 New York Plaza New York, New York, ABA No. 021-000-021 For credit to Congress Financial Corporation Account No. 322-001-293 Re: Subsidiaries of Hanover Direct, Inc. For purposes of this letter agreement, the term "Banking Day" shall mean any day, other than Saturday or Sunday, when Lender and commercial banks are open in New York, New York and Europe. (c) All such loans and any other obligations, liabilities and indebtedness of any Borrowers or Guarantors to Richemont under the Richemont $10,000,000 Credit Agreements shall be subordinated to the right of payment of Lender to receive the prior indefeasible payment in full of all Obligations in accordance with the Subordination Agreement, dated as of the date hereof, between Lender and Richemont (the "Richemont $10,000,000 Subordination Agreement"). (d) All payments by Richemont hereunder shall be made directly by Richemont to the Payment Account on behalf of Borrowers for the benefit of Lender and shall be applied by Lender to the Obligations in accordance with the Loan Agreement and the other Financing Agreements. All payments by Richemont hereunder shall be reimbursement obligations of Borrowers to Richemont under the Richemont $10,000,000 Credit Agreements subject to the terms and conditions -2- 3 of the Richemont $10,000,000 Subordination Agreement. The obligations of Richemont hereunder to make payments are absolute and shall be made to Lender in accordance with the terms hereof from time to time, including, without limitation, at any time any Borrower is a debtor or debtor-in-possession in any case under the U.S. Bankruptcy Code or any similar proceeding under any state insolvency law. (e) Notwithstanding anything to the contrary contained in the Richemont $10,000,000 Credit Agreements, the obligations of Richemont to make the payments hereunder to Lender shall be continuing from the date hereof through and including the earlier of (i) the indefeasible payment in full of all Obligations owed to Lender or termination of the Financing Agreements in accordance with the terms thereof and (ii) the reduction of the maximum credit in respect of the Richemont $10,000,000 Credit Agreements to zero ($-0-) solely by reason of the reductions in such maximum credit availability in connection with cash equity contributions or with conversions by Richemont to the extent permitted by the Richemont $10,000,000 Subordination Agreement. 2. Subordination; Permitted Payments; Reductions in Credit Limit. (a) The Indebtedness of Borrowers arising in connection with the subordinated loans by Richemont to Borrowers pursuant to the terms hereof, and the Richemont $10,000,000 Credit Agreements shall be subject to, and subordinate in right of payment to, the final payment and satisfaction in full of all of the Obligations as set forth in the Richemont $10,000,000 Subordination Agreement. Borrowers may make payments in respect of such Indebtedness to the extent provided in the Richemont $10,000,000 Subordination Agreement. (b) The maximum credit availability under the Richemont $10,000,000 Credit Agreements may be permanently reduced in the amount equal to the net cash proceeds solely by reason of cash equity contributions or purchases and the amount of conversions by Richemont to the extent provided in the Richemont $10,000,000 Subordination Agreement. (c) In the event that principal amounts outstanding under the Richemont $10,000,000 Credit Agreements are repaid by Borrowers to Richemont as permitted by Section 2.2(a) of the Richemont $10,000,000 Subordination Agreement, then the amount of the loans available for request by Lender hereunder shall be reinstated and be available to be paid to Lender in accordance with terms and conditions hereof, but subject to the then credit availability under the Richemont $10,000,000 Credit Agreements. (d) In addition to all payments required to be made pursuant hereto, Borrowers hereby irrevocably authorize and direct that all amounts otherwise made available under the Richemont $10,000,000 Credit Agreements be remitted by Richemont directly to the Payment Account for application to the Obligations by Lender arising in connection with the Loan Agreement and the other Financing Agreements. - 3 - 4 3. Subrogation. Richemont hereby irrevocably and unconditionally waives all statutory, contractual, common law, equitable and other claims against Borrowers, or any of the Collateral for subrogation, reimbursement, exoneration, contribution, indemnification or other recourse in respect of sums paid or payable to Lender by Richemont hereunder until all of the Obligations are paid and satisfied in full. When all Obligations shall have been indefeasibly paid in full and discharged and all the Financing Agreements have been terminated, Richemont shall, to the extent permitted by law, be subrogated to the rights of Lender to receive payments in respect of the obligations under the Richemont $10,000,000 Credit Agreements. 4. Waivers and Consents. Notice of acceptance hereof, the making of Loans and providing Letter of Credit Accommodations to, and the incurring of any expenses by or in respect of, Borrowers and Richemont by Lender, and all other notices to which Richemont and Borrowers are or may be entitled are hereby waived (other than notices to be provided to Richemont by Lender under Sections 1 and 11 hereof). Richemont waives notice of, and hereby consents to (a) subject to the provision of the Richemont $10,000,000 Subordination Agreement, any amendment, modification, supplement, renewal, restatement or extensions of time of payment of or increase or decrease in the amount of any of the Obligations or to the Loan Agreement or any of the other Financing Agreements or any Collateral, (b) the taking, exchange, surrender and releasing of Collateral or guarantees now or at any time held by or available to Lender for the Obligations or any other person at any time liable for or in respect of the Obligations, (c) the exercise of, or refraining from the exercise of any rights against Borrowers, Richemont or any other obligor or any Collateral, (d) the settlement, compromise or release of, or the waiver of any default with respect to, any of the Lender, and/or (e) any Obligations incurred, or grant of a security interest to secure Obligations, under Section 364 of the U.S. Bankruptcy Code to Borrowers, as debtor-in-possession. Any of the foregoing shall not, in any manner, affect the terms hereof or impair the obligations of Richemont hereunder. All of the Obligations shall be deemed to have been made or incurred in reliance upon this letter agreement. 5. Insolvency. This letter agreement shall be applicable both before and after the filing of any petition by or against any Borrower under the U.S. Bankruptcy Code and all converted or succeeding cases in respect thereof, and all references herein to any Borrower shall be deemed to apply to a trustee for any Borrower and any Borrower as a debtor-in-possession. The rights of Lender and the obligations of Richemont hereunder shall continue after any filing in respect of any such proceeding on the same basis as before the date of the petition of such proceeding. 6. Account Stated. The books and records of Lender showing the account between Lender and Borrowers shall be admissible in evidence in any action or proceeding against or involving Richemont as prima facie proof of the items therein set forth, and the monthly statements of Lender rendered to Borrowers, to the extent to which no written objection is made within thirty (30) days from the date of sending thereof to Borrowers, shall be deemed conclusively correct, absent manifest error, and constitute an account stated between Lender and Borrowers and be binding on Richemont. - 4 - 5 7. Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. (a) The validity, interpretation and enforcement of this letter agreement and any dispute arising out of the relationship between Richemont and Lender, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of New York (without giving effect to principles of conflicts of laws). (b) The parties hereto hereby irrevocably consent and submit 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 waive any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this letter agreement or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of Richemont, Borrowers and Lender in respect of this letter agreement 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 Richemont or Borrowers and Lender or the conduct of any such persons in connection with this letter agreement, the other Financing Agreements or otherwise shall be heard only in the courts described above (except that Lender shall have the right to bring any action or proceeding against Richemont or its property in the courts of any other jurisdiction which Lender deems necessary or appropriate in order to realize on any collateral at any time granted by Borrowers or Richemont to Lender or to otherwise enforce its rights against Richemont or its property). (c) Richemont 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 its address set forth on the signature pages hereof 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 Lender's option, by service upon Richemont in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, Richemont shall appear in answer to such process, failing which Richemont shall be deemed in default and judgment may be entered by Lender against Richemont for the amount of the claim and other relief requested. (d) EACH OF THE PARTIES HERETO HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER THIS LETTER AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF RICHEMONT, BORROWERS AND LENDER IN RESPECT OF THIS LETTER AGREEMENT 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. EACH OF THE PARTIES HERETO HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT RICHEMONT - 5 - 6 OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) Lender shall not have any liability to Richemont (whether in tort, contract, equity or otherwise) for losses suffered by Richemont in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this letter agreement, or any act, omission or event occurring in connection herewith, unless it is determined by a final and non-appealable judgment or court order binding on Lender that the losses were the result of acts or omissions constituting gross negligence or willful misconduct. In any such litigation, Lender shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with the exercise of ordinary care in the performance by it of the terms of the Loan Agreement and the other Financing Agreements. 8. Notices. All notices, requests and demands hereunder shall be in writing and (a) made to Lender and to Richemont at their respective addresses set forth on Schedule A hereto as either party may designate by written notice to the other in accordance with this provision, and (b) deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next business day, two (2) Banking Days after sending; and if by certified mail, return receipt requested, seven (7) Banking Days after mailing. 9. Partial Invalidity. If any provision of this letter agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this letter agreement as a whole, but this letter agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by applicable law. 10. Entire Agreement. This letter agreement represents the entire agreement and understanding of this parties concerning the subject matter hereof, and supersedes all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. 11. Successors and Assigns. This letter agreement may not be assigned by Richemont without the prior written consent of Lender, which consent Lender shall not unreasonably withhold in its good faith judgment, and shall be binding upon Richemont and its successors and assigns and shall inure to the benefit of Lender and its successors, endorsees, transferees and assigns. Lender may only transfer and assign its rights hereunder in connection with an assignment of its interests under, and in accordance with, the Loan Agreement so long as in the event of the transfer or assignment of such interests to more than one person, all of such transferees and assignees shall have appointed a single agent to be responsible for the administration of the arrangement of such transferees or assignees with Richemont hereunder. Nothing contained herein shall be construed to limit or affect the right of Lender to sell any participations in the financing arrangements of Lender with Borrowers. In the event of any such assignment, the Lender shall provide to Richemont a copy of the assignment agreement, together - 6 - 7 with evidence of the duly authorized signatories of such assignee who are authorized to provide the notices to be given to Richemont under Section 1 hereof. The liquidation, dissolution or termination of Richemont shall not terminate this letter agreement as to such entity or as to Richemont. 12. Construction. All references to the term "Richemont" wherever used herein shall mean Richemont and its successors and assigns (including, without limitation, any receiver, trustee or custodian for Richemont or any of its assets or Richemont in its capacity as debtor or debtor-in-possession under the United States Bankruptcy Code). All references to the term "Lender" wherever used herein shall mean Lender and its successors and assigns and all references to the term "Borrowers" wherever used herein shall mean Borrowers and their respective successors and assigns (including, without limitation, any receiver, trustee or custodian for any Borrower or any of its assets or any Borrower in its capacity as debtor or debtor-in-possession under the United States Bankruptcy Code). All references to the term "Person" or "person" wherever used herein shall mean any individual, sole proprietorship, partnership, corporation (including, without limitation, any corporation which elects subchapter S status under the Internal Revenue Code of 1986, as amended), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof. All references to the plural shall also mean the singular and to the singular shall also mean the plural. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] - 7 - 8 13. Counterparts. This letter agreement may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. Making proof of this agreement shall not be necessary to produce or to account for more than one counterpart thereof signed by each of the parties hereto. Very truly yours, RICHEMONT FINANCE, S.A. By: /s/ Jan P. du Plessis ------------------------------- Title: Director ---------------------------- By: /s/ Alan Grieve ------------------------------- Title: Director ---------------------------- AGREED: CONGRESS FINANCIAL CORPORATION By: /s/ Janet Last --------------------------- Title: Vice President ----------------------- ACKNOWLEDGED AND AGREED HANOVER DIRECT PENNSYLVANIA, INC. By: /s/ Brian C. Harriss --------------------------- Title: VP ----------------------- BRAWN OF CALIFORNIA, INC. By: /s/ Brian C. Harriss --------------------------- Title: VP ----------------------- GUMP'S BY MAIL, INC. By: /s/ Brian C. Harriss --------------------------- Title: PRES ----------------------- [SIGNATURES CONTINUE ON NEXT PAGE] - 8 - 9 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] GUMP'S CORP. By: /s/ Brian C. Harriss --------------------------- Title: VP ----------------------- LWI HOLDINGS, INC. By: /s/ Brian C. Harriss --------------------------- Title: VP ----------------------- HANOVER DIRECT VIRGINIA INC. By: /s/ Brian C. Harriss --------------------------- Title: PRES ----------------------- TWEEDS, LLC By: /s/ Brian C. Harriss --------------------------- Title: VP ----------------------- SILHOUETTES, LLC By: /s/ Brian C. Harriss --------------------------- Title: VP ----------------------- HANOVER COMPANY STORE, LLC By: /s/ Brian C. Harriss --------------------------- Title: VP ----------------------- DOMESTICATIONS, LLC By: /s/ Brian C. Harriss --------------------------- Title: PRES ----------------------- [SIGNATURES CONTINUE ON NEXT PAGE] - 9 - 10 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER REALTY, INC. By: /s/ Brian C. Harriss --------------------------- Title: PRES ----------------------- THE COMPANY STORE FACTORY, INC. By: /s/ Brian C. Harriss --------------------------- Title: VP ----------------------- THE COMPANY OFFICE, INC. By: /s/ Brian C. Harriss --------------------------- Title: VP ----------------------- KEYSTONE INTERNET SERVICES, INC. By: /s/ Brian C. Harriss --------------------------- Title: PRES ----------------------- - 10 - 11 SCHEDULE A TO RICHEMONT $10,000,000 CALL AGREEMENT To Lender: Congress Financial Corporation 1133 Avenue of the Americas New York, New York 10036 Attention: Mr. Laurence S. Forte Telecopier: 212-545-4283 Telephone: 212-545-4280 To Richemont: Richemont Finance S.A. 35 Boulevard Prince Henri L 1724 Luxembourg Attention: General Manager Telecopier: 011-352-22-4219 Telephone: 011-352-22-4210 with copies to: Richemont Finance S.A. Rigistrasse 2 Zug 6300 Switzerland Attention: Mr. J. Alan Grieve Fax: 011-4141-711-7138 Phone: 011-4141-710-3322 and Robert P. Wessely, Esq. Dorsey & Whitney 250 Park Avenue New York, New York 10036 Telecopier: 212-953-7201 Telephone: 212-415-9200 - 11 - EX-10.9 9 AMENDED AND RESTATED STOCK OPTION AGREEMENT 1 EXHIBIT 10.9 AMENDED AND RESTATED CLOSING PRICE OPTION This AMENDED AND RESTATED STOCK OPTION AGREEMENT (this "Agreement") is made as of April 14, 2000 between Hanover Direct, Inc., a Delaware corporation (the "Company"), and Rakesh K. Kaul (the "Executive"). WHEREAS, the Compensation Committee of the Company's Board of Directors (the "Compensation Committee") has heretofore adopted and the Company's shareholders have heretofore approved and ratified the 2000 Long-Term Incentive Plan for Rakesh K. Kaul (the "Plan"); WHEREAS, the Plan provides for certain modifications to the terms of the Closing Price Option granted to Executive as part of the Long-Term Incentive Plan for Rakesh K. Kaul dated August 23, 1996 (the "Old Plan") subject to the terms set forth herein. NOW, THEREFORE, in consideration of the promises and the mutual agreements herein set forth, the parties hereto agree as follows: 1. The Company hereby evidences and confirms the grant to the Executive on August 23, 1996 (the "Date of Grant") by the Compensation Committee of an option (the "Option") to purchase 2,000,000 shares of Common Stock (the "Shares") at an option price of $1.15625 per share, representing the fair market value of the Common Stock on the date thereof. The Option shall expire on March 7, 2006 (the "Expiration Date"), subject to earlier cancellation or termination as provided herein. 2. Subject to the other provisions contained herein regarding the exercisability of the Option, this Option shall become exercisable only as provided in this Section 2. (a) Except as otherwise provided in paragraph (b), this Option shall vest and become exercisable in equal parts on each successive anniversary of March 6, 2000 over the three year period commencing on March 6, 2000 provided that Executive remains employed by the Company and/or its affiliates or subsidiaries (collectively the "Company"). (b) Notwithstanding the foregoing, the Option shall immediately vest and become exercisable in full (i) upon the termination of Executive's employment by reason of death, Disability, by Company without Cause or by Executive within ninety days of an occurrence constituting Good Reason (as such terms are defined in the Employment Agreement dated as of March 6, 2000 between Executive and the Company (the "Employment Agreement")), (ii) upon a Change of Control (as such term is defined in the Hanover Direct, Inc. Thirty-Six Month Compensation Continuation Plan (the "Change of Control Plan")), or (iii) upon satisfaction of the condition, as certified by the Compensation Committee (such certification not to be improperly withheld), that the average closing price of the Common Stock on the American 1 2 Stock Exchange composite tape or other recognized market source, as determined by the Compensation Committee, has obtained an average of $4.50 per share during any period of 91 consecutive calendar days commencing after August 23, 1996 and ending on or before March 7, 2002. 3. In the event of a termination of the Executive's employment with the Company while any portion of the Option remains unexercised, the Executive's rights to exercise the Option shall be exercisable only as follows: (i) Involuntary Termination. If the Executive's employment is involuntarily terminated by the Company other than for Cause or Executive resigns for Good Reason (as such terms are defined in the Employment Agreement), his Option may be exercised during the six-month period following the later of (x) such termination or (y) the registration of the Shares underlying the Option. For purposes hereof, the provisions of the Employment Agreement shall apply in determining whether the Executive's employment has been involuntarily terminated by the Company other than for Cause or if Executive has resigned with Good Reason. (ii) Death. If the Executive's employment terminates by reason of death, the Option may be exercised during the twelve-month period following such termination. (iii) Disability. If the Executive's employment terminates by reason of Disability (as such term is defined in the Employment Agreement), the Option may be exercised during the twelve-month period following such termination. For purposes hereof, the provisions of the Employment Agreement shall apply in determining whether the Executive's employment has been terminated due to a Disability. (iv) Change of Control. If Executive's employment terminates other than for Cause or if Executive resigns with Good Reason (as such terms are defined in the Change of Control Plan) within twenty-four months of a Change of Control (as such term is defined in the Change of Control Plan), the Option may be exercised during the twelve-month period following such termination. For purposes hereof, the provisions of the Change of Control Plan shall apply in determining whether a Change of Control has occurred. (v) Termination in Other Circumstances. If the Executive's employment terminates in circumstances not described in clauses (i) through (iv), the Executive may, within 30 days following such termination, exercise the Option with respect to such number of Shares as to which the Option is exercisable on the date of termination, as determined pursuant to Section 2. Notwithstanding the foregoing, the Option shall in no event be exercisable in whole or in part after the Expiration Date. 4. (a) Except as provided in paragraph (b), the Option is not transferable by the Executive other than by will or the laws of descent and distribution and is exercisable, during the Executive's lifetime, only by the Executive. (b) Notwithstanding the provisions of paragraph (a): 2 3 (i) In the event of the Executive's incapacity, the Option may be exercised by a conservator, guardian, or the agent under a Durable Power of Attorney; (ii) Upon the Executive's death, the Option is transferable by will, by a revocable or irrevocable trust established by the Executive, or by a written beneficiary designation executed by the Executive and delivered to the Company prior to the Executive's death; (iii) The Executive may transfer the Option to the Executive's spouse and/or issue or trusts for the benefit of the Executive, the Executive's spouse, and/or the Executive's issue. 5. In order to exercise the Option, in whole or in part, the Executive shall give written notice to the Company, specifying the number of Shares to be purchased and the purchase price to be paid, and accompanied by the payment of the purchase price. Such purchase price may be paid in cash, a certified check, or a bank check payable to the Company, or in whole shares of Common Stock evidenced by negotiable certificates, valued at their fair market value on the date of exercise, or in a combination of the foregoing. Alternatively, the Option may be exercised, in whole or in part, by delivering a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds necessary to pay the purchase price, and such other documents as the Compensation Committee may require. Upon receipt of payment, the Company shall deliver to the Executive (or to any other person entitled to exercise the Option) a certificate or certificates for such Shares. If certificates representing shares of Common Stock are used to pay all or part of the purchase price of the Option, separate certificates shall be delivered by the Company representing the same number of shares as each certificate so used and an additional certificate shall be delivered representing the additional shares to which the Executive is entitled as a result of exercise of the Option. 6. The Option shall be exercised only with respect to full Shares; no fractional Shares shall be issued. 7. As a condition to the issuance of Shares under the Option, the Executive agrees to remit to the Company at the time of exercise any taxes required to be withheld by the Company under the applicable laws or other regulations of any governmental authority, whether federal, state of local, and whether domestic or foreign. The Company shall promptly remit such taxes to the applicable governmental authority. 8. If the Executive so requests in writing, shares purchased upon exercise of the Option may be issued in the name of the Executive and another person jointly with the right of survivorship, or in the name of a revocable trust of which the Executive is the grantor. 9. The Option does not qualify as an incentive stock option under Section 422 of the Internal Revenue Code. 10. This Option shall be binding upon and inure to the benefit of any successor or assignee of the Company and to any executor, administrator, legal representative, legatee, or distributee or transferee entitled by law or the provisions of the Plan to the Executive's rights hereunder. 3 4 11. The Option is subject in all respects to the terms of the Plan, the provisions of which are incorporated in this Agreement by reference. 12. This Agreement is entered into, and shall be construed and enforced, under the laws of the State of New York, and shall not be modified except by written agreement signed by the parties hereto. 13. This Agreement supercedes any prior agreements regarding the Closing Price Option, including the Stock Option Agreement between Hanover Direct, Inc. and Kaul dated August 23, 1996 concerning the subject matter hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. HANOVER DIRECT, INC. By: /s/ Brian C. Harriss ------------------------------------- Its: Senior Vice President ------------------------------------ /s/ Rakesh K. Kaul ---------------------------------------- Rakesh K. Kaul 4 EX-10.10 10 STOCK OPTION AGREEMENT 1 EXHIBIT 10.10 ERIZON OPTION This STOCK OPTION AGREEMENT (this "Agreement") is made as of April 14, 2000 between Hanover Direct, Inc., a Delaware corporation (the "Company"), and Rakesh K. Kaul (the "Executive"). WHEREAS, the Compensation Committee of the Company's Board of Directors (the "Compensation Committee") has heretofore adopted and the Company's shareholders have heretofore approved and ratified the Long-Term Incentive Plan for Rakesh K. Kaul (the "Plan"); and WHEREAS, the Plan provides for the granting of stock options in erizon, Inc. subject to the terms set forth herein NOW, THEREFORE, in consideration of the promises and the mutual agreements herein set forth, the parties hereto agree as follows: 1. The Company hereby evidences and confirms the grant to the Executive on the date hereof (the "Date of Grant") by the Compensation Committee of an option (the "Initial Option") to purchase 60 shares of the Common Stock of erizon, Inc. (the "Shares"), which amount represents 6% of the fully diluted Common Stock (including all outstanding warrants and options, vested and unvested) of erizon, Inc. as of the date hereof. The exercise price for the Initial Option shall be equal to the fair market value of the Common Stock of erizon, Inc. on the Date of Grant as determined in good faith by the Board of Directors of the Company, provided that the fair market value of the Common Stock of erizon, Inc. for purposes of establishing the exercise price for the Initial Option shall not exceed $200,000,000. Executive shall receive protection from further dilution of the Shares until such time as erizon, Inc. completes its first round of Board-approved equity or convertible debt financing after which time there shall be no protection from further dilution of the Shares. Upon completion of its first round of Board-approved equity or convertible debt financing, the Company shall grant Executive an additional option (the "Additional Option") to purchase Shares that, together with the Initial Option, shall represent 6% of the fully diluted Common Stock of erizon, Inc. (including all outstanding warrants and options, vested and unvested). The exercise price for the Additional Option shall be equal to the fair market value of the Common Stock on the date the Additional Option is granted to Executive, as determined in good faith by the Board of Directors of the Company. Other than as expressly provided for in this Section 1, the Initial Option and the Additional Option (collectively the "Option") shall be treated as if granted on the Date of Grant. The Option shall expire on March 6, 2010 (the "Expiration Date"), subject to earlier cancellation or termination as provided herein. 2. Subject to the other provisions contained herein regarding the exercisability of the Option, the Option shall become exercisable only as provided in this Section 2: (a) Except as otherwise provided in paragraph (b), the Option shall vest and become exercisable in equal parts on each successive anniversary of March 6, 2000 over the four-year period commencing on March 6, 2000 provided that Executive remains employed by the Company and/or its affiliates or subsidiaries (collectively the "Company"). (b) Notwithstanding the foregoing, the Option shall immediately vest and become exercisable in full (i) upon the termination of Executive's employment by reason of death, Disability, by the Company without Cause or by Executive within ninety days of an occurrence constituting Good 1 2 Reason (as such terms are defined in the Employment Agreement dated as of March 6, 2000 between Executive and the Company (hereinafter the "Employment Agreement")) or (ii) upon the occurrence of a Change of Control (as such term is defined in the Hanover Direct, Inc. Thirty-Six Month Compensation Continuation Plan (hereinafter the "Change of Control Plan")). 3. In the event of a termination of the Executive's employment with the Company while any portion of the Option remains unexercised, the Executive's rights to exercise the Option shall be exercisable only as follows: (i) Involuntary Termination. If the Executive's employment is involuntarily terminated by the Company other than for Cause or Executive resigns for Good Reason (as such terms are defined in the Employment Agreement), his Option may be exercised during the six-month period following the later of (x) such termination or (y) the registration of the Shares underlying the Option. For purposes hereof, the provisions of the Employment Agreement shall apply in determining whether the Executive's employment has been involuntarily terminated by the Company other than for Cause or if Executive has resigned with Good Reason. (ii) Death. If the Executive's employment terminates by reason of death, the Option may be exercised during the twelve-month period following such termination. (iii) Disability. If the Executive's employment terminates by reason of Disability (as such term is defined in the Employment Agreement), the Option may be exercised during the twelve-month period following such termination. For purposes hereof, the provisions of the Employment Agreement shall apply in determining whether the Executive's employment has been terminated due to a Disability. (iv) Change of Control. If Executive's employment terminates other than for Cause or if Executive resigns with Good Reason (as such terms are defined in the Employment Agreement) within twenty-four months of a Change of Control (as such term is defined in the Employment Agreement), the Option may be exercised during the twelve-month period following such termination. For purposes hereof, the provisions of the Change of Control Plan shall apply in determining whether a Change of Control has occurred. (v) Termination in Other Circumstances. If the Executive's employment terminates in circumstances not described in clauses (i) through (iv), the Executive may, within 30 days following such termination, exercise the Option with respect to such number of Shares as to which the Option is exercisable on the date of termination, as determined pursuant to Section 2. Notwithstanding the foregoing, the Option shall in no event be exercisable in whole or in part after the Expiration Date. 4. If at the time of Executive's termination for any reason the Common Stock of erizon, Inc. is not publicly-traded, at the Executive's request, the Company shall purchase from the Executive the Shares as to which the Option is exercisable, as determined pursuant to Section 2, or any portion thereof at the then current fair market value as determined by the Board of Directors of the Company in good faith. Any dispute concerning the valuation of the fair market value of the Company will be determined using a "baseball arbitration model" by a mutually agreed upon investment banking company. The computation of fair market value will assume (i) underwriter fees and discounts as if the Initial Public Offering had taken place, and (ii) public market security. 2 3 5. (a) Except as provided in paragraph (b), the Option is not transferable by the Executive other than by will or the laws of descent and distribution and is exercisable, during the Executive's lifetime, only by the Executive. (b) Notwithstanding the provisions of paragraph (a): (i) In the event of the Executive's incapacity, the Option may be exercised by a conservator, guardian, or the agent under a Durable Power of Attorney; (ii) Upon the Executive's death, the Option is transferable by will, by a revocable or irrevocable trust established by the Executive, or by a written beneficiary designation executed by the Executive and delivered to the Company prior to the Executive's death; (iii) The Executive may transfer the Option to the Executive's spouse and/or issue or trusts for the benefit of the Executive. the Executive's spouse, and/or the Executive's issue. 6. In order to exercise the Option, in whole or in part, the Executive shall give written notice to the Company, specifying the number of Shares to be purchased and the purchase price to be paid, and accompanied by the payment of the purchase price. Such purchase price may be paid in cash, a certified check, or a bank check payable to the Company, or in whole shares of Common Stock held by the Executive for at least six months evidenced by negotiable certificates, valued at their fair market value on the date of exercise, or in a combination of the foregoing. Alternatively, the Option may be exercised, in whole or in part, by delivering a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds necessary to pay the purchase price, and such other documents as the Compensation Committee may require. Upon receipt of payment, the Company shall deliver to the Executive (or to any other person entitled to exercise the Option) a certificate or certificates for such Shares. If certificates representing shares of Common Stock are used to pay all or part of the purchase price of the Option, separate certificates shall be delivered by the Company representing the same number of shares as each certificate so used and an additional certificate shall be delivered representing the additional shares to which the Executive is entitled as a result of exercise of the Option. 7. The Option shall be exercised only with respect to full Shares or fractional shares having a value of not less than $100,000; no fractional Shares having lesser value shall be issued. 8. As a condition to the issuance of Shares under the Option, the Executive agrees to remit to the Company at the time of exercise any taxes required to be withheld by the Company under the applicable laws or other regulations of any governmental authority, whether federal, state of local, and whether domestic or foreign. The Company shall promptly remit such taxes to the applicable governmental authority. 9. If the Executive so requests in writing, shares purchased upon exercise of the Option may be issued in the name of the Executive and another person jointly with the right of survivorship, or in the name of a revocable trust of which the Executive is the grantor. 10. The Option does not qualify as an incentive stock option under Section 422 of the Internal Revenue Code. 11. This Option shall be binding upon and inure to the benefit of any successor or assignee of the Company and to any executor, administrator, legal representative, legatee, or distributee or transferee entitled by law or the provisions of the Plan to the Executive's rights hereunder. 3 4 12. The Option is subject in all respects to the terms of the Plan, the provisions of which are incorporated in this Agreement by reference. 13. This Agreement is entered into, and shall be construed and enforced, under the laws of the State of New York, and shall not be modified except by written agreement signed by the parties hereto. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. HANOVER DIRECT, INC. By: /s/ Ralph Bulle ----------------------------------- Its: Senior Vice President ------------------------------------- By: /s/ Curt Johnson Its: Senior Vice President /s/ Rakesh K. Kaul ------------------------------------- Rakesh K. Kaul 4 EX-10.11 11 KEY EXECUTIVE THIRTY-SIX MONTH COMPENSATION PLAN 1 Exhibit 10.11 HANOVER DIRECT, INC. KEY EXECUTIVE THIRTY-SIX MONTH COMPENSATION CONTINUATION PLAN ARTICLE 1 ESTABLISHMENT OF THE PLAN 1.1 Hanover Direct, Inc. (the "Company") has established the Hanover Direct, Inc. Key Executive Thirty-Six Month Compensation Continuation Plan (the "Plan") effective as of December 26, 1999. The purpose of the Plan is to attract and retain key management personnel by reducing uncertainty and providing greater personal security in the event of a Change of Control. 1.2 The Company intends for this Plan to constitute an employee welfare plan within the meaning of Section 3(1) of the Employee Retirement Security Act of 1974 , as amended ("ERISA"), and a severance pay plan within the meaning of Department of Labor (DOL) Regulation Section 2510.3-2(b). ARTICLE 2 DEFINITIONS 2.1 "Board of Directors" means the Board of Directors of the Company. 2.2 "Change of Control" means the first to occur of any of the events described in subsections (i) through (iv) below. (i) A Change of Control will occur when any Person becomes, through an acquisition, the beneficial owner of shares of the Company having at least fifty percent (50%) of the total number of votes that may be cast for the election of directors of the Company (the "Voting Shares"); provided, however, that the following acquisitions shall not constitute a Change in Control: (a) if a Person owns less than fifty percent (50%) of the voting power of the Company and that Person's ownership increases above fifty percent (50%) solely by virtue of an acquisition of stock by the Company, then no Change of Control has occurred, unless and until that Person subsequently acquires one or more additional shares representing voting power of the Company; or (b) any acquisition by a Person who as of the date of the establishment of the Plan owned at least thirty-three percent (33%) of the Voting Shares. (ii)(a) Notwithstanding the foregoing, a Change of Control will occur when the shareholders of the Company approve any of the following (each, a "Transaction"): (I) any reorganization, merger, consolidation or other business combination of the Company; (II) any sale of fifty percent (50%) or more of the Company's assets; or (III) a complete liquidation or dissolution of the Company. (b) Notwithstanding (ii)(a) above, shareholder approval of either of the following types of Transactions will not give rise to a Change of Control: 2 (I) a Transaction involving only the Company and one or more of its subsidiaries; or (II) a Transaction immediately following which the shareholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity. (iii) A Change of Control will occur when, within any twenty-four (24) month period, persons who were directors of the Company immediately before the beginning of such period (the "Incumbent Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board of Directors or the board of directors of any successor to the Company. For purposes of this subsection (iii), any director who was not a director as of the effective date of this Plan shall be deemed to be an Incumbent Director if such director was elected to the Board of Directors by, or on the recommendation of, or with the approval of, at least a majority of the members of the Board of Directors or the nominating committee who, at the time of the vote, qualified as Incumbent Directors either actually or by prior operation of this clause, and any persons (and their successors from time to time) who are designated by a holder of thirty-three percent (33%) or more of the Voting Shares to stand for election and serve as directors in lieu of other such designees serving as directors on the effective date of the Plan shall be considered Incumbent Directors. Notwithstanding the foregoing, any director elected to the Board of Directors to avoid or settle a threatened or actual proxy contest shall not, under any circumstances, be deemed to be an Incumbent Director. (iv) A Change of Control will occur when the Company sells, assigns or transfers more than fifty percent (50%) of its interest in, or the assets of, one or more subsidiaries (each, a "Sold Subsidiary" and, collectively, "Sold Subsidiaries"); provided, however, that such a sale, assignment or transfer will constitute a Change of Control only for: (a) the Participants who are Employees of that Sold Subsidiary; and (b) the Participants who are Employees of a direct or indirect parent company of one or more Sold Subsidiaries of the Company, and then only if: (I) the gross assets of its Sold Subsidiaries constitute more than fifty percent (50%) of the gross assets of such parent company (calculated on a consolidated basis with the direct and indirect subsidiaries of such parent company with reference to the most recent balance sheets of the Sold Subsidiaries and the parent company); (II) the property, plant and equipment of its Sold Subsidiaries constitute more than fifty percent (50%) of the property, plant and equipment of such parent company (calculated on a consolidated basis with the direct and indirect subsidiaries of such parent company with reference to the most recent balance sheets of the Sold Subsidiaries and the parent company); or (III) in the case of a publicly-traded parent company, the ratio (as of the date a binding agreement for the sale is entered) of (x) the capitalization (based on the sale price) of its Sold Subsidiaries to (y) the market capitalization of the parent company, is greater than 0.50. For purposes of this Section 2.2(iv), a Transaction shall be deemed to involve the sale of more than fifty percent (50%) of a company's assets if: (a) the gross assets being sold constitute more than fifty percent (50%) of the gross assets of the company as stated on the most recent balance sheet of the company; 3 (b) the property, plant and equipment being sold constitute more than fifty percent (50%) of the property, plant and equipment of the company as stated on the most recent balance sheet of the company; or (c) in the case of a publicly-traded company, the ratio (as of the date a binding agreement for the sale is entered) of (x) the capitalization (based on the sale price) of the division, subsidiary or business unit being sold to (y) the market capitalization of the company, is greater than 0.50. For purposes of this Section 2.2(iv), no Change of Control shall be deemed to have occurred if, immediately following a sale, assignment or transfer by the Company of more than fifty percent (50%) of its interest in, or the assets of, a Sold Subsidiary, any shareholder of the Company owning 33% or more of the voting power of the Company immediately prior to such transactions owns no less than the equivalent percentage of the voting power of the Sold Subsidiary. 2.3 "Company" means Hanover Direct, Inc. or any of its subsidiaries or affiliates that adopt the Plan, except that the Company in the context of the Plan Administrator, the Board of Directors and a Change of Control shall only mean Hanover Direct, Inc. 2.4 "Disability" means the permanent and total disability of the Participant such that he/she is unable to substantially perform his/her duties and responsibilities with the Company by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve (12) months. The Participant will not be considered to be permanently and totally disabled unless he/she furnishes proof of the existence of such disability in such form and manner and based on competent medical advice, and at such times, as the Plan Administrator may reasonably require. 2.5 "Employee" means any person whom the Company employs for purposes of the Federal Insurance Contributions Act. 2.6 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.7 "For Cause" means the involuntary termination of employment of the Participant because of (i) the willful and continued failure by the Participant to perform his/her duties at the Company, (ii) misconduct by the Participant that is injurious to the Company, financially or otherwise, (iii) commission by the Participant of an act of fraud or dishonesty relating to and adversely affecting the Company, (iv) conviction of the Participant of a felony in connection with his employment with the Company, or (v) the habitual failure of the Participant, after written notice specifying such failure and a reasonable opportunity to cure such failure having lapsed, to perform his employment duties at the Company in a satisfactory manner. 2.8 "For Good Reason" means the voluntary termination of employment by the Participant, within two (2) years of any of the following actions that occur in anticipation of or upon or after a Change of Control, and because of (i) a substantial and material diminution in the then-current duties or responsibilities of the Participant at the Company, (ii) a material and substantial diminution in the then-current base salary, target bonus or comparable long-term incentive opportunity of the Participant, (iii) requiring the Participant to regularly report to work at a facility that is more than thirty (30) miles from the facility the Participant regularly reports, (iv) the failure by the Company to continue in effect any material benefit or compensation plan including, but not limited to, life insurance plan, health insurance plan and accidental death or disability plan in which the Participant is participating, unless such benefit or compensation plan, life insurance plan, health insurance plan, or accidental death or disability plan or similar plan is replaced with a comparable plan in which the Participant will participate or which will provide the Participant with comparable benefits, (v) the failure of the Company to provide the Participant with the number of paid vacation days to which the Participant is normally entitled in accordance with the normal vacation policy of the Company, or (vi) any action by the Company that adversely affects in a 4 material way the Participant's participation in or materially reduces the Participant's benefits under any of such benefit or compensation plans. 2.9 "Participant" means Rakesh Kaul, or other employee selected for participation in the Plan by the Chief Executive Officer of the Company, all of whom are approved by the Plan Administrator upon the adoption of the Plan or following their employment by the Company after the effective date of the Plan. 2.10 "Person" means any person (as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof), including a 'group' as defined in Section 13(d)(3) of the Exchange Act, but excluding (i) the Company, (ii) any subsidiary of the Company, (iii) any employee benefit plan sponsored or maintained by the Company or any subsidiary of the Company (including any trustee of such plan acting as trustee), and (iv) any person who, as of the date of the establishment of the Plan, owned at least thirty-three percent (33%) of the Voting Shares (but excluding any unaffiliated successor or assignee of such 33% or greater holder). 2.11 "Plan Administrator" means the Company. 2.12 "Without Cause" means the involuntary termination of employment of the Participant due to lack of work at the Company or any other reason that the Board of Directors determines is in the best interest of the Company other than For Cause or a Disability. ARTICLE 3 ELIGIBILITY FOR PLAN PARTICIPATION Section 2.9 sets forth the employees of the Company who shall be participants in the Plan. Except as set forth in Article 9 of the Plan, prior to a Change of Control the participation in the Plan of any Participant shall cease on the following dates: (i) the date a Participant is no longer classified as an eligible Employee; (ii) the date of the Participant's death; (iii) the date on which a Participant voluntarily terminates his/her employment with the Company; (iv) the date on which a Participant is terminated by the Company; or (v) the effective date of the termination of the Plan; provided, however, that in no event shall Employee's participation in the Plan be terminated in anticipation of a Change of Control. Except as set forth in Article 9 of the Plan, upon or after a Change of Control the participation in the Plan of any Participant shall cease on the following dates: (i) the date a Participant is no longer classified as an eligible Employee; (ii) the date on which a Participant voluntarily terminates his/her employment with the Company without Good Reason; (iii) the date on which a Participant is terminated by the Company for Cause; (iv) the date on which a Participant voluntarily or involuntarily terminates employment as a result of Disability; or (v) the effective date of the termination of the Plan. ARTICLE 4 CONDITIONS FOR PAYMENT OF BENEFITS A Participant shall be entitled to severance pay and benefits under the Plan only if there occurs a Change of Control and thereafter the Company terminates his/her employment Without Cause or the Participant voluntarily terminates his/her employment for Good Reason during the two (2) year period following the Change of Control. A Participant shall not be entitled to severance pay and benefits under the Plan if he/she (i) resigns other than for Good Reason, (ii) is terminated for Cause, (iii) dies prior to a Change of Control or prior to a termination qualifying for severance pay and benefits under the Plan; or (iv) voluntarily or involuntarily terminates employment as a result of Disability. 5 ARTICLE 5 SALARY CONTINUATION BENEFITS 5.1 The amount of severance pay and benefits to which a Participant will be entitled shall include (i) an amount equal to thirty-six (36) months of the Participant's base annualized salary; (ii) an amount equal to three (3) times the greater of (x) a short-term bonus calculated pursuant to the 2000 Short-Term Plan for Rakesk K. Kaul (the "Short-Term Plan") as if the Company had met 100% of its target for the year in which the termination occurs or (y) the average of the short-term bonus amounts paid or payable to the Participant pursuant to the Short-Term Plan for the greater of (1) the two years preceding the year of termination or (2) the two years preceding the year of the Change of Control; (iii) to the extent not previously paid to the Participant, the short-term bonus payable to the Participant pursuant to the Short-Term Plan for the year preceding the termination of the Participant; (iv) for the year of the Participant's termination, a short-term bonus calculated pursuant t o the Short-Term Plan as if the Company had met 100% of its target for such year, but pro rated to reflect the portion of such year during which the Participant was employed; (v) an amount equal to thirty-six (36) times the monthly applicable premium that would be charged by the Company for COBRA continuation coverage for the Participant, the Participant's spouse and the dependents of the Participant under the Company's group health plan at the time of the Participant's termination of employment; (vi) an amount equal to thirty-six (36) months of the Participant's car allowance then in effect as of the date of the termination of the Participant; and (vii) an amount equal to the cost of twelve (12) months of executive-level outplacement services at a major outplacement services firm. 5.2 Except as set forth in Section 5.3, the aggregate severance payments described in Section 5.1 above shall be made to the Participant in one lump sum payment within thirty (30) days of the Participant's termination of employment with the Company. 5.3 Severance payments will be made only after the Participant executes a release and waiver containing such terms and conditions as the Plan Administrator may reasonably require. 5.4 In the event that any portion of the aggregate of all payments or benefits made or provided to, or that may be made or provided to, the Participant under the Plan ("Aggregate Payments") is determined to constitute an Excess Parachute Payment, as such term is defined in Section 280G(b)(1) of the Internal Revenue Code of 1986, as amended (the "Code"), the Company shall pay to the Participant prior to the time any excise tax imposed by Section 4999 of the Code ("Excise Tax") is payable with respect to such Aggregate Payments, an additional amount which, after the imposition of all income and excise taxes thereon, is equal to the Excise Tax on the Aggregate Payments; provided, however, that if the present value of the Aggregate Payments exceed the Safe-Harbor Amount (as hereinafter defined) by ten percent (10%) or less, then the Aggregate Payments shall be reduced (in present value) to the Safe-Harbor Amount. The "Safe-Harbor Amount" means the amount, expressed as a present value, which maximizes the aggregate present value of the Aggregate Payments without causing any payment to be subject to the Excise Tax as a result of Section 280G of the Code. For purposes of this Section 5.4, present value shall be determined in accordance with Section 280G(d)(4) of the Code. ARTICLE 6 CURRENT YEAR BONUS PAYOUT Upon the occurrence of a Change of Control, the Participant will be eligible for a current year bonus payout of an amount equivalent to his or her eligible target bonus as defined in the Company's Management Incentive Plan prorated by the portion of the year that has elapsed up to the date of the Change of Control. Such bonus payout shall be made within thirty (30) days of the Participant's termination of employment with the Company if such Participant's employment terminates as a result of the Change of Control. 6 ARTICLE 7 OPTIONAL CASH OUT OF STOCK OPTIONS 7.1 Notwithstanding any other provisions of the Plan, if a Change of Control occurs then all stock options and stock appreciation rights previously granted to the Participant shall become fully exercisable as of the date of the Change of Control, whether or not otherwise exercisable and vested as of that date. 7.2 In the event that during the two (2) year period following a Change of Control the Company terminates the Participant's employment Without Cause or the Participant voluntarily terminates his/her employment for Good Reason, any options held by the Participant at the time of such termination shall remain exercisable until twelve (12) months following such termination (but not beyond the expiration of the option's term). 7.3 Any Participant may, at any time within thirty (30) days next following the Change of Control, in lieu of exercising his/her stock options, elect to receive a cash payment equal to the positive difference between (i) the aggregate exercise price of the shares for which such election is made, and (ii) the fair market value of such shares on the date such right is exercised; provided, however, that any such election to receive a cash payment would not violate the applicable pooling of interest rules in effect at the time of the Change of Control. 7.4 Any restricted period in effect as of the date of the Change of Control shall end with respect to shares of restricted stock previously awarded to the Participant. ARTICLE 8 CLAIMS FOR BENEFITS 8.1 In the event that a Participant desires to make a claim with respect to any of the benefits provided hereunder, the Participant shall submit evidence satisfactory to the officer of the Company that the Plan Administrator designates to receive claims. Any claim with respect to any of the benefits provided under the Plan shall be made in writing within ninety (90) days of the event that the Participant is asserting constitutes a termination of employment or the first occurrence of the event which otherwise forms the basis of the Participant's claim. Failure by the Participant to submit his/her claim within the ninety (90) day period shall bar the Participant from any claim for benefits under the Plan as a result of the occurrence of that event. 8.2 In the event that a claim of a Participant is wholly or partially denied, the Participant or his/her duly authorized representative may appeal the denial of the claim to the Board of Directors or to any committee that the Board of Directors designates at any time within ninety (90) days after the Participant receives written notice from the Company of the denial of the claim. In connection therewith, the Participant or his/her duly authorized representative may request a review of the denied claim, may review pertinent documents, and may submit issues and comments in writing. Upon receipt of an appeal, the Board of Directors or such designated committee shall make a decision with respect to the appeal and, not later than sixty (60) days after receipt of a request for review, shall furnish the Participant with a decision on review in writing, including the specific reasons for the decision written in a manner calculated to be understood by the Participant, as well as specific references to the pertinent provisions of the Plan upon which the decision is based. 8.3 No benefit that shall be payable under the Plan to any Participant shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. 7 8.4 The Plan shall not give any Employee or Participant any right or claim except to the extent that the right is fixed specifically under the Plan. The establishment of the Plan shall not be construed to give any Employee or Participant a right to be continued in the employ of the Company or as interfering with the right of the Company to terminate the employment of any Employee or Participant at any time. ARTICLE 9 ADMINISTRATION AND FINANCING OF THE PLAN 9.1 The Plan Administrator and/or the Board of Directors shall have the discretion, authority, duty, power and responsibility to decide all factual and legal questions under the Plan, including without limitation, (i) the interpretation and construction of the provisions of the Plan as it deems appropriate, necessary or advisable and any ambiguous or unclear terms within the plan document, (ii) the adoption, establishment and revision of rules, procedures and regulations relating to the Plan, (iii) the determination of the conditions subject to which any benefits may be payable, (iv) the resolution of all questions concerning the status and rights of a participant and others under the Plan, whether a claimant is eligible for benefits under the Plan and the amount of the benefits, if any, a claimant is entitled to receive, and (v) any other determinations which it believes necessary or advisable for the administration and operation of the Plan.. All determinations of the Plan Administrator and/or Board of Directors shall be final and binding on all Employees and Participants. The Plan Administrator may appoint a committee or an agent or other representative to act on its behalf, and may delegate to such committee or agent or representative any of the powers of the Plan Administrator (the "Committee"). Any action that such Committee or agent or representative takes shall be considered to be the action of the Plan Administrator, when the committee or agent or representative is acting within the scope of the authority that the Plan Administrator delegates it, and the Plan Administrator shall be responsible for all such actions. 9.2 The company that employs the Participant on his last day of employment will fund the Plan by payments made from its general assets. ARTICLE 10 AMENDMENT AND TERMINATION The Board of Directors in accordance with applicable corporate law reserves the right at any time to amend or terminate the Plan, except that if the Plan is terminated in anticipation of or upon or after a Change of Control has occurred, the Board of Directors may not terminate the participation in the Plan of any Participant who is in the Plan when a Change of Control is anticipated or as of the date of the Change of Control and the Board of Directors may not amend or terminate the Plan as it affects any Participant in the Plan as of the date of the Change of Control. ARTICLE 11 MISCELLANEOUS PROVISIONS 11.1 The failure of the Plan Administrator to enforce any of the provisions of the Plan shall in no way be construed to be a waiver of these provisions, nor in any way to affect the validity of the Plan or any part thereof, or the right of the Plan Administrator thereafter to enforce every provision. 11.2 This Plan replaces and supercedes all prior plans, programs and arrangements providing severance-type benefits to the Participant. The severance pay and benefits payable under this Plan shall not duplicate any benefits provided to the Participant under any agreement, arrangement, program, employee handbook , severance or other plan entered into or effective after the effective date of the Participant's 8 participation in the Plan and prior to or after a Change of Control. The benefits that this Plan provides shall not be reduced or offset by any other payments or benefits that the Participant may receive from any other third party or other employer after the termination of the Participant's employment with the Company. 11.3 Article headings are for convenience only and the language of the Plan itself will be controlling. 11.4 This Plan shall be unfunded. Any liability of the Company under the Plan shall be based solely on contractual obligations, if any, that are created hereunder. No such liability of the Company shall be deemed to be secured by any property of the Company. 11.5 Each member of any committee and each member of the Board of Directors shall, except as prohibited by law, be indemnified and held harmless by the Company from any and all liabilities, costs and expenses (including legal fees), to the extent not covered by liability insurance, arising out of any action taken (or the omission of any action) by such individual with respect to the Plan unless the liability, cost or expense arises from the individual's (i) claim for his or her own benefit, (ii) gross negligence, (iii) bad faith, (iv) reasonable belief his or her conduct was unlawful, (v) conviction of any criminal act or criminal misconduct. This indemnification shall continue as to an individual who has ceased to be a committee member or member of the Board of Directors and shall inure to the benefit of the heirs, executors and administrators of such individual. 11.6 Whenever any benefits become payable under the Plan, the Company shall have the right to withhold such amounts as are sufficient to satisfy any federal, state or local withholding tax requirements. 11.7 The Participant is under no obligation to mitigate the terms of this Agreement. 11.8 The Plan shall be construed and administered under the laws of the State of New York. IN WITNESS WHEREOF, the Company has caused the Plan to be executed on March 6, 2000. HANOVER DIRECT, INC. By: /s/ Ralph Bulle -------------------------------- Title: Senior Vice President ----------------------------- EX-10.12 12 KEY EXECUTIVE TWENTY-FOUR MONTH COMPENSATION PLAN 1 Exhibit 10.12 HANOVER DIRECT, INC. KEY EXECUTIVE TWENTY-FOUR MONTH COMPENSATION CONTINUATION PLAN ARTICLE 1 ESTABLISHMENT OF THE PLAN 1.1 Hanover Direct, Inc. (the "Company") has established the Hanover Direct, Inc. Key Executive Twenty-Four Month Compensation Continuation Plan (the "Plan") effective as of December 26, 1999. The purpose of the Plan is to attract and retain key management personnel by reducing uncertainty and providing greater personal security in the event of a Change of Control. 1.2 The Company intends for this Plan to constitute an employee welfare plan within the meaning of Section 3(1) of the Employee Retirement Security Act of 1974 , as amended ("ERISA"), and a severance pay plan within the meaning of Department of Labor (DOL) Regulation Section 2510.3-2(b). ARTICLE 2 DEFINITIONS 2.1 "Board of Directors" means the Board of Directors of the Company. 2.2 "Change of Control" means the first to occur of any of the events described in subsections (i) through (iv) below. (i) A Change of Control will occur when any Person becomes, through an acquisition, the beneficial owner of shares of the Company having at least fifty percent (50%) of the total number of votes that may be cast for the election of directors of the Company (the "Voting Shares"); provided, however, that the following acquisitions shall not constitute a Change in Control: (a) if a Person owns less than fifty percent (50%) of the voting power of the Company and that Person's ownership increases above fifty percent (50%) solely by virtue of an acquisition of stock by the Company, then no Change of Control has occurred, unless and until that Person subsequently acquires one or more additional shares representing voting power of the Company; or (b) any acquisition by a Person who as of the date of the establishment of the Plan owned at least thirty-three percent (33%) of the Voting Shares. (ii)(a) Notwithstanding the foregoing, a Change of Control will occur when the shareholders of the Company approve any of the following (each, a "Transaction"): (I) any reorganization, merger, consolidation or other business combination of the Company; (II) any sale of fifty percent (50%) or more of the Company's assets; or (III) a complete liquidation or dissolution of the Company. (b) Notwithstanding (ii)(a) above, shareholder approval of either of the following types of Transactions will not give rise to a Change of Control: 2 (I) a Transaction involving only the Company and one or more of its subsidiaries; or (II) a Transaction immediately following which the shareholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity. (iii) A Change of Control will occur when, within any twenty-four (24) month period, persons who were directors of the Company immediately before the beginning of such period (the "Incumbent Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board of Directors or the board of directors of any successor to the Company. For purposes of this subsection (iii), any director who was not a director as of the effective date of this Plan shall be deemed to be an Incumbent Director if such director was elected to the Board of Directors by, or on the recommendation of, or with the approval of, at least a majority of the members of the Board of Directors or the nominating committee who, at the time of the vote, qualified as Incumbent Directors either actually or by prior operation of this clause, and any persons (and their successors from time to time) who are designated by a holder of thirty-three percent (33%) or more of the Voting Shares to stand for election and serve as directors in lieu of other such designees serving as directors on the effective date of the Plan shall be considered Incumbent Directors. Notwithstanding the foregoing, any director elected to the Board of Directors to avoid or settle a threatened or actual proxy contest shall not, under any circumstances, be deemed to be an Incumbent Director. (iv) A Change of Control will occur when the Company sells, assigns or transfers more than fifty percent (50%) of its interest in, or the assets of, one or more subsidiaries (each, a "Sold Subsidiary" and, collectively, "Sold Subsidiaries"); provided, however, that such a sale, assignment or transfer will constitute a Change of Control only for: (a) the Participants who are Employees of that Sold Subsidiary; and (b) the Participants who are Employees of a direct or indirect parent company of one or more Sold Subsidiaries of the Company, and then only if: (I) the gross assets of its Sold Subsidiaries constitute more than fifty percent (50%) of the gross assets of such parent company (calculated on a consolidated basis with the direct and indirect subsidiaries of such parent company with reference to the most recent balance sheets of the Sold Subsidiaries and the parent company); (II) the property, plant and equipment of its Sold Subsidiaries constitute more than fifty percent (50%) of the property, plant and equipment of such parent company (calculated on a consolidated basis with the direct and indirect subsidiaries of such parent company with reference to the most recent balance sheets of the Sold Subsidiaries and the parent company); or (III) in the case of a publicly-traded parent company, the ratio (as of the date a binding agreement for the sale is entered) of (x) the capitalization (based on the sale price) of its Sold Subsidiaries to (y) the market capitalization of the parent company, is greater than 0.50. For purposes of this Section 2.2(iv), a Transaction shall be deemed to involve the sale of more than fifty percent (50%) of a company's assets if: (a) the gross assets being sold constitute more than fifty percent (50%) of the gross assets of the company as stated on the most recent balance sheet of the company; 3 (b) the property, plant and equipment being sold constitute more than fifty percent (50%) of the property, plant and equipment of the company as stated on the most recent balance sheet of the company; or (c) in the case of a publicly-traded company, the ratio (as of the date a binding agreement for the sale is entered) of (x) the capitalization (based on the sale price) of the division, subsidiary or business unit being sold to (y) the market capitalization of the company, is greater than 0.50. For purposes of this Section 2.2(iv), no Change of Control shall be deemed to have occurred if, immediately following a sale, assignment or transfer by the Company of more than fifty percent (50%) of its interest in, or the assets of, a Sold Subsidiary, any shareholder of the Company owning 33% or more of the voting power of the Company immediately prior to such transactions owns no less than the equivalent percentage of the voting power of the Sold Subsidiary. 2.3 "Company" means Hanover Direct, Inc. or any of its subsidiaries or affiliates that adopt the Plan, except that the Company in the context of the Plan Administrator, the Board of Directors and a Change of Control shall only mean Hanover Direct, Inc. 2.4 "Disability" means the permanent and total disability of the Participant such that he/she is unable to substantially perform his/her duties and responsibilities with the Company by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve (12) months. The Participant will not be considered to be permanently and totally disabled unless he/she furnishes proof of the existence of such disability in such form and manner and based on competent medical advice, and at such times, as the Plan Administrator may reasonably require. 2.5 "Employee" means any person whom the Company employs for purposes of the Federal Insurance Contributions Act. 2.6 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.7 "For Cause" means the involuntary termination of employment of the Participant because of (i) the willful and continued failure by the Participant to perform his/her duties at the Company, (ii) misconduct by the Participant that is injurious to the Company, financially or otherwise, (iii) commission by the Participant of an act of fraud or dishonesty relating to and adversely affecting the Company, (iv) conviction of the Participant of a felony in connection with his employment with the Company, or (v) the habitual failure of the Participant, after written notice specifying such failure and a reasonable opportunity to cure such failure having lapsed, to perform his employment duties at the Company in a satisfactory manner. 2.8 "For Good Reason" means the voluntary termination of employment by the Participant, within two (2) years of any of the following actions that occur in anticipation of or upon or after a Change of Control, and because of (i) a substantial and material diminution in the then-current duties or responsibilities of the Participant at the Company, (ii) a material and substantial diminution in the then-current base salary, target bonus or comparable long-term incentive opportunity of the Participant, (iii) requiring the Participant to regularly report to work at a facility that is more than thirty (30) miles from the facility the Participant regularly reports, (iv) the failure by the Company to continue in effect any material benefit or compensation plan including, but not limited to, life insurance plan, health insurance plan and accidental death or disability plan in which the Participant is participating, unless such benefit or compensation plan, life insurance plan, health insurance plan, or accidental death or disability plan or similar plan is replaced with a comparable plan in which the Participant will participate or which will provide the Participant with comparable benefits, (v) the failure of the Company to provide the Participant with the number of paid vacation days to which the Participant is normally entitled in accordance with the normal vacation policy of the Company, or (vi) any action by the Company that adversely affects in a 4 material way the Participant's participation in or materially reduces the Participant's benefits under any of such benefit or compensation plans. 2.9 "Participant" means any employee who is a corporate executive vice president or corporate senior vice president of the Company or strategic business unit president or other employee selected for participation in the Plan by the Chief Executive Officer of the Company, all of whom are approved by the Plan Administrator upon the adoption of the Plan or following their employment by the Company after the effective date of the Plan. 2.10 "Person" means any person (as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof), including a 'group' as defined in Section 13(d)(3) of the Exchange Act, but excluding (i) the Company, (ii) any subsidiary of the Company, (iii) any employee benefit plan sponsored or maintained by the Company or any subsidiary of the Company (including any trustee of such plan acting as trustee), and (iv) any person who, as of the date of the establishment of the Plan, owned at least thirty-three percent (33%) of the Voting Shares (but excluding any unaffiliated successor or assignee of such 33% or greater holder). 2.11 "Plan Administrator" means the Company. 2.12 "Without Cause" means the involuntary termination of employment of the Participant due to lack of work at the Company or any other reason that the Board of Directors determines is in the best interest of the Company other than For Cause or a Disability. ARTICLE 3 ELIGIBILITY FOR PLAN PARTICIPATION Section 2.9 sets forth the employees of the Company who shall be participants in the Plan. Except as set forth in Article 9 of the Plan, prior to a Change of Control the participation in the Plan of any Participant shall cease on the following dates: (i) the date a Participant is no longer classified as an eligible Employee; (ii) the date of the Participant's death; (iii) the date on which a Participant voluntarily terminates his/her employment with the Company; (iv) the date on which a Participant is terminated by the Company; or (v) the effective date of the termination of the Plan; provided, however, that in no event shall Employee's participation in the Plan be terminated in anticipation of a Change of Control. Except as set forth in Article 9 of the Plan, upon or after a Change of Control the participation in the Plan of any Participant shall cease on the following dates: (i) the date a Participant is no longer classified as an eligible Employee; (ii) the date on which a Participant voluntarily terminates his/her employment with the Company without Good Reason; (iii) the date on which a Participant is terminated by the Company for Cause; (iv) the date on which a Participant voluntarily or involuntarily terminates employment as a result of Disability; or (v) the effective date of the termination of the Plan. ARTICLE 4 CONDITIONS FOR PAYMENT OF BENEFITS A Participant shall be entitled to severance pay and benefits under the Plan only if there occurs a Change of Control and thereafter the Company terminates his/her employment Without Cause or the Participant voluntarily terminates his/her employment for Good Reason during the two (2) year period following the Change of Control. A Participant shall not be entitled to severance pay and benefits under the Plan if he/she (i) resigns other than for Good Reason, (ii) is terminated for Cause, (iii) dies prior to a Change of Control or prior to a termination qualifying for severance pay and benefits under the Plan; or (iv) voluntarily or involuntarily terminates employment as a result of Disability. 5 ARTICLE 5 SALARY CONTINUATION BENEFITS 5.1 The amount of severance pay and benefits to which a Participant will be entitled shall include (i) an amount equal to twenty-four (24) months of the Participant's base annualized salary; (ii) an amount equal to the lesser of (a) two (2) times the target bonus for the Participant as defined in the Company's Management Incentive Plan, or (b) two (2) times the largest bonus calculated as a percentage of base salary earned by the Participant during any of the three (3) years prior to the Change of Control, except that those Participants with less than one (1) full year of service as of the date of the Change of Control will be paid at two (2) times their target bonus amount as defined in the Company's Management Incentive Plan; (iii) an amount equal to twenty-four (24) times the monthly applicable premium that would be charged by the Company for COBRA continuation coverage for the Participant, the Participant's spouse and the dependents of the Participant under the Company's group health plan at the time of the Participant's termination of employment; (iv) an amount equal to twenty-four (24) months of the Participant's car allowance then in effect as of the date of the termination of the Participant; and (v) an amount equal to the cost of twelve (12) months of executive-level outplacement services at a major outplacement services firm. 5.2 Except as set forth in Section 5.3, the aggregate severance payments described in Section 5.1 above shall be made to the Participant in one lump sum payment within thirty (30) days of the Participant's termination of employment with the Company. 5.3 Severance payments will be made only after the Participant executes a release and waiver containing such terms and conditions as the Plan Administrator may reasonably require. 5.4 In the event that any portion of the aggregate of all payments or benefits made or provided to, or that may be made or provided to, the Participant under the Plan ("Aggregate Payments") is determined to constitute an Excess Parachute Payment, as such term is defined in Section 280G(b)(1) of the Internal Revenue Code of 1986, as amended (the "Code"), the Company shall pay to the Participant prior to the time any excise tax imposed by Section 4999 of the Code ("Excise Tax") is payable with respect to such Aggregate Payments, an additional amount which, after the imposition of all income and excise taxes thereon, is equal to the Excise Tax on the Aggregate Payments; provided, however, that if the present value of the Aggregate Payments exceed the Safe-Harbor Amount (as hereinafter defined) by ten percent (10%) or less, then the Aggregate Payments shall be reduced (in present value) to the Safe-Harbor Amount. The "Safe-Harbor Amount" means the amount, expressed as a present value, which maximizes the aggregate present value of the Aggregate Payments without causing any payment to be subject to the Excise Tax as a result of Section 280G of the Code. For purposes of this Section 5.4, present value shall be determined in accordance with Section 280G(d)(4) of the Code. ARTICLE 6 CURRENT YEAR BONUS PAYOUT Upon the occurrence of a Change of Control, the Participant will be eligible for a current year bonus payout of an amount equivalent to his or her eligible target bonus as defined in the Company's Management Incentive Plan prorated by the portion of the year that has elapsed up to the date of the Change of Control. Such bonus payout shall be made within thirty (30) days of the Participant's termination of employment with the Company if such Participant's employment terminates as a result of the Change of Control. 6 ARTICLE 7 OPTIONAL CASH OUT OF STOCK OPTIONS 7.1 Notwithstanding any other provisions of the Plan, if a Change of Control occurs then all stock options and stock appreciation rights previously granted to the Participant shall become fully exercisable as of the date of the Change of Control, whether or not otherwise exercisable and vested as of that date. 7.2 In the event that during the two (2) year period following a Change of Control the Company terminates the Participant's employment Without Cause or the Participant voluntarily terminates his/her employment for Good Reason, any options held by the Participant at the time of such termination shall remain exercisable until twelve (12) months following such termination (but not beyond the expiration of the option's term). 7.3 Any Participant may, at any time within thirty (30) days next following the Change of Control, in lieu of exercising his/her stock options, elect to receive a cash payment equal to the positive difference between (i) the aggregate exercise price of the shares for which such election is made, and (ii) the fair market value of such shares on the date such right is exercised; provided, however, that any such election to receive a cash payment would not violate the applicable pooling of interest rules in effect at the time of the Change of Control. 7.4 Any restricted period in effect as of the date of the Change of Control shall end with respect to shares of restricted stock previously awarded to the Participant. ARTICLE 8 CLAIMS FOR BENEFITS 8.1 In the event that a Participant desires to make a claim with respect to any of the benefits provided hereunder, the Participant shall submit evidence satisfactory to the officer of the Company that the Plan Administrator designates to receive claims. Any claim with respect to any of the benefits provided under the Plan shall be made in writing within ninety (90) days of the event that the Participant is asserting constitutes a termination of employment or the first occurrence of the event which otherwise forms the basis of the Participant's claim. Failure by the Participant to submit his/her claim within the ninety (90) day period shall bar the Participant from any claim for benefits under the Plan as a result of the occurrence of that event. 8.2 In the event that a claim of a Participant is wholly or partially denied, the Participant or his/her duly authorized representative may appeal the denial of the claim to the Board of Directors or to any committee that the Board of Directors designates at any time within ninety (90) days after the Participant receives written notice from the Company of the denial of the claim. In connection therewith, the Participant or his/her duly authorized representative may request a review of the denied claim, may review pertinent documents, and may submit issues and comments in writing. Upon receipt of an appeal, the Board of Directors or such designated committee shall make a decision with respect to the appeal and, not later than sixty (60) days after receipt of a request for review, shall furnish the Participant with a decision on review in writing, including the specific reasons for the decision written in a manner calculated to be understood by the Participant, as well as specific references to the pertinent provisions of the Plan upon which the decision is based. 8.3 No benefit that shall be payable under the Plan to any Participant shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. 7 8.4 The Plan shall not give any Employee or Participant any right or claim except to the extent that the right is fixed specifically under the Plan. The establishment of the Plan shall not be construed to give any Employee or Participant a right to be continued in the employ of the Company or as interfering with the right of the Company to terminate the employment of any Employee or Participant at any time. ARTICLE 9 ADMINISTRATION AND FINANCING OF THE PLAN 9.1 The Plan Administrator and/or the Board of Directors shall have the discretion, authority, duty, power and responsibility to decide all factual and legal questions under the Plan, including without limitation, (i) the interpretation and construction of the provisions of the Plan as it deems appropriate, necessary or advisable and any ambiguous or unclear terms within the plan document, (ii) the adoption, establishment and revision of rules, procedures and regulations relating to the Plan, (iii) the determination of the conditions subject to which any benefits may be payable, (iv) the resolution of all questions concerning the status and rights of a participant and others under the Plan, whether a claimant is eligible for benefits under the Plan and the amount of the benefits, if any, a claimant is entitled to receive, and (v) any other determinations which it believes necessary or advisable for the administration and operation of the Plan.. All determinations of the Plan Administrator and/or Board of Directors shall be final and binding on all Employees and Participants. The Plan Administrator may appoint a committee or an agent or other representative to act on its behalf, and may delegate to such committee or agent or representative any of the powers of the Plan Administrator (the "Committee"). Any action that such Committee or agent or representative takes shall be considered to be the action of the Plan Administrator, when the committee or agent or representative is acting within the scope of the authority that the Plan Administrator delegates it, and the Plan Administrator shall be responsible for all such actions. 9.2 The company that employs the Participant on his last day of employment will fund the Plan by payments made from its general assets. ARTICLE 10 AMENDMENT AND TERMINATION The Board of Directors in accordance with applicable corporate law reserves the right at any time to amend or terminate the Plan, except that if the Plan is terminated in anticipation of or upon or after a Change of Control has occurred, the Board of Directors may not terminate the participation in the Plan of any Participant who is in the Plan when a Change of Control is anticipated or as of the date of the Change of Control and the Board of Directors may not amend or terminate the Plan as it affects any Participant in the Plan as of the date of the Change of Control. ARTICLE 11 MISCELLANEOUS PROVISIONS 11.1 The failure of the Plan Administrator to enforce any of the provisions of the Plan shall in no way be construed to be a waiver of these provisions, nor in any way to affect the validity of the Plan or any part thereof, or the right of the Plan Administrator thereafter to enforce every provision. 11.2 This Plan replaces and supercedes all prior plans, programs and arrangements providing severance-type benefits to the Participant. The severance pay and benefits payable under this Plan shall not duplicate any benefits provided to the Participant under any agreement, arrangement, program, employee handbook , severance or other plan entered into or effective after the effective date of the Participant's participation in the Plan and prior to or after a Change of Control. The benefits that this Plan provides shall 8 not be reduced or offset by any other payments or benefits that the Participant may receive from any other third party or other employer after the termination of the Participant's employment with the Company. 11.3 Article headings are for convenience only and the language of the Plan itself will be controlling. 11.4 This Plan shall be unfunded. Any liability of the Company under the Plan shall be based solely on contractual obligations, if any, that are created hereunder. No such liability of the Company shall be deemed to be secured by any property of the Company. 11.5 Each member of any committee and each member of the Board of Directors shall, except as prohibited by law, be indemnified and held harmless by the Company from any and all liabilities, costs and expenses (including legal fees), to the extent not covered by liability insurance, arising out of any action taken (or the omission of any action) by such individual with respect to the Plan unless the liability, cost or expense arises from the individual's (i) claim for his or her own benefit, (ii) gross negligence, (iii) bad faith, (iv) reasonable belief his or her conduct was unlawful, (v) conviction of any criminal act or criminal misconduct. This indemnification shall continue as to an individual who has ceased to be a committee member or member of the Board of Directors and shall inure to the benefit of the heirs, executors and administrators of such individual. 11.6 Whenever any benefits become payable under the Plan, the Company shall have the right to withhold such amounts as are sufficient to satisfy any federal, state or local withholding tax requirements. 11.7 The Participant is under no obligation to mitigate the terms of this Agreement. 11.8 The Plan shall be construed and administered under the laws of the State of New York. IN WITNESS WHEREOF, the Company has caused the Plan to be executed on December 26, 1999. HANOVER DIRECT, INC. By: /s/ Ralph Bulle ------------------------------------- Title: Senior Vice President ---------------------------------- EX-27 13 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 THREE MONTHS ENDED MARCH 25, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-30-2000 MAR-25-2000 3,376 0 30,708 (3,888) 55,892 117,040 93,881 (48,586) 192,064 97,438 50,690 0 0 142,641 (101,182) 192,064 130,150 130,150 53,016 138,050 2,459 784 3,014 (13,373) 75 (13,448) 0 0 0 (13,448) (.06) (.06)
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