-----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, H3qPAPbeFIAU1RlbSvta5Ms9yYjA5zive0jS+3cu3H0dBjCHaTbJ5JJjueOo06Bp uER2m/Sm2/WbyXrYuLEdIA== 0000950123-02-003134.txt : 20020415 0000950123-02-003134.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950123-02-003134 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20011229 FILED AS OF DATE: 20020328 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08056 FILM NUMBER: 02591921 BUSINESS ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 BUSINESS PHONE: 2018653800 MAIL ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 FORMER COMPANY: FORMER CONFORMED NAME: HORN & HARDART CO /NV/ DATE OF NAME CHANGE: 19920703 10-K405 1 y58340e10-k405.txt HANOVER DIRECT, INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001 COMMISSION FILE NUMBER 1-12082 ------------------------ HANOVER DIRECT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 115 RIVER ROAD, BUILDING 10, EDGEWATER, NEW JERSEY (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 13-0853260 (IRS EMPLOYER IDENTIFICATION NO.) 07020 (ZIP CODE) (201) 863-7300 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, $.66 2/3 PAR VALUE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 21, 2002, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $29,430,676.62 (based on the closing price of the Common Stock on the American Stock Exchange on March 21, 2002 of $0.43 per share; shares of Common Stock owned by directors and officers of the Company are excluded from this calculation; such exclusion does not represent a conclusion by the Company that all of such directors and officers are affiliates of the Company). As of March 21, 2002, the registrant had 138,235,800 shares of Common Stock outstanding (excluding treasury shares). ------------------------ DOCUMENTS INCORPORATED BY REFERENCE The Company's definitive proxy statement to be filed by the Company pursuant to Regulation 14A is incorporated into items 11, 12 and 13 of Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- HANOVER DIRECT, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001 INDEX
PAGE ---- PART I ITEM 1. Business.................................................... 2 General................................................... 2 Strategic Realignment..................................... 2 Hanover Brands............................................ 4 erizon.................................................... 7 Incubator Investments..................................... 8 Credit Management......................................... 9 Financing................................................. 9 Additional Investments.................................... 10 Employees................................................. 12 Seasonality............................................... 12 Competition............................................... 12 Trademarks................................................ 12 Government Regulation..................................... 12 Listing Information....................................... 13 ITEM 2. Properties.................................................. 13 ITEM 3. Legal Proceedings........................................... 14 ITEM 4. Submission of Matters to a Vote of Security Holders......... 17 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder's Matters....................................... 18 ITEM 6. Selected Financial Data..................................... 19 ITEM 7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations............... 20 Results of Operations..................................... 20 Liquidity and Capital Resources........................... 24 Forward Looking Statements................................ 27 Cautionary Statements..................................... 27 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk........................................................ 28 ITEM 8. Financial Statements and Supplementary Data................. 29 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 65 PART III ITEM 10. Directors and Executive Officers of the Registrant.......... 67 ITEM 11. Executive Compensation...................................... 70 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 70 ITEM 13. Certain Relationships and Related Transactions.............. 70 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 71 Signatures.................................................. 73
PART I ITEM 1. BUSINESS GENERAL Hanover Direct, Inc. (the "Company") provides quality, branded merchandise through a portfolio of catalogs and e-commerce platforms to consumers, as well as a comprehensive range of Internet, e-commerce and fulfillment services to businesses. Hanover Brands, Inc. ("Hanover Brands"), the Company's business-to-consumer subsidiary, is comprised of its catalog and Web site portfolio of home fashions, apparel and gift brands including during 2001 Domestications, The Company Store, Scandia Down, Silhouettes, International Male, Undergear and Gump's By Mail. Each brand can be accessed on the Internet individually by name. In addition, the Company owns Gump's, a retail store based in San Francisco, California. In 2001, the Company discontinued certain businesses, including its The Company Store at Home, Great Finds, Outtakes, Encore, Turiya, Kitchen & Home and Domestications Kitchen & Garden print catalogs, sold its Improvements business and terminated its marketing agreement with Compagnie de la Chine. At the commencement of 2001, erizon, Inc. ("erizon"), the Company's business-to-business subsidiary, was comprised of the Company's direct commerce IT platform, Keystone Internet Services, Inc., the Company's third party, end-to-end, fulfillment, logistics and e-care provider, and Desius LLC, offering Web shop services and e-commerce systems development. erizon also formerly serviced the logistical, IT and fulfillment needs of Hanover Brands through an intercompany services agreement which was terminated effective December 30, 2000. In January 2001, the Company ceased Desius LLC's business operations and, as a result, erizon now consists principally of the third party fulfillment business of Keystone Internet Services, Inc. The Company is incorporated in Delaware and its executive offices were formerly located at 1500 Harbor Boulevard, Weehawken, New Jersey 07087. As of December 3, 2001, the Company moved its executive offices to 115 River Road, Edgewater, New Jersey 07020. The Company's telephone number is (201) 863-7300. The Company is a successor in interest to The Horn & Hardart Company, a restaurant company founded in 1911, and Hanover House Industries, Inc., founded in 1934. Richemont Finance S.A. ("Richemont"), a Luxembourg company, owns approximately 20.8% of the Company's outstanding common stock. Richemont is an affiliate of Compagnie Financiere Richemont, A.G., a Swiss based publicly traded luxury goods company. STRATEGIC REALIGNMENT On January 5, 2001, the Company announced a strategic business realignment program which included (1) the elimination of approximately 285 FTE positions across all its business units, (2) the closure of the Company's Always In Style business, (3) the discontinuance by Hanover Brands of the underperforming Turiya, Kitchen & Home and Domestications Kitchen & Garden catalogs while incorporating some of the product offerings within continuing catalogs, (4) the termination by Hanover Brands of its marketing agreement with Compagnie de la Chine, (5) the closure by Hanover Brands of certain retail outlets and a satellite facility in New Jersey, (6) the expected closure by erizon of its leased fulfillment and telemarketing facility in Maumelle, Arkansas later in 2001 (the facility was closed in May 2001) and (7) the immediate cessation by erizon of the operations of Desius LLC. Such actions were taken in an effort to direct the Company's resources primarily towards growth in core brands, such as The Company Store, Domestications and Silhouettes brands, while reducing costs in all areas of the business and eliminating investment activities that had not yet generated sufficient revenue to produce profitable returns. erizon consolidated the Maumelle operations within its remaining facilities and now provides the bulk of its fulfillment services for third party clients of its Keystone Internet Services, Inc. subsidiary within its existing operations. The consolidation of Keystone activities in other facilities provides a better opportunity to the Company to focus resources, particularly customer service support, on clients to service their needs. The Company retained Newmark Retail Financial Advisors LLC to seek qualified purchasers for its Gump's By Mail and Gump's San Francisco business, its Brawn of California business, including the 2 International Male and Undergear brands, its Scandia Down business, its Silhouettes business and its 277,500 square foot warehouse and fulfillment facility located in Hanover, Pennsylvania. The Company terminated its contract with Newmark Retail Financial Advisors LLC effective February 28, 2002. The Company may be obligated to pay Newmark certain tail or other ancillary fees depending on the circumstances. In March 2001, the Company took additional steps in its strategic business realignment program which included (1) the elimination of approximately 24 FTE positions principally in Hanover Brands and the Company's IT operations, (2) the expected closure by the Company of a portion of its leased principal executive offices in Weehawken, New Jersey and a leased storage facility later in the year, (3) the execution of an agreement for a new discount buyers club to consumers with MemberWorks Incorporated, and (4) initiatives directed at achieving costs savings in package shipping costs and telemarketing and customer service. In December 2001, the Company completed the closure of a portion of its leased principal executive offices in Weehawken, New Jersey and relocated the principal executive offices to 115 River Road, The Hudson River Pier, Edgewater, New Jersey 07020 in order to facilitate the sublet of approximately 57,000 square feet of excess space but has remained in occupancy of a portion of the space located in Weehawken, New Jersey for catalog and other operations. On May 3, 2001, as part of the Company's strategic business realignment program, the Company sold its fulfillment warehouse in Hanover, Pennsylvania (the "Kindig Lane Property") and certain equipment located therein for $4.7 million to an unrelated third party. The Company has continued to use the Kindig Lane Property under a lease agreement with the third party, and will lease a portion of the Kindig Lane Property until August 2002. The Company intends to transition the activities of the Kindig Lane Property into the Company's fulfillment center in Roanoke, Virginia. On May 15, 2001, the Company closed its subleased fulfillment and telemarketing facility in Maumelle, Arkansas. The sublease for the Maumelle facility is currently due to expire in 2010 but the Company is negotiating a lease termination agreement with the landlord and the sublandlord pursuant to which the Company and the sublandlord will each make a substantial cash payment to the landlord and, upon satisfaction of certain other conditions, the landlord and the sublandlord will release the Company from any obligations and liabilities under its sublease, other than as to certain damage to the building. On June 29, 2001, the Company sold certain assets and liabilities of its Improvements business to HSN, a division of USA Networks, Inc.'s Interactive Group for approximately $33.0 million. In conjunction with the sale, the Company's Keystone Internet Services, Inc. subsidiary agreed to provide telemarketing and fulfillment services for the Improvements business under a service agreement with the buyer for a period of three years. Subsequently, the services arrangement was expanded so that Keystone provides a greater range of services to HSN. During 2001, the Company consolidated the management and operations of the Gump's retail store and the Gump's By Mail catalog in one geographic location, San Francisco, California. The Company has also streamlined the senior management of Gump's, and has put in place business and profit improvement initiatives, including the planned launch during 2002 of various specialty shops-in-shops in the Gump's San Francisco retail store and the development of a customer loyalty program. During 2001, the Company discontinued various catalogs, websites, mailings and programs in its Brawn of California operations, and eliminated unprofitable circulation of its International Male and Undergear catalogs, in an effort to focus the business on the International Male core customer. The Company has put various profit improvement initiatives in place at Brawn of California, including a reduction in the number of FTE employees, the closure of the off-site photographic studio, and the adoption of digital photography. In addition, the Company has initiated a number of inventory management initiatives at Brawn of California. As a result of all the foregoing strategic business realignment actions, the Company's business to business revenues in fiscal 2001 were materially reduced; however, the Company will continue to market its end-to-end fulfillment services to strong third-party clients in 2002 and beyond. Taken in conjunction with the Company's announced intention to direct resources primarily towards growth in core brands, these actions caused the Company, pursuant to SFAS No. 131, to report results for the consolidated operations of the Company as one segment commencing in fiscal 2001. The Company intends to continue to investigate both internal and external opportunities to further reduce costs, improve cashflow and maximize shareholder value. 3 HANOVER BRANDS General. The Company, through Hanover Brands, is a leading specialty direct marketer with a diverse portfolio of branded home fashions, men's and women's apparel and gift products marketed via direct mail-order catalogs and connected Internet Web sites. The Company's catalog titles are organized into five brand groups -- Home Fashions -- Mid-Market brands, Home Fashions -- Upscale brands, Women's Apparel brands, Men's Apparel brands and Gift brands groups -- each consisting of one or more catalog/online titles. All of these brand groups utilize central purchasing and inventory management functions and erizon's common systems platform, telemarketing, fulfillment, distribution and administrative functions. During 2001, the Company mailed approximately 241.5 million catalogs (including certain catalogs relating to businesses of the Company that were later discontinued and catalogs related to the Company's Improvements business prior to its sale), answered more than 9.2 million customer service/order calls and processed and shipped 7.2 million packages to customers. On June 29, 2001, the Company sold certain assets and liabilities of its Improvements business to HSN, a division of USA Networks, Inc.'s Interactive Group for approximately $33.0 million. In conjunction with the sale, the Company's Keystone Internet Services, Inc. subsidiary agreed to provide telemarketing and fulfillment services for the Improvements business under a service agreement with the buyer for a period of three years. The asset purchase agreement between the Company and HSN provides for a reduction in the sale price if the performance of the Improvements business in the 2001 fiscal year fails to achieve a targeted EBITDA level as defined in the agreement. The business achieved the targeted EBITDA level so no reduction in the sale price was required. In addition, if Keystone Internet Services, Inc. fails to perform its obligations during the first two years of the services contract, the purchaser can receive a reduction in the original purchase price of up to $2.0 million. An escrow fund of $3.0 million, which was withheld from the original proceeds of the sale of approximately $33.0 million, has been established for a period of two years under the terms of an escrow agreement between LWI Holdings, Inc., HSN and The Chase Manhattan Bank as a result of these contingencies. As of December 29, 2001, the balance in the escrow fund was approximately $2.6 million. The Company reviews its portfolio of catalogs as well as new opportunities to acquire or develop catalogs from time to time. In 2001, the Company discontinued its The Company Store at Home, Great Finds, Outtakes, Encore, Turiya, Kitchen & Home and Domestications Kitchen & Garden print catalogs. Each of the Company's specialty catalogs targets distinct market segments offering a focused assortment of merchandise designed to meet the needs and preferences of its target customers. Through market research and ongoing testing of new products and concepts, each brand group determines each catalog's own merchandise strategy, including appropriate price points, mailing plans and presentation of its products. The Company is continuing its development of exclusive or private label products for a number of its catalogs, including Domestications and The Company Store, to further enhance the brand identity of the catalogs. The Company's specialty catalogs typically range in size from approximately 24 to 116 pages with two to five new editions per year depending on the seasonality and fashion content of the products offered. Each edition may be mailed several times each season with variations in format and content. Each catalog employs the services of an outside creative agency or has its own creative staff that is responsible for the designs, layout, copy, feel and theme of the book. Generally, the initial sourcing of new merchandise for a catalog begins two to four months before the catalog is mailed. The following is a description of the Company's catalogs in each of the Company's five brand groups: Home Fashions -- Mid-Market Brands: Domestications is a leading home fashions catalog offering affordable luxury for every room in the home for today's value-oriented and style-conscious consumer. Home Fashions -- Upscale Brands: The Company Store is an upscale home fashions catalog focused on high quality down products and other private label and branded home furnishings. Scandia Down is a nationally known retailer specializing in luxury down products and home fashions. 4 Women's Apparel Brands: Silhouettes is a leading fashion catalog offering large size women upscale apparel and accessories. Men's Apparel Brands: International Male offers contemporary men's fashions and accessories at reasonable prices. Undergear is a leader in fashionable and functional men's underwear, workout wear and active wear. Gift Brands: Gump's By Mail(R) and Gump's(R) San Francisco are luxury sources for discerning customers of jewelry, gifts and home furnishings, as well as market leaders in offering Asian inspired products. In March 1999, the Company, through a newly formed subsidiary, started up and promoted a discount buyers club to consumers known as "The Shopper's Edge." In exchange for an up-front membership fee, the Shopper's Edge program enables members to purchase a wide assortment of merchandise at discounts which are not available through traditional retail channels. Effective December 1999, the Company sold its interest in The Shopper's Edge subsidiary to FAR Services, LLC, an unrelated third party, for a nominal fair value based upon an independent appraisal. In January 2001, the Company terminated its Agreement with FAR Services and ceased the offering of memberships in The Shopper's Edge to its customers. Members continued to have the ability to have their memberships automatically renewed and billed unless canceled by the member. The last renewals of memberships were processed in October 2001 by mutual agreement between the Company and FAR Services as a result of the terms of the then-pending settlement agreement between the Federal Trade Commission and Ira Smolev, the owner of FAR Services. For the purpose of monitoring and processing refunds for the Company's customers, the Company remained in its position as bookkeeper for the club during 2001. The Company will continue to perform the function of bookkeeper until April 2003, or the period of eighteen months beyond the time the last member was renewed, since members are due refunds for cancellations which might occur at any time during an annual membership and surety bonds secured by letters of credit obtained with funds held by the bookkeeper are in place in six states, and must remain in place for six months beyond the last date of any membership. Marketing and Database Management. The Company maintains a proprietary customer list currently containing approximately 13 million names of customers who have purchased from one of the Company's catalogs within the past 36 months. Approximately 2.7 million of the names on the list represent customers who have made purchases from at least one of the Company's catalogs within the last 12 months. The list contains name, gender, residence and historical transaction data. This database is selectively enhanced with demographic, socioeconomic, lifestyle and purchase behavior overlays from other sources. The Company utilizes modeling and segmentation analysis to devise catalog marketing and circulation strategies that are intended to maximize customer contribution by catalog. This analysis is the basis for the Company's determination of which of the Company's catalogs will be mailed and how frequently to a particular customer, as well as the promotional incentive content of the catalog(s) such customer receives. The Company utilizes name lists rented from other mailers and compilers as a primary source of new customers for the Company's catalogs. Many of the catalogs participate in a consortium database of catalog buyers whereby new customers are obtained by the periodic submission of desired customer buying behavior and interests to the consortium and the subsequent rental of non-duplicative names from the consortium. Other sources of new customers include traditional print space advertisements and promotional inserts in outbound merchandise packages. In March 2001, the Company entered into a five-year marketing services agreement with MemberWorks, Incorporated under which the Company's catalogs market and offer a variety of MemberWorks membership programs for a wide variety of goods and services to the Company's catalog customers when they call to place an order. To the extent that the Company achieves a certain acceptance rate by reading scripts to its customers, the Company is guaranteed a certain revenue stream dependent upon the actual number of offers made. To the extent that the program performs better than a pre-designated level, the Company will receive a higher level of revenue than its guaranteed minimum. MemberWorks has the exclusive rights to first up-sell 5 position on all merchandise order calls made to the Company, after any cross-sells which the catalogs may make for their own primary (or catalog-based) products, but before any offer for one of the Company's pre-existing catalog-based membership clubs. The catalog company may choose not to read an up-sell script on all inbound order calls only due to business necessities. Initially, prospective members participate in a 30-day trial period that, unless canceled, is automatically converted into a full membership term, which is one year in duration. Memberships are automatically renewed at the end of each year unless canceled by the member. Since early 2002, the Company has been testing the offer of membership terms which are one month in duration. Memberships are automatically renewed and billed at the end of each month unless canceled by the member. The Internet as a source of new customers continues to grow in importance. Internet sales increased approximately 30% from $62,589,000 in 2000 to $81,787,000 in 2001. The Company maintains an active presence on the Internet by having a commerce-enabled Web site for each of its catalogs which offers its merchandise, takes catalog requests, and accepts orders for not only Web site merchandise but also from any print catalog already mailed. The Web sites for each brand are promoted within each catalog, in traditional print media advertising, in TV commercials, and on third party Web sites. The Company utilizes marketing opportunities available to it by posting its catalog merchandise and accepting orders on third party Web sites, for which it is charged a commission. Third party Web site-advertising arrangements entered into by the Company includes partnerships with AOL, Yahoo, ArtSelect, StoreRunner, and e-centives. Purchasing. The Company's large sales volume permits it to achieve a variety of purchasing efficiencies, including the ability to obtain prices and terms that are more favorable than those available to smaller companies or than would be available to the Company's individual catalogs were they to operate independently. Major goods and services used by the Company are purchased or leased from selected suppliers by its central buying staff. These goods and services include paper, catalog printing and printing related services such as order forms and color separations, communication systems including telephone time and switching devices, packaging materials, expedited delivery services, computers and associated network software and hardware. The Company's telephone telemarketing phone service costs (both inbound and outbound calls) are typically contracted for a two to three-year period. In the fourth quarter of 1999, the Company entered in to a two-year call center service agreement with MCI Worldcom and in the fourth quarter of 2001, the Company revised its agreement with MCI WorldCom that provided for a two-and-a-half-year extension expiring during April 2004. Under the revised agreement, the Company obtained a reduction in the rate it had been paying pursuant to the agreement entered into in 1999. In connection with the revised agreement, the Company agreed to guarantee certain levels of call volume and the Company has met and anticipates that it will continue to meet such targets. The Company generally enters into annual arrangements for paper and printing with a limited number of suppliers. These arrangements permit periodic price increases or decreases based on prevailing market conditions, changes in supplier costs and continuous productivity improvements. For 2001, paper costs approximated 6.6% of the Company's net revenues. The Company experienced a 10% increase in paper prices during 2000 and a 4% decrease during 2001. The Company has been negotiating lower paper prices for 2002 and expects that such prices will be approximately 12.8% lower than 2001. The Company normally experiences increased costs of sales and operating expenses as a result of the general rate of inflation and commodity price fluctuations. Operating margins are generally maintained through internal cost reductions and operating efficiencies, and then through selective price increases where market conditions permit. Inventory Management. The Company's inventory management strategy is designed to maintain inventory levels that provide optimum in-stock positions while maximizing inventory turnover rates and minimizing the amount of unsold merchandise at the end of each season. The Company manages inventory levels by monitoring sales and fashion trends, making purchasing adjustments as necessary and by promotional sales. Additionally, the Company sells excess inventory through special sale catalogs, sales/liquidation postings in brand Web sites, e-auctions, its outlet stores and to jobbers. The Company acquires products for resale in its catalogs from numerous domestic and foreign vendors. No single third party source supplied more than 10% of the Company's products in 2001. The Company's vendors are selected based on their ability to reliably meet the Company's production and quality requirements, as well as their financial strength and willingness to meet the Company's needs on an ongoing basis. 6 The Company receives approximately 73% of its orders through its toll-free telephone service, which offers customer access seven days per week, 24 hours per day. Telemarketing and Distribution. Hanover Brands' telemarketing and distribution needs are provided by erizon. The management information systems used by Hanover Brands are discussed below. The Company mails its catalogs through the United States Postal Service ("USPS") utilizing pre-sort, bulk mail and other discounts. Most of the Company's packages are shipped through the USPS. Overall, catalog mailing and package shipping costs approximated 18.6% of the Company's net revenues in 2001. The USPS has announced that it proposes to implement postage rate increases ranging from 13.5% for Priority Mail to 7.3% for Standard Mail effective June 30, 2002 at the earliest. The Company does not expect these increases to have a material adverse effect on its results of operations. The Company mitigates the impact of postage rate increases by obtaining rate discounts from the USPS by automatically weighing each parcel and sorting and trucking packages to a number of USPS drop points throughout the country. Some packages are shipped using a consolidator for less frequently used drop points. The Company also utilizes United Parcel Service and other delivery services. In 2001, the Company's contractual rates with United Parcel Service remained the same as in 2000. The Company expects that United Parcel Service will increase its rates by 3.5% in July 2002 but the Company does not expect this increase to have a material adverse effect on its results of operations. The Company examines alternative shipping services with competitive rate structures from time to time. erizon General. The Company, through erizon, is an end-to-end technology solutions provider for e-commerce customers. During 2001, erizon was comprised of the Company's telemarketing, fulfillment and distribution functions as well as its proprietary, fully integrated systems platform internally known as Pegasus. That system is described under "Management Information Systems" below. Other assets as of December 29, 2001 include three warehouse fulfillment centers one leased temporary storage facility totaling approximately 1.1 million square feet, and three telemarketing/e-care centers and one satellite call center with over 770 agent positions. In addition, the Company subleases a vacant a 497,200 square foot warehouse and telemarketing facility in Maumelle, Arkansas for which the Company is currently negotiating a lease termination agreement. On February 28, 2002, the Company closed its telemarketing facility in San Diego, California, which had 100 agent positions. erizon is also home to Keystone Internet Services, Inc. ("Keystone"), which provides back-end e-commerce services to a roster of Internet players. Keystone's services range from fulfillment and e-care to platform logistics products. erizon also services the logistical, IT and fulfillment needs of Hanover Brands. In January 2001, erizon ceased the operations of Desius LLC, formerly the Company's e-commerce software systems and programming Web shop joint venture for e-commerce applications. As a result, erizon now consists principally of the third party fulfillment business of Keystone Internet Services, Inc. Telemarketing. The Company has created a telephone network to link its three primary telemarketing facilities in Hanover, Pennsylvania, York, Pennsylvania and LaCrosse, Wisconsin. On February 28, 2002, the Company closed its telemarketing facility in San Diego, California. The Company's telemarketing facilities utilize state-of-the-art telephone switching equipment which enables the Company to route calls between telemarketing centers and thus provide prompt customer service. In the fourth quarter of 2001, the Company extended its call center services agreement with MCI Worldcom to provide that it would terminate during April 2004. In April 2000 the Company entered into a three-year agreement with GE Capital International Services to provide telemarketing services in India. In September 2001, the Company entered into an amendment with GE Capital International Services to provide that the agreement would terminate during December 2001, instead of on April 2, 2002, and achieved a full and mutual release of all liability and obligation after that date; the agreement terminated on December 28, 2001. See "Hanover Brands -- Purchasing." The Company trains its telemarketing service representatives to be courteous, efficient and knowledgeable about the Company's products and those of its third party customers. Telemarketing service representatives generally receive 40 hours of training in selling products, services, systems and communication skills through simulated as well as actual phone calls. A substantial portion of the evaluation of telemarketing service representatives' performance is based on how well the representative meets customer service standards. While primarily trained with product knowledge to serve customers of one or more specific catalogs, 7 telemarketing service representatives also receive cross training that enables them to take overflow calls from other catalogs. The Company utilizes customer surveys as an important measure of customer satisfaction. Distribution. The Company presently operates four distribution centers in three principal locations: two in Roanoke, Virginia (one is owned by the Company and the other is a leased temporary storage facility), one in Hanover, Pennsylvania and one in LaCrosse, Wisconsin. The Company uses these facilities to handle merchandise distribution for Hanover Brands as well as its third party e-tail clients. See "Properties." On May 15, 2001, the Company closed its distribution center in Maumelle, Arkansas. Management Information Systems. All the Company's catalogs are part of its integrated mail order and catalog system operating on its mid-range computer systems. Additionally, its fulfillment centers are part of the Company's warehouse management system. The Company's systems have been designed to meet its requirements as a high volume publisher of multiple catalogs. The Company is continuing to devote resources to improving its systems. The Company's software system is an on-line, real-time system which is used in managing all phases of the Company's operations and includes order processing, fulfillment, inventory management, list management and reporting. The software provides the Company with a flexible system that offers data manipulation and in-depth reporting capabilities. The management information systems are designed to permit the Company to achieve efficiencies in the way its financial, merchandising, inventory, telemarketing, fulfillment and accounting functions are performed. Keystone Internet Services. Launched in 1998, Keystone initially serviced the needs of other direct marketers without back-end fulfillment resources. Keystone currently offers e-commerce solutions and services to a customer base of brand name manufacturers and retailers who lack the end-to-end systems needed to enter e-commerce quickly, easily and affordably. During 2001, the Company consolidated Keystone's operations and management functions and refocused its business activities against profitable clients. Keystone offers its client base of 11 third party clients as of December 29, 2001 the resources needed on the "front-end" ranging from Web site creation and management to Internet marketing to multi-channel marketing promotions to structured financing. "Front-end" logistical services provided by Keystone include telemarketing and e-care. Keystone can take orders off the Web and answer e-mails as well as handle order processing, credit card transaction processing, customer database management and systems programming and interface support. On the "back-end," Keystone offers services including fulfillment, order management, inventory management and facility management. All this can be done using the Company's proprietary Pegasus multi-channel, multi-title platform described above. Desius. In 1999, the Company entered into a joint venture with RS Software (India), Ltd. to provide Web shop services and e-commerce software, systems and programming, augmenting the Company's programming services. The Desius teams have been based in Calcutta, India and the United States in an effort to provide 24/7 service. The Calcutta based Desius team also has provided additional resources including creative marketing, Web site creation, maintenance and management. Desius also has served as the outsourcing arm for Keystone clients which lack resources in these areas. During 2001, as part of its strategic business realignment program, the Company ceased Desius LLC's business operations. INCUBATOR INVESTMENTS In 1999, the Company began to focus on expansion of its business portfolio through new Internet-related initiatives and sought to take equity stakes in promising on-line businesses and an active role in their development and technology. In 1999, the Company acquired a majority equity interest in Always in Style, LLC, an interactive service that provides consumers with personalized style and taste advice and tailored e-commerce merchandise offers. Retailers participating in the Always in Style retail network are provided with a ready-made solution and a virtually instantaneous way of adding this functionality to their Web sites. Always in Style was formally launched in November 1999. In January 2001, as part of its strategic business realignment program, the Company announced that it planned to discontinue the Always in Style business and in March 2001 sold its interest in Always in Style, LLC to its partner in such venture. 8 In 2000, the Company acquired minority equity interests of an immaterial value in three on-line businesses with which the Company did business. Two of such businesses have ceased operations. CREDIT MANAGEMENT Several of the Company's catalogs, including Domestications, International Male and Gump's By Mail, offer their own private label credit cards. In 1999, the Company entered into a new three-year account purchase and credit card marketing and services agreement with Capital One Services, Inc. and Capital One Bank under which Capital One provides for the sale and servicing of accounts receivable originating from the Company's private label credit card program. On March 9, 2002, the agreement automatically renewed for an additional one-year period. FINANCING Congress Credit Facility. The Company's credit facility with Congress Financial Corporation ("Congress") provides the Company with a maximum credit line, subject to certain limitations, 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 the assets of the Company and places restrictions on the incurrence of additional indebtedness and on the payment of common stock dividends. As of December 29, 2001, the Company had $29.6 million of borrowings outstanding under the amended Congress Credit Facility comprised of $13.5 million under the revolving loan facility, and $10.5 million and $5.6 million of Tranche A Term Loans and Tranche B Term Loans, respectively. The Company may draw upon the amended Congress Credit Facility to fund working capital requirements as needed. In November 2001, the Company amended the Congress Credit Facility to waive a default that resulted from the calculation of the EBITDA covenant requirement and revised the definition of EBITDA to include the net income derived from the sale of the Kindig Lane Property and the assets of the Improvements business. In addition, the amendment required a reserve of $500,000 against the availability under the Congress Credit Facility's borrowings terms and a fee of $500,000. In March 2002, the Company amended the Congress Credit Facility to amend the definition of Consolidated Net Worth such that, effective July 1, 2002, to the extent that the goodwill or intangible assets of the Company and its subsidiaries are impaired under the provisions of Financial Accounting Standards No. 142, such write-off of assets would not be considered a reduction of total assets for the purposes of computing Consolidated Net Worth. The consolidated working capital, consolidated net worth and EBITDA covenants were also amended. In addition, the amendment required the payment of a fee of $100,000. Achievement of the Company's strategic business realignment program is critical to the maintenance of adequate liquidity, as is compliance with the terms and provisions of the Congress Credit Facility and the Company's ability to operate effectively during the 2002 fiscal year. Richemont Transaction; Series A and B Participating Preferred Stock. On August 24, 2000, the Company issued 1.4 million shares of preferred stock designated as Series A Cumulative Participating Preferred Stock (the "Series A Preferred Stock") to Richemont for $70.0 million. The Series A Preferred Stock is described below under "Additional Investments." On December 19, 2001, the Company consummated a transaction with Richemont (the "Richemont Transaction") in which the Company repurchased from Richemont all of the outstanding shares of the Series A Preferred Stock and 74,098,769 shares of the Common Stock of the Company held by Richemont in return for the issuance to Richemont of 1,622,111 shares of newly-created Series B Participating Preferred Stock (the "Series B Preferred Stock") and the reimbursement of expenses of $1 million to Richemont. Richemont agreed, as part of the transaction, to forego any claim it had to the accrued but unpaid dividends on the Series A Preferred Stock. The Richemont Transaction was made pursuant to an Agreement (the "Agreement"), dated as of December 19, 2001, between the Company and Richemont. The terms of the Series B Preferred Stock are described below under "Additional Investments." 9 General. At December 29, 2001, the Company had $1.1 million in cash and cash equivalents compared with $1.7 million at December 30, 2000. Working capital and current ratios at December 29, 2001 were $20.9 million and 1.26 to 1 versus $16.8 million and 1.15 to 1 at December 30, 2000. Total cumulative borrowings, including financing under capital lease obligations, as of December 29, 2001 aggregated $29.7 million, $26.5 million of which is classified as long-term. Remaining availability under the Congress Revolving Credit Facility as of December 29, 2001 was $17.3 million ($18.4 million including cash on hand). Capital commitments at December 29, 2001 totaled less than $100,000, principally for leasehold improvements. ADDITIONAL INVESTMENTS Series B Participating Preferred Stock. On December 24, 2001, as part of the Richemont Transaction, the Company issued and sold 1,622,111 shares of preferred stock designated as Series B Preferred Stock, par value $0.01 per share, in a private placement to Richemont. In the event of the liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock are entitled to a liquidation preference (the "Liquidation Preference") which was initially $47.36 per share and which increases quarterly, commencing March 1, 2002. As of March 1, 2002, the Liquidation Preference was $49.15 per share. As of June 1, 2002, September 1, 2002, and December 1, 2002, the Liquidation Preference will be $51.31, $53.89 and $56.95 per share, respectively. As of March 1, 2003, June 1, 2003 and September 1, 2003, the Liquidation Preference will be $60.54, $64.74 and $69.64 per share, respectively. As a result, beginning November 30, 2003, the aggregate Liquidation Preference of the Series B Preferred Stock will be effectively equal to the aggregate liquidation preference of the Class A Preferred Stock. As of December 1, 2003, March 1, 2004, June 1, 2004, September 1, 2004 and December 1, 2004, the Liquidation Preference will be $72.25, $74.96, $77.77, $80.69 and $83.72 per share, respectively. As of March 1, 2005 and June 1, 2005, the Liquidation Preference will be $86.85 and $90.11 per share, respectively. The holders of the Series B Preferred Stock are entitled to ten votes per share on any matter on which the Common Stock votes. In addition, in the event that the Company defaults in its obligations under the Agreement, the Certificate of Designations of the Series B Preferred Stock or its agreements with Congress Financial, or in the event that the Company fails to redeem at least 811,056 shares of Series B Preferred Stock by August 31, 2003, then the holders of the Series B Preferred Stock, voting as a class, shall be entitled to elect two members to the Board of Directors of the Company. Dividends on the Series B Preferred Stock are required to be paid whenever a dividend is declared on the Common Stock. The amount of any dividend on the Series B Preferred Stock shall be determined by multiplying (i) the amount obtained by dividing the amount of the dividend on the Common Stock by the then current fair market value of a share of Common Stock and (ii) the Liquidation Preference of the Series B Preferred Stock. The Series B Preferred Stock must be redeemed by the Company on August 23, 2005. The Company may redeem all or less than all of the then outstanding shares of Series B Preferred Stock at any time prior to that date. At the option of the holders thereof, the Company must redeem the Series B Preferred Stock upon a Change of Control or upon the consummation of an Asset Disposition or Equity Sale (all as defined in the Certificate of Designations of the Series B Preferred Stock). The redemption price for the Series B Preferred Stock upon a Change of Control or upon the consummation of an Asset Disposition or Equity Sale is the then applicable Liquidation Preference of the Series B Preferred Stock plus the amount of any declared but unpaid dividends on the Series B Preferred Stock. The redemption price was initially $47.36 per share and increases quarterly, commencing March 1, 2002. As of March 1, 2002, the redemption price was $49.15 per share. As of June 1, 2002, September 1, 2002, and December 1, 2002, the redemption price will be $51.31, $53.89 and $56.95 per share, respectively. As of March 1, 2003, June 1, 2003 and September 1, 2003, the redemption price will be $60.54, $64.74 and $69.64 per share, respectively. As a result, beginning November 30, 2003, the aggregate redemption price of the Series B Preferred Stock will be effectively equal to the aggregate redemption price of the Class A Preferred Stock. As of December 1, 2003, March 1, 2004, June 1, 2004, September 1, 2004 and December 1, 2004, the redemption price will be $72.75, $74.96, $77.77, $80.69 and $83.72 per share, respectively. As of March 1, 2005 and June 1, 2005, the redemption price will be $86.85 and $90.11 per share, respectively. The Company's obligation to redeem the Series B Preferred Stock upon an Asset Disposition or an Equity Sale is subject to the satisfaction of certain conditions set forth in the Certificate of Designations. 10 The Certificate of Designations of the Series B Preferred Stock provides that, for so long as Richemont is the holder of at least 25% of the then outstanding shares of Series B Preferred Stock, it shall be entitled to appoint a non-voting observer to attend all meetings of the Board of Directors and any committees thereof. Pursuant to the terms of the Certificate of Designations of the Series B Preferred Stock, the Company's obligation to pay dividends on or redeem the Series B Preferred Stock is subject to its compliance with its agreements with Congress. The Congress Credit Facility requires that the proceeds from certain asset sales by the Company be paid to Congress before any such proceeds are used to redeem the Series B Preferred Stock. Series A Cumulative Participating Preferred Stock. On August 24, 2000, the Company issued and sold 1.4 million shares of preferred stock designated as Series A Cumulative Participating Preferred Stock in a private placement (not involving the use of underwriters or other placement agents) to Richemont, a Luxembourg company which then owned approximately 47.9% of the Company's outstanding Common Stock, for an aggregate purchase price of $70.0 million in cash. There were no underwriting discounts or commissions related to such sale. The rights of the holders of the Company's Common Stock have been limited or qualified by such issuance and sale. The Series A Preferred Stock has a par value of $0.01 per share, and a liquidation preference of $50.00 per share, and was recorded net of issuance costs of $2.3 million. The issuance costs will be accreted as a dividend over a five-year period ending on the mandatory redemption date. Dividends are cumulative and accrue at an annual rate of 15%, or $7.50 per share, and are payable quarterly either in cash or in-kind through the issuance of additional Series A Preferred Stock. Cash dividend payments are required for dividend payment dates occurring after February 1, 2004. As of December 30, 2000, the Company accrued dividends of $3.8 million, and reserved 75,498 additional shares of Series A Preferred Stock for the payment of such dividend. In-kind dividends and issuance cost accretion are charged against additional paid-in capital, with a corresponding increase in the carrying amount of the Series A Preferred Stock. Cash dividends will also be reflected as a charge to additional paid-in capital, however, no adjustment to the carrying amount of the Series A Preferred Stock will be made. The Series A Preferred Stock is generally non-voting, except if dividends have been in arrears and unpaid for four quarterly periods, whether or not consecutive. The holder of the Series A Preferred Stock shall then have the exclusive right to elect two directors of the Company until such time as all such cumulative dividends accumulated on the Series A Preferred Stock have been paid in full. Furthermore, the holder of the Series A Preferred Stock is entitled to receive additional participating dividends in the event any dividends are declared or paid on, or any other distribution is made with respect to, the Common Stock of the Company. The additional dividends would be equal to 6150% of the amount of the dividends or distributions payable in respect of one share of Common Stock. In the event of a liquidation or dissolution of the Company, the holder of the Series A Preferred Stock shall be paid an amount equal to $50.00 per share of Series A Preferred Stock plus the amount of any accrued and unpaid dividends, before any payments to other stockholders. The Company may redeem the Series A Preferred Stock in whole at any time and the holder of the Series A Preferred Stock may elect to cause the Company to redeem all or any of such holder's Series A Preferred Stock under certain circumstances involving a change of control, asset disposition or equity sale. Mandatory redemption of the Series A Preferred Stock by the Company is required on August 23, 2005 (the "Final Redemption Date") at a redemption price of $50.00 per share of Series A Preferred Stock plus the amount of any accrued and unpaid dividends. If, at the Final Redemption Date, the Company does not have sufficient capital and surplus legally available to redeem all the outstanding shares of the Series A Preferred Stock, the Company will be required to take all measures permitted under the Delaware General Corporation Law to increase the amount of its capital and surplus legally available and to redeem as many shares of the Series A Preferred Stock as it may legally redeem. Thereafter, as funds become available, the Company will be required to redeem as many additional shares of the Series A Preferred Stock as it legally can, until it has redeemed all remaining outstanding shares of the Series A Preferred Stock. On December 19, 2001, as part of the Richemont Transaction, the Company repurchased from Richemont all of the outstanding shares of the Series A Preferred Stock. Richemont agreed, as part of the transaction, to forego any claim it had to the accrued but unpaid dividends on the Series A Preferred Stock. 11 EMPLOYEES As of December 29, 2001, the Company employed approximately 2,163 people on a full-time basis and approximately 288 people on a part-time basis. The number of part-time employees at December 29, 2001 reflects a temporary increase in headcount necessary to fill the seasonal increase in orders during the holiday season. On January 5, 2001, the Company announced the elimination of approximately 285 FTE positions across all its business units and in March 2001, the Company eliminated certain additional positions principally in Hanover Brands and its IT operations. During the fiscal year ending December 29, 2001, the Company eliminated a total of approximately 834 FTE positions, including approximately 54 positions at or above the level of director, which included open positions that were eliminated. The Company made prospective payments to separated employees either weekly or bi-weekly based upon each person's previous payment schedule. SEASONALITY The revenues and business for both the Hanover Brands and erizon subsidiaries are seasonal. The Company processes and ships more catalog orders during the fourth quarter holiday season than in any other quarter of the year. Many of the Company's clients for B-to-B e-commerce transaction services experience similar seasonal trends resulting in increased order processing during the holiday season. Accordingly, the Company recognizes a disproportionate share of annual revenue during the last three months of the year. COMPETITION The Company believes that the principal bases upon which it competes in the Hanover Brands business are quality, value, service, proprietary product offerings, catalog design, web site design, convenience, speed and efficiency. The Company's catalogs compete with other mail order catalogs, both specialty and general, and retail stores, including department stores, specialty stores and discount stores. Competitors also exist in each of the Company's catalog specialty areas of women's apparel, home fashions, men's apparel and gifts. A number of the Company's competitors have substantially greater financial, distribution and marketing resources than the Company. The Company is maintaining an active commerce-enabled Internet Web site presence for all of its catalogs, and for Encore and Great Finds. A substantial number of each of the Company's catalog competitors maintain an active commerce-enabled Internet web site presence as well. A number of such competitors have substantially greater financial, distribution and marketing resources than the Company. Sales from the Internet for web site merchandisers grew in 2001. The Company believes in the future of the Internet and online commerce, including the marketing opportunities arising from this medium, and has directed part of its marketing focus, resources and manpower to that end. The Company believes that the principal bases upon which it competes in the erizon business are value, service, flexibility, scalability, convenience and efficiency. The Company's third party fulfillment business competes with NewRoads, Inc., Client Logic, Inc., PFS Web, Inc., DialAmerica Marketing, Inc., TeleServices Direct, Inc. and SubmitOrder.com, amongst others. A number of the Company's competitors have substantially greater financial, distribution and marketing resources than the Company. TRADEMARKS Each of the Company's catalogs has its own federally registered trademarks that are owned by Hanover Brands and its subsidiaries. Hanover Brands and its subsidiaries also own numerous trademarks, copyrights and service marks on logos, products and catalog offerings. erizon has federally registered trademarks that are used by its subsidiaries. The Company and its subsidiaries also have protected various trademarks internationally. The Company and its subsidiaries vigorously protect such marks and believe there is substantial goodwill associated with them. GOVERNMENT REGULATION The Company is subject to Federal Trade Commission regulations governing its advertising and trade practices, Consumer Product Safety Commission regulations governing the safety of the products it sells in its 12 catalogs and other regulations relating to the sale of merchandise to its customers. The Company is also subject to the Department of Treasury-Customs regulations with respect to any goods it directly imports. The imposition of a sales and use tax collection obligation on out-of-state catalog companies in states to which they ship products was the subject of a case decided in 1994 by the United States Supreme Court. While the Court reaffirmed an earlier decision that allowed direct marketers to make sales into states where they do not have a physical presence without collecting sales taxes with respect to such sales, the Court further noted that Congress has the power to change this law. The Company believes that it collects sales tax in all jurisdictions where it is currently required to do so. LISTING INFORMATION By letter dated May 2, 2001, the American Stock Exchange notified the Company that it was below certain of the American Stock Exchange's continued listing guidelines set forth in the American Stock Exchange Company Guide. The American Stock Exchange instituted a review of the Company's eligibility for continuing listing of the Company's common stock on the American Stock Exchange. On January 17, 2002, the Company received a letter dated January 9, 2002 from the American Stock Exchange confirming that the American Stock Exchange determined to continue the Company's listing on the American Stock Exchange pending quarterly reviews of the Company's compliance with the steps of its strategic realignment program. This determination was made subject to the Company's favorable progress in satisfying the American Stock Exchange's guidelines for continued listing and to the American Stock Exchange's periodic review of the Company's Securities and Exchange Commission and other filings. The American Stock Exchange has requested certain additional financial information from the Company to be delivered on or before April 15, 2002, which the Company intends to provide prior to such date. ITEM 2. PROPERTIES Hanover Brands: The Company's Hanover Brands subsidiary owns and operates a 150,000 square foot home fashion manufacturing facility located in LaCrosse, Wisconsin. The facility produces down-filled comforters for sale under "The Company Store" and "Scandia Down" brand names. In addition, the Company leases the following properties: - A 84,953 square foot building formerly used as corporate headquarters and administrative offices located in Weehawken, New Jersey under a 15-year lease expiring in April 2005, of which approximately 18,000 square feet have been subleased and as to which the Company is seeking a subtenant for the remainder of the property, - A 30,000 square foot corporate headquarters and administration offices located in Edgewater, New Jersey under a lease expiring in May 2005, and - Eight retail outlet stores located in California, Pennsylvania and Wisconsin having approximately 125,000 square feet of space in the aggregate, with leases running through 2010. During 2001, the Company closed 4 other retail outlet stores. erizon: The Company's erizon subsidiary owns and operates the following properties: - A 775,000 square foot warehouse and fulfillment facility located in Roanoke, Virginia, which is subject to a mortgage in favor of Congress Financial Corporation, - A 58,000 square foot administration and telemarketing facility located in LaCrosse, Wisconsin, which is subject to a mortgage in favor of Congress Financial Corporation, and - Approximately four acres of land adjacent to its leased warehouse and fulfillment facility in Hanover, Pennsylvania. 13 Each of these properties is subject to a mortgage in favor of the Company's lender, Congress Financial Corporation. In addition, the Company leases the following properties: - A 72,000 square foot warehouse and fulfillment facility located in Hanover, Pennsylvania under a lease expiring in August 2002, - A closed 497,200 square foot warehouse and telemarketing facility located in Maumelle, Arkansas under a ten-year sublease expiring in 2010, for which the Company is currently negotiating a lease termination agreement with the landlord and the sublandlord pursuant to which the Company and the sublandlord will each make a substantial cash payment to the landlord and, upon the satisfaction of certain other conditions, the landlord and the sublandlord will release the Company from any obligations and liabilities under its sublease, other than as to certain damage to the building, - A 185,000 square foot warehouse and fulfillment facility located in LaCrosse, Wisconsin under a 14-year lease expiring in December 2002, and - A 123,000 square foot telemarketing, customer service and administrative facility located in Hanover, Pennsylvania, under a 3-year lease expiring in January 2003, for which the Company is currently negotiating a lease extension to terminate on January 31, 2004, with a reduction in rentals payable and the conveyance to the landlord of the four adjacent acres of land owned by the Company. Additionally, the Company utilizes a temporary storage facility of 72,000 square feet under a lease expiring September 30, 2004 in Roanoke, Virginia to house merchandise during the holiday selling period and leases an additional satellite telemarketing facility in York, Pennsylvania under a lease expiring July 31, 2006. The Company also leases a 30,000 square foot satellite telemarketing and administration facility in San Diego, California under a lease expiring April 2005; on February 28, 2002, the Company terminated the telemarketing operations conducted at such facility, as announced during 2001. On May 3, 2001, as part of the Company's strategic business realignment program, the Company sold its 277,500 square foot warehouse and fulfillment facility in Hanover, Pennsylvania (the "Kindig Lane Property") and certain equipment located therein for $4.7 million to an unrelated third party. The Company has continued to use the Kindig Lane Property under a lease agreement with the third party, and will lease a portion of the Kindig Lane Property until August 2002. The Company intends to transition the activities of the Kindig Lane Property into the Company's fulfillment center in Roanoke, Virginia. In January 2001, the Company announced that it expected to close, and on May 15, 2001 did close, its leased warehouse and telemarketing facility located in Maumelle, Arkansas. The Company also announced that it would consolidate the Maumelle operations within its remaining facilities and provide the bulk of its fulfillment services for third party clients of its Keystone Internet Services, Inc. subsidiary within its existing operations. The sublease for the Maumelle facility is currently due to expire in 2010 but the Company is negotiating a lease termination agreement with the landlord and the sublandlord as described above. ITEM 3. LEGAL PROCEEDINGS 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 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) attorneys' fees and costs. The Company's motion to dismiss is pending and discovery has commenced. The plaintiff has deposed a number of individuals. On April 11, 2001, the 14 Court held a hearing on plaintiff's class certification motion. Subsequent to the April 11, 2001 hearing on plaintiff's class certification motion, plaintiff filed a motion to amend the definition of the class. On July 23, 2001, plaintiff's class certification motion was granted, defining the class as "All persons in the United States who are customers of any catalog or catalog company owned by Hanover Direct, Inc. and who have at any time purchased a product from such company and paid money which was designated to be an 'insurance' charge." On August 21, 2001 the Company filed an appeal of the order with the Oklahoma Court of Appeals and subsequently moved to stay proceedings in the district court pending resolution of the appeal. In January 2002, the Company filed its brief in support of its appeal from the district court's class certification order. At a subsequent status hearing, and the parties agreed that issues pertaining to notice to the class would be stayed pending resolution of the appeal, that certain other issues would be subject to limited discovery, and that the issue of a stay for any remaining issues would be resolved if and when such issues arise. The Company believes it has defenses against the claims. However, it is too early to determine the outcome or range of potential settlement, which could have a material impact on the Company's results of operations when settled in a future period. Moreover, defense counsel to the Company will seek to have the resolution of the four class action cases (Martin, and the Teichman, Wilson and Argonaut cases which are discussed below) combined, or their effects lessened, in that there are common issues and a substantially similar class sought to be defined in the four cases. On June 28, 2001, Rakesh K. Kaul, the Company's former President and Chief Executive Officer, filed a five-count complaint (the "Complaint") in New York State Court against the Company, seeking damages and other relief arising out of his separation of employment from the Company, including severance payments of $2,531,352 plus the cost of employee benefits, attorneys' fees and costs incurred in connection with the enforcement of his rights under his employment agreement with the Company, payment of $298,650 for accrued and unused vacation, damages in the amount of $3,583,800, or, in the alternative, a declaratory judgment from the court that he is entitled to all change of control benefits under the "Hanover Direct, Inc. Thirty-Six Month Salary Continuation Plan", and damages in the amount of $1,396,066 or $850,000 due to the Company's purported breach of the terms of the "Long-Term Incentive Plan for Rakesh K. Kaul" by failing to pay him a "tandem bonus" he alleges was due and payable to him within the 30 days following his resignation. The Company removed the case to the U.S. District Court for the Southern District of New York on July 25, 2001. Mr. Kaul filed an Amended Complaint ("Amended Complaint") in the U.S. District Court for the Southern District of New York on September 18, 2001. The Amended Complaint repeats many of the claims made in the original Complaint and adds ERISA claims. On October 11, 2001, the Company filed its Answer, Defenses and Counterclaim to the Amended Complaint, denying liability under each and every of Mr. Kaul's causes of action, challenging all substantive assertions, raising several defenses and stating nine counterclaims against Mr. Kaul. The counterclaims include (1) breach of contract; (2) breach of the Non-Competition and Confidentiality Agreement with the Company; (3) breach of fiduciary duty; (4) unfair competition; and (5) unjust enrichment. The Company seeks damages, including without limitation, the $341,803 in severance pay and car allowance Mr. Kaul received following his resignation, $412,336 for amounts paid to Mr. Kaul for car allowance and related benefits, the cost of a long-term disability policy, and certain payments made to personal attorneys and consultants retained by Mr. Kaul during his employment, $43,847 for certain services the Company provided and certain expenses the Company incurred, relating to the renovation and leasing of office space occupied by Mr. Kaul's spouse at 115 River Road, Edgewater, New Jersey, the Company's current headquarters, $211,729 on a tax loan to Mr. Kaul outstanding since 1997 and interest, compensatory and punitive damages and attorney's fees. The case is pending and the parties are engaged in discovery. In January 2000 and May 2001, the Company provided its full cooperation in an investigation by the Federal Trade Commission ("FTC") into the marketing of discount buying clubs to see whether any of the entities investigated 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. It was subsequently revealed to the Company that the FTC was conducting an investigation into the activities of entities owned or controlled by Ira Smolev. On October 24, 2001, the FTC made final its "Stipulated Final Judgment And Order For Permanent Injunction And Monetary Settlement" against Ira Smolev and named defendant companies in the case of Federal Trade Commission v. Ira Smolev, et al. (USDC So.Dist. FL, Ft. Lauderdale Div.) (the "Order"). The named defendants included The Shopper's Edge, LLC (the Company's private label discount buying club which is owned by Mr. Smolev), FAR Services, LLC (the Smolev-owned contracting party to the Company's Marketing Agreement which was 15 terminated in January 2001) and Consumer Data Depot, LLC (the Smolev-owned contracting party to the Company's Paymentech Processing Agreement). The Order will directly affect only those activities of the Company, which are "in active concert or participation with the named defendants [i.e., The Shopper's Edge, LLC, FAR Services, LLC and Consumer Data Depot, LLC]." The most important implication of the Order was that the Company, as bookkeeper to the club for sustaining members of The Shopper's Edge, may not process payments from members of The Shopper's Edge club for membership renewals where the purported authorization of the membership occurred prior to the effective date of the Order, without first obtaining, within 60 days prior to the date on which the consumer is billed, an "express verifiable authorization" of such renewal that complies with the specifications of the Order. All choices specified for "express verifiable authorization" contained in the Order are effectively "positive opt-in," would have required some direct mail or technology expenditures and would have severely hurt response rates, which could have had a material impact on the Company's profits from discount buying club membership revenues. The last renewals of Shopper's Edge memberships were processed in October, 2001 by agreement between the Company and Ira Smolev, and the Company is therefore now unaffected by the Order. On August 15, 2001, the Company was served with a summons and four-count complaint filed in Superior Court for the City and County of San Francisco, California, entitled Teichman v. Hanover Direct, Inc., Hanover Brands, Inc., Hanover Direct Virginia, Inc., and Does 1-100. The complaint was filed by a California resident, seeking damages and other relief for herself and a class of all others similarly situated, arising out of the $0.50 insurance fee charged by catalogs and Internet sites operated by subsidiaries of the Company. Defendants, including the Company, filed motions to dismiss based on a lack of personal jurisdiction over them. The motion to dismiss has been re-set for hearing on April 4, 2002. In January, 2002, plaintiff sought leave to name six additional entities: International Male, Domestications Kitchen & Garden, Silhouettes, Hanover Company Store, Kitchen & Home, and Domestications as co-defendants. On March 12, 2002, the Company was served with the First Amended Complaint in which plaintiff named as defendants the Company, Hanover Brands, Hanover Direct Virginia, LWI Holdings, Hanover Company Store, Kitchen and Home, and Silhouettes, and in which all causes of action related to state sales tax have been removed. With the removal of sales tax issues, the Teichman case concerns issues identical to the Martin case and may make it easier to stay the Teichman case pending the outcome of the Martin case. The Company's response to the first amended complaint is due April 15, 2002. The Company believes it has defenses against the claims but intends to file a motion to stay the case. It is too early to determine the outcome or range of potential settlement, which could have a material impact on the Company's results of operations when settled in a future period. Moreover, defense counsel to the Company will seek to have the resolution of the four class action cases (Martin and the Teichman, and the Wilson and Argonaut cases which are discussed below) combined, or their effects lessened, in that there are common issues and a substantially similar class sought to be defined in the four cases. The Company was named as one of 88 defendants in a patent infringement complaint filed on November 23, 2001 by the Lemelson Medical, Education & Research Foundation, Limited Partnership (the "Lemelson Foundation"). The complaint, filed in the U.S. District Court in Arizona, was not served on the Company until March 2002. In the complaint, the Lemelson Foundation accuses the named defendants of infringing seven U.S. patents which allegedly cover "automatic identification" technology through the defendants' use of methods for scanning production markings such as bar codes. The Company received a letter dated November 27, 2001 from attorneys for the Lemelson Foundation notifying the Company of the complaint and offering a license. The Company has been invited to join a common interest/joint-defense group consisting of defendants named in the complaint as well as in other actions brought by the Lemelson Foundation. The Company is currently in the process of analyzing the merits of the issues raised by the complaint, notifying vendors of its receipt of the complaint and letter, evaluating the merits of joining the joint-defense group, and having discussions with attorneys for the Lemelson Foundation regarding the license offer. A preliminary estimate of the royalties and attorneys' fees which the Company may pay if it decides to accept the license offer from the Lemelson Foundation range from about $125,000 to $400,000. The Company has decided to gather further information, but will not agree to a settlement at this time. A class action lawsuit was commenced on February 13, 2002 entitled Jacq Wilson, suing on behalf of himself, all others similarly situated, and the general public v. Brawn of California, Inc. dba International Male and Undergear, and Does 1-100 ("Brawn") in the Superior Court of the State of California, City and County of San Francisco. Does 1-100 are internet and catalog direct marketers offering a selection of men's 16 clothing, sundries, and shoes who advertise within California and nationwide. The complaint alleges that for at least four years, members of the class have been charged an unlawful, unfair, and fraudulent insurance fee and tax on orders sent to them by Brawn; that Brawn was engaged in untrue, deceptive and misleading advertising in that it was not lawfully required or permitted to collect insurance, tax and sales tax from customers in California; and that Brawn has engaged in acts of unfair competition under the State's Business and Professions Code. Plaintiff and the class seek (i) restitution and disgorgement of all monies wrongfully collected and earned by Brawn, including interest and other gains made on account of these practices, including reimbursement in the amount of the insurance, tax and sales tax collected unlawfully, together with interest, (ii) an order enjoining Brawn from charging customers insurance, and tax on its order forms and/or from charging tax on the delivery, shipping and insurance charges, (iii) an order directing Brawn to notify the California State Board of Equalization of the failure to pay the correct amount of tax to the State and to take appropriate steps to provide the State with the information needed for audit, and (iv) compensatory damages, attorney fees, pre-judgment interest, and costs of the suit. The claims of the individually named plaintiff and for each member of the class amount to less than $75,000. The Company's response is due by April 15, 2002. The Company believes it has defenses against the claims but intends to file a motion for summary judgment in the case. It is too early to determine the outcome or range of potential settlement, which could have a material impact on the Company's results of operations when settled in a future period. Moreover, defense counsel to the Company will seek to have the resolution of the four class action cases (Martin, Teichman and the Wilson, and the Argonaut case which is discussed below) combined, or their effects lessened, in that there are common issues and a substantially similar class sought to be defined in the four cases. A class action lawsuit was commenced on February 20, 2002 entitled Argonaut Consumer Rights Advocates Inc., suing on behalf of the General Public v. Gump's By Mail, Inc. ("Gump's"), and Does 1-100 in the Superior Court of the State of California, City and County of San Francisco. The plaintiff is a non-profit public benefit corporation suing under the California Business and Profession Code. Does 1-100 would include persons whose activities include the direct sale of tangible personal property to California consumers including the type of merchandise that Gump's -- the store and the catalog -- sell, by telephone, mail order, and sales through the web sites www.gumpsbymail.com and www.gumps.com. The complaint alleges that for at least four years, members of the class have been charged an unlawful, unfair, and fraudulent tax and "sales tax" on their orders in violation of California law and court decisions, including the state Revenue and Taxation Code, Civil Code, and the California Board of Equalization; that Gump's engages in unfair business practices; that Gump's engaged in untrue and misleading advertising in that it was not lawfully required to collect tax and sales tax from customers in California, is not lawfully required or permitted to add tax and sales tax on separately stated shipping or delivery charges to California consumers; and that it does not add the appropriate or applicable or specific correct tax or sales tax to its orders. Plaintiff and the class seek (i) restitution of all tax and sales tax charged by Gump's on each transaction and/or restitution of tax and sales tax charged on the shipping charges, (ii) an order enjoining Gump's from charging customers for tax on orders or from charging tax on the shipping charges; and (ii) attorney fees, pre-judgment interest on the sums refunded, and costs of the suit. A status conference has been set for July 26, 2002. The Company's response is due by April 15, 2002. The Company believes it has defenses against the claims but intends to file a motion for summary judgment in the case. It is too early to determine the outcome or range of potential settlement, which could have a material impact on the Company's results of operations when settled in a future period. Moreover, defense counsel to the Company will seek to have the resolution of the four class action cases combined, or their effects lessened, in that there are common issues and a substantially similar class sought to be defined in the four cases. See also Note 18 of Notes to Consolidated Financial Statements for the years ended December 29, 2001, December 30, 2000 and December 25, 1999 elsewhere herein. In addition, the Company is involved in various routine lawsuits of a nature, which are deemed customary and incidental to its businesses. In the opinion of management, the ultimate disposition of these actions will not have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on the American Stock Exchange under the symbol "HNV". The following table sets forth, for the periods shown, the high and low sale prices of the Company's Common Stock as reported on the American Stock Exchange Composite Tape. As of March 21, 2002, there were 138,235,800 shares of Common Stock outstanding and approximately 3,670 holders of record of Common Stock.
HIGH LOW ------ ------ FISCAL 2001 First Quarter (Dec. 31, 2000 to March 31, 2001)........... $0.563 $0.280 Second Quarter (April 1, 2001 to June 30, 2001)........... $0.340 $0.120 Third Quarter (July 1, 2001 to Sept. 29, 2001)............ $0.370 $0.170 Fourth Quarter (Sept. 30, 2001 to Dec. 29, 2001).......... $0.350 $0.240 FISCAL 2000 First Quarter (Dec. 26, 1999 to March 25, 2000)........... $3.688 $2.313 Second Quarter (March 26, 2000 to June 24, 2000).......... $2.560 $0.938 Third Quarter (June 25, 2000 to Sept. 23, 2000)........... $1.688 $0.500 Fourth Quarter (Sept. 24, 2000 to Dec. 30, 2000).......... $0.625 $0.188
The Company is restricted from paying dividends on its Common Stock or from acquiring its capital stock by certain debt covenants contained in agreements to which the Company is a party. 18 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial data for each of the fiscal years indicated:
2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA) INCOME STATEMENT DATA: Net Revenues............................ $532,165 $603,014 $549,852 $546,114 $557,638 Special charges (credit)................ 11,277 19,126 144 (485) (2,209) (Loss) from operations.................. (23,965) (70,552) (13,756) (16,807) (1,849) (Gain) on sale of Improvements business.............................. (23,240) -- -- -- -- (Gain) on sale of Kindig Lane Property.............................. (1,529) -- -- -- -- (Gain) on sale of The Shopper's Edge.... -- -- (4,343) -- -- (Gain) on sale of Austad's.............. -- -- (967) -- -- Income/(Loss) before interest and taxes................................. 804 (70,552) (8,446) (16,807) (1,849) Interest expense, net................... 6,529 10,083 7,338 7,778 8,028 Net (loss).............................. (5,845) (80,800) (16,314) (25,595) (10,876) Preferred stock dividends............... 10,745 4,015 634 578 190 -------- -------- -------- -------- -------- Net (Loss) applicable to common stockholders.......................... $(16,590) $(84,815) $(16,948) $(26,163) $(11,066) -------- -------- -------- -------- -------- PER SHARE: Net (Loss) per common share -- basic and diluted............................... $ (.08) $ (.40) $ (.08) $ (.13) $ (.06) -------- -------- -------- -------- -------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (THOUSANDS): Basic................................... 210,536 213,252 210,719 206,508 176,621 -------- -------- -------- -------- -------- Diluted................................. 210,536 213,252 210,719 206,508 176,621 -------- -------- -------- -------- -------- BALANCE SHEET DATA (END OF PERIOD): Working capital (1)..................... $ 20,935 $ 16,835 $ 17,990 $ 43,929 $ 47,570 Total assets............................ 157,661 203,019 191,419 218,870 230,299 Total debt (1).......................... 29,710 39,036 42,835 58,859 59,958 Redeemable Series A Preferred Stock..... -- 71,628 -- -- -- Redeemable Series B Preferred Stock..... 76,823 -- -- -- -- Shareholders' equity (deficit).......... (35,728) (24,452) 53,865 66,470 75,551
- --------------- (1) The amounts for 1998 and 1997 include both a receivable and an obligation under receivables financing of $18,998 and $21,918, respectively, pursuant to SFAS No. 125. There were no cash dividends declared on the Common Stock in any of the periods presented. See notes to Consolidated Financial Statements. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the fiscal years indicated, the percentage relationship to revenues of certain items in the Company's Consolidated Statements of Income (Loss):
FISCAL YEAR 2001 2000 1999 ----- ----------- ----- Net revenues............................................. 100.0% 100.0% 100.0% Cost of sales and operating expenses..................... 63.8 67.2 63.7 Write-down (recovery) of inventory of discontinued catalogs............................................... -- 0.3 (0.4) Special charges.......................................... 2.1 3.2 -- Selling expenses......................................... 26.5 25.4 24.8 General and administrative expenses...................... 10.7 14.1 12.5 Depreciation and amortization............................ 1.4 1.5 1.7 (Gain) on sale of Improvements business.................. (4.4) -- -- (Gain) on sale of Kindig Lane Property................... (0.3) -- -- (Gain) on sale of The Shopper's Edge..................... -- -- (0.8) (Gain) on sale of Austad's............................... -- -- (0.2) Income/(loss) before interest and taxes.................. 0.2 (11.7) (1.5) Interest expense, net.................................... 1.2 1.7 1.3 Net (loss)............................................... (1.1)% (13.4)% (3.0)%
RESULTS OF OPERATIONS 2001 COMPARED WITH 2000 Net (Loss). The Company reported a net loss of $(5.8) million or $(.08) per share for the year ended December 29, 2001 compared with a net loss of $(80.8) million or $(.40) per share for the comparable period last year. The per share amounts were calculated after deducting preferred dividends of $10.7 million in 2001 and $4.0 million in 2000. As part of a transaction consummated with Richemont in December 2001 (see Notes 8 and 9 to the Company's Consolidated Financial Statements), Richemont agreed to forego any claim that it had to accrued but unpaid dividends on the Series A Preferred Stock in exchange for the issuance of Series B Preferred Stock. This transaction resulted in an increase in shareholders' equity of $5.6 million. The weighted average number of shares outstanding was 210,535,959 and 213,251,945 for the current and prior year periods, respectively. This decrease in weighted average shares was due in part to the conversion of 1,530,000 issued common shares into treasury shares. Compared to the comparable period last year, the $75.0 million decrease in net loss was primarily due to: i. gain on sale of the Improvements business; ii. gain on sale of the Kindig Lane Property; iii. decreased special charges related to the Company's strategic business realignment program; iv. decreased cost of sales and operating expenses; v. decreased general and administrative expenses; and vi. a reduction in interest expense Net Revenues. Net revenues decreased $70.8 million (11.7%) for the year ended December 29, 2001 to $532.2 million from $603.0 million for the comparable period in 2000. This decrease was in part due to the sale of the Improvements business on June 29, 2001, which accounted for $27.6 million of the reduction in revenue in 2001. An additional portion of the drop in revenues amounting to $7.8 million can be attributed to the Company's decision to scale back on its third party fulfillment business by focusing only on profitable operations. The discontinuance of the Domestications Kitchen & Garden, Encore, Kitchen & Home and Turiya catalogs contributed $21.2 million to the reduction of net revenues in 2001. The balance of the net revenues decrease can be attributable to softness in demand related to both the International Male and Gumps brands. 20 Cost of Sales and Operating Expenses. Cost of sales and operating expenses decreased to 63.8% of net revenues for the year ended December 29, 2001 as compared to 67.2% of net revenues for the comparable period in 2000. This change is partially due to an increase in the amount of direct import merchandise, which has a favorable impact on merchandise cost as a percent of net revenues and accounted for 0.8% of the percentage drop. The balance of the reduction of 3.4% of costs as a percentage of net revenues can be primarily attributed to the significant reduction in operating costs that have resulted from actions taken in connection with the Company's strategic business realignment program. The largest reductions occurred in the areas of fixed costs associated with the Company's fulfillment centers and information systems. These reductions in costs, however, were partially offset by higher postage costs as a percent of Net Revenues. Special Charges. In December 2000, the Company developed a plan to strategically realign the business and direct the Company's resources primarily towards growth in Hanover Brands while at the same time reducing costs in all areas of the business and eliminating investment activities that had not generated sufficient revenue to produce profitable returns. As a result of actions needed to execute this plan, the Company recorded a special charge of $19.1 million in fiscal 2000 to cover costs related to severance, facility exit costs and fixed asset write-offs. In 2001, the Company took additional actions towards implementing the strategic business realignment program that included: - The sale of the Kindig Lane facility; - The closing of the San Diego Telemarketing Center; - Reduction of full-time equivalent positions across all business units; and - Relocation of certain operating and administrative functions from its office facility in Weehawken, New Jersey to Edgewater, New Jersey. These additional actions resulted in special charges of $11.3 million to cover costs related to severance, facility exit costs and fixed asset write-offs. Selling Expenses. Selling expenses increased to 26.5% of revenues for the year ended December 29, 2001 from 25.4% for the comparable period in 2000 primarily due to the under-performance of catalog mailings during the second quarter period. General and Administrative Expenses. General and Administrative expenses decreased by $28.2 million in 2001 which accounted for a significant portion of the Company's reduction in its net loss for the year. As a percentage of Net Revenues, General and Administrative expenses dropped to 10.7% in 2001 from a high of 14.1% experienced in 2000. The reduction in costs are primarily attributable to the elimination of a significant number of FTE positions across all departments which began late in 2000 as part of the Company's strategic business realignment program and continued throughout the year 2001. Although the reductions in General and Administrative costs occurred throughout all overhead areas, the largest reduction in the amount of approximately $8.6 million can be attributed to the decision to eliminate the erizon investment activities and the related overhead established to support them. Depreciation and Amortization. Depreciation and amortization decreased to 1.4% of Net Revenues for the year ended December 29, 2001 from 1.5% for the comparable period in 2000. The decrease is a result of the complete amortization of a major computer system in the year 2000 as well as the write-down of fixed assets in connection with the Company's strategic business realignment program in the year 2001. Loss from Operations. The Company's loss from operations decreased by $46.6 million to $24.0 million for the year ended December 29, 2001 from a loss of $70.6 million for the comparable period in 2000. Gain on sale of the Improvements business and the Kindig Lane Property. The combined gain on sales of the Improvements business and the Kindig Lane Property represented 4.7% of Net Revenue for the year ended December 29, 2001 and accounted for $24.8 million of the reduction in the Company's Net Loss for the year. The Company recognized a $23.2 million Net Gain on the sales of the Improvements business net of a non-cash goodwill charge of $6.1 million, in the second quarter of 2001. The Company realized a net gain on the sale of the Kindig Lane Property of approximately $1.5 million, which included the sale price net of selling expenses in excess of the net book value of assets sold. Interest Expense, Net. Interest Expense, Net decreased $3.6 million to $6.5 million which is attributable to lower average borrowings over the last nine months coupled with a reduction in interest rates. 21 Income Taxes. The income tax provision, which has been provided for state taxes, for the year ended December 29, 2001 was consistent with the provision in fiscal 2000. 2000 COMPARED WITH 1999 Net (Loss). The Company reported a net loss of $80.8 million or $(.40) per common share for fiscal year 2000 compared with a net loss of $16.3 million or ($.08) per common share for fiscal year 1999. Per share amounts are expressed after deducting preferred dividends of $4.0 million in 2000 and $0.6 million in 1999. The weighted average number of shares outstanding was 213,251,945 for fiscal year 2000 compared to 210,718,546 for fiscal year 1999. The increase in weighted average shares outstanding was primarily 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 $64.5 million increase in net loss was primarily due to: i. higher distribution and systems development costs primarily related to the expansion of the Company's business to business ("B-to-B") e-commerce transaction services operation; ii. the recording of special charges in the fourth quarter of 2000 in connection with the Company's strategic business realignment program; iii. the impact of the write-down of inventory associated with the decision made in the fourth quarter of 2000 to discontinue three catalog brands; iv. higher general and administrative expenses; and v. higher interest expense. Net Revenues. Net revenues increased $53.2 million or 9.7% to $603.0 million for fiscal year 2000 from $549.9 million for fiscal year 1999. Approximately $52.5 million of this increase is attributable to revenues generated from the Company's core brands, which amounted to $547.0 million, an increase of 10.6% over the comparable period in 1999. This increase is attributable to higher demand across most merchandise categories aided by an increase in circulation of catalogs offering these brands which increased from 214 million catalogs in 1999 to 251 million in 2000. Net revenues from discontinued brands in year 2000 amounted to $18.4 million which represents a $15.0 million decrease from 1999 which also included three additional brands which had been discontinued or repositioned earlier in that year. This decrease in net revenues, however, was offset by an increase of the same amount in net revenues generated by the Company's B-to-B e-commerce transaction services operation, which increased by 101.3% to $30 million for fiscal year 2000. Cost of Sales and Operating Expenses. Cost of sales and operating expenses increased by $54.5 million or 15.5% over the amount reported for 1999. A significant portion of this increase can be attributed to the increase in net revenues for the fiscal 2000 period; however, cost of sales and operating expenses, as a percent of net revenue, increased to 67.2% in fiscal 2000 compared with 63.7% in 1999 primarily due to higher distribution and systems development costs associated with the expansion of the Company's B-to-B e- commerce transaction services operation. This expansion included the investment for a new fulfillment and distribution facility in Maumelle, Arkansas in addition to increased headcount and higher facility/equipment rental expenses. Special Charges. In December 2000, the Company developed a plan to strategically realign the business and direct the Company's resources primarily towards continued profitable growth in Hanover Brands while at the same time reducing costs in all areas of the business and eliminating investment activities that had not generated sufficient revenue to produce profitable returns. Key elements of this strategic business realignment plan included: - Concentrate on core brands; - Reduce several hundred full time equivalent positions across all business units; - Close the Always in Style business; - Eliminate under performing catalogs: Turiya, Kitchen & Home, Domestications Kitchen & Garden; 22 - Terminate the Compagnie de la Chine marketing agreement; - Close the fulfillment and telemarketing facility in Maumelle, Arkansas and consolidate Keystone fulfillment operations; - Cease Desius LLC's business operations. As a result of actions needed to execute this plan, the Company recorded a special charge of $19.1 million in the fiscal year ended 2000 to cover costs related to severance, facility exit costs and fixed-asset write-offs. Write-down of Inventory of Discontinued Catalog Brands. As part of the Company's strategic business realignment program the Company decided to eliminate three under performing catalogs: Turiya, Kitchen & Home, and Domestications Kitchen & Garden. The inventory on-hand at December 30, 2000 was written-down to its net realizable value based upon plans developed for the liquidation of the merchandise. This write-down resulted in a charge of $2.0 million, which compares to a recovery recorded in 1999 of $1.9 million representing favorable results in liquidating merchandise provided for in 1998 that was associated with the discontinued Austad's, Tweeds and Colonial Garden Kitchens catalog brands. Selling Expenses. Selling expenses increased by $16.9 million or 12.4% over the fiscal year 1999. As a percent of net revenues, they were 25.4% versus 24.8% in 1999. The increase as a percent of net revenues can be attributable to the increase in circulation in year 2000, as well as an additional charge of $0.7 million incurred in the fourth quarter related to the write-down of prepaid catalog costs associated with the discontinuance of three catalogs at the end of the fiscal 2000 year. General and Administrative Expenses. General and Administrative expenses increased by $16.0 million or 23.1% over fiscal year 1999. This increase was primarily a result of additional professional fees and consulting costs associated with splitting the Company into two separate business segments and the addition of personnel and related costs to support the expansion of the Company's B-to-B e-commerce transaction services operations. In addition a portion of the increase is attributable to charges incurred in the fourth quarter of 2000 related to the transition of senior management. Depreciation and Amortization. Depreciation and amortization decreased by $0.3 million (3.1%) from the fiscal year 1999. Loss before Interest and Taxes. The Company's loss before interest and taxes increased by $62.1 million to $70.5 million in fiscal 2000 from a loss of $8.4 million in fiscal 1999. Beginning in 2000, the Company's results were comprised of the following segments: - Direct Commerce: Income before interest and taxes decreased by $7.5 million primarily due to higher catalog costs reflecting higher paper costs as well as an increase in circulation, higher merchandise postage expense and higher personnel-related expenses, all of which were partially offset by the 1999 reversal of a portion of the 1998 charge for the write-down of discontinued catalog inventory. - B-to-B Services: Loss before interest and taxes increased by $38.6 million primarily due to higher distribution and systems development costs, which included higher costs related to an increase in headcount as well as higher consulting and facility/equipment rental expenses, primarily related to the 2000 expansion of the Company's B-to-B e-commerce transaction services operation. This expansion includes the addition of a new fulfillment and distribution facility in Maumelle, Arkansas. Additionally, the Company incurred a higher provision for doubtful accounts. - Corporate/Other: Loss before interest and taxes increased by $16.0 million primarily attributable to costs associated with splitting the Company into two business segments and the costs recorded for the transition of senior management in the fourth quarter of 2000. Interest Expense, Net. Interest Expense, Net increased by $2.7 million to $10.1 million in 2000 primarily due to higher average borrowings and interest rates during the 2000 period. Income Taxes. The Company did not record a Federal income tax provision in 2000 or 1999 due to net operating losses incurred during both years. The Company's state tax provision was $0.2 million and $0.5 million for fiscal 2000 and 1999, respectively. 23 LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities. During the year ended December 29, 2001, net cash used in operating activities was $21.2 million. This was primarily due to the net loss from operations which, when adjusted for interest, taxes, depreciation, amortization and other non-cash items, comprised $17.3 million of operating cash used in the period. Additionally, cash outflows resulted from the reduction in accrued liabilities and accounts payable partially offset by a decrease in net accounts receivable. Net cash provided by investing activities. During the year ended December 29, 2001, net cash provided by investing activities was $33.1 million, which was primarily due to approximately $33.0 million of gross proceeds from the sale of the Improvements business. Of the approximately $33.0 million, $3.0 million of the proceeds of the sale are being held in escrow for a period of up to two years under the terms of an Escrow Agreement between LWI Holdings, Inc., HSN LP and The Chase Manhattan Bank (see Note 2 to the Company's Consolidated Financial Statements). As of December 29, 2001, the balance in the escrow fund was $2.6 million. Net cash used in financing activities. During the year ended December 29, 2001, net cash used in financing activities was $12.4 million. Payments to reduce Congress term loans were $6.3 million and payments of the revolving loan facility were $2.2 million. The Company paid $3.1 million in fees associated with the Richemont transaction (see Notes 8 and 9 to the Company's Consolidated Financial Statements). Payments relating to the redemption of the Company's 7 1/2% Convertible Subordinated Debentures were $0.8 million. Richemont Transaction. On December 19, 2001, the Company consummated a transaction with Richemont (the "Richemont Transaction"). In the Richemont Transaction, the Company repurchased from Richemont all of the outstanding shares of the Series A Preferred Stock and 74,098,769 shares of the Common Stock of the Company held by Richemont in return for the issuance to Richemont of 1,622,111 shares of newly-created Series B Participating Preferred Stock (the "Series B Preferred Stock") and the reimbursement of expenses of $1 million to Richemont. Richemont agreed, as part of the transaction, to forego any claim it had to the accrued but unpaid dividends on the Series A Preferred Stock. The Richemont Transaction was made pursuant to an Agreement (the "Agreement"), dated as of December 19, 2001, between the Company and Richemont. The impact of the Richemont Transaction was to reflect the reduction of the Series A Preferred Stock for the then carrying amount of $82.4 million and the issuance of Series B Preferred Stock in the amount of $76.8 million which was equal to the aggregate liquidation preference of the Series B Preferred Stock on December 19, 2001. In addition, the par value of $49.4 million of the Common Stock repurchased by the Company and retired was reflected as a reduction of Common Stock, with an offsetting increase to additional paid-in capital. The Company recorded a net increase in shareholders' equity of $5.6 million as a result of the Richemont Transaction. The shares of Series A Preferred Stock that were repurchased from Richemont represented all of the outstanding shares of such series. The Company has filed a certificate in Delaware eliminating the Series A Preferred Stock from its certificate of incorporation. Congress Credit Facility. On March 24, 2000, the Company amended its credit facility with Congress to provide the Company with a maximum credit line, subject to certain limitations, 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 the assets of the Company and places restrictions on the incidence of additional indebtedness and on the payment of Common Stock dividends. As of December 29, 2001, the Company had $29.6 million of borrowings outstanding under the amended Congress Credit Facility comprised of $13.5 million under the revolving loan facility, and $10.5 million and $5.6 million of Tranche A Term Loans and Tranche B Term Loans, respectively. The Company may draw upon the amended Congress Credit Facility to fund working capital requirements as needed. Under the amended Congress Credit Facility, the Company is required to maintain minimum net worth, working capital, and EBITDA. As used throughout the agreement, EBITDA represents earnings before 24 interest, taxes, depreciation, amortization and certain allowable non-cash items. In November 2001, the Company further amended the Congress Credit Facility to waive a default that resulted from the calculation of the EBITDA covenant requirement and agreed to revise the definition to include the net income derived from the sale of the Kindig Lane Property and the assets of the Improvements business. For the year ended December 29, 2001, EBITDA, based on the above definition, was $19.3 million, which exceeded the amount required under the Congress Credit Facility. As of December 29, 2001, the Company was in compliance with these covenants as amended. In addition, the amendment required a reserve of $500,000 against the availability under the facility borrowing terms and the payment of a fee of $500,000. In March 2002, the Company amended the Congress Credit Facility to amend the definition of Consolidated Net Worth such that, effective July 1, 2002, to the extent that the goodwill or intangible assets of the Company and its subsidiaries are impaired under the provisions of Financial Accounting Standards No. 142, such write-off of assets would not be considered a reduction of total assets for the purposes of computing Consolidated Net Worth. The consolidated working capital, consolidated net worth and EBITDA covenants were also amended. In addition, the amendment required a fee of $100,000. Management anticipates that they will be able to maintain compliance with these covenants, as amended, throughout 2002. On May 3, 2001, as part of the Company's strategic business realignment program, the Company sold its fulfillment warehouse in Hanover, Pennsylvania (the "Kindig Lane Property") and certain equipment located therein for $4.7 million to an unrelated third party. Substantially all of the net proceeds of the sale were paid to Congress and applied to a partial repayment of the Tranche A Term Loan made to Hanover Direct Pennsylvania, Inc., an affiliate of the Company, and to a partial repayment of the indebtedness under the Congress Credit Facility. The Company realized a net gain on the sale of approximately $1.5 million, which included the sale price net of selling expenses as well as the net book value of assets sold. The Company has continued to use the Kindig Lane Property under a lease agreement with the third party, and will lease a portion of the Kindig Lane Property until August 2002. The Company is transitioning the activities of the Kindig Lane Property into the Company's fulfillment center in Roanoke, Virginia. On June 29, 2001, the Company sold certain assets and liabilities of its Improvements business to HSN, a division of USA Networks, Inc.'s Interactive Group for approximately $33.0 million. In conjunction with the sale, the Company's Keystone Internet Services, Inc. subsidiary agreed to provide telemarketing and fulfillment services for the Improvements business under a service agreement with the buyer for a period of three years. The asset purchase agreement between the Company and HSN provides for a reduction in the sale price if the performance of the Improvements business in the 2001 fiscal year fails to achieve a targeted EBITDA level as defined in the agreement. In addition, if Keystone Internet Services, Inc. fails to perform its obligations during the first two years of the services contract, the purchaser can receive a reduction in the original purchase price of up to $2.0 million. An escrow fund of $3.0 million, which was withheld from the original proceeds of the sale of approximately $33.0 million, has been established for a period of two years under the terms of an escrow agreement between LWI Holdings, Inc., HSN and The Chase Manhattan Bank as a result of these contingencies. As of December 29, 2001, the balance in the escrow fund was $2.6 million. The Company recognized a net gain on the sale of approximately $23.2 million, including a non-cash goodwill charge of $6.1 million, in the second quarter of 2001, which represents the excess of the net proceeds from the sale over the net assets assumed by HSN, the goodwill associated with the Improvements business and expenses related to the transaction. The recognition of an additional gain of up to approximately $2.6 million has been deferred until the contingencies described above expire, which will not occur prior to the middle of the 2003 fiscal year. The Company received a letter from the American Stock Exchange (the "AMEX") notifying the Company that it was below certain of the AMEX's continued listing guidelines set forth in the AMEX Company Guide. The AMEX instituted a review of the Company's eligibility for continuing listing of the Company's Common Stock on the AMEX. On January 17, 2002 the Company received a letter dated January 9, 2002 from AMEX confirming that AMEX had determined to continue the Company's listing on AMEX pending quarterly reviews of the Company's compliance with the steps of its strategic business realignment program. This determination is subject to the Company's favorable progress in satisfying the AMEX guidelines for continued listing and to AMEX's periodic review of the Company's Securities and Exchange Commission and other filings. The AMEX has requested certain additional financial information 25 from the Company to be delivered on or before April 15, 2002, which the Company intends to provide prior to such date. General. At December 29, 2001, the Company had $1.1 million in cash and cash equivalents compared with $1.7 million at December 30, 2000. Working capital and current ratios at December 29, 2001 were $20.9 million and 1.26 to 1 versus $16.8 million and 1.15 to 1 at December 30, 2000. Total cumulative borrowings, including financing under capital lease obligations, as of December 29, 2001, aggregated $29.7 million, $26.5 million of which is classified as long-term. Remaining availability under the Congress Revolving Credit Facility as of December 29, 2001 was $17.3 million ($18.4 million including cash on hand). There were nominal capital commitments (less than $0.1 million) at December 29, 2001. Management believes that the Company has sufficient liquidity and availability under its credit agreements to fund its planned operations through at least December 28, 2002. Achievement of the cost saving and other objectives of the Company's strategic business realignment program is critical to the maintenance of adequate liquidity as is compliance with the terms and provisions of the Congress Credit Facility and the Company's ability to operate effectively during the 2002 fiscal year. USE OF ESTIMATES AND OTHER CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Significant accounting policies employed by the Company, including the use of estimates, are presented in the Notes to the Company's Consolidated Financial Statements. Critical accounting policies are those that are most important to the portrayal of the Company's financial condition and results of operations, and require management's most difficult, subjective or complex judgments, as result of the need to make estimates about the effect of matters that are inherently uncertain. The Company's most critical accounting policies, discussed below, pertain to revenue recognition, inventories, prepaid catalog costs and accrued liabilities. In applying such policies, management must use some amounts that are based upon its informed judgment and best estimates. Because of the uncertainty inherent in these estimates, actual results could differ from estimates used in applying these critical accounting policies. The Company is not aware of any reasonably likely events or circumstances which would result in different amounts being reported that would materially affect its financial condition or results of operations. The accounting polices for revenue recognition, inventories and prepaid catalog costs are adequately described in Note 1 of the Notes to the Company's Consolidated Financial Statements. Accrued liabilities requiring the most difficult or subjective judgments include liabilities associated with commitments and contingencies, leases related to buildings vacated as part of the Company's strategic business realignment program and costs associated with future returns of the Company's product. Estimates are made for potential litigation losses, if deemed probable. The most subjective estimate associated with lease liabilities relates to the assumptions made for subleasing space. A liability is established for the future return of merchandise at the time of sale, based upon historical and current trends. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indications arise) for impairments. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt SFAS 142 effective January 1, 2002. The Company is currently evaluating the effect that adoption of the provisions of SFAS 142 will have on its results of operations and financial position. The Company will disclose the results of the goodwill transition impairment, as required, in the second quarter of fiscal 2002. In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived 26 assets. SFAS No. 144 also extends the reporting requirements to report separately as discontinued operations, components of an entity that have either been disposed of or classified as held-for-sale. The Company has adopted the provisions of SFAS No. 144 in fiscal 2002 and does not expect that such adoption will have a significant effect on the Company's results of operations or financial position. FORWARD LOOKING STATEMENTS The following statements constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: "Management anticipates that they will be able to maintain compliance with these covenants, as amended, throughout 2002." "Management believes that the Company has sufficient liquidity and availability under its credit agreements to fund its planned operations through at least December 28, 2002." CAUTIONARY STATEMENTS The following material identifies important factors that could cause actual results to differ materially from those expressed in the forward looking statement identified above and in any other forward looking statements contained elsewhere herein: The recent general deterioration in economic conditions in the United States leading to reduced consumer confidence, reduced disposable income and increased competitive activity and the business failure of companies in the retail, catalog and direct marketing industries. Such economic conditions leading to a reduction in consumer spending generally and in home fashions specifically, and leading to a reduction in consumer spending specifically with reference to other types of merchandise the Company offers in its catalogs or over the Internet, or which are offered by the Company's third party fulfillment clients. Customer response to the Company's merchandise offerings and circulation changes; effects of shifting patterns of e-commerce versus catalog purchases; costs associated with printing and mailing catalogs and fulfilling orders; effects of potential slowdowns or other disruptions in postal service; dependence on customers' seasonal buying patterns; and fluctuations in foreign currency exchange rates. The ability of the Company to achieve projected levels of sales and the ability of the Company to reduce costs commensurately with sales projections. Increases in postage, printing and paper prices and/or the inability of the Company to reduce expenses generally as required for profitability and/or increase prices of the Company's merchandise to offset expense increases. The failure of the Internet generally to achieve the projections for it with respect to growth of e-commerce or otherwise, and the failure of the Company to increase Internet sales. The imposition of regulatory, tax or other requirements with respect to Internet sales. Actual or perceived technological difficulties or security issues with respect to conducting e-commerce over the Internet generally or through the Company's web sites or those of its third party fulfillment clients specifically. The ability of the Company to attract and retain management and employees generally and specifically with the requisite experience in e-commerce, Internet and direct marketing businesses. The ability of employees of the Company who have been promoted as a result of the Company's strategic business realignment program to perform the responsibilities of their new positions. The recent general deterioration in economic conditions in the United States leading to key vendors and suppliers reducing or withdrawing trade credit to companies in the retail and catalog and direct marketing industries. The risk that key vendors or suppliers may reduce or withdraw trade credit to the Company, convert the Company to a cash basis or otherwise change credit terms, or require the Company to provide letters of credit or cash deposits to support its purchase of inventory, increasing the Company's cost of capital and impacting the Company's ability to obtain merchandise in a timely manner. Vendors beginning to withhold shipments of merchandise to the Company. The ability of the Company to find alternative vendors and suppliers on competitive terms if vendors or suppliers who exist cease doing business with the Company. The inability of the Company to timely obtain and distribute merchandise, leading to an increase in backorders and cancellations. Defaults under the Congress Credit Facility, or inadequacy of available borrowings thereunder, reducing or impairing the Company's ability to obtain letters of credit or other credit to support its purchase of 27 inventory and support normal operations, impacting the Company's ability to obtain, market and sell merchandise in a timely manner. Continued compliance by the Company with and the enforcement by Congress of financial and other covenants and limitations contained in the Congress Credit Facility, including net worth, net working capital, capital expenditure and EBITDA covenants, and limitations based upon specified percentages of eligible receivables and eligible inventory, and the requirement that the Company maintain $3.0 million of excess credit availability at all times, affecting the ability of the Company to continue to make borrowings under the Congress Credit Facility. Continuation of the Company's history of operating losses, and the incidence of costs associated with the Company's strategic business realignment program, resulting in the Company failing to comply with certain financial and other covenants contained in the Congress Credit Facility, including net worth, net working capital, capital expenditure and EBITDA covenants and the ability of the Company to obtain waivers from Congress in the event that future internal and/or external events result in performance which results in noncompliance by the Company with the terms of the Congress Credit Facility requiring remediation. The ability of the Company to complete the Company's strategic business realignment program within the time periods anticipated by the Company. The ability of the Company to realize the aggregate cost savings and other objectives anticipated in connection with the strategic business realignment program, or within the time periods anticipated therefor. The aggregate costs of effecting the strategic business realignment program may be greater than the amounts anticipated by the Company. The ability of the Company to obtain advance rates under the Congress Credit Facility which are at least as favorable as those obtained in the past. The ability of the Company to transfer its own as well as its third party fulfillment operations conducted at the fulfillment center located in Kindig Lane, Hanover, Pennsylvania to other facilities in a timely manner while satisfying its contractual obligations to provide fulfillment services for third party clients and itself. The ability of the Company to dispose of assets related to its third party fulfillment business, to the extent not transferred to other facilities. The initiation by the Company of additional cost cutting and restructuring initiatives, the costs associated therewith, and the ability of the Company to timely realize any savings anticipated in connection therewith. The ability of the Company to maintain insurance coverage required in order to operate its businesses and as required by the Congress Credit Facility. The inability of the Company to access the capital markets due to market conditions generally, including a lowering of the market valuation of companies in the direct marketing and retail businesses, and the Company's business situation specifically. The inability of the Company to sell assets at industry multiples or at all due to market conditions generally, as a result of market conditions following the events of September 11, 2001 and otherwise. The Company's dependence up to August 24, 2000 on Richemont and its affiliates for financial support and the fact that they are not under any obligation ever to provide any additional support in the future. The ability of the Company to maintain the listing of its Common Stock on the American Stock Exchange. The continued willingness of customers to place and receive mail orders in light of worries about bio-terrorism. The ability of the Company to sublease or terminate or renegotiate the leases of its vacant facilities in Weehawken, New Jersey, Maumelle, Arkansas and other locations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATES: The Company's exposure to market risk relates to interest rate fluctuations for borrowings under its Congress Revolving Credit Facility and its Term Financing Facility, which bear interest at variable rates. At December 29, 2001, outstanding principal balances under these facilities subject to variable rates of interest were approximately $29.6 million. If interest rates were to increase by one quarter of one percent from current levels, the resulting increase in interest expense would not have a material impact on the Company's results of operations taken as a whole. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Hanover Direct, Inc: We have audited the accompanying consolidated balance sheets of Hanover Direct, Inc. (a Delaware corporation) as of December 29, 2001 and December 30, 2000, and the related consolidated statements of income (loss), shareholders' equity (deficit) and cash flows for each of the three fiscal years in the period ended December 29, 2001. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hanover Direct, Inc. and subsidiaries as of December 29, 2001 and December 30, 2000 and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 29, 2001 in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of valuation and qualifying accounts is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York March 16, 2002 29 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 29, 2001 AND DECEMBER 30, 2000
DECEMBER 29, DECEMBER 30, 2001 2000 ------------ ------------ (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 1,121 $ 1,691 Accounts receivable, net of allowance for doubtful accounts of $2,117 in 2001 and $5,668 in 2000........... 19,456 27,703 Inventories............................................... 59,223 69,612 Prepaid catalog costs..................................... 14,620 23,084 Deferred tax asset, net................................... 3,300 3,300 Other current assets...................................... 3,000 3,056 -------- --------- Total Current Assets.................................... 100,720 128,446 -------- --------- PROPERTY AND EQUIPMENT, AT COST: Land...................................................... 4,509 4,724 Buildings and building improvements....................... 18,205 23,442 Leasehold improvements.................................... 12,466 12,624 Furniture, fixtures and equipment......................... 59,287 59,773 Construction in progress.................................. -- 647 -------- --------- 94,467 101,210 Accumulated depreciation and amortization................. (60,235) (55,570) -------- --------- Property and equipment, net............................... 34,232 45,640 -------- --------- Goodwill, net............................................. 9,278 15,816 Deferred tax asset, net................................... 11,700 11,700 Other assets.............................................. 1,731 1,417 -------- --------- Total Assets............................................ $157,661 $ 203,019 ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations............................................. $ 3,162 $ 3,718 Accounts payable.......................................... 46,348 67,858 Accrued liabilities....................................... 25,132 34,443 Customer prepayments and credits.......................... 5,143 5,592 -------- --------- Total Current Liabilities............................... 79,785 111,611 -------- --------- NON-CURRENT LIABILITIES: Long-term debt............................................ 26,548 35,318 Other..................................................... 10,233 8,914 -------- --------- Total Non-current Liabilities........................... 36,781 44,232 -------- --------- Total Liabilities....................................... 116,566 155,843 -------- --------- SERIES A CUMULATIVE PARTICIPATING PREFERRED STOCK, redeemable at $50 per share ($70,000), 2,345,000 shares authorized, issued and outstanding: none at December 29, 2001 and 1,475,498 at December 30, 2000................... -- 71,628 -------- --------- SERIES B REDEEMABLE PREFERRED STOCK, authorized, issued and outstanding 1,622,111 shares at December 29, 2001 and none at December 30, 2000...................................... 76,823 -- -------- --------- SHAREHOLDERS' EQUITY (DEFICIT): Common Stock, $.66 2/3 par value, authorized 300,000,000 shares in 2001 and 2000; issued 140,336,729 shares in 2001 and 214,425,498 shares in 2000............................ 93,558 142,951 Capital in excess of par value.............................. 351,558 307,595 Accumulated deficit......................................... (477,497) (471,651) -------- --------- (32,381) (21,105) Less: Treasury stock, at cost (2,100,929 shares in 2001 and 729,167 shares in 2000)................................... (2,942) (2,223) Notes receivable from sale of Common Stock.................. (405) (1,124) -------- --------- Total Shareholders' Equity (Deficit).................... (35,728) (24,452) -------- --------- Total Liabilities and Shareholders' Equity (Deficit).... $157,661 $ 203,019 ======== =========
See notes to Consolidated Financial Statements. 30 CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND DECEMBER 25, 1999
2001 2000 1999 -------- -------- -------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) NET REVENUES............................................... $532,165 $603,014 $549,852 -------- -------- -------- OPERATING COSTS AND EXPENSES: Cost of sales and operating expenses..................... 339,556 404,959 350,502 Write-down of inventory of discontinued catalogs......... -- 2,048 (1,932) Special charges.......................................... 11,277 19,126 144 Selling expenses......................................... 141,140 153,462 136,584 General and administrative expenses...................... 56,727 84,881 68,928 Depreciation and amortization............................ 7,430 9,090 9,382 -------- -------- -------- 556,130 673,566 563,608 -------- -------- -------- (LOSS) FROM OPERATIONS..................................... (23,965) (70,552) (13,756) (Gain) on sale of Improvements business.................. (23,240) -- -- (Gain) on sale of Kindig Lane Property................... (1,529) -- -- (Gain) on sale of The Shopper's Edge..................... -- -- (4,343) (Gain) on sale of Austad's............................... -- -- (967) -------- -------- -------- INCOME (LOSS) BEFORE INTEREST AND TAXES.................... 804 (70,552) (8,446) Interest expense, net.................................... 6,529 10,083 7,338 -------- -------- -------- (Loss) before income taxes............................... (5,725) (80,635) (15,784) Income tax provision..................................... 120 165 530 -------- -------- -------- NET (LOSS) AND COMPREHENSIVE (LOSS)........................ (5,845) (80,800) (16,314) Preferred stock dividends................................ 10,745 4,015 634 -------- -------- -------- NET (LOSS) APPLICABLE TO COMMON SHAREHOLDERS............... $(16,590) $(84,815) $(16,948) ======== ======== ======== NET (LOSS) PER COMMON SHARE: Net (loss) per common share -- basic and diluted......... $ (.08) $ (.40) $ (.08) ======== ======== ======== Weighted average common shares outstanding -- basic and diluted (thousands)................................... 210,536 213,252 210,719 ======== ======== ========
See notes to Consolidated Financial Statements. 31 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND DECEMBER 25, 1999
2001 2000 1999 ------- -------- -------- (IN THOUSANDS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss)................................................ $(5,845) $(80,800) $(16,314) Adjustments to reconcile net (loss) to net cash (used) by operating activities: Depreciation and amortization, including deferred fees.................................................. 8,112 11,271 11,951 Provision for doubtful accounts......................... 91 4,947 2,817 Special charges......................................... 3,254 19,126 144 Write-down of inventory of discontinued catalogs (recovery)............................................ -- 2,048 (1,932) Gain on the sale of Improvements business............... (23,240) -- -- Gain on the sale of Kindig Lane Property................ (1,529) -- -- Gain on the sale of Austad's............................ -- -- (967) Compensation expense related to stock options........... 1,841 5,175 2,890 Changes in assets and liabilities Accounts receivable..................................... 7,398 (3,363) (8,639) Inventories............................................. 7,077 (16,844) 8,853 Prepaid catalog costs................................... 4,456 (2,779) (4,288) Accounts payable........................................ (12,818) 4,309 (1,045) Accrued liabilities..................................... (11,117) 2,119 710 Customer prepayments and credits........................ (300) 1,180 (279) Other, net.............................................. 1,400 1,803 (572) ------- -------- -------- Net cash (used) by operating activities................... (21,220) (51,808) (6,671) ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property and equipment.................. (1,636) (14,581) (4,830) Proceeds from sale of Improvements business............. 30,036 -- -- Proceeds from sale of Kindig Lane Property.............. 4,671 -- -- Proceeds from sale of Austad's.......................... -- -- 1,568 Proceeds from investment................................ -- 988 -- ------- -------- -------- Net cash provided (used) by investing activities.......... 33,071 (13,593) (3,262) ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) under revolving credit facility.............................................. (2,189) 12,810 5,202 Borrowings (payments) under term loan facility.......... (6,277) 9,820 -- Payments of 7.5% convertible debentures................. (751) -- -- Payments of long-term debt and capital lease obligations........................................... (81) (24,130) (2,745) Net proceeds from issuance of preferred stock........... -- 67,700 -- Payment of debt issuance costs.......................... (3,095) (2,770) (2,701) Payment of preferred stock dividends.................... -- (920) -- Proceeds from issuance of common stock.................. -- 847 936 Other, net.............................................. (28) 886 (117) ------- -------- -------- Net cash provided (used) by financing activities.......... (12,421) 64,243 575 ------- -------- -------- Net (decrease) in cash and cash equivalents............... (570) (1,158) (9,358) Cash and cash equivalents at the beginning of the year.... 1,691 2,849 12,207 ------- -------- -------- Cash and cash equivalents at the end of the year.......... $ 1,121 $ 1,691 $ 2,849 ======= ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest................................................ $ 5,286 $ 7,723 $ 4,765 Income taxes............................................ $ 150 $ 414 $ 713 Non-cash investing and financing activities: Redemption of Series B Convertible Additional Preferred Stock................................................. $ -- $ 6,350 $ -- Stock dividend and accretion Series A Cumulative Participating Preferred Stock......................... $10,745 $ 3,927 $ -- Redemption of Series A Cumulative Participating Preferred Stock and Accrued Stock Dividends........... $82,390 $ -- $ -- Issuance of Series B Redeemable Preferred Stock......... $76,823 $ -- $ -- Non-cash gain on sale of The Shopper's Edge............. $ -- $ -- $ 4,343 Tandem share expirations................................ $ 719 $ 394 $ 1,016 Capital lease obligations............................... $ 9 $ -- $ 517
See notes to Consolidated Financial Statements. 32 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 25, 1999, DECEMBER 30, 2000 AND DECEMBER 29, 2001
PREFERRED STOCK SERIES B COMMON STOCK CONVERTIBLE $.66 2/3 PAR VALUE CAPITAL --------------- ------------------ IN EXCESS OF ACCUM. SHARES AMOUNT SHARES AMOUNT PAR VALUE (DEFICIT) ------ ------ ------- -------- ------------ --------- (IN THOUSANDS OF DOLLARS AND SHARES) BALANCE AT DECEMBER 26, 1998....... 635 $6,128 210,786 $140,524 $297,751 $(373,815) ==== ====== ======= ======== ======== ========= Net income (loss) applicable to common shareholders.............. (16,948) Preferred stock accretion.......... 190 Stock options granted.............. 2,890 Cash received for Tandem receivable....................... Issuance & forfeitures of Common Stock for employee stock plan.... 734 489 447 Tandem share expirations........... ---- ------ ------- -------- -------- --------- BALANCE AT DECEMBER 25, 1999....... 635 $6,318 211,520 $141,013 $301,088 $(390,763) ==== ====== ======= ======== ======== ========= Net income/(loss) applicable to common shareholders.............. (84,815) Preferred stock accretion.......... 32 (152) 152 Preferred stock dividend........... (3,775) 3,775 Stock options granted.............. 5,175 Cash received for Tandem receivable....................... Tandem note write-down............. Issuance & forfeitures of Common Stock for employee stock plan.... 713 476 371 Tandem share expirations........... Conversion to Common Stock......... (635) (6,350) 2,192 1,462 4,888 ---- ------ ------- -------- -------- --------- BALANCE AT DECEMBER 30, 2000....... -- $ -- 214,425 $142,951 $307,595 $(471,651) ==== ====== ======= ======== ======== ========= Net income/(loss) applicable to common shareholders.............. (16,590) Preferred stock accretion.......... (2,129) 2,129 Preferred stock dividend........... (8,615) 8,615 Stock options granted.............. 1,841 Issuance & forfeitures of Common Stock for employee stock plan.... 10 7 (5) Tandem share expirations........... Retirement of Treasury Shares...... Preferred stock issuance costs..... (2,095) Conversion to Preferred Stock...... (74,098) (49,400) 54,966 ==== ====== ======= ======== ======== ========= BALANCE AT DECEMBER 29, 2001....... -- $ -- 140,337 $ 93,558 $351,558 $(477,497) ==== ====== ======= ======== ======== ========= NOTES RECEIVABLE TREASURY STOCK FROM SALE ---------------- OF COMMON SHARES AMOUNT STOCK TOTAL ------ ------- ---------- -------- (IN THOUSANDS OF DOLLARS AND SHARES) BALANCE AT DECEMBER 26, 1998....... (358) $ (813) $(3,305) $ 66,470 ====== ======= ======= ======== Net income (loss) applicable to common shareholders.............. (16,948) Preferred stock accretion.......... 190 Stock options granted.............. 2,890 Cash received for Tandem receivable....................... 327 327 Issuance & forfeitures of Common Stock for employee stock plan.... 936 Tandem share expirations........... (294) (1,016) 1,016 -- ------ ------- ------- -------- BALANCE AT DECEMBER 25, 1999....... (652) $(1,829) $(1,962) $ 53,865 ====== ======= ======= ======== Net income/(loss) applicable to common shareholders.............. (84,815) Preferred stock accretion.......... 32 Preferred stock dividend........... -- Stock options granted.............. 5,175 Cash received for Tandem receivable....................... 10 10 Tandem note write-down............. 434 434 Issuance & forfeitures of Common Stock for employee stock plan.... 847 Tandem share expirations........... (77) (394) 394 -- Conversion to Common Stock......... -- ------ ------- ------- -------- BALANCE AT DECEMBER 30, 2000....... (729) $(2,223) $(1,124) $(24,452) ====== ======= ======= ======== Net income/(loss) applicable to common shareholders.............. (16, 590) Preferred stock accretion.......... -- Preferred stock dividend........... -- Stock options granted.............. 1,841 Issuance & forfeitures of Common Stock for employee stock plan.... 2 Tandem share expirations........... (1,530) (719) 719 Retirement of Treasury Shares...... 158 -- Preferred stock issuance costs..... (2,095) Conversion to Preferred Stock...... 5,566 ====== ======= ======= ======== BALANCE AT DECEMBER 29, 2001....... (2,101) $(2,942) $ (405) $(35,728) ====== ======= ======= ========
See notes to Consolidated Financial Statements. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND DECEMBER 25, 1999 1. BACKGROUND OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations -- Hanover Direct, Inc., a Delaware corporation (the "Company"), is a specialty direct marketer, which markets a diverse portfolio of branded home fashions, men's and women's apparel, and gift products, through mail-order catalogs and connected Internet Web sites directly to the consumer ("direct commerce"). In addition, the Company continues to service existing third party clients with business to business (B-to-B) e-commerce transaction services. These services include a full range of order processing, customer care, customer information, and shipping and distribution services. The Company utilizes a fully integrated system and operations support platform initially developed to manage the Company's wide variety of catalog/Internet product offerings. This infrastructure is being utilized by the aforementioned B-to-B e-commerce transaction services on behalf of third party clients. Due to the strategic realignment effective December 30, 2000 pursuant SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (Note 11), the Company began to report results for the consolidated operations of Hanover Direct, Inc. as one segment commencing with the fiscal year 2001. Basis of Presentation -- The consolidated financial statements include all subsidiaries of the Company, and all intercompany transactions and balances have been eliminated. The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year's presentation. Significant estimates include allowance for doubtful accounts, provision for sales returns, prepaid catalog costs and special charges (Note 3). Fiscal Year -- The Company operates on a 52 or 53 week fiscal year, ending on the last Saturday in December. The years ended December 29, 2001 and December 25, 1999 were as reported 52-week years. The year ended December 30, 2000 was a 53-week year. Had fiscal 2000 been a 52-week year, the total revenue would have decreased by $5.2 million. Cash and Cash Equivalents -- Cash includes cash equivalents consisting of highly liquid investments with an original maturity of ninety days or less. Inventories -- Inventories consist principally of merchandise held for resale and are stated at the lower of cost or market. Cost, which is determined using the first-in, first-out (FIFO) method, includes the cost of the product as well as freight-in charges. The Company considers slow moving inventory to be surplus and calculates a loss on the impairment as the difference between an individual item's cost and the net proceeds anticipated to be received upon disposal. The Company utilizes various liquidation vehicles to dispose of aged catalog inventory including special sales catalogs, sales sections in other catalogs and liquidations through off-price merchants. Such inventory is written down to its net realizable value, if the expected proceeds of disposal are less than the cost of the merchandise. Prepaid Catalog Costs -- Prepaid catalog costs consist of direct response advertising costs related to catalog production and mailing. In accordance with Statement of Position ("SOP") 93-7, "Reporting on Advertising Costs," these costs are deferred and amortized as selling expenses over the estimated period in which the sales related to such advertising are generated. Total catalog expense was $139.2 million, $150.4 million and $133.0 million for fiscal years 2001, 2000 and 1999, respectively. Depreciation and Amortization -- Depreciation and amortization of property and equipment is computed on the straight-line method over the following lives: buildings and building improvements, 30-40 years; furniture, fixtures and equipment, 3-10 years; and leasehold improvements, over the estimated useful lives or the terms of the related leases, whichever is shorter. Repairs and maintenance are expensed as incurred. Goodwill, Net -- Excess of cost over the net assets of acquired businesses is amortized on a straight-line basis over periods of up to forty years. Accumulated amortization was $4.3 million and $5.0 million at December 29, 2001 and December 30, 2000, respectively. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt SFAS 142 effective January 1, 2002. The Company is currently evaluating the effect that adoption of the provisions of SFAS 142 will have on its results of operations and financial position. The Company will disclose the results of the goodwill transition impairment, as required, in the second quarter of fiscal 2002. Impairment of Long-lived Assets -- In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed Of," the Company reviews long-lived assets for impairment whenever events indicate that the carrying amount of such assets may not be fully recoverable. The Company performs non-discounted cash flow analyses to determined if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. There was no impairment during 2001. In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 also extends the reporting requirements to report separately, as discontinued operations, components of an entity that have either been disposed of or classified as held-for-sale. The Company has adopted the provisions of SFAS No. 144 during fiscal 2002, and does not expect that such adoption will have a significant effect on the Company's results of operations or financial position. Stock Based Compensation -- The Company accounts for its stock based compensation to employees using the fair value-based methodology under SFAS No. 123, "Accounting for Stock-Based Compensation." Income Taxes -- The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." It requires an asset and liability approach for financial accounting and reporting for income taxes. The provision for income taxes is based on income after adjustment for those temporary and permanent items which are not considered in the determination of taxable income. Deferred tax results when the Company recognizes revenues or expenses for income tax purposes in a different year than for financial reporting purposes. Net (Loss) Per Share -- Net (loss) per share is computed using the weighted average number of common shares outstanding in accordance with the provisions of SFAS No. 128, "Earnings Per Share." The weighted average number of shares used in the calculation for both basic and diluted net (loss) per share for fiscal 2001, 2000 and 1999 was 210,535,959, 213,251,945 and 210,718,546 shares, respectively. Diluted earnings per share equals basic earnings per share as the dilutive calculation for preferred stock and stock options would have an anti-dilutive impact as a result of the net losses incurred during fiscal years 2001, 2000 and 1999. The number of potentially dilutive securities excluded from the calculation of diluted earnings per share were 978,253, 2,678,492, and 9,233,837 common share equivalents for fiscal 2001, 2000 and 1999, respectively. These amounts consist of the following: 978,253 options to purchase common stock for fiscal 2001; 2,678,492 options to purchase common stock for fiscal 2000 and 6,846,995 options to purchase common stock and 2,386,842 common stock equivalents for the potential conversion of the Series B Convertible Additional Preferred Stock for fiscal 1999. Revenue Recognition -- -- Direct Commerce: The Company recognizes revenue, net of estimated returns, upon shipment of merchandise to customers. Postage and handling charges billed to customers are also recognized as revenue upon shipment of related merchandise and the related costs are classified as cost of sales and operating expenses. The Company accrues for expected future returns at the time of sale based upon historical and 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) current trends. The Company defers revenue recognition for membership fees received in its Buyer's Club programs until the cancellation period ends. Thereafter, revenue is recognized on a monthly basis over the remaining membership period. -- B-to-B Services: Revenues from the Company's e-commerce transaction services are recognized as the related services are provided. Customers are charged on an activity unit basis, which applies a contractually specified rate according to the type of transaction service performed. Fair Value of Financial Instruments -- The carrying amounts for cash and cash equivalents, accounts receivable, accounts payable and the current portion of long-term debt approximate fair value due to the short maturities of these instruments. Additionally, the current value of long-term debt also approximates fair value, as this debt bears interest at prevailing market rates. Derivative Investments and Hedging Activities -- The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its related amendment in SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," as of December 31, 2000. These pronouncements require companies to reflect the fair value of all derivative instruments, including those embedded in other contracts, as assets or liabilities in a company's financial statements. Changes in fair value of derivative instruments are generally reflected in earnings, with the exception of certain hedging transactions, for which the change in fair value may be accounted for as a component of other comprehensive income, provided certain criteria are met as specified in these pronouncements. The Company currently does not utilize derivative instruments or engage in hedging transactions, nor is there any embedded derivative instrument as of December 29, 2001 that must be recognized pursuant to these statements. 2. DIVESTITURES During 2001, the Company sold the following businesses and assets: Sale of Improvements Business: On June 29, 2001, the Company sold certain assets and liabilities of its Improvements business to HSN, a division of USA Networks, Inc.'s Interactive Group, for approximately $33.0 million. In conjunction with the sale, the Company's Keystone Internet Services, Inc. subsidiary agreed to provide telemarketing and fulfillment services for the Improvements business under a service agreement with the buyer for a period of three years. The asset purchase agreement between the Company and HSN provides for a reduction in the sale price if the performance of the Improvements business in the 2001 fiscal year fails to achieve a targeted EBITDA level as defined in the agreement. In addition, if Keystone Internet Services, Inc. fails to perform its obligations during the first two years of the services contract, the purchaser can receive a reduction in the original purchase price of up to $2.0 million. An escrow fund, which was withheld from the original proceeds of the sale of approximately $33.0 million, has been established for a period of two years under the terms of an escrow agreement between LWI Holdings, Inc., HSN and The Chase Manhattan Bank as a result of these contingencies. As of December 29, 2001, the balance in the escrow fund was $2.6 million. The Company recognized a net gain on the sale of approximately $23.2 million, net of a non-cash goodwill charge of $6.1 million, in the second quarter of 2001, which represents the excess of the net proceeds from the sale over the net assets assumed by HSN, the goodwill associated with the Improvements business and expenses related to the transaction. The recognition of an additional gain of up to approximately $2.6 million has been deferred until the contingencies described above expire, which will not fully occur prior to the middle of the 2003 fiscal year. Sale of Kindig Lane Property: On May 3, 2001, as part of the Company's strategic business realignment program, the Company sold its fulfillment warehouse in Hanover, Pennsylvania (the "Kindig Lane Property") and certain equipment located therein for $4.7 million to an unrelated third party. Substantially all of the net proceeds of the sale were paid to Congress Financial Corporation ("Congress"), pursuant to the terms of the Congress Credit Facility, and applied to a partial repayment of the Tranche A Term Loan made to Hanover Direct Pennsylvania, Inc., an affiliate of the Company, and to a partial repayment of the indebtedness under the Congress Credit Facility. The Company realized a net gain on the sale of approximately $1.5 million, which included the sale price net of selling expenses in excess of the net book value of assets sold. The 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company has continued to use the Kindig Lane Property under a lease agreement with the third party, and will lease a portion of the Kindig Lane Property until August 2002. The Company is transitioning the activities of the Kindig Lane Property into the Company's fulfillment center in Roanoke, Virginia. During 1999, the Company sold the following businesses and assets: Austad's: In October 1999, the Company sold the remaining assets of its non-core Austad's catalog, which featured golf equipment, apparel and gifts, for $1.6 million. The assets disposed of primarily included inventory and intangible assets, which were previously written off, such as customer lists and trademarks. The combined book value of assets sold was approximately $0.6 million resulting in a net pre-tax gain of $1.0 million. The Shopper's Edge: In March 1999, the Company, through a newly formed subsidiary, started up and promoted a discount buyers club to consumers known as "The Shopper's Edge." In exchange for an up-front membership fee, the Shopper's Edge program enables members to purchase a wide assortment of merchandise at discounts which are not available through traditional retail channels. Initially, prospective members participated in a 45-day trial period that, unless canceled, was automatically converted into a full membership term, which was one year in duration. Memberships were automatically renewed at the end of each term unless canceled by the member. During 1999, primarily as a result of timing of revenue and expense recognition, the Shopper's Edge subsidiary incurred losses of $4.3 million reflecting both cash payments and outstanding liabilities to the Company of $3.3 million and $1.0 million, respectively. The Company's operating results reflect $0.1 million of net losses after the elimination of these intercompany transactions. The Company recorded membership fee revenue, as well as an allowance for estimated cancellations, on a straight-line basis over the one-year membership term, which commenced immediately following the expiration of the initial 45-day trial period. Costs tied to acceptances such as commissions paid to service providers as well as membership servicing and transaction-processing expenses were deferred and expensed as membership fee revenue was recognized. All other costs, including membership kits and postage, were expensed as incurred. Under the terms of the program, the Company was entitled to periodic withdrawals of funds provided by up-front membership fees. These withdrawals, however, were subject to contractual limitations as the Shopper's Edge subsidiary was required to maintain adequate cash balances to fund estimated membership reimbursements resulting from cancellations. Accordingly, funds retained within the Shopper's Edge subsidiary were reported as "restricted cash" in the Company's balance sheet during 1999. If membership reimbursements due to cancellations exceeded the amount of funds retained by the Shopper's Edge subsidiary, the Company was liable to cover the shortfall. Effective December 1999, the Company sold its interest in the Shopper's Edge subsidiary to an unrelated third party for a nominal fair value based upon an independent appraisal. At the time of the sale, the liabilities of the subsidiary exceeded the assets by $4.3 million resulting in a gain on sale to the Company of $4.3 million. The gain represented the portion of deferred income of the Shopper's Edge that the Company received in the form of withdrawals discussed above which, in accordance with the Company's revenue recognition policy for memberships, would not have been earned until the completion of the membership term. The deferred income was recognized immediately upon the sale and has been reflected as a gain on sale in the accompanying consolidated statement of income (loss) for the year ended December 25, 1999. There are no conditions to the obligations of the Company to refund any portion of the cash withdrawals received prior to the sale. The Company entered into a solicitation services agreement with the purchaser whereby the Company will provide solicitation services for the program and will receive commissions for member acceptances based on a fixed fee per member basis, adjusted for cancellation rates on a prospective basis. Membership revenue earned during the fiscal year ended December 25, 1999 was $3.9 million, which is included in revenues in the accompanying consolidated statement of income (loss). Had the new solicitation services agreement been in place for fiscal 1999, net revenues on a pro-forma basis would have increased by $1.4 million reflecting the inclusion of $5.3 million of fee revenue for solicitation services provided versus $3.9 million of recorded membership fee revenue under the old agreement. Furthermore, on a pro-forma basis, the Company's loss from operations would have decreased by $5.4 million to $8.4 million. For the fiscal years ended 2001 and 2000, the Company received approximately $2.5 million and $5.0 million of fee revenue for solicitation services provided. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Blue Ridge Associates -- In January 1994, the Company purchased for $1.1 million a 50% interest in Blue Ridge Associates ("Blue Ridge"), a partnership which owns an apparel distribution center in Roanoke, Virginia. The remaining 50% interest is held by an unrelated third party. This investment is accounted for under the equity method of accounting. The Company's investment in Blue Ridge was approximately $0.8 million at December 25, 1999. In December 1996, the Company consolidated the fulfillment and telemarketing activities handled at this facility into its home fashion distribution facility in Roanoke, Virginia, and attempted to sublease the vacated space. In April 1999, the Company sublet the vacated premises to an unrelated third party for a five-year period expiring in April 2004. In February 2000, the Company sold its partnership interest in Blue Ridge to the holder of the other 50% for $0.8 million, which approximated the Company's carrying value of the investment. 3. SPECIAL CHARGES In December 2000, the Company recorded special charges aggregating approximately $19.1 million. These charges consisted of severance ($5.0 million), facility exit costs ($5.9 million) and fixed asset write-offs ($8.2 million, of which $7.2 million is non-cash) related to the Company's previously announced strategic business realignment program which included (1) the elimination of approximately 285 full-time equivalent ("FTE") positions across all its business units; (2) the closure of the Company's Always in Style business; (3) the discontinuance by Hanover Brands of the under-performing Turiya, Kitchen & Home and Domestications Kitchen & Garden catalogs while incorporating some of the product offerings within continuing catalogs; (4) the termination by Hanover Brands of its marketing agreement with Compagnie de la Chine; (5) the closure by Hanover Brands of certain retail outlets and a satellite facility in New Jersey; (6) the closure by erizon of its leased fulfillment and telemarketing facility in Maumelle, Arkansas; and (7) the immediate cessation by erizon of the operations of Desius LLC. Such actions were taken in an effort to direct the Company's resources primarily towards continued profitable growth in Hanover Brands while reducing costs in all areas of the business and eliminating investment activities that had not yet generated sufficient revenue to produce profitable returns. Erizon intended to consolidate the Maumelle operations within its remaining facilities and to provide the bulk of its fulfillment services for third party clients of its Keystone Internet Services, Inc. ("Keystone") subsidiary within its existing operations. The consolidation of Keystone's activities in other facilities was intended to provide a better opportunity to focus resources, particularly customer service support, on clients to service their needs. In 2001, an additional amount for special charges was recorded in the amount of $11.3 million. These charges are related to the strategic business realignment program that was initiated at the end of 2000 and consisted of additional severance ($4.2 million), facility exit costs ($4.0 million) and fixed asset write-offs ($3.1 million all of which is non-cash). In December 2001, the Company made a decision as part of the continuing implementation of the strategic business realignment program to close its San Diego telemarketing center in the first quarter of 2002. Accordingly, severance costs include $0.4 million for associates of the telemarketing center whose jobs were eliminated as a result. In addition, severance costs recorded for the year include $0.4 million for associates of the Kindig Lane Facility whose jobs were eliminated as a result of the sale of the facility in May 2001. The remainder of the severance charges recorded in 2001, which amounted to $3.4 million, represents the elimination of 442 FTE positions. In October 2001, the Company determined it was more cost effective to relocate certain of its operating and administrative functions from the first floor of its facility in Weehawken, New Jersey to a previously closed space in Edgewater, New Jersey and in anticipation of subletting the space vacated in Weehawken, New Jersey. This amendment of the original plan resulted in an additional charge of $0.8 million for the Weehawken facility and a charge of $0.7 million for the write-off of fixed assets related to this location. In addition, the exit of the Maumelle and Kindig Lane buildings, as well as the closing of the San Diego telemarketing center, resulted in special charges of $3.7 million in addition to the aforementioned severance costs. The charges related to the exit of the Maumelle facility included a $1.1 million addition to the estimated loss on the lease provision and $1.9 million fixed asset write-down. The exit charges for the Kindig Lane 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) building consisted of a $0.5 million write-off for the impairment in value of the fixed assets located in that facility. Finally, the costs associated with closing the San Diego telemarketing center were $0.2 million. The special charges recorded in 2001 also included $1.9 million to revise estimated losses provided for sub-lease arrangements in connection with a retail outlet store in San Diego that was previously closed and office facilities located in San Francisco, California. This was for anticipated losses on sublease arrangements for the San Francisco office space resulting from declining market values in that area of the country. As of December 29, 2001, a liability is included on the Company's balance sheet related to future costs in connection with the Company's strategic business realignment program consisting of: Severance -- The cost of employee severance includes termination benefits for line and supervisory personnel in fulfillment, telemarketing, MIS, merchandising, and various levels of corporate and catalog management. Approximately $2.5 million of these costs are recorded in accrued liabilities in the accompanying Condensed Consolidated Balance Sheet at December 29, 2001. Actual severance payments made in 2001 amounted to $6.1 million. Facility Exit Costs and Fixed Asset Write-downs -- These costs are primarily related to the Company's decision to close its fulfillment center in Maumelle, Arkansas and the San Diego telemarketing center, exit office space in Weehawken, New Jersey and to close several of its retail outlets. Approximately, $4.8 million of these costs is included in accrued liabilities at December 29, 2001 and an additional $3.8 million is included in non-current liabilities as they will not be paid until 2003 or later. Facility exit costs and fixed asset write-offs against the accruals in 2001 amounted to $3.9 million. 4. WRITE-DOWN OF INVENTORY OF DISCONTINUED CATALOGS In the fourth quarter of 2000, the Company made a decision to discontinue three catalogs brands, Domestications Kitchen & Garden, Turiya and Kitchen & Home. These three catalog brands generated revenues of $4.7 million, $18.4 million and $19.6 million in 2001, 2000 and 1999, respectively. In 2000, the Company recorded provisions of approximately $2.0 million related to the write-down of inventory associated with these catalogs to their net realizable value, based upon the planned liquidation of such inventory, and $0.7 million of additional 2000 charges related to the acceleration of the amortization of prepaid catalog costs associated with the discontinuance of these catalogs' operations based upon their estimated realizability relative to the wind-down plan in 2001. At the end of 2001, aged catalog inventory remaining was $.1 million for Domestications Kitchen & Garden, $0 for Turiya and $.1 million for Kitchen & Home. All inventory related to these discontinued catalogs are reserved as part of the write-down provisions. In 1998, the Company decided to discontinue the traditional catalog operations of the Tweeds, Austad's and Colonial Garden Kitchens catalog brands. These "non-core" catalog brands were to be repositioned as primarily e-commerce brands and, if unsuccessful, discontinued. In 1998, the Company recorded provisions of approximately $3.7 million related to the write-down of inventory associated with these catalogs to net realizable value based on the planned liquidation of such inventory. The Company utilizes various liquidation vehicles to dispose of aged catalog inventory including special sales catalogs, sales sections in other catalogs, and liquidations through off-price merchants. During 1999, the Company was able to utilize special sales catalogs, which provide higher cost recoveries, to dispose of its non-core catalog inventory to a larger extent than anticipated at the end of 1998. Accordingly, $1.9 million of the 1998 charges were reversed and included in the Company's 1999 results. During 1999, the Company sold the remaining assets of its non-core Austad's catalog for $1.6 million; fully discontinued its Tweeds catalog operation; and repositioned and relaunched its Colonial Garden Kitchens catalog as Domestications Kitchen & Garden, which was subsequently discontinued. 5. TRANSFER OF CREDIT CARD ACCOUNTS RECEIVABLE During July 1999, the Company finalized a new three-year credit card marketing and servicing agreement with a new provider and terminated the prior servicing agreement. The new terms include provisions requiring the Company to equally share credit losses over an agreed upon benchmark for the first 18 months of the agreement, however, the Company is not obligated to repurchase any non-collectible receivables. Upon the 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expiration of this period, all credit card receivables transferred are non-recourse to the Company. Furthermore, the Company is no longer required to maintain a deposit as security for its performance under the terms of the new agreement. Reflecting the change in terms included in the new agreement, the Company, in accordance with SFAS No. 125 and its subsequent amendment under SFAS No. 140, accounted for the transfer of its private label credit card receivables as a sale. Accordingly, the Company's consolidated balance sheets no longer reflect a financing receivable and a related long-term obligation. No gain or loss was recognized upon the transition to the new agreement. 6. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
DEC. 29, DEC. 30, 2001 2000 -------- -------- Restructuring............................................... $ 7,291 $ 9,160 Reserve for future sales returns............................ 2,764 3,371 Compensation................................................ 9,053 13,466 Taxes....................................................... 1,098 1,134 Other....................................................... 4,926 7,312 ------- ------- Total.................................................. $25,132 $34,443 ======= =======
7. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
DEC. 29, DEC. 30, 2001 2000 -------- -------- Congress Credit Facility.................................... $29,599 $38,065 7.5% Convertible Subordinated Debentures due 2007........... -- 751 Obligations under capital leases............................ 111 192 Other....................................................... -- 28 ------- ------- 29,710 39,036 Less: current portion..................................... 3,162 3,718 ------- ------- Total.................................................. $26,548 $35,318 ======= =======
Revolving Credit Facility -- On December 29, 2001, the Company's credit facility (the "Congress Credit Facility") with Congress Financial Corporation ("Congress") was a maximum credit line, subject to certain limitations, of up to $82.5 million. The Congress Credit Facility expires on January 31, 2004 and is comprised of a revolving loan facility, a $17.5 million Tranche A Term Loan having an eighty-four month term, and a $7.5 million Tranche B Term Loan having a thirty-six month term. Total cumulative borrowings 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 is secured by all of the assets of the Company and places restrictions on the incurrence of additional indebtedness and on the payment of common stock dividends. As of December 29, 2001, the Company had $29.6 million of borrowings outstanding under the Congress Credit Facility, comprised of $13.5 million under the revolving loan facility, bearing an interest rate of 5.25%, and $10.5 million, bearing an interest rate of 5.50%, and $5.6 million, bearing an interest rate of 13.0%, of Tranche A Term Loans and Tranche B Term Loans, respectively. As of December 30, 2000, the Company had $38.1 million of borrowings outstanding under the Congress Credit Facility comprised of $15.7 million under the revolving loan facility, bearing an interest rate of 10.0%, and $14.9 million, bearing an interest rate of 10.25%, and $7.5 million, bearing an interest rate of 13.75%, of Tranche A Term Loans and Tranche B Term Loans, respectively. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The revolving loan facility bears interest at prime plus .5% or Eurodollar plus 2.5%, the Tranche A Term Loans bear interest at prime plus .75% or Eurodollar plus 3.5%, and the Tranche B Term Loans bear interest at prime plus 4.25%, but in no event less than 13.0%. Under the Congress Credit Facility, the Company is required to maintain minimum net worth, working capital and EBITDA as defined throughout the terms of the agreement. In November 2001, the Company amended the Congress Credit Facility to waive a default that resulted from the calculation of the EBITDA covenant requirement and revised the definition of EBITDA to include the net income derived from the sale of the Kindig Lane Property and the assets of the Improvements business. As of December 29, 2001 the Company was in compliance with these covenants as amended. In addition, the amendment requires a reserve of $500,000 against the availability under the Congress Credit Facility's borrowings terms, and a fee of $500,000. In March 2002, the Company further amended the Congress Credit Facility to amend the definition of Consolidated Net Worth such that, effective July 1, 2002, to the extent that the goodwill or intangible assets of the Company and its subsidiaries are impaired under the provisions of Financial Accounting Standards No. 142, such write-off of assets would not be considered a reduction of total assets for the purpose of computing Consolidated Net Worth. The consolidated working capital, consolidated net worth and EBITDA covenants were also amended. In addition, the amendment required the payment of a fee of $100,000. Achievement of the Company's strategic business realignment program is critical to the maintenance of adequate liquidity, as is compliance with the terms and provisions of the Congress Credit Facility and the Company's ability to operate effectively during the 2002 fiscal year. 7 1/2% Convertible Subordinated Debentures Due 2007 -- The Company is successor to The Horn & Hardart Company, the issuer of 7 1/2 % Convertible Subordinated Debentures which had been due March 7, 2007 (the "Securities"). In accordance with the optional redemption provisions of the Indenture and the Debentures, on September 28, 2001, the Company redeemed all of the outstanding principal balance of the Securities at $751,000, a price of 100% of the face value of the Securities, plus accrued and unpaid interest of an immaterial amount. General -- At December 29, 2001, the aggregate annual principal payments required on debt instruments are as follows (in thousands): 2002 -- $3,162; 2003 -- $6,554; 2004 -- $15,519; 2005 -- $1,992; and thereafter -- $2,483. 8. SERIES A CUMULATIVE PARTICIPATING PREFERRED STOCK On August 24, 2000, the Company issued 1.4 million shares of preferred stock designated as Series A Cumulative Participating Preferred Stock (the "Series A Preferred Stock") to Richemont, the then holder of approximately 47.9% of the Company's Common Stock, for $70 million. The Series A Preferred Stock had a par value of $0.01 per share and a liquidation preference of $50.00 per share and was recorded net of issuance costs of $2.3 million. The issuance costs were accreted as a dividend over a five-year period ending on the mandatory redemption date. Dividends were cumulative and accrue at an annual rate of 15%, or $7.50 per share, and were payable quarterly either in cash or in-kind through the issuance of additional Series A Preferred Stock. Cash dividend payments were required for dividend payment dates occurring after February 1, 2004. As of September 30, 2001, the Company accrued dividends of $12,389,700, and reserved 247,794 additional shares of Series A Preferred Stock for the payment of such dividends. In-kind dividends and issuance cost accretion were charged against additional paid-in capital, with a corresponding increase in the carrying amount of the Series A Preferred Stock. Cash dividends were also reflected as a charge to additional paid-in capital, however, no adjustment to the carrying amount of the Series A Preferred Stock was made. The Series A Preferred Stock was generally non-voting, except if dividends had been in arrears and unpaid for four quarterly periods, whether or not consecutive. The holder of the Series A Preferred Stock was entitled to receive additional participating dividends in the event any dividends were declared or paid, or any other distribution was made, with respect to the Common Stock of the Company. The additional dividends would be equal to the applicable percentage of the amount of the dividends or distributions payable in respect of one share of Common Stock. In the event of a liquidation or dissolution of the Company, the holder of the 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Series A Preferred Stock would be paid an amount equal to $50.00 per share of Series A Preferred Stock plus the amount of any accrued and unpaid dividends, before any payments to other shareholders. The Company could redeem the Series A Preferred Stock in whole at any time and the holder of the Series A Preferred Stock could elect to cause the Company to redeem all or any of such holder's Series A Preferred Stock under certain circumstances involving a change of control, asset disposition or equity sale. Mandatory redemption of the Series A Preferred Stock by the Company was required on August 23, 2005 (the "Final Redemption Date") at a redemption price of $50.00 per share of Series A Preferred Stock plus the amount of any accrued and unpaid dividends. On December 19, 2001, the Company consummated a transaction with Richemont (the "Richemont Transaction"). In the Richemont Transaction, the Company repurchased from Richemont all of the outstanding shares of the Series A Preferred Stock and 74,098,769 shares of the Common Stock of the Company held by Richemont in return for the issuance to Richemont of 1,622,111 shares of newly-created Series B Participating Preferred Stock (the "Series B Preferred Stock") and the reimbursement of expenses of $1 million to Richemont. Richemont agreed, as part of the transaction, to forego any claim it had to the accrued but unpaid dividends on the Series A Preferred Stock. The Richemont Transaction was made pursuant to an Agreement (the "Agreement"), dated as of December 19, 2001, between the Company and Richemont. The impact of the Richemont Transaction was to reflect the reduction of the Series A Preferred Stock for the then carrying amount of $82.4 million and the issuance of Series B Preferred Stock in the amount of $76.8 million which was equal to the aggregate liquidation preference of the Series B Preferred Stock on December 19, 2001. In addition, the par value of $49.4 million of the Common Stock repurchased by the Company and retired was reflected as a reduction of Common Stock, with an offsetting increase to additional paid-in capital. The Company recorded a net increase in shareholders' equity of $5.6 million as a result of the Richemont Transaction. The shares of the Series A Preferred Stock that were repurchased from Richemont represented all of the outstanding shares of such series. The Company has filed a certificate in Delaware eliminating the Series A Preferred Stock from its certificate of incorporation. 9. SERIES B CUMULATIVE PARTICIPATING PREFERRED STOCK On December 19, 2001, as part of the Richemont Transaction, the Company issued to Richemont 1,622,111 shares of Series B Preferred Stock. The Series B Preferred Stock has a par value of $0.01 per share. The holders of the Series B Preferred Stock are entitled to ten votes per share on any matter on which the Common Stock votes. In addition, in the event that the Company defaults in its obligations under the Agreement, the Certificate of Designations of the Series B Preferred Stock or its agreements with Congress Financial, or in the event that the Company fails to redeem at least 811,056 shares of Series B Preferred Stock by August 31, 2003, then the holders of the Series B Preferred Stock, voting as a class, shall be entitled to elect two members to the Board of Directors of the Company. In the event of the liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock are entitled to a liquidation preference (the "Liquidation Preference") which was initially $47.36 per share and which increases quarterly, commencing March 1, 2002. As of March 1, 2002, the Liquidation Preference was $49.15 per share. As of June 1, 2002, September 1, 2002, and December 1, 2002, the Liquidation Preference will be $51.31, $53.89 and $56.95 per share, respectively. As of March 1, 2003, June 1, 2003, September 1, 2003 and December 1, 2003, the Liquidation Preference will be $60.54, $64.74, $69.64 and $72.25 per share, respectively. As of March 1, 2004, June 1, 2004, September 1, 2004 and December 1, 2004, the Liquidation Preference will be $74.96, $77.77, $80.69 and $83.72 per share, respectively. As of March 1, 2005 and June 1, 2005, the Liquidation Preference will be $86.85 and $90.11 per share, respectively. As a result, beginning November 30, 2003, the aggregate Liquidation Preference of the Series B Preferred Stock will be effectively equal to the aggregate liquidation preference of the Class A Preferred Stock that was repurchased (See Note 8). For each increase in liquidation preference amounts, the Company will reflect the change as an increase in 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Series B Preferred Stock with a corresponding reduction in additional paid-in capital. Such accretion will be recorded as a reduction of net income available to common shareholders. Dividends on the Series B Preferred Stock are required to be paid whenever a dividend is declared on the Common Stock. The amount of any dividend on the Series B Preferred Stock shall be determined by multiplying (i) the amount obtained by dividing the amount of the dividend on the Common Stock by the then current fair market value of a share of Common Stock and (ii) the Liquidation Preference of the Series B Preferred Stock. The Series B Preferred Stock must be redeemed by the Company on August 23, 2005. The Company may redeem all or less than all of the then outstanding shares of Series B Preferred Stock at any time prior to that date. At the option of the holders thereof, the Company must redeem the Series B Preferred Stock upon a Change of Control or upon the consummation of an Asset Disposition or Equity Sale (all as defined in the Certificate of Designations of the Series B Preferred Stock). The redemption price for the Series B Preferred Stock upon a Change of Control or upon the consummation of an Asset Disposition or Equity Sale is the then applicable Liquidation Preference of the Series B Preferred Stock plus the amount of any declared but unpaid dividends on the Series B Preferred Stock. The Company's obligation to redeem the Series B Preferred Stock upon an Asset Disposition or an Equity Sale is subject to the satisfaction of certain conditions set forth in the Certificate of Designations. The Certificate of Designations of the Series B Preferred Stock provides that, for so long as Richemont is the holder of at least 25% of the then outstanding shares of Series B Preferred Stock, it shall be entitled to appoint a non-voting observer to attend all meetings of the Board of Directors and any committees thereof. To date Richemont has not appointed such an observer. Pursuant to the terms of the Certificate of Designations of the Series B Preferred Stock, the Company's obligation to pay dividends on or redeem the Series B Preferred Stock is subject to its compliance with its agreements with Congress. 10. CAPITAL STOCK Richemont Transaction -- On December 19, 2001, as part of the Richemont Transaction, the Company repurchased from Richemont and retired 74,098,759 shares of the Common Stock of the Company held by Richemont. As part of the transaction, Richemont revoked the proxy that it then held to vote 4,289,000 shares of Common Stock which were owned by a third party. General -- At December 29, 2001 and December 30, 2000, there were 140,336,729 and 214,425,498 shares of Common Stock issued and outstanding, respectively. Additionally, an aggregate of 9,332,778 shares of Common Stock was reserved for issuance pursuant to the exercise of outstanding options at December 29, 2001. Treasury stock consisted of 2,100,929 and 729,167 shares of Common Stock at December 29, 2001 and December 30, 2000, respectively. In December 2001 and December 2000, the Company retained 1,530,000 and 80,000 shares, respectively, of outstanding Common Stock held in escrow on behalf of certain participants in the Company's Executive Equity Incentive Plan whose rights, under the terms of the plan, expired during 2001 and 2000. Dividend Restrictions -- The Company is restricted from paying dividends on its Common Stock or from acquiring its capital stock by certain debt covenants contained in agreements to which the Company is a party. 11. SEGMENT REPORTING In prior years the Company reported two separate operating and reporting segments: direct commerce and business to business ("B-to-B") e-commerce transaction services. In conjunction with the Company's previously announced strategic business realignment program, the Company has (1) terminated an intercompany services agreement between erizon and Hanover Brands effective December 30, 2000, (2) ceased the Desius LLC business operations of erizon and (3) closed erizon's leased fulfillment and telemarketing facility in Maumelle, Arkansas. As a result of these actions, the Company's business to business revenues in fiscal 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2001 and beyond are expected to be reduced and for the foreseeable future will be limited to third party clients serviced by Keystone Internet Services, Inc. Taken in conjunction with the Company's announced intention to direct resources primarily towards growth in core brands, these actions have caused the Company, pursuant to SFAS 131, to report results for the consolidated operations of Hanover Direct, Inc. as one segment commencing in fiscal year 2001. 12. STOCK BASED COMPENSATION PLANS The Company has established several stock based compensation plans for the benefit of its officers and employees. As discussed in the Summary of Significant Accounting Policies (Note 1), the Company applies the fair-value based methodology of SFAS No. 123 and, accordingly, has recorded stock compensation expense of $1.8 million, $5.2 million and $2.9 million for fiscal 2001, 2000 and 1999, respectively. The effects of applying SFAS No. 123 for recognizing compensation costs are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1996 and additional awards in the future are anticipated. The information below details each of the Company's stock compensation plans, including any changes during the years presented. 1999 Stock Option Plan for Directors - During August 1999, the Board of Directors adopted the 1999 Stock Option Plan for Directors providing stock options to purchase shares of Common Stock of the Company to certain eligible directors who were neither employees of the Company nor non-resident aliens (the "Director's Plan"). The Director's Plan was ratified by the Company's shareholders at the 2000 Annual Meeting. The Company may issue stock options to purchase up to 700,000 shares of Common Stock to eligible directors at an exercise price equal to the fair market value as of the date of grant. An eligible director shall receive a stock option grant to purchase 50,000 shares of Common Stock as of the effective date of his/her initial appointment or election to the Board of Directors. Furthermore, on each Award Date, defined as August 4, 2000 or August 3, 2001, eligible directors were granted stock options to purchase an additional 10,000 shares of Common Stock. Stock options granted have terms of 10 years and shall vest and become exercisable over three (3) years from the date of grant; however, in the event of a change in control, options shall vest and become exercisable immediately. Payment for shares purchased upon exercise of options shall be in cash or stock of the Company. Options outstanding, granted and the weighted average exercise prices under the 1999 Stock Option Plan for Directors are as follows: 1999 STOCK OPTION PLAN FOR DIRECTORS
2001 2000 --------------------- --------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE --------- -------- --------- -------- Options outstanding, beginning of period........ 420,000 $2.13 -- -- Granted.................................... 110,000 .27 540,000 $2.15 Exercised.................................. (10,000) .20 -- -- Forfeited.................................. (130,000) 1.98 (120,000) 2.25 --------- ----- --------- ----- Options outstanding, end of period.............. 390,000 $1.70 420,000 $2.13 ========= ===== ========= ===== Options exercisable, end of period.............. 273,332 $2.01 116,667 $2.35 ========= ===== ========= ===== Weighted average fair value of options granted....................................... $ .20 $ 1.07 ========= =========
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions for grants in fiscal 2001 and 2000 under the 1999 Stock Option Plan for Directors were as follows: risk free interest rate of 4.88% and 5.87%, expected volatility of 83.93% and 54.35%, expected life of 6 years, and no expected dividends. The following table summarizes 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) information about stock options outstanding at December 29, 2001 under the 1999 Stock Option Plan for Directors:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- ----------------------- WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE AT CONTRACTUAL EXERCISE AT EXERCISE EXERCISE PRICES 12/29/01 LIFE PRICE 12/29/01 PRICE - --------------- ----------- ----------- -------- ----------- -------- $.20.............................. 40,000 9.6 $ .20 20,000 $ .20 $.36.............................. 50,000 9.6 $ .36 -- $ .36 $1.00............................. 50,000 8.6 $1.00 36,666 $1.00 $2.35............................. 250,000 7.6 $2.35 216,667 $2.35 ------- --- ----- ------- ----- 390,000 8.2 $1.70 273,332 $2.01 ======= === ===== ======= =====
Other Director Options -- In February 1996, four directors were granted options to purchase 5,000 shares each at an exercise price of $1.44. Of the 20,000 total options granted, 10,000 options were exercised, 5,000 were canceled and the remaining 5,000 expired in February 2001, leaving no options outstanding and exercisable at December 29, 2001. 1993 Executive Equity Incentive Plan -- In December 1992, the Board of Directors adopted the 1993 Executive Equity Incentive Plan (the "Incentive Plan"). The Incentive Plan was approved by the Company's shareholders at the 1993 Annual Meeting. The Incentive Plan encouraged executives to acquire and retain a significant ownership stake in the Company. Under the Incentive Plan, executives were given an opportunity to purchase shares of Common Stock with up to 80% of the purchase price financed with a six year full recourse Company loan, which bore interest at the mid-term applicable federal rate as determined by the Internal Revenue Service. The Incentive Plan participants purchased shares of Common Stock at prices ranging from $0.69 to $4.94, with the Company accepting notes bearing interest at rates ranging from 5.00% to 7.75%. For each share of stock an employee purchased, he/she received stock options to acquire two additional shares of Common Stock, up to a maximum of 250,000 shares in the aggregate. The stock options, which were granted by the Compensation Committee of the Board of Directors, vested after three years and expired after six years. On December 31, 1996, the Incentive Plan was terminated in accordance with its terms, and no additional Common Stock was purchased or stock options granted. Changes in options outstanding, expressed in numbers of shares, for the Incentive Plan are as follows: EXECUTIVE EQUITY INCENTIVE PLAN
2001 2000 1999 ------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- -------- -------- -------- -------- -------- Options outstanding, beginning of period........ 80,000 $1.72 454,000 $1.13 614,000 $1.44 Exercised.................... -- -- (274,000) 1.00 (60,000) 2.67 Forfeited.................... (80,000) 1.72 (100,000) 1.00 (100,000) 2.11 ------- ----- -------- ----- -------- ----- Options outstanding, end of period..................... -- -- 80,000 $1.72 454,000 $1.13 ======= ===== ======== ===== ======== ===== Options exercisable, end of period..................... -- -- 80,000 $1.72 454,000 $1.13 ======= ===== ======== ===== ======== =====
45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Changes to the notes receivable principal balances related to the Incentive Plan are as follows:
2001 2000 1999 -------- -------- ---------- Notes Receivable balance, beginning of period............. $324,400 $655,500 $1,690,500 Payments.................................................. -- (9,600) (262,000) Forfeitures............................................... (11,000) (321,500) (773,000) -------- -------- ---------- Notes Receivable balance, end of period................... $313,400 $324,400 $ 655,500 ======== ======== ==========
In December 1999, the rights of certain participants in the Incentive Plan expired. These participants had cumulative promissory notes of approximately $1.0 million payable to the Company, comprised of $0.8 million of principal and $0.2 million of interest, on the expiration date. Accordingly, collateral encompassing 20,000 shares, 80,000 shares, and 294,249 shares of the Company's Common Stock in fiscal years 2001, 2000, and 1999 respectively, held in escrow on behalf of each participant, was transferred to and retained by the Company in satisfaction of the aforementioned promissory notes, which were no longer required to be settled. The Company recorded these shares as treasury stock. Furthermore, these participants forfeited their initial 20% cash down payment, which was required for entry into the Incentive Plan. Management Stock Option Plans -- The Company approved for issuance to employees 20,000,000 shares of the Company's Common Stock pursuant to the Company's 2000 Management Stock Option Plan and 7,000,000 shares of the Company's Common Stock pursuant to the Company's 1996 Stock Option Plan. Under both plans, the option exercise price is equal to the fair market value as of the date of grant. However, for stock options granted to an employee owning more than 10% of the total combined voting power of all classes of Company stock, the exercise price is equal to 110% of the fair market value of the Company's Common Stock as of the grant date. Stock options granted to an individual employee under the 2000 Management Stock Option Plan may not exceed 1,000,000 shares of the Company's Common Stock. Stock options granted to an individual employee under the 1996 Stock Option Plan may not exceed 500,000 shares of the Company's Common Stock and may be performance-based. All options granted must be specifically identified as incentive stock options or non-qualified stock options, as defined in the Internal Revenue Code. Furthermore, the aggregate fair market value of Common Stock for which an employee is granted incentive stock options that first became exercisable during any given calendar year shall be limited to $100,000. To the extent such limitation is exceeded, the option shall be treated as a non-qualified stock option. Stock options may be granted for terms not to exceed 10 years and shall be exercisable in accordance with the terms and conditions specified in each option agreement. In the case of an employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock, the options must become exercisable within 5 years. Payment for shares purchased upon exercise of options shall be in cash or stock of the Company. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For the combined Management Stock Option Plans, options outstanding, granted and the weighted average exercise prices are as follows:
2001 2000 1999 ---------------------- ----------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- -------- ----------- -------- ---------- -------- Options outstanding, beginning of period.............. 9,240,947 $2.41 5,927,984 $1.99 5,301,400 $1.66 Granted.......... -- -- 5,459,000 2.71 2,010,000 2.53 Exercised........ -- -- (414,537) 1.10 (693,821) 1.01 Forfeited........ (5,298,169) 2.36 (1,731,500) 2.26 (689,595) 1.95 ---------- ----- ----------- ----- ---------- ----- Options outstanding, end of period....... 3,942,778 $2.47 9,240,947 $2.41 5,927,984 $1.99 ========== ===== =========== ===== ========== ===== Options exercisable, end of period....... 2,386,362 $2.13 3,235,167 $1.82 2,620,344 $1.41 ========== ===== =========== ===== ========== ===== Weighted average fair value of options granted............. -- $ 1.60 $ 1.21 ========== =========== ==========
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model. There were no grants issued during fiscal year 2001. The weighted average assumptions for grants in fiscal 2000 and 1999 are as follows: risk free interest rate of 5.60% and 5.83%, respectively, expected volatility of 56.85% and 53.81%, respectively, expected lives of 6 years for fiscal 2000 and 4 years for fiscal 1999, and no expected dividends. The following table summarizes information about stock options outstanding at December 29, 2001 under the Combined Management Stock Option Plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- ----------------------- WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE AT CONTRACTUAL EXERCISE AT EXERCISE RANGE OF EXERCISE PRICES 12/29/01 LIFE PRICE 12/29/01 PRICE - ------------------------ ----------- ----------- -------- ----------- -------- $0.25 to $1.01................. 721,446 2.3 $0.93 691,446 $0.94 $1.43 to $1.75................. 353,332 3.1 $1.48 327,082 $1.46 $2.37 to $2.94................. 809,000 4.7 $2.49 563,917 $2.52 $3.00 to $3.50................. 2,059,000 7.0 $3.17 803,917 $3.17 --------- --- ----- --------- ----- 3,942,778 5.3 $2.47 2,386,362 $2.13 ========= === ===== ========= =====
The Chief Executive Officer (the "CEO") Stock Option Plans -- The information below details each of the stock-based plans granted in 1996 for the benefit of Rakesh K. Kaul, the former Chief Executive Officer of the Company (the "CEO"). In each of the plans, the option price represents the average of the low and high fair market values of the Common Stock on August 23, 1996, the date of the closing of the 1996 Rights Offering On December 5, 2000, the CEO resigned, resulting in the right to exercise the remaining options for 12 months thereafter. No options were exercised by December 5, 2001, thus, as of December 29, 2001, there were no options outstanding or exercisable. The details of the plans are as follows: The CEO Tandem Plan -- Pursuant to the Company's Tandem Plan (the "Tandem Plan"), the right to purchase an aggregate of 1,000,000 shares of Common Stock and an option to purchase 2,000,000 shares of Common Stock was approved for issuance to the CEO. The option is subject to anti-dilution provisions and due to the Company's 1996 Rights Offering was adjusted to 1,510,000 shares of Common Stock and 3,020,000 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) options. Following the resignation of the CEO in December 2000, the CEO tendered to the Company 1,510,000 Tandem Plan shares of common stock and, to date, the Company has treated the tender of such shares as satisfying a promissory note of approximately $1.3 million. However, this matter is the subject of pending litigation between the CEO and the Company. The Company recorded these shares as treasury stock. There were no options outstanding and exercisable under the Tandem Plan at December 29, 2001. The CEO Performance Year Plan -- Pursuant to the Company's Performance Year Plan (the "Performance Plan"), an option to purchase an aggregate of 1,000,000 shares of Common Stock was approved for issuance to the CEO in 1996. The options are based upon performance as defined by the Compensation Committee of the Board of Directors. Should a performance target not be attained, the option is carried over to the succeeding year in conjunction with that year's option until the expiration date. The options expire 10 years from the date of grant and vest over four years. Payment for shares purchased upon the exercise of the options shall be in cash or stock of the Company. Due to the resignation of the CEO on December 5, 2000 and the absence of an exercise of the outstanding options for 12 months thereafter, the options were forfeited on December 5, 2001. No options were outstanding and exercisable under the Performance Plan at December 29, 2001. The CEO Closing Price Option Plan -- Pursuant to the Company's Closing Price Option Plan (the "Closing Price Plan"), an option to purchase an aggregate of 2,000,000 shares of Common Stock was approved for issuance to the CEO in 1996. The options expire 10 years from the date of grant and will become vested upon the Company's stock price reaching a specific target over a consecutive 91-calendar day period as defined by the Compensation Committee of the Board of Directors. In May 1998, the Compensation Committee of the Board of Directors reduced the target per share market price at which the Company's Common Stock had to trade in consideration of the dilutive effect of the increase in outstanding shares from the date of the grant. The performance period has a range of 6 years beginning August 23, 1996, the date of the closing of the 1996 Rights Offering. Due to the resignation of the CEO on December 5, 2000 and the absence of an exercise of the outstanding options for 12 months thereafter, the options were forfeited on December 5, 2001. No options were outstanding and exercisable under the Closing Price Plan at December 29, 2001. The CEO Six Year Stock Option Plan -- Pursuant to NAR's Six Year Stock Option Plan (the "Six Year Plan"), an option to purchase an aggregate of 250,000 shares of Common Stock was granted to the CEO by NAR Group Limited ("NAR") in 1996. The option is subject to anti-dilution provisions and due to the Company's 1996 Rights Offering was adjusted to 377,500 option shares. The options expire 6 years from the date of grant and vest after one year. Due to the resignation of the CEO on December 5, 2000 and the absence of an exercise of the outstanding options for 12 months thereafter, the options were forfeited on December 5, 2001. No options were outstanding and exercisable under the Six Year Plan at December 29, 2001. The CEO Seven Year Stock Option Plan -- Pursuant to NAR's Seven Year Stock Option Plan (the "Seven Year Plan"), an option to purchase an aggregate of 250,000 shares of Common Stock was granted to the CEO by NAR in 1996. The option is subject to anti-dilution provisions and due to the Company's 1996 Rights Offering was adjusted to 377,500 option shares. The options expire 7 years from the date of grant and vest after two years. Due to the resignation of the CEO on December 5, 2000 and the absence of an exercise of the outstanding options for 12 months thereafter, the options were forfeited on December 5, 2001. No options were outstanding and exercisable under the Seven Year Plan at December 29, 2001. The CEO Eight Year Stock Option Plan -- Pursuant to NAR's Eight Year Stock Option Plan (the "Eight Year Plan"), an option to purchase an aggregate of 250,000 shares of Common Stock was granted to the CEO by NAR in 1996. The option is subject to anti-dilution provisions and due to the Company's 1996 Rights Offering was adjusted to 377,500 option shares. The options expire 8 years from the date of grant and vest after three years. Due to the resignation of the CEO on December 5, 2000 and the absence of an exercise of the outstanding options for 12 months thereafter, the options were forfeited on December 5, 2001. No options were outstanding and exercisable under the Eight Year Plan at December 29, 2001. The CEO Nine Year Stock Option Plan -- Pursuant to NAR's Nine Year Stock Option Plan (the "Nine Year Plan"), an option to purchase an aggregate of 250,000 shares of common stock was granted to the CEO by NAR in 1996. The option was subject to anti-dilution provisions and due to the Company's 1996 Rights 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Offering was adjusted to 377,500 option shares. The options expire 9 years from the date of grant and vest after four years. Due to the resignation of the CEO on December 5, 2000 and the absence of an exercise of the outstanding options for 12 months thereafter, the options were forfeited on December 5, 2001. No options were outstanding and exercisable under the Nine Year Plan at December 29, 2001. For the combined CEO Stock Option Plans, options outstanding, granted and the weighted average exercise prices are as follows: CEO STOCK OPTION PLANS
2001 2000 1999 ---------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- -------- --------- -------- --------- -------- Options outstanding, beginning of period............. 7,530,000 $1.16 7,530,000 $1.16 7,530,000 $1.16 Forfeited............ (7,530,000) -- -- -- -- -- ---------- ----- --------- ----- --------- ----- Options outstanding, end of period...... -- -- 7,530,000 $1.16 7,530,000 $1.16 ========== ===== ========= ===== ========= ===== Options exercisable, end of period...... -- -- 7,040,000 $1.16 4,147,500 $1.16 ========== ===== ========= ===== ========= =====
The new Executive Employment Agreement entered into by the Company on March 6, 2000 provided Rakesh K. Kaul with the option to purchase 6% of the common stock of erizon, Inc. at the estimated fair market value on the date of the grant which option was to vest in equal parts over a four year period and to expire ten years from the date of grant. The Company recorded no compensation expense for the year ended December 29, 2001 and $.8 million during the year ended December 30, 2000 related to this option grant. The fair value of options at the date of grant was estimated to be $62,000 per share based on the following assumptions: risk-free interest rate of 6.0%, expected life of 4 years, expected volatility of 54.8% and no expected dividends. As described more fully in Note 17, the Company is currently involved in litigation with Rakesh K. Kaul, the Company's former President and Chief Executive Officer, regarding, among other issues, the amount of cash and benefits to which Mr. Kaul may have been entitled, if any, as a result of his resignation on December 5, 2000. Since the litigation is only in the discovery phase, it is not certain at this time what the impact of his resignation will have on all of the option plans described above. OTHER STOCK AWARDS During 1997, the Company granted, and the Compensation Committee of the Board of Directors approved, non-qualified options to certain employees for the purchase of an aggregate of 1,000,000 shares of the Company's Common Stock. The options vested over three years and are due to expire in 2003. The options have an exercise price of $0.75 and a remaining contractual life of 1.2 years. The fair value of the options at the date of grant was estimated to be $0.52 based on the following weighted average assumptions: risk free interest rate of 6.48%, expected life of 4 years, expected volatility of 59.40% and no expected dividends. In June 2001, 809,000 options that had not been exercised were forfeited by certain employees. As of December 29, 2001, there were no options outstanding and exercisable. Meridian Options -- During December 2000, the Company granted, and the Company's Board of Directors approved, options ("2000 Meridian Options") for the purchase of an aggregate of 4,000,000 shares of Common Stock with an exercise price of $0.25 per share. These options have been allocated as follows: Thomas C. Shull, 2,700,000 shares; Paul Jen, 500,000 shares; John F. Shull, 500,000 shares; Evan M. Dudik, 200,000 shares; and Peter Schweinfurth, 100,000 shares. In December 2001, a new Services Agreement (the "Current Services Agreement") was entered into by the Company by and among Meridian, Mr. Shull, and the Company. Under the Current Services Agreement, the 2000 Meridian Options granted terminate in the 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) event that the Services Agreement is terminated (i) the tenth day after written notice by the Company to Meridian and Mr. Shull of material breach of the Services Agreement by Meridian or Mr. Shull or willful misconduct by Meridian or Mr. Shull, or (ii) upon the death or permanent disability of Mr. Shull. The 2000 Meridian Options vest and become exercisable in the event of the following terminations of the Services Agreement: (i) the tenth day after written notice by Meridian and Mr. Shull to the Company that the Company is in material breach of the Services Agreement; (ii) December 4, 2001 for all 2000 Meridian Options, except one-half of Mr. Shull's 2000 Meridian Options which vest and become exercisable on June 30, 2002; (iii) the first day after the acquisition of the Company (whether by merger or the acquisition of all of its outstanding capital stock) or the tenth day after the sale of 50% or more of the market value of the Company's assets; and (iv) on the day the Company terminates the engagement of Meridian and Mr. Shull when there has been no willful misconduct or material breach of the Agreement by either Meridian or Mr. Shull. When the 2000 Meridian Options vest and become exercisable upon a termination of the Services Agreement, they shall remain exercisable until their termination on the second anniversary of the termination of the Services Agreement (or their earlier exercise). In the event of a vesting resulting from a liquidation termination, such vesting shall take place sufficiently in advance of such termination to permit such optionee to take all steps reasonably necessary to exercise his options and to deal with the common shares purchased under the options so that those common shares may be treated in the same manner as the common shares of other shareholders. The fair value of the 2000 Meridian Options was estimated to be $0.07 cents per share at the date of grant based on the following assumptions: risk-free interest rate of 6.0%, expected life of 1.5 years, expected volatility of 54.0% and no expected dividends. Under the Current Services Agreement, the Company granted, and the Company's Board of Directors approved, options ("2001 Options") for the purchase of an additional 1,000,000 shares of Common Stock with an exercise price of $0.30. These options have been allocated as follows: Thomas C. Shull, 500,000 shares; Edward M. Lambert, 300,000 shares; Paul Jen, 100,000 shares; and John F. Shull, 100,000 shares. Under the Current Services Agreement, the 2001 Options granted terminate in the event that the Services Agreement is terminated (i) the tenth day after written notice by the Company to Meridian and Mr. Shull of material breach of the Services Agreement by Meridian or Mr. Shull or willful misconduct by Meridian or Mr. Shull, or (ii) upon the death or permanent disability of Mr. Shull. The 2001 Options vest and become exercisable in the event of the following terminations of the Services Agreement: (i) the tenth day after written notice by Meridian and Mr. Shull to the Company that the Company is in material breach of the Services Agreement; (ii) March 31, 2003; (iii) the first day after the acquisition of the Company (whether by merger or the acquisition of all of its outstanding capital stock) or the tenth day after the sale of 50% or more of the market value of the Company's assets; and (iv) on the day the Company terminates the engagement of Meridian and Mr. Shull when there has been no willful misconduct or material breach of the Current Services Agreement by either Meridian or Mr. Shull. When the 2001 Options vest and become exercisable upon a termination of the Services Agreement, they shall remain exercisable until their termination on the second anniversary of the termination of the Services Agreement (or their earlier exercise). In the event of a vesting resulting from a liquidation termination, such vesting shall take place sufficiently in advance of such termination to permit such optionee to take all steps reasonably necessary to exercise his options and to deal with the common shares purchased under the options so that those common shares may be treated in the same manner as the common shares of other shareholders. The fair value of the 2001 Options was estimated to be $0.16 cents per share at the date of grant based on the following assumptions: risk-free interest rate of 2.82%, expected life of 1.25 years, expected volatility of 129.73% and no expected dividends. The following table summarizes information about stock options outstanding and exercisable at December 29, 2001 under the Meridian Option Plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ ------------------------- WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE AT CONTRACTUAL EXERCISE AT EXERCISE RANGE OF EXERCISE PRICES 12/29/01 LIFE PRICE 12/29/01 PRICE - ------------------------ ----------- ----------- -------- ----------- -------- $0.25.................. 4,000,000 2.00 $0.25 2,650,000 $0.25 $0.30.................. 1,000,000 4.25 $0.30 -- --
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. EMPLOYEE BENEFIT PLANS The Company maintains several defined contribution (401K) plans that collectively cover all employees of the Company and provide employees with the option of investing in the Company's stock. The Company matches a percentage of employee contributions to the plans up to $10,000. Matching contributions for all plans were $.6 million, $.8 million and $.7 million for fiscal 2001, 2000 and 1999, respectively. 14. INCOME TAXES At December 29, 2001, the Company had net operating loss carry forwards ("NOL") totaling $348.6 million which expire as follows: 2003 -- $14.6 million, 2004 -- $14.3 million, 2005 -- $20.6 million, 2006 -- $46.9 million, 2007 -- $27.7 million, 2010 -- $24.6 million, 2011 -- $64.9 million, 2012 -- $30.0 million, 2018 -- $24.4 million, 2019 -- $19.5 million, 2020 -- $60.2 million and 2021 -- $0.9 million. The Company's available NOL for tax purposes consist of $74.1 million of NOL subject to a $4.0 million annual limitation under Section 382 of the Internal Revenue Code of 1986 and $274.5 million of NOL not subject to a limitation. The unused portion of the $4.0 million annual limitation for any year may be carried forward to succeeding years to increase the annual limitation for those succeeding years. SFAS No. 109, "Accounting for Income Taxes," requires that the future tax benefit of such NOL be recorded as an asset to the extent that management assesses the utilization of such NOL to be "more likely than not." Despite incurring an additional NOL of $0.9 million in 2001, management believes that the Company will be able to utilize up to $43.0 million of NOL based upon the Company's assessment of numerous factors, including its future operating plans. For the years ended December 29, 2001 and December 30, 2000, the Company maintained its deferred tax asset of $15.0 million (net of a valuation allowance of $121.6 million in 2001 and $123.9 million in 2000). Management believes that the $15.0 million net deferred tax asset still represents a reasonable estimate of the future utilization of the NOL and the reversal of timing items. Management will continue to routinely evaluate the likelihood of future profits and the necessity of future adjustments to the deferred tax asset valuation allowance. Realization of the future tax benefits is dependent on the Company's ability to generate taxable income within the carry forward period and the periods in which net temporary differences reverse. Future levels of operating income and taxable income are dependent upon general economic conditions, competitive pressures on sales and margins, postal and other delivery rates, and other factors beyond the Company's control. Accordingly, no assurance can be given that sufficient taxable income will be generated for utilization of NOL and reversals of temporary differences. The Company's Federal income tax provision was zero for fiscal 2001, 2000 and 1999. The Company's provision for state income taxes was $0.1 million in 2001, $0.2 million in 2000 and $0.5 million in 1999. A reconciliation of the Company's net loss for financial statement purposes to taxable loss for the years ended December 29, 2001, December 30, 2000 and December 25, 1999 is as follows (in thousands):
YEAR ENDING ----------------------------------- 2001 2000 1999 ------- -------- -------- (Loss) before income taxes.............................. $(5,725) $(80,635) $(15,784) Differences between income before taxes for financial statement purposes and taxable income: State income taxes...................................... (120) (165) (530) Permanent differences................................... 2,176 7,484 1,313 Net change in temporary differences..................... 2,742 13,091 (4,516) ------- -------- -------- Taxable (loss).......................................... $ (927) $(60,225) $(19,517) ------- -------- --------
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) THE COMPONENTS OF THE NET DEFERRED TAX ASSET AT DECEMBER 29, 2001 ARE AS FOLLOWS (IN MILLIONS):
NON- CURRENT CURRENT TOTAL ------- ------- ------ Federal tax NOL and business tax credit carry forwards...... $ -- $122.1 $122.1 Allowance for doubtful accounts............................. 0.7 -- 0.7 Inventories................................................. 0.3 -- 0.3 Prepaid catalog costs....................................... (2.5) -- (2.5) Property and equipment...................................... -- 6.3 6.3 Excess of net assets of acquired business................... -- (1.3) (1.3) Mailing lists............................................... -- 1.3 1.3 Accrued liabilities......................................... 2.8 -- 2.8 Customer prepayments and credits............................ 1.3 -- 1.3 Deferred gain on sale of Improvements catalog............... 0.9 -- 0.9 Deferred credits............................................ -- 0.5 0.5 Tax basis in net assets of discontinued operations in excess of financial statement amount............................. 4.1 -- 4.1 Other....................................................... -- 0.1 0.1 ----- ------ ------ Deferred tax asset.......................................... 7.6 129.0 136.6 Valuation allowance......................................... 4.3 117.3 121.6 ----- ------ ------ Deferred tax asset, net..................................... $ 3.3 $ 11.7 $ 15.0 ===== ====== ======
The Company has established a valuation allowance for a portion of the deferred tax asset due to the limitation on the utilization of the NOL and the Company's estimate of the future utilization of the NOL. The Internal Revenue Service ("IRS") has not examined the Company's tax returns for years subsequent to 1984. The IRS, upon examination of such returns, might challenge the availability of the NOL. The Company believes, however, that the IRS challenges that would limit the utilization of the NOL will not have a material adverse effect on the Company's financial position. Total tax expense for each of the three fiscal years presented differs from the amount computed by applying the Federal statutory tax rate due to the following:
2001 2000 1999 PERCENT PERCENT PERCENT OF PRE-TAX OF PRE-TAX OF PRE-TAX LOSS LOSS LOSS ---------- ---------- ---------- Tax (benefit) at Federal statutory rate..................... (35.0)% (35.0)% (35.0)% State and local taxes....................................... 1.4 0.1 2.2 Net increase in (reversal of) temporary differences: Depreciation and amortization.......................... 9.5 0.4 (3.2) Deferred compensation.................................. (13.2) 0.3 9.1 Restructuring reserves................................. 38.6 7.1 (5.8) Customer allowance and return reserves................. (5.7) 0.1 0.7 Inventory.............................................. (12.6) 0.9 (7.2) Prepaid catalog costs.................................. 25.0 (2.1) (1.5) Allowance for doubtful accounts........................ (21.2) 0.7 (0.6) Gain (loss) on asset disposal.......................... 4.2 (1.5) 1.7 Insurance.............................................. (7.5) -- -- Other.................................................. (0.3) (0.2) (3.2) Tax NOL for which no benefit could be recognized............ 5.7 26.1 43.3 Permanent differences....................................... 13.3 3.2 2.9 ----- ----- ----- 2.2% 0.1% 3.4% ===== ===== =====
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. LEASES Certain leases to which the Company is a party provide for payment of real estate taxes and other expenses. Most leases are operating leases and include various renewal options with specified minimum rentals. Rental expense for operating leases related to continuing operations, net of sublease income, was as follows (in thousands):
YEAR ENDING ------------------------------- 2001 2000 1999 ------- ------- ------- Minimum rentals............................................. $11,040 $13,810 $10,168 Sublease income............................................. (22) (13) -- ------- ------- ------- Net minimum rentals......................................... $11,018 $13,797 $10,168 ======= ======= =======
Future minimum lease payments under non-cancelable operating leases (net of sublease income) and capital leases relating to continuing operations that have initial or remaining terms in excess of one year, together with the present value of the net minimum lease payments as of December 29, 2001, are as follows (in thousands):
OPERATING CAPITAL TOTAL YEAR ENDING LEASES LEASES LEASES - ----------- ----------- --------- ----------- 2002............................................... $ 8,520 $106 $ 8,626 2003............................................... 5,536 5 5,541 2004............................................... 3,395 5 3,400 2005............................................... 2,303 -- 2,303 2006............................................... 1,763 -- 1,763 Thereafter......................................... 5,282 -- 5,282 ------- ---- ------- Total minimum lease payments............... $26,799 $116 $26,915 ======= ==== ======= Less amount representing interest (a).............. (5) ---- Present value of minimum lease payments (b)........ $111 ====
- --------------- (a) Amount necessary to reduce net minimum lease payments to present value calculated at the Company's incremental borrowing rate at the inception of the leases. (b) Reflected in the balance sheet as current and non-current capital lease obligations of $102 and $9 December 29, 2001 and $126 and $66 at December 30, 2000, respectively. The Company has established reserves for certain future minimum lease payments under noncancelable operating leases due to restructuring of business operations related to such leases. The future commitments under such leases, net of related sublease income under noncancelable subleases, are as follows (in thousands):
MINIMUM NET LEASE SUBLEASE LEASE YEAR ENDING COMMITMENTS INCOME COMMITMENTS - ----------- ------------- ---------- ------------- 2002.............................................. $ 5,143 $(1,184) $ 3,959 2003.............................................. 5,017 (1,056) 3,961 2004.............................................. 4,711 (808) 3,903 2005.............................................. 3,331 (517) 2,814 2006.............................................. 2,604 (293) 2,311 Thereafter........................................ 8,853 (379) 8,474 ------- ------- ------- Total minimum lease payments.............. $29,659 $(4,237) $25,422 ======= ======= =======
53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For leases with escalating rentals, the Company records expense under the straight-line method, resulting in the accrual of a deferred rent liability. This liability will be offset in such future periods as actual lease payments exceed the straight-line rent expense. The deferred rent liability included in other non-current liabilities was as follows (in thousands):
2001 2000 1999 ------ ------ ------ Deferred rent.............................. $2,290 $2,340 $2,124
Noncancelable future lease payments in excess of straight-line rent expense will result in the net reduction of the deferred rent liability as follows (in thousands):
REDUCTION IN YEAR ENDING DEFERRED RENT - ----------- ------------- 2002...................................................... $ 118 2003...................................................... 182 2004...................................................... 408 2005...................................................... 380 2006...................................................... 282 Thereafter................................................ 920 ------ Total deferred rent............................... $2,290 ======
The future minimum lease payments under non-cancelable leases that remain from the Company's discontinued restaurant operations as of December 29, 2001 are as follows:
MINIMUM LEASE SUBLEASE YEAR ENDING PAYMENTS INCOME - ----------- -------- -------- 2002.................................................. $ 509 $ (455) 2003.................................................. 431 (383) 2004.................................................. 380 (338) 2005.................................................. 285 (263) Thereafter............................................ 0 (29) ------ ------- Total minimum lease payments.................. $1,605 $(1,468) ====== =======
16. CHANGES IN MANAGEMENT AND EMPLOYMENT AGREEMENTS Resignation of Rakesh K. Kaul. On December 5, 2000, Rakesh K. Kaul resigned as President and Chief Executive Officer of the Company, and resigned from the Board of Directors of the Company. Appointment of Thomas C. Shull; December 2000 Services Agreement. On December 5, 2000, Thomas C. Shull was named President and Chief Executive Officer and was elected to the Board of Directors of the Company. Effective on that date, Mr. Shull, Meridian Ventures, LLC, a limited liability company controlled by Mr. Shull ("Meridian"), and the Company entered into a Services Agreement (the "December 2000 Services Agreement"). The December 2000 Services Agreement was replaced by a subsequent services agreement, dated as of August 1, 2001, among Mr. Shull, Meridian and the Company, and a Services Agreement dated as of December 14, 2001 among Mr. Shull, Meridian, and the Company, as described below. Under the December 2000 Services Agreement, Meridian provided for the benefit of the Company the services of Mr. Shull and the services of two (or more, at Meridian's discretion) additional consultants. The term of the December 2000 Services Agreement, and the term for the services of Mr. Shull, began on December 5, 2000 and would have terminated on December 4, 2001 (the "December 2000 Agreement Term"), while the term for the services of the consultants would terminate on June 4, 2001. Under the December 2000 Services Agreement, Meridian was to receive from the Company $75,000 per month for the services of Mr. Shull and, during the first six months of the December 2000 Agreement Term, an additional $75,000 per month for the services of the consultants (collectively, the "December 2000 Base 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Fees"). The Company also was required to pay Meridian $30,000 per month during the first six months of services and $15,000 per month during the remaining six months of services (collectively, the "December 2000 Flat Fees"). The Company also reimbursed Mr. Shull and the consultants for reasonable out-of-pocket expenses incurred on behalf of the Company. Pursuant to the December 2000 Services Agreement, the Company granted Mr. Shull and the consultants stock options (the "Meridian Options") for an aggregate four million (4,000,000) shares of the Company's Common Stock (See Note 12). The December 2000 Services Agreement was replaced by the August 2001 Services Agreement, and a Services Agreement dated as of December 14, 2001 among Mr. Shull, Meridian, and the Company, as described below. Resignation of Certain Officers. During the quarter ended March 31, 2001, Richard B. Hoffman resigned as President and Chief Operating Officer of Hanover Brands, Inc., Ralph J. Bulle resigned as Senior Vice President, Human Resources of the Company, Curt B. Johnson resigned as Senior Vice President and General Counsel and Secretary of the Company and Michael G. Lutz resigned as Executive Vice President and Chief Operating Officer of the Company. Appointment of Certain Officers. On April 25, 2001, Brian C. Harriss, the Senior Vice President and Chief Financial Officer of the Company, was elevated to the positions of Executive Vice President and Chief Financial Officer of the Company; Michael D. Contino, the Senior Vice President and Chief Information Officer of the Company, was elevated to the positions of Executive Vice President and Chief Operating Officer of the Company; Charles F. Messina, the Senior Vice President, Human Resources of the Company, was elevated to the positions of Executive Vice President and Chief Administrative Officer and Secretary of the Company; Jeffrey Potts, the Senior Vice President, D-Commerce and New Ventures of the Company, was elevated to the position of President of Home Brands of the Company; and Charles Blue was elected to the position of Senior Vice President of Finance of the Company. Hanover Direct, Inc. Key Executive Eighteen-Month Compensation Continuation Plan. Effective April 27, 2001, the Company terminated the Hanover Direct, Inc. Key Executive Thirty-Six Month Compensation Continuation Plan and the Hanover Direct, Inc. Key Executive Twenty-Four Month Compensation Plan. Effective April 27, 2001, the Company established the Hanover Direct, Inc. Key Executive Eighteen Month Compensation Continuation Plan (the "Executive Plan") for its Chief Executive Officer, corporate executive vice presidents, corporate senior vice presidents, strategic unit presidents, and other employees selected by its Chief Executive Officer. The purpose of the Executive 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. For purposes of the Executive Plan, a "Change of Control" will occur: (i) when any person becomes, through an acquisition, the beneficial owner of shares of the Company having at least 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 of Control: (a) if a person owns less than 50% of the voting power of the Company and that person's ownership increases above 50% solely by virtue of an acquisition of stock by the Company, then no Change of Control will have 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 Executive Plan owned at least 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 50% or more of the market value of the Company's assets (for this purpose, 50% is deemed to be $107.6 million; or (III) a complete liquidation or dissolution of the Company; (b) notwithstanding (ii)(a), shareholder approval of either of the following types of Transactions will not give rise to a Change of Control: (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) when, within any 24 month period, persons who were directors of the Company (each, a "Director") immediately before the beginning of such period (the "Incumbent Directors") cease (for any reason other than death or disability) to constitute at least a 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) majority of the Board of Directors or the board of directors of any successor to the Company (For purposes of (iii), any Director who was not a Director as of the effective date of the Executive Plan will 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 (iii), and any persons (and their successors from time to time) who are designated by a holder of 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 Executive 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); or (iv) when the Company sells, assigns or transfers more than 50% of its interest in, or the assets of, one or more of its subsidiaries (each, a "Sold Subsidiary" and, collectively, the "Sold Subsidiaries"); provided, however, that such a sale, assignment or transfer will constitute a Change of Control only for: (a) the Executive Plan participants who are employees of that Sold Subsidiary; and (b) the Executive Plan participants who are employees of a direct or indirect parent company of one or more Sold Subsidiaries, and then only if: (I) the gross assets of such parent company's Sold Subsidiaries constitute more than 50% of the gross assets of such parent company (calculated on a consolidated basis with the direct and indirect subsidiaries of such parent company and with reference to the most recent balance sheets of the Sold Subsidiaries and the parent company); (II) the property, plant and equipment of such parent company's Sold Subsidiaries constitute more than 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 and 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 such parent company's Sold Subsidiaries, to (y) the market capitalization of such parent company, is greater than 0.50. (For purposes of (iv), a Transaction shall be deemed to involve the sale of more than 50% of a company's assets if: (a) the gross assets being sold constitute more than 50% of the gross assets of the Company as stated on the most recent balance sheet of the Company; (b) the property, plant and equipment being sold constitute more than 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 (iv), no Change of Control will be deemed to have occurred if, immediately following a sale, assignment or transfer by the Company of more than 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.) Under the Executive Plan, an Executive Plan participant shall be entitled to Change of Control Benefits under the Executive Plan solely if there occurs a Change of Control and thereafter the Company terminates his/her employment other than For Cause (as defined in the Executive Plan) or the participant voluntarily terminates his/her employment with the Company For Good Reason (as defined in the Executive Plan), in either case, solely during the 2-year period immediately following the Change of Control. A participant will not be entitled to Change of Control Benefits under the Executive Plan if: (i) he/she voluntarily terminates his/her employment with the Company or has his/her employment with the Company terminated by the Company, in either case, prior to a Change of Control, (ii) he/she voluntarily terminates employment with the Company following a Change of Control but other than For Good Reason, (iii) he/she is terminated by the Company following a Change of Control For Cause, (iv) has his/her employment with the Company terminated solely on account of his/her death, (v) he/she voluntarily or involuntarily terminates his/her employment with the Company following a Change of Control as a result of his/her Disability (as defined in the Executive Plan), or (vi) his/her employment with the Company is terminated by the Company upon or following a Change of Control but where he/she receives an offer of comparable employment, regardless of whether the participant accepts the offer of comparable employment. The Change of Control Benefits under the Executive Plan are as follows: (i) an amount equal to 18 months of the participant's annualized base salary; (ii) an amount equal to the product of 18 multiplied by 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the applicable monthly 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 in which the participant was participating and with the coverage elected by the participant, in each case immediately prior to the time of the participant's termination of employment with the Company; (iii) an amount equal to 18 months of the participant's car allowance then in effect as of the date of the termination of the participant's employment with the Company; and (iv) an amount equal to the cost of 12 months of executive-level outplacement services at a major outplacement services firm. Transaction Bonus Letters. During May 2001, each of Charles F. Messina, Thomas C. Shull, Jeffrey Potts, Brian C. Harriss and Michael D. Contino (each, a "Participant") entered into a letter agreement with the Company (a "Transaction Bonus Letter") under which the Participant would be paid a bonus on the occurrence of certain transactions involving the sale of certain of the Company's businesses. In addition, Mr. Shull is a party to a "Letter Agreement" with the Company, dated April 30, 2001, pursuant to which, following the termination of the December 2000 Services Agreement, in the event he is terminated without cause during any period of his continued employment as the Chief Executive Officer of the Company, he shall be paid one year of his annual base salary (the "Shull Termination Payment"). Effective June 1, 2001, the Company amended the Executive Plan to provide that, notwithstanding anything to the contrary contained in the Executive Plan, Section 10.2 of the Executive Plan shall not be effective with respect to the payment of (i) a Participant's "Transaction Bonuses," and/or (ii) the Shull Termination Payment. The payment of any such "Transaction Bonus" to any of the Participants, and/or the payment of the Shull Termination Payment, shall be paid in addition to, and not in lieu of, any Change of Control Benefit payable to any Participant or Mr. Shull pursuant to the terms of the Executive Plan. In conjunction with his resignation as Executive Vice President and Chief Financial Officer, Mr. Harris has released any claims which he may have against the Company under his Transaction Bonus Letter. The remaining Transaction Bonus Letters, other than the Transaction Bonus Letter with Mr. Potts, remain in effect. Letter Agreement with Mr. Shull and Meridian. On April 30, 2001, Mr. Shull, Meridian and the Company entered into a letter agreement (the "Letter Agreement") specifying Mr. Shull's rights under the Executive Plan, which is discussed above. Under the Letter Agreement, Mr. Shull and Meridian agreed that, so long as the Executive Plan is in effect and Mr. Shull is a Participant thereunder, Meridian and Mr. Shull will accept the Change in Control Benefits provided for in the Executive Plan in lieu of the compensation contemplated by the December 2000 Services Agreement between them (which benefits amounts will not be offset against the December 2000 flat fee provided for in the December 2000 Services Agreement and shall be payable at such times and in such amounts as provided in the Executive Plan rather than in a lump sum payable within five business days after the termination date of the December 2000 Services Agreement as contemplated by the December 2000 Services Agreement). For purposes of the change in control benefits under the Executive Plan and the Letter Agreement, Mr. Shull's annualized base salary is $600,000. In addition to the benefits provided by the December 2000 Services Agreement, Mr. Shull and those persons named in the December 2000 Services Agreement shall also be entitled to the optional cash out of stock options as provided in the Executive Plan. Under the Letter Agreement, Mr. Shull is also entitled to payment of one year annual base salary in the event he is terminated without cause during any period of his continued employment as the Chief Executive Officer of the Company following the termination of the December 2000 Services Agreement. The participation and benefits to which Mr. Shull is entitled under the Executive Plan shall also survive the termination of the December 2000 Services Agreement pursuant to the terms thereof in the event that Mr. Shull is still employed as the Chief Executive Officer of the Company and is a Participant under the Executive Plan. Should the Executive Plan no longer be in effect or Mr. Shull no longer be a Participant thereunder, Meridian and Mr. Shull shall continue to be entitled to the compensation contemplated by the December 2000 Services Agreement. Hanover Direct, Inc. Directors Change of Control Plan. Effective May 3, 2001, the Company's Board of Directors established the Hanover Direct, Inc. Directors Change of Control Plan (the "Directors Plan") for all Directors of the Company except for (i) any Director who is also an employee of the Company for purposes of the Federal Insurance Contributions Act; or (ii) 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 a Director. For purposes of the Directors Plan, a "Change of Control" will occur upon 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the occurrence of any of the events specified in item (i), (ii) or (iii) of the definition of "Change in Control" under the Executive Plan, as discussed above. A participant in the Directors Plan shall be entitled to receive a Change of Control Payment under the Directors Plan if there occurs a Change of Control and he/she is a Director on the effective date of such Change of Control. A Change of Control Payment under the Directors Plan shall be an amount equal to the greater of (i) $40,000 or (ii) 150% of the sum of the annual retainer fee, meeting fees and per diem fees paid to a Director for his/her service on the Board of Directors of the Company during the 12-month period immediately preceding the effective date of the Change of Control. August 2001 Services Agreement. As of August 1, 2001, Mr. Shull, Meridian and the Company entered into a Services Agreement (the "August 2001 Services Agreement"), which replaced the December 2000 Services Agreement which was to expire in December 2001. The August 2001 Services Agreement was replaced by a subsequent services agreement, dated as of December 14, 2001, among Mr. Shull, Meridian and the Company, as described below. Under the August 2001 Services Agreement, Meridian provided for the benefit of the Company the services of Mr. Shull and the services of up to two additional consultants (the "Consultants"). The term of the August 2001 Services Agreement, and the term for the services of Mr. Shull and the Consultants, began on August 1, 2001 and would have terminated on June 30, 2002 (the "August 2001 Agreement Term"). Under the August 2001 Services Agreement, Meridian was to receive from the Company $75,000 per month for the services of Mr. Shull and up to an additional $60,000 per month for the services of the Consultants (collectively, the "August 2001 Base Fees"). The Company also was required to pay Meridian up to $21,000 per month during the August 2001 Agreement Term (the "August 2001 Flat Fee"). The Company also reimbursed Mr. Shull and the Consultants for reasonable out-of-pocket expenses incurred on behalf of the Company. The August 2001 Services Agreement has been replaced by the December 2001 Services Agreement, as described below. Resignation of Mr. Potts. During the quarter ended September 30, 2001, Jeffrey Potts resigned as President of Home Brands of the Company. December 2001 Services Agreement. As of December 14, 2001, Mr. Shull, Meridian and the Company entered into a Services Agreement (the "December 2001 Services Agreement"), which replaced the August 2001 Services Agreement which was to expire in June 30, 2002. Under the December 2001 Services Agreement, Meridian will provide for the benefit of the Company the services of Mr. Shull. The term of the December 2001 Services Agreement, and the term for the services of Mr. Shull began on December 14, 2001 and will terminate on March 31, 2003 (the "December 2001 Agreement Term"). On or prior to February 1, 2003, the Company may extend the December 2001 Agreement Term on a day to day basis upon written notice to Mr. Shull, and thereafter, either Mr. Shull or the Company may terminate the December 2001 Services Agreement and the December 2001 Agreement Term with 60 days notice to the other. Under the December 2001 Services Agreement, Meridian is to receive from the Company $75,000 per month for the services of Mr. Shull (the "December 2001 Base Fee"). The Company also is required to pay Meridian $15,000 per month during the December 2001 Agreement Term (the "December 2001 Flat Fee"). The Company also reimburses Mr. Shull for reasonable out-of-pocket expenses incurred on behalf of the Company. Under the December 2001 Services Agreement, the Company shall make a lump sum cash payment of $450,000 to Meridian on June 30, 2002, provided the December 2001 Services Agreement is then in effect. This payment will be made by the end of 2002. Under the December 2001 Services Agreement, the Company guaranteed Mr. Shull a target bonus for the Company's 2001 fiscal year pursuant to the Company's 2001 Management Incentive Plan equal to $300,000, which was paid during the first quarter of 2002. In addition, Mr. Shull has earned a bonus for the Company's 2001 fiscal year pursuant to the Company's 2001 Management Incentive Plan equal to $600,000 (including the above-described target bonus). This payment will be made by the end of 2002. Mr. Shull shall 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) receive the same bonus amount for fiscal 2002 under the Company's 2002 Management Incentive Plan as all other Class 8 participants (as defined in such Plan) receive under such Plan for such period, subject to all of the terms and conditions applicable generally to Class 8 participants thereunder. The Company also acknowledged in the December 2001 Services Agreement that it has extended the benefits of its Executive Plan, and its transaction bonus program, to Mr. Shull. Under the December 2001 Services Agreement, upon the closing of any transaction which constitutes a Change of Control (as defined in the December 2001 Services Agreement), provided that Mr. Shull is then employed by the Company, the Company shall make a lump sum cash payment to Meridian on the date of such closing of $900,000 pursuant to the Executive Plan, $300,000 pursuant to the Company's transaction bonus program and at least $300,000 in target bonus (plus any amount of maximum bonus) payable pursuant to the Company's 2001 Management Incentive Plan. Any such lump sum payment would be in lieu of (i) any cash payment under the December 2001 Services Agreement as a result of a termination of the December 2001 Services Agreement upon the first day after the acquisition of the Company (whether by merger or the acquisition of all of its outstanding capital stock) or the tenth day after the sale of 50% or more of the market value of the Company's assets (for this purpose under the December 2001 Services Agreement, such 50% amount shall be deemed to be $107.6 million), and (ii) the aggregate amount of December 2001 Base Fees and December 2001 Flat Fees to which Meridian would have otherwise been entitled through the end of the December 2001 Agreement Term. Pursuant to the December 2001 Services Agreement, the Company has granted to Mr. Shull and the Consultants options for an aggregate of 1,000,000 shares of the Company's Common Stock with an exercise price equal to the closing price on December 14, 2001 (the "2001 Options") (See Note 12). Under the December 2001 Services Agreement, additional amounts are payable to Meridian by the Company under certain circumstances upon the termination of the December 2001 Services Agreement. If the termination is on account of the expiration of the December 2001 Agreement Term, Meridian shall be entitled to receive a lump sum payment equal to $450,000 in severance pay and at least $300,000 in target or maximum bonus pursuant to the Company's 2001 Management Incentive Plan or 2002 Management Incentive Plan, as applicable. If the termination is on account of the Company's material breach of the December 2001 Services Agreement or the Company's termination of the engagement of Meridian and Mr. Shull where there has been no Willful Misconduct (as defined in the December 2001 Services Agreement) or material breach thereof by either Mr. Shull or Meridian, Meridian shall be entitled to receive (i) a lump sum payment equal to the aggregate amount of December 2001 Base Fees and December 2001 Flat Fees to which it would have otherwise been entitled through the end of the December 2001 Agreement Term, plus (ii) $600,000 in severance pay and at least $300,000 in target or maximum bonus pursuant to the Company's 2001 or 2002 Management Incentive Plan, as applicable. If the termination is on account of the acquisition of the Company (whether by merger or the acquisition of all of its outstanding capital stock) or the sale of 50% or more of the market value of the Company's assets (for this purpose under the December 2001 Services Agreement, such 50% amount shall be deemed to be $107.6 million) and the amount realized in the transaction is less than $0.50 per common share (or the equivalent of $0.50 per common share), and if and only if the Company's Executive Plan shall not then be in effect, Meridian shall be entitled to receive a lump sum payment equal to the aggregate amount of December 2001 Base Fees and December 2001 Flat Fees to which it would have otherwise been entitled through the end of the December 2001 Agreement Term. If the termination is on account of the acquisition of the Company (whether by merger or the acquisition of all of its outstanding capital stock) or the sale of 50% or more of the market value of the Company's assets (for this purpose under the December 2001 Services Agreement, such 50% amount shall be deemed to be $107.6 million) and the amount realized in the transaction equals or exceeds $0.50 per common share (or the equivalent of $0.50 per common share), and if and only if the Company's Executive Plan shall not then be in effect, Meridian shall be entitled to receive a lump sum payment equal to the greater of the aggregate amount of December 2001 Base Fees and December 2001 Flat Fees to which it would have otherwise been entitled through the end of the December 2001 Agreement Term or $1,000,000. If the termination is on account of an acquisition or sale of the Company (whether by merger or the acquisition of all of its outstanding capital stock) or the sale of 50% or more of the market value of the Company's assets (for this purpose under the December 2001 Services Agreement, such 50% amount shall be deemed to be $107.6 million) and the 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's Executive Plan shall then be in effect, Mr. Shull shall be entitled to receive his benefit under the Company's Executive Plan plus a lump sum cash payment on the date of closing of such sale or acquisition of $300,000 pursuant to the Company's transaction bonus program and at least $300,000 in target bonus (plus any amount of maximum bonus) payable pursuant to the Company's 2001 Management Incentive Plan or 2002 Management Incentive Plan, as applicable. Under the December 2001 Services Agreement, the Company is required to maintain directors' and officers' liability insurance during the December 2001 Agreement Term. The Company is also required to indemnify Meridian, Mr. Shull or any member, officer or employee of, or consultant, contractor or subcontractor to, Meridian who serves as a Consultant to the Company. The Transaction Bonus Letter between the Company and Mr. Shull remains valid and in effect, pursuant to which the Company shall pay Mr. Shull a lump sum transaction bonus equal to $300,000 on the date of closing of any transaction which constitutes a Change of Control (as defined in the Company's Executive Plan) provided that he is actively employed by the Company on the date the Change of Control occurs. Mr. Shull's voluntary termination or involuntary termination for cause shall cause such transaction bonus to become null and void. Appointment of Chairman. On January 10, 2002, the Board of Directors announced the appointment of Mr. Shull as Chairman of the Company's Board of Directors. Resignation of Brian C. Harriss and Appointment of Edward M. Lambert. Effective January 28, 2002, Edward M. Lambert was appointed to succeed Brian C. Harriss as Executive Vice President and Chief Financial Officer of the Company and Mr. Harriss was appointed as Executive Advisor to the Chairman of the Company coincident with his resignation as Executive Vice President and Chief Financial Officer of the Company. 17. RELATED PARTY TRANSACTIONS At December 29, 2001, Richemont Finance S.A. ("Richemont"), a Luxembourg company, owned approximately 20.8% of the Company's Common Stock outstanding through direct ownership. At December 29, 2001, current and former officers and executives of the Company owed the Company approximately $0.3 million, excluding accrued interest, under the 1993 Executive Equity Incentive Plan. These amounts due to the Company bear interest at rates ranging from 5.54% to 7.75% and are due or will be due during 2002. On December 19, 2001, the Company consummated a transaction with Richemont (the "Richemont Transaction"). In the Richemont Transaction, the Company repurchased from Richemont all of the outstanding shares of the Series A Preferred Stock and 74,098,769 shares of the Common Stock of the Company held by Richemont in return for the issuance to Richemont of 1,622,111 shares of newly-created Series B Participating Preferred Stock (the "Series B Preferred Stock") and the reimbursement of expenses of $1 million to Richemont. Richemont agreed, as part of the transaction, to forego any claim it had to the accrued but unpaid dividends on the Series A Preferred Stock. The Richemont Transaction was made pursuant to an Agreement (the "Agreement"), dated as of December 19, 2001, between the Company and Richemont. As part of the Richemont Transaction, the Company (i) released Richemont, the individuals appointed by Richemont to the Board of Directors of the Company and certain of their respective affiliates and representatives (collectively, the "Richemont Group") from any claims by or in the right of the Company against any member of the Richemont Group which arise out of Richemont's acts or omissions as a stockholder of or lender to the Company or the acts or omissions of any Richemont board designee in his capacity as such and (ii) entered into an Indemnification Agreement with Richemont pursuant to which the Company agreed to indemnify each member of the Richemont Group from any losses suffered as a result of any third party claim which is based upon Richemont's acts as a stockholder or lender of the Company or the acts or omissions of any Richemont board designee in his capacity as such. As of December 14, 2001, Mr. Shull, Meridian and the Company entered into the December 2001 Services Agreement which replaced the August 2001 Services Agreement. See Note 16. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of August 1, 2001, Mr. Shull, Meridian and the Company entered into the August 2001 Services Agreement which replaced the December 2000 Services Agreement. See Note 16. During May 2001, the Company entered into Transaction Bonus Letters with each of Mr. Shull, Mr. Messina, Mr. Potts, Mr. Harriss and Mr. Contino. See Note 16. On April 30, 2001, the Company and Mr. Shull entered into the Letter Agreement, relating to certain termination payments under the Executive Plan. See Note 16. As of December 2000, Mr. Shull, Meridian and the Company entered into the December 2000 Services Agreement. See Note 16. On August 24, 2000, the Company issued 1.4 million shares of preferred stock designated as Series A Cumulative Participating Preferred Stock (the "Series A Preferred Stock") to Richemont for $70.0 million. The Company used the proceeds of the issuance of the Series A Preferred Stock to repay in full all borrowings outstanding under the Richemont $10 million Line of Credit and the Richemont $25 million Line of Credit, plus accrued and unpaid interest thereon, and for working capital purposes. From March 24, 2000 through August 24, 2000, the Company was a party to a $10.0 million unsecured line of credit facility (the "Richemont $10.0 million Line of Credit") with Richemont. The Richemont $10.0 million Line of Credit facility provided the Company with financing from Richemont should the excess availability under the Congress Credit Facility fall below $3.0 million. Additionally, the Company could have borrowed up to $5.0 million under the Richemont $10.0 million Line of Credit to pay trade creditors in the ordinary course of business. On August 24, 2000, the Richemont $10.0 million Line of Credit was terminated and all borrowings outstanding as of August 24, 2000 of approximately $5.0 million, plus accrued and unpaid interest and fees, were repaid and retired from a portion of the net proceeds obtained from the issuance of the Company's Series A Preferred Stock to Richemont. From March 1, 2000 through August 24, 2000, the Company was a party to a $25.0 million unsecured line of credit facility (the "Richemont $25.0 Million Line of Credit") with Richemont which provided the Company with funding from Richemont to continue the development and expansion of the Company's B-to-B e-commerce transaction services operation. On August 24, 2000, the Richemont $25.0 million Line of Credit was terminated and all borrowings outstanding as of August 24, 2000 of approximately $25.0 million, plus accrued and unpaid interest and fees, were repaid and retired from a portion of the net proceeds obtained from the issuance of the Company's Series A Preferred Stock to Richemont. 18. COMMITMENTS AND 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 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) attorneys' fees and costs. The Company's motion to dismiss is pending and discovery has commenced. The plaintiff has deposed a number of individuals. On April 11, 2001, the Court held a hearing on plaintiff's class certification motion. Subsequent to the April 11, 2001 hearing on plaintiff's class certification motion, plaintiff filed a motion to amend the definition of the class. On July 23, 2001, plaintiff's class certification motion was granted, defining the class as "All persons in the United States who are customers of any catalog or catalog company owned by Hanover Direct, Inc. and who have at any time purchased a product from such company and paid money which was designated to be an 'insurance' 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) charge." On August 21, 2001 the Company filed an appeal of the order with the Oklahoma Court of Appeals and subsequently moved to stay proceedings in the district court pending resolution of the appeal. In January 2002, the Company filed its brief in support of its appeal from the district court's class certification order. At a subsequent status hearing, and the parties agreed that issues pertaining to notice to the class would be stayed pending resolution of the appeal, that certain other issues would be subject to limited discovery, and that the issue of a stay for any remaining issues would be resolved if and when such issues arise. The Company believes it has defenses against the claims. However, it is too early to determine the outcome or range of potential settlement, which could have a material impact on the Company's results of operations when settled in a future period. Moreover, defense counsel to the Company will seek to have the resolution of the four class action cases (Martin, and the Teichman, Wilson and Argonaut cases which are discussed below) combined, or their effects lessened, in that there are common issues and a substantially similar class sought to be defined in the four cases. On June 28, 2001, Rakesh K. Kaul, the Company's former President and Chief Executive Officer, filed a five-count complaint (the "Complaint") in New York State Court against the Company, seeking damages and other relief arising out of his separation of employment from the Company, including severance payments of $2,531,352 plus the cost of employee benefits, attorneys' fees and costs incurred in connection with the enforcement of his rights under his employment agreement with the Company, payment of $298,650 for accrued and unused vacation, damages in the amount of $3,583,800, or, in the alternative, a declaratory judgment from the court that he is entitled to all change of control benefits under the "Hanover Direct, Inc. Thirty-Six Month Salary Continuation Plan", and damages in the amount of $1,396,066 or $850,000 due to the Company's purported breach of the terms of the "Long-Term Incentive Plan for Rakesh K. Kaul" by failing to pay him a "tandem bonus" he alleges was due and payable to him within the 30 days following his resignation. The Company removed the case to the U.S. District Court for the Southern District of New York on July 25, 2001. Mr. Kaul filed an Amended Complaint ("Amended Complaint") in the U.S. District Court for the Southern District of New York on September 18, 2001. The Amended Complaint repeats many of the claims made in the original Complaint and adds ERISA claims. On October 11, 2001, the Company filed its Answer, Defenses and Counterclaim to the Amended Complaint, denying liability under each and every of Mr. Kaul's causes of action, challenging all substantive assertions, raising several defenses and stating nine counterclaims against Mr. Kaul. The counterclaims include (1) breach of contract; (2) breach of the Non-Competition and Confidentiality Agreement with the Company; (3) breach of fiduciary duty; (4) unfair competition; and (5) unjust enrichment. The Company seeks damages, including without limitation, the $341,803 in severance pay and car allowance Mr. Kaul received following his resignation, $412,336 for amounts paid to Mr. Kaul for car allowance and related benefits, the cost of a long-term disability policy, and certain payments made to personal attorneys and consultants retained by Mr. Kaul during his employment, $43,847 for certain services the Company provided and certain expenses the Company incurred, relating to the renovation and leasing of office space occupied by Mr. Kaul's spouse at 115 River Road, Edgewater, New Jersey, the Company's current headquarters, $211,729 on a tax loan to Mr. Kaul outstanding since 1997 and interest, compensatory and punitive damages and attorney's fees. The case is pending and the parties are engaged in discovery. In January 2000 and May 2001, the Company provided its full cooperation in an investigation by the Federal Trade Commission ("FTC") into the marketing of discount buying clubs to see whether any of the entities investigated 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. It was subsequently revealed to the Company that the FTC was conducting an investigation into the activities of entities owned or controlled by Ira Smolev. On October 24, 2001, the FTC made final its "Stipulated Final Judgment And Order For Permanent Injunction And Monetary Settlement" against Ira Smolev and named defendant companies in the case of Federal Trade Commission v. Ira Smolev, et al. (USDC So.Dist. FL, Ft. Lauderdale Div.) (the "Order"). The named defendants included The Shopper's Edge, LLC (the Company's private label discount buying club which is owned by Mr. Smolev), FAR Services, LLC (the Smolev-owned contracting party to the Company's Marketing Agreement which was terminated in January 2001) and Consumer Data Depot, LLC (the Smolev-owned contracting party to the Company's Paymentech Processing Agreement). The Order will directly affect only those activities of the Company, which are "in active concert or participation with the named defendants [i.e., The Shopper's Edge, 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LLC, FAR Services, LLC and Consumer Data Depot, LLC]." The most important implication of the Order was that the Company, as bookkeeper to the club for sustaining members of The Shopper's Edge, may not process payments from members of The Shopper's Edge club for membership renewals where the purported authorization of the membership occurred prior to the effective date of the Order, without first obtaining, within 60 days prior to the date on which the consumer is billed, an "express verifiable authorization" of such renewal that complies with the specifications of the Order. All choices specified for "express verifiable authorization" contained in the Order are effectively "positive opt-in," would have required some direct mail or technology expenditures and would have severely hurt response rates, which could have had a material impact on the Company's profits from discount buying club membership revenues. The last renewals of Shopper's Edge memberships were processed in October, 2001 by agreement between the Company and Ira Smolev, and the Company is therefore now unaffected by the Order. On August 15, 2001, the Company was served with a summons and four-count complaint filed in Superior Court for the City and County of San Francisco, California, entitled Teichman v. Hanover Direct, Inc., Hanover Brands, Inc., Hanover Direct Virginia, Inc., and Does 1-100. The complaint was filed by a California resident, seeking damages and other relief for herself and a class of all others similarly situated, arising out of the $0.50 insurance fee charged by catalogs and Internet sites operated by subsidiaries of the Company. Defendants, including the Company, filed motions to dismiss based on a lack of personal jurisdiction over them. The motion to dismiss has been re-set for hearing on April 4, 2002. In January, 2002, plaintiff sought leave to name six additional entities: International Male, Domestications Kitchen & Garden, Silhouettes, Hanover Company Store, Kitchen & Home, and Domestications as co-defendants. On March 12, 2002, the Company was served with the First Amended Complaint in which plaintiff named as defendants the Company, Hanover Brands, Hanover Direct Virginia, LWI Holdings, Hanover Company Store, Kitchen and Home, and Silhouettes, and in which all causes of action related to state sales tax have been removed. With the removal of sales tax issues, the Teichman case concerns issues identical to the Martin case and may make it easier to stay the Teichman case pending the outcome of the Martin case. The Company's response to the first amended complaint is due April 15, 2002. The Company believes it has defenses against the claims but intends to file a motion to stay the case. It is too early to determine the outcome or range of potential settlement, which could have a material impact on the Company's results of operations when settled in a future period. Moreover, defense counsel to the Company will seek to have the resolution of the four class action cases (Martin and the Teichman, and the Wilson and Argonaut cases which are discussed below) combined, or their effects lessened, in that there are common issues and a substantially similar class sought to be defined in the four cases. The Company was named as one of 88 defendants in a patent infringement complaint filed on November 23, 2001 by the Lemelson Medical, Education & Research Foundation, Limited Partnership (the "Lemelson Foundation"). The complaint, filed in the U.S. District Court in Arizona, was not served on the Company until March 2002. In the complaint, the Lemelson Foundation accuses the named defendants of infringing seven U.S. patents which allegedly cover "automatic identification" technology through the defendants' use of methods for scanning production markings such as bar codes. The Company received a letter dated November 27, 2001 from attorneys for the Lemelson Foundation notifying the Company of the complaint and offering a license. The Company has been invited to join a common interest/joint-defense group consisting of defendants named in the complaint as well as in other actions brought by the Lemelson Foundation. The Company is currently in the process of analyzing the merits of the issues raised by the complaint, notifying vendors of its receipt of the complaint and letter, evaluating the merits of joining the joint-defense group, and having discussions with attorneys for the Lemelson Foundation regarding the license offer. A preliminary estimate of the royalties and attorneys' fees which the Company may pay if it decides to accept the license offer from the Lemelson Foundation range from about $125,000 to $400,000. The Company has decided to gather further information, but will not agree to a settlement at this time. A class action lawsuit was commenced on February 13, 2002 entitled Jacq Wilson, suing on behalf of himself, all others similarly situated, and the general public v. Brawn of California, Inc. dba International Male and Undergear, and Does 1-100 ("Brawn") in the Superior Court of the State of California, City and County of San Francisco. Does 1-100 are internet and catalog direct marketers offering a selection of men's clothing, sundries, and shoes who advertise within California and nationwide. The complaint alleges that for at 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) least four years, members of the class have been charged an unlawful, unfair, and fraudulent insurance fee and tax on orders sent to them by Brawn; that Brawn was engaged in untrue, deceptive and misleading advertising in that it was not lawfully required or permitted to collect insurance, tax and sales tax from customers in California; and that Brawn has engaged in acts of unfair competition under the State's Business and Professions Code. Plaintiff and the class seek (i) restitution and disgorgement of all monies wrongfully collected and earned by Brawn, including interest and other gains made on account of these practices, including reimbursement in the amount of the insurance, tax and sales tax collected unlawfully, together with interest, (ii) an order enjoining Brawn from charging customers insurance, and tax on its order forms and/or from charging tax on the delivery, shipping and insurance charges, (iii) an order directing Brawn to notify the California State Board of Equalization of the failure to pay the correct amount of tax to the State and to take appropriate steps to provide the State with the information needed for audit, and (iv) compensatory damages, attorney fees, pre-judgment interest, and costs of the suit. The claims of the individually named plaintiff and for each member of the class amount to less than $75,000. The Company's response is due by April 15, 2002. The Company believes it has defenses against the claims but intends to file a motion for summary judgment in the case. It is too early to determine the outcome or range of potential settlement, which could have a material impact on the Company's results of operations when settled in a future period. Moreover, defense counsel to the Company will seek to have the resolution of the four class action cases (Martin, Teichman and the Wilson, and the Argonaut case which is discussed below) combined, or their effects lessened, in that there are common issues and a substantially similar class sought to be defined in the four cases. A class action lawsuit was commenced on February 20, 2002 entitled Argonaut Consumer Rights Advocates Inc., suing on behalf of the General Public v. Gump's By Mail, Inc. ("Gump's"), and Does 1-100 in the Superior Court of the State of California, City and County of San Francisco. The plaintiff is a non-profit public benefit corporation suing under the California Business and Profession Code. Does 1-100 would include persons whose activities include the direct sale of tangible personal property to California consumers including the type of merchandise that Gump's -- the store and the catalog -- sell, by telephone, mail order, and sales through the web sites www.gumpsbymail.com and www.gumps.com. The complaint alleges that for at least four years, members of the class have been charged an unlawful, unfair, and fraudulent tax and "sales tax" on their orders in violation of California law and court decisions, including the state Revenue and Taxation Code, Civil Code, and the California Board of Equalization; that Gump's engages in unfair business practices; that Gump's engaged in untrue and misleading advertising in that it was not lawfully required to collect tax and sales tax from customers in California, is not lawfully required or permitted to add tax and sales tax on separately stated shipping or delivery charges to California consumers; and that it does not add the appropriate or applicable or specific correct tax or sales tax to its orders. Plaintiff and the class seek (i) restitution of all tax and sales tax charged by Gump's on each transaction and/or restitution of tax and sales tax charged on the shipping charges, (ii) an order enjoining Gump's from charging customers for tax on orders or from charging tax on the shipping charges; and (ii) attorney fees, pre-judgment interest on the sums refunded, and costs of the suit. A status conference has been set for July 26, 2002. The Company's response is due by April 15, 2002. The Company believes it has defenses against the claims but intends to file a motion for summary judgment in the case. It is too early to determine the outcome or range of potential settlement, which could have a material impact on the Company's results of operations when settled in a future period. Moreover, defense counsel to the Company will seek to have the resolution of the four class action cases combined, or their effects lessened, in that there are common issues and a substantially similar class sought to be defined in the four cases. In addition, the Company is involved in various routine lawsuits of a nature, which are deemed customary and incidental to its businesses. In the opinion of management, the ultimate disposition of these actions will not have a material adverse effect on the Company's financial position or results of operations. 19. AMERICAN STOCK EXCHANGE NOTIFICATION By letter dated May 2, 2001, the American Stock Exchange (the "AMEX") notified the Company that it was below certain of the AMEX's continued listing guidelines set forth in the AMEX Company Guide. The AMEX instituted a review of the Company's eligibility for continuing listing of the Company's Common Stock on the AMEX. On January 17, 2002, the Company received a letter dated January 9, 2002 from AMEX confirming that the AMEX determined to continue the Company's listing on AMEX pending 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) quarterly reviews of the Company's compliance with the steps of its strategic business realignment program. This determination was made subject to the Company's favorable progress in satisfying the AMEX guidelines for continued listing and to AMEX's periodic review of the Company's Securities and Exchange Commission and other filings. The AMEX has requested certain additional financial information from the Company to be delivered on or before April 15, 2002, which the Company intends to provide prior to such date. 20. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 Net revenue..................................... $144,294 $133,507 $117,431 $136,933 Earnings (loss) before interest and taxes....... (5,806) 14,607 (5,325) (2,672) Net earnings (loss)............................. (7,642) 12,732 (6,806) (4,129) Preferred stock dividends....................... 2,880 2,984 3,092 1,789 Net earnings (loss) applicable to common shareholders.................................. $(10,522) $ 9,748 $ (9,898) $ (5,918) ======== ======== ======== ======== Net earnings (loss) per share - basic and diluted....................................... $ (0.05) $ 0.05 $ (0.05) $ (0.03) ======== ======== ======== ======== 2000 Net revenue..................................... $130,150 $143,406 $140,381 $189,077 (Loss) before interest and taxes................ (10,359) (11,347) (12,402) (36,444) Net (loss)...................................... (13,448) (13,686) (14,799) (38,867) Preferred stock dividends....................... 87 -- 1,146 2,782 Net (loss) applicable to common shareholders.... $(15,535) $(13,686) $(15,945) $(41,649) ======== ======== ======== ======== Net (loss) per share - basic and diluted........ $ (0.06) $ (0.06) $ (0.07) $ (0.20) ======== ======== ======== ========
In December 2000, the Company recorded special charges (see Note 3) aggregating approximately $19.1 million related to the Company's strategic business realignment program. In 2001, an additional amount for special charges (see Note 3) relating to the Company's strategic business realignment program was recorded in the amount of $11.3 million. During the first six months of 2001, the Company recorded special charges during the first and second quarters of $1.1 million and $5.0 million, respectively. For the final six months of 2001, the Company recorded special charges of $5.2 million, all of which were recorded during the fourth quarter. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 65 SCHEDULE II HANOVER DIRECT, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND DECEMBER 25, 1999 (IN THOUSANDS OF DOLLARS)
COLUMN C COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E - --------------------------------- ---------- --------------------------- ---------- ---------- BALANCE AT CHARGE TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) PERIOD - ----------- ---------- --------- -------------- ---------- ---------- 2001: Allowance for Doubtful Accounts Receivable, Current............ $ 5,668 $ 91 $3,642(1) $ 2,117 Reserves for Discontinued Operations..................... 588 275 126(2) 737 Restructuring Reserve............ 13,022 8,023 9,989(2) 11,056 Reserves for Sales Return........ 3,371 2,692 3,299(2) 2,764 Deferred Tax Asset Valuation Allowance...................... 123,900 $ (2,300)(4) 121,600 2000: Allowance for Doubtful Accounts Receivable, Current............ 3,912 4,947 3,191(1) 5,668 Reserves for Discontinued Operations..................... 849 261(2) 588 Restructuring Reserve............ 2,299 11,895 1,172(2) 13,022 Reserves for Sales Return........ 4,680 6,101 7,410(2) 3,371 Deferred Tax Asset Valuation Allowance...................... 97,500 26,400(4) 123,900 1999: Allowance for Doubtful Accounts Receivable, Current............ 4,035 2,817 2,940(1) 3,912 Reserves for Discontinued Operations..................... 982 133(2) 849 Restructuring Reserve............ 3,286 607 1,594(3) 2,299 Reserves for Sales Return........ 4,778 9,915 10,013(2) 4,680 Deferred Tax Asset Valuation Allowance...................... 94,700 2,800(4) 97,500
- --------------- (1) written-off (2) Utilization of reserves (3) Utilization of reserves ($1,131) and reversal of reserves ($463) (4) Represents the change in the valuation allowance offset by the change in the gross tax asset. 66 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Identification of Directors: Directors hold office until the next annual meeting or until their successors have been elected or until their earlier death, resignation, retirement, disqualification or removal as provided in the Company's Certificate of Incorporation and Bylaws. The Board of Directors amended the Company's Bylaws, effective on the date of the 2001 Annual Meeting of Shareholders of the Company (May 31, 2001), to reduce the size of the Company's Board of Directors to six Directors. On January 10, 2002, the Board of Directors announced the reduction of the number of Directors of the Company from six to five. On January 10, 2002, the Board of Directors announced the appointment of Thomas C. Shull as Chairman of the Company's Board of Directors and the election of E. Pendleton James as a member of the Company's Board of Directors, each filling the vacancies created by the resignation of Eloy Michotte and Alan Grieve and each to serve until the Company's next Annual Shareholders Meeting.
DIRECTOR NAME AGE TITLE AND OTHER INFORMATION SINCE - ---- --- --------------------------- ----------- Thomas C. Shull 50 Thomas C. Shull has been Chairman of the Company's 2000 Board of Directors since January 10, 2002 and a member of the Board of Directors of the Company and President and Chief Executive Officer of the Company since December 5, 2000. In 1990, Mr. Shull co-founded Meridian Ventures, a venture management and turnaround firm presently based in Connecticut and has served as chief executive officer since its inception. From 1997 to 1999, he served as President and CEO of Barneys New York, a leading luxury retailer, where he led them out of bankruptcy. From 1992 to 1994, Mr. Shull was Executive Vice President of the R.H. Macy Company, Inc., where he was responsible for human resources, information technology, business development, strategic planning and merchandise distribution and led the merger negotiations with Federated Department Stores. Prior to that, he served as a consultant with McKinsey & Company and in the early 1980's as a member of the National Security Council Staff in the Reagan White House. E. Pendleton James 72 E. Pendleton James has been a director of the 2002 Company since January 2002. Mr. James has over thirty years experience in executive search and recently merged his firm, Pendleton James Associates, with Whitehead Mann. He currently serves on the Board of the Citizens for Democracy Corps and is a Trustee for the Center for the Study of the Presidency. Mr. James served as an assistant to Presidents Nixon and Reagan. He is a former member of the Board of Directors of Comsat Corporation, the Metropolitan Life Series Fund, the White House Fellows Commission, the Ronald Reagan Foundation and the USO World Board of Governors.
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DIRECTOR NAME AGE TITLE AND OTHER INFORMATION SINCE - ---- --- --------------------------- ----------- J. David Hakman 60 J. David Hakman has been the President and Chief 1991 Executive Officer of Hakman Capital Corporation, Burlingame, California, an investment and merchant banking firm, since 1980. Mr. Hakman also serves as a director of Concord Camera Corp., a firm which manufactures and distributes cameras. Mr. Hakman was originally appointed a director of the Company in May 1989 pursuant to a nomination and standstill agreement among the Company and Theodore H. Kruttschnitt, Edmund Manwell, and himself ("Nomination and Standstill Agreement") and was elected a director of the Company in October 1991. Kenneth J. Krushel 49 Kenneth J. Krushel has been the Executive Vice 1999 President of Strategic and Business Development of Blackboard Inc., a provider of e-education software and commerce and access systems, since December 2000. From October 1999 to December 2000, Mr. Krushel was the Chairman and Chief Executive Officer of College Enterprises, Inc. From 1996 to 1999, Mr. Krushel was the Senior Vice President of Strategic Development for NBC Corp. and from 1994 to 1996 was Senior Vice President, Business Development, for King World Productions. Formerly, Mr. Krushel was President and Chief Operating Officer of Think Entertainment and Vice-President of Programming and Marketing for American Cablesystems. Mr. Krushel was elected a director of the Company in May 1999. Basil P. Regan 61 Basil P. Regan has been the General Partner of 2001 Regan Partners, L.P., a limited partnership which invests primarily in turnaround companies and special situations, since December 1989. He has been President of Regan Fund Management Ltd. since October 1995, which manages Regan Partners, L.P., Regan Fund International, L.P. and Super Hedge Fund, L.P. From 1986 to 1989, Mr. Regan was Vice President and Director of Equity Research of Reliance Group Holdings. Mr. Regan was elected a director of the Company in August 2001.
(b) Identification of Executive Officers: Pursuant to the Company's Bylaws, its officers are chosen annually by the Board of Directors and hold office until their respective successors are chosen and qualified. Effective January 28, 2002, Edward M. Lambert was appointed to succeed Brian C. Harriss as Executive Vice President and Chief Financial Officer of the Company and Mr. Harriss was appointed as Executive Advisor to the Chairman of the Company coincident with his resignation as Executive Vice President and Chief Financial Officer of the Company. 68
OFFICE HELD NAME AGE TITLE AND OTHER INFORMATION SINCE - ---- --- --------------------------- ----------- Thomas C. Shull 50 President and Chief Executive Officer and a member 2000 of the Board of Directors since December 5, 2000. Chairman of the Board since January 10, 2002. In 1990, Mr. Shull co-founded Meridian Ventures, a venture management and turnaround firm presently based in Connecticut and has served as chief executive officer since its inception. From 1997 to 1999, he served as President and Chief Executive Officer of Barneys New York, a leading luxury retailer, where he led them out of bankruptcy. From 1992 to 1994, Mr. Shull was Executive Vice President of the R.H. Macy Company, Inc., where he was responsible for human resources, information technology, business development, strategic planning and merchandise distribution and led the merger negotiations with Federated Department Stores. Prior to that, he served as a consultant with McKinsey & Company and in the early 1980s as a member of the National Security Council Staff in the Reagan White House. Edward M. Lambert 41 Executive Vice President and Chief Financial 2002 Officer since January 28, 2002. From July 2001 until January 28, 2002, Mr. Lambert served as an advisor to the Company. In 1990, Mr. Lambert co-founded Meridian Ventures, a venture management and turnaround firm presently based in Connecticut and served as a Managing Director until December 2000. From 1998 to 1999, he served as Chief Financial Officer of Barneys New York, a leading luxury retailer, and from 1993 to 1994, he served as Executive Vice President of Tecstar, Inc., a space systems manufacturer. Mr. Lambert is a graduate of the California Institute of Technology (Cal Tech) and holds a M.B.A. from the Harvard Business School. Michael D. Contino 41 Executive Vice President and Chief Operating 1996 Officer since April 25, 2001. Senior Vice President and Chief Information Officer from December 1996 to April 25, 2001 and President of Keystone Internet Services, Inc. since November 2000. Mr. Contino joined the Company in 1995 as Director of Computer Operations and Telecommunications. Prior to 1995, Mr. Contino was the Senior Manager of IS Operations at New Hampton, Inc., a subsidiary of Spiegel, Inc. Charles F. Messina 58 Executive Vice President, Chief Administrative 2000 Officer and Secretary since January 2001. Group President since November 2001. From December 1999 until December 2000, Mr. Messina served as the Vice President of Human Resources for Hanover Brands, Inc. Mr. Messina joined the Company in August 1999. Before joining the Company, Mr. Messina was the Vice President for Specialty Retail, International Sourcing and Human Resources with Meldisco, a division of the Melville Corporation and, prior to that, Mr. Messina served as the Vice President of Human Resources for the Children's Place. William C. Kingsford 55 Vice President and Corporate Controller since May 1997 1997. Prior to May 1997, Mr. Kingsford was Vice President and Chief Internal Auditor at Melville Corporation.
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OFFICE HELD NAME AGE TITLE AND OTHER INFORMATION SINCE - ---- --- --------------------------- ----------- Frank J. Lengers 45 Vice President, Treasurer since October 2000. Mr. 2000 Lengers joined the Company in November 1988 as an Internal Audit Manager. From 1990 to 1994, Mr. Lengers served as Manager of Corporate Treasury Operations. In 1994, he was promoted to Director of Treasury Operations and in 1997 to Assistant Treasurer, a position he held until October 2000. Prior to joining the Company, Mr. Lengers held various audit positions with R.H. Macy & Co. and The Metropolitan Museum of Art. Steven Lipner 53 Vice President -- Taxation since October 2000. Mr. 2000 Lipner served as Director of Taxes from February 1984 to October 2000. Prior thereto, he served as Director of Taxes at Avnet, Inc. and held various positions in public accounting. He holds a license as a Certified Public Accountant in New York.
ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed by the Company pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed by the Company pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed by the Company pursuant to Regulation 14A. 70 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report:
PAGE NO. ---- 1. Index to Financial Statements Report of Independent Public Accountants -- Hanover Direct, Inc. and Subsidiaries Financial Statements........................... 29 Consolidated Balance Sheets as of December 29, 2001 and December 30, 2000........................................... 30 Consolidated Statements of Income (Loss) for the years ended December 29, 2001, December 30, 2000 and December 25, 1999........................................................ 31 Consolidated Statements of Cash Flows for the years ended December 29, 2001, December 30, 2000 and December 25, 1999........................................................ 32 Consolidated Statements of Shareholders' Equity for the years ended December 29, 2001, December 30, 2000 and December 25, 1999........................................... 33 Notes to Consolidated Financial Statements for the years ended December 29, 2001, December 30, 2000 and December 25, 1999........................................................ 34 Supplementary Data: Selected quarterly financial information (unaudited) for the fiscal year ended December 29, 2001......................... 65 2. Index to Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts for the years ended December 29, 2001, December 30, 2000 and December 25, 1999........................................... 66 Schedules other than that listed above are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3. Exhibits The exhibits required by Item 601 of Regulation S-K filed as part of, or incorporated by reference in, this report are listed in the accompanying Exhibit Index found after the Signature page.
(b) Reports on Form 8-K: 1.1 Form 8-K, filed November 8, 2001 -- reporting pursuant to Item 5 of such Form scheduling information concerning its quarterly conference call with management to review the third quarter 2001 results. 1.2 Form 8-K, filed November 16, 2001 -- reporting pursuant to Item 5 of such Form an unofficial transcript of its quarterly conference call with management to review the third quarter 2001 results. 1.3 Form 8-K, filed December 6, 2001 -- reporting pursuant to Item 5 of such Form the new address of its executive offices. 1.4 Form 8-K, filed December 14, 2001 -- reporting pursuant to Item 5 of such Form the execution of a Services Agreement, dated as of December 14, 2001, among Thomas C. Shull, Meridian Ventures, LLC and Hanover Direct, Inc., which replaced a previous Services Agreement dated as of August 1, 2001. 1.5 Form 8-K, filed December 20, 2001 -- reporting pursuant to Items 1 and 5 of such Form a transaction with Richemont Finance S.A., pursuant to an Agreement dated as of December 19, 2001, between the Company and Richemont. 1.6 Form 8-K, filed December 26, 2001 -- reporting pursuant to Item 5 of such Form an unofficial transcript of its conference call with management reviewing the transaction with Richemont, as described above. 71 1.7 Form 8-K, filed January 10, 2002 -- reporting pursuant to Item 5 of such Form the appointment of Mr. Thomas C. Shull as Chairman of the Board of Directors of the Company, the election of Mr. E. Pendleton James as a member of the Board of Directors of the Company, the reduction of the number of Directors from six to five, and the time and place of the Company's 2002 Annual Shareholders Meeting. 1.8 Form 8-K, filed January 17, 2002 -- reporting pursuant to Item 5 of such Form the appointment of Mr. Edward M. Lambert as Executive Vice President & Chief Financial Officer of the Company effective January 28, 2002. 1.9 Form 8-K, filed January 17, 2002 -- reporting pursuant to Item 5 of such Form the Company's receipt of a letter dated January 9, 2002 from the American Stock Exchange. 1.10 Form 8-K, filed January 28, 2002 -- reporting pursuant to Item 5 of such Form the appointment of Mr. Brian C. Harriss as Executive Advisor to the Chairman of the Company coincident with his resignation as Executive Vice President & Chief Financial Officer of the Company, effective January 28, 2002. 1.10 Form 8-K, filed March 27, 2002 -- reporting pursuant to Item 5 of such Form scheduling information regarding its conference call with management to review the fiscal 2001 full year operating results. 72 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 27, 2002 HANOVER DIRECT, INC. (Registrant) By: /s/ THOMAS C. SHULL ------------------------------------ Thomas C. Shull, Chairman of the Board, President and Chief Executive Officer (On behalf of the registrant and as principal executive officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated below. Principal Officers: /s/ EDWARD M. LAMBERT - ----------------------------------------------------- Edward M. Lambert, Executive Vice President and Chief Financial Officer (principal financial officer) /s/ WILLIAM C. KINGSFORD - ----------------------------------------------------- William C. Kingsford, Vice President and Corporate Controller (principal accounting officer)
Board of Directors: /s/ THOMAS C. SHULL - ----------------------------------------------------- Thomas C. Shull, Director /s/ J. DAVID HAKMAN - ----------------------------------------------------- J. David Hakman, Director /s/ BASIL P. REGAN - ----------------------------------------------------- Basil P. Regan, Director /s/ E. PENDLETON JAMES - ----------------------------------------------------- E. Pendleton James, Director /s/ KENNETH J. KRUSHEL - ----------------------------------------------------- Kenneth J. Krushel, Director
Date: March 27, 2002 73 EXHIBIT INDEX
EXHIBIT NUMBER ITEM 601 OF PAGE REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE NO. - -------------- ----------------------------------------------------------------------- ---- 2.1 Asset Sale Agreement, dated as of August 19, 1999 between the Company, AHI and TAC and Euclid Logistics, Inc. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 25, 1999. 2.2 Letter agreement, dated December 21, 1999, between the Company and FAR Services, LLC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 25, 1999. 2.3 The Shopper's Edge, LLC Purchase Agreement, dated as of December 25, 1999, between Hanover Brands, Inc. and Far Services, LLC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 25, 1999. 2.4 Asset Purchase Agreement, dated as of June 13, 2001, among the Company, LWI Holdings, Inc., HSN LP, HSN Improvements, LLC and HSN Catalog Services, Inc. Incorporated by reference to the Company's Current Report on Form 8-K filed August 9, 2001. 2.5 Amendment No. 1, dated as of June 20, 2001, to the Asset Purchase Agreement, dated as of June 13, 2001, among the Company, LWI Holdings, Inc., HSN LP, HSN Improvements, LLC and HSN Catalog Services, Inc. Incorporated by reference to the Company's Current Report on Form 8-K filed August 9, 2001. 2.6 Agreement, dated as of December 19, 2001, between the Company and Richemont. Incorporated by reference to the Company's Current Report on Form 8-K filed December 20, 2001. 3.1 Restated Certificate of Incorporation. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 3.2 Certificate of Correction filed to correct a certain error in the Restated Certificate of Incorporation. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 26, 1998. 3.3 Certificate of Amendment to Certificate of Incorporation dated May 28, 1999. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 25, 1999. 3.4 Certificate of Correction Filed to Correct a Certain Error in the Restated Certificate of Incorporation dated August 26, 1999. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 25, 1999. Certificate of Designations, Powers, Preferences and Rights of Series A Cumulative Participating Preferred Stock. Incorporated by reference to the Company's Current Report on Form 8-K filed August 30, 2000. 3.5 Certificate of Designations, Powers, Preferences and Rights of Series A Cumulative Participating Preferred Stock. Incorporated by reference to the Company's Current Report on Form 8-K filed August 30, 2000. 3.6 Certificate of the Designations, Powers, Preferences and Rights of Series B Participating Preferred Stock. Incorporated by reference to the Company's Current Report on Form 8-K filed December 20, 2001. 3.7 Certificate of Elimination of the Series A Cumulative Participating Preferred Stock. Incorporated by reference to the Company's Current Report on Form 8-K filed December 20, 2001. 3.8 By-laws. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 27, 1997.
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EXHIBIT NUMBER ITEM 601 OF PAGE REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE NO. - -------------- ----------------------------------------------------------------------- ---- 4.1 Warrant Agreement dated as of October 25, 1991 ("NAR Warrant") between the Company* and NAR Group Limited ("NAR") for 279,110 shares of Common Stock. Incorporated by reference to the Company's* Current Report on Form 8-K dated October 25, 1991. 4.2 Registration Rights Agreement dated as of July 8, 1991 among the Company*, NAR and Intercontinental Mining & Resources Limited ("IMR"). Incorporated by reference to the Company's* Current Report on Form 8-K Dated July 10, 1991. 4.3 Warrant Agreement dated as of January 1, 1994 between the Company and Sears Shop At Home Services, Inc. ("Sears"). Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 4.4 Registration Rights Agreement dated as of February 16, 1995 among the Company and the Aegis Sellers. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 4.5 Warrant Agreement dated as of July 8, 1991 between the Company and IMR for 1,750,000 shares of Common Stock. Incorporated by reference to the Company's Current Report on Form 8-K dated July 10, 1991. 4.6 Warrant Agreement dated as of October 25, 1991 between the Company and NAR for 931,791 shares of Common Stock. Incorporated by reference to the Company's Current Report on Form 8-K dated October 25, 1991. 4.7 Second Amendment to Warrant Agreement and Warrant Certificate for 931,791 shares of Common Stock, between the Company and NAR dated as of November 13, 1995. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 1995. 4.8 First Amendment to Warrant Agreement and Warrant Certificate for 1,750,000 shares of Common Stock, between the Company and IMR dated as of November 13, 1995. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 1995. 4.9 First Amendment to Warrant Agreement and Warrant Certificate for 279,110 shares of Common Stock, between the Company and NAR dated as of November 13, 1995. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 1995. 4.10 Second Amendment to Warrant Agreement between the Company and IMR dated as of August 23, 1996. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 4.11 Second Amendment to Warrant Agreement between the Company and NAR dated as of August 23, 1996. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 4.12 Third Amendment to Warrant Agreement between the Company and NAR dated as of August 23, 1996. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 4.13 Registration Rights Agreement between the Company and Richemont dated as of August 23, 2000. Incorporated by reference to the Company's Current Report on Form 8-K filed August 30, 2000. 10.1 Stock Option Plan, as amended. Incorporated by reference to the Company's* Annual Report on Form 10-K for the fiscal year ended December 28, 1991. 10.2 Form of Stock Option Agreement between the Company* and certain Directors of the Company, as amended. Incorporated by reference to the Company's* Annual Report on Form 10-K for the fiscal year ended December 28, 1991. 10.3 Termination of Employment Agreement and Employment and Consulting Agreement dated as of December 31, 1995 between the Company and Jack E. Rosenfeld. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996.
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EXHIBIT NUMBER ITEM 601 OF PAGE REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE NO. - -------------- ----------------------------------------------------------------------- ---- 10.4 Registration Rights Agreement between the Company and Rakesh K. Kaul, dated as of August 23, 1996. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.5 Form of Indemnification Agreement among the Company* and each of the Company's directors and executive officers. Incorporated by reference to the Company's* Current Report on Form 8-K dated October 25, 1991. 10.6 Letter Agreement dated May 5, 1989 among the Company*, Theodore H. Kruttschnitt, J. David Hakman and Edmund R. Manwell. Incorporated by reference to the Company's* Current Report on Form 8-K dated May 10, 1989. 10.7 Hanover Direct, Inc. Savings Plan as amended. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended January 1, 1994. 10.8 Restricted Stock Award Plan. Incorporated by reference to the Company's* Registration Statement on Form S-8 filed on February 24, 1993, Registration No. 33-58760. 10.9 All Employee Equity Investment Plan. Incorporated by reference to the Company's* Registration Statement on Form S-8 filed on February 24, 1993, Registration No. 33-58756. 10.10 Executive Equity Incentive Plan, as amended. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.11 Form of Supplemental Retirement Plan. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended January 1, 1994. 10.12 1996 Stock Option Plan, as amended. Incorporated by reference to the Company's 1997 Proxy Statement. 10.13 1999 Stock Option Plan for Directors. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 25, 1999. 10.14 2000 Management Stock Option Plan. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 25, 1999. 10.15 2002 Stock Option Plan for Directors. FILED HEREWITH. 82 10.16 Hanover Direct, Inc. Key Executive Eighteen Month Compensation Continuation Plan. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001. 10.17 Amendment No. 1 to the Hanover Direct, Inc. Key Executive Eighteen Month Compensation Continuation Plan, dated as of June 1, 2001. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 10.18 Hanover Direct, Inc. Key Executive Twelve Month Compensation Continuation Plan. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001. 10.19 Hanover Direct, Inc. Key Executive Six Month Compensation Continuation Plan. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001. 10.20 Hanover Direct, Inc. Directors Change of Control Plan. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001.
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EXHIBIT NUMBER ITEM 601 OF PAGE REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE NO. - -------------- ----------------------------------------------------------------------- ---- 10.21 Loan and Security Agreement dated as of November 14, 1995 by and among Congress Financial Corporation ("Congress"), HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Inc. ("The Company Store") , Tweeds, Inc. ("Tweeds"), LWI Holdings, Inc. ("LWI"), Aegis Catalog Corporation ("Aegis"), Hanover Direct Virginia, Inc. ("HDVA") and Hanover Realty Inc. ("Hanover Realty"). Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 1995. 10.22 First Amendment to Loan and Security Agreement dated as of February 22, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.23 Second Amendment to Loan and Security Agreement dated as of April 16, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.24 Third Amendment to Loan and Security Agreement dated as of May 24, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.25 Fourth Amendment to Loan and Security Agreement dated as of May 31, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.26 Fifth Amendment to Loan and Security Agreement dated as of September 11, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.27 Sixth Amendment to Loan and Security Agreement dated as of December 5, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.28 Seventh Amendment to Loan and Security Agreement dated as of December 18, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.29 Eighth Amendment to Loan and Security Agreement dated as of March 26, 1997 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 26, 1998. 10.30 Ninth Amendment to Loan and Security Agreement dated as of April 18, 1997 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 26, 1998.
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EXHIBIT NUMBER ITEM 601 OF PAGE REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE NO. - -------------- ----------------------------------------------------------------------- ---- 10.31 Tenth Amendment to Loan and Security Agreement dated as of October 31, 1997 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 26, 1998. 10.32 Eleventh Amendment to Loan and Security Agreement dated as of March 25, 1998 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 26, 1998. 10.33 Twelfth Amendment to Loan and Security Agreement dated as of September 30, 1998 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 25, 1999. 10.34 Thirteenth Amendment to Loan and Security Agreement dated as of September 30, 1998 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 25, 1999. 10.35 Fourteenth Amendment to Loan and Security Agreement dated as of February 28, 2000 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 25, 1999. 10.36 Fifteenth Amendment to Loan and Security Agreement dated as of March 24, 2000 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, LWI, HDVA, 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. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 25, 2000. 10.37 Sixteenth Amendment to Loan and Security Agreement dated as of August 8, 2000 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, LWI, HDVA, 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. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 24, 2000. 10.38 Seventeenth Amendment to Loan and Security Agreement dated as of January 5, 2001 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, LWI, HDVA, 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. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 2000. 10.39 Eighteenth Amendment to Loan and Security Agreement, dated as of November 12, 2001, among Congress, HDPA, Brawn, Gump's by Mail, Gump's, LWI, HDVA, 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. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2001.
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EXHIBIT NUMBER ITEM 601 OF PAGE REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE NO. - -------------- ----------------------------------------------------------------------- ---- 10.40 Nineteenth Amendment to Loan and Security Agreement, dated as of December 18, 2001, by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, LWI, HDVA, 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. Incorporated by reference to the Company's Current Report on Form 8-K filed December 20, 2001. 10.41 Twentieth Amendment to Loan and Security Agreement, dated as of March 86 5, 2002, by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, HDVA, Hanover Realty, The Company Store Factory, Inc., The Company Office, Inc., Keystone Internet Services, Inc., Silhouettes, LLC, Hanover Company Store, LLC and Domestications, LLC. FILED HEREWITH. 10.42 Twenty-first Amendment to Loan and Security Agreement, dated as of 104 March 21, 2002, among Congress, HDPA, Brawn, Gump's by Mail, Gump's, HDVA, Hanover Realty, The Company Store Factory, Inc., The Company Office, Inc., Keystone Internet Services, Inc., Silhouettes, LLC, Hanover Company Store, LLC and Domestications, LLC. FILED HEREWITH. 10.43 Long-Term Incentive Plan for Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.44 Short-Term Incentive Plan for Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.45 Tandem Option Plan dated as of August 23, 1996 between the Company and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.46 Closing Price Option dated as of August 23, 1996 between the Company and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.47 Performance Price Option dated as of August 23, 1996 between the Company and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.48 Six-Year Stock Option dated as of August 23, 1996 between NAR and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.49 Seven-Year Stock Option dated as of August 23, 1996 between NAR and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.50 Eight-Year Stock Option dated as of August 23, 1996 between NAR and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.51 Nine-Year Stock Option dated as of August 23, 1996 between NAR and Rakesh K. Kaul. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 28, 1996. 10.52 Stock Purchase Agreement, dated as of November 4, 1997, by and between the Company and SMALLCAP World Fund, Inc. ("SMALLCAP"). Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 26, 1998. 10.53 Registration Rights Agreement, dated as of November 4, 1997, by and between the Company and SMALLCAP. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 26, 1998.
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EXHIBIT NUMBER ITEM 601 OF PAGE REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE NO. - -------------- ----------------------------------------------------------------------- ---- 10.54 Account Purchase and Credit Card Marketing and Services Agreement, dated as of March 9, 1999, between the Company and Capital One Services, Inc. and Capital One Bank. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 25, 1999. 10.55 Addendum to Account Purchase and Credit Card Marketing and Services 119 Agreement, dated as of July 7, 1999, between the Company and Capital One Services, Inc. and Capital One Bank. FILED HEREWITH. 10.56 Employment Agreement dated as of March 6, 2000 between the Company and Rakesh K. Kaul. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 25, 2000. 10.57 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. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 25, 2000. 10.58 Subordination Agreement dated as of March 24, 2000, between Congress and Richemont. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 25, 2000. 10.59 Letter Agreement, dated as of March 24, 2000, between Richemont and Congress. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 25, 2000. 10.60 Amended and Restated Stock Option Agreement dated as of April 14, 2000 between the Company and Rakesh K. Kaul. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 25, 2000. 10.61 Stock Option Agreement dated as of April 14, 2000 between erizon, Inc. and Rakesh K. Kaul. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 25, 2000. 10.62 Hanover Direct, Inc. Key Executive Thirty-Six Month Compensation Continuation Plan. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 25, 2000. 10.63 Hanover Direct, Inc. Key Executive Twenty-Four Month Compensation Continuation Plan. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 25, 2000. 10.64 Intercompany Services Agreement by and between erizon, Inc. and Hanover Brands, Inc. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 24, 2000. 10.65 Amendment to Intercompany Services Agreement by and between Hanover Brands, Inc. and erizon, Inc. effective as of December 27, 2000. Incorporated by reference to the Company's Current Report on Form 8-K filed January 22, 2001. 10.66 Commitment Letter dated August 7, 2000 between the Company and Richemont. Incorporated by reference to the Company's Current Report on Form 8-K filed August 10, 2000. 10.67 Securities Purchase Agreement between the Company and Richemont dated as of August 23, 2000. Incorporated by reference to the Company's Current Report on Form 8-K filed August 30, 2000. 10.68 Services Agreement dated as of December 5, 2000 among Meridian Ventures, LLC, Thomas C. Shull and the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 30, 2000.
80 EX-10.15 3 y58340ex10-15.txt 2002 STOCK OPTION PLAN FOR DIRECTORS EXHIBIT 10.15 HANOVER DIRECT, INC. 2002 STOCK OPTION PLAN FOR DIRECTORS 1. Purpose. The purpose of the Hanover Direct, Inc. 2002 Stock Option Plan for Directors (the "Plan") is to advance the interests of Hanover Direct, Inc. (the "Company") by providing non-employee directors of the Company, through the grant of options to purchase shares of Common Stock (as hereinafter defined), with a larger personal and financial interest in the Company's success. 2. Administration. The Plan shall be administered by a committee (the "Committee") consisting of at least two members of the Board of Directors of the Company (the "Board"). The Committee shall have full power and authority to interpret the Plan, to establish such rules and regulations as it deems appropriate for the administration of the Plan, and to take such other action as it deems necessary or desirable for the administration of the Plan. The Committee's interpretation and construction of any provision of the Plan or the terms of any Option (as hereinafter defined) shall be conclusive and binding on all parties. 3. Participants. Each director of the Company who is neither an employee of the Company nor an Ineligible Director (as hereinafter defined) (a "Non-Employee Director") shall be eligible to be granted Options to purchase shares of Common Stock ("Options") under the Plan. An "Ineligible Director" means any director of the Company who is a nonresident alien. Nothing contained in the Plan, or in any Option granted pursuant to the Plan, shall confer upon any Director any right to the continuation of his or her directorship or limit in any way the right of the Company to terminate his or her directorship at any time. 4. The Shares. Options may be granted from time to time under the Plan for the purchase, in the aggregate, of not more than 500,000 shares of common stock, par value $0.66 2/3 per share, of the Company ("Common Stock") (subject to adjustment pursuant to Section 13). Such shares of Common Stock may be set aside out of the authorized but unissued shares of Common Stock not reserved for any other purpose or out of previously issued shares acquired by the Company and held in its treasury. Any shares of Common Stock which, by reason of the termination or expiration of an Option or otherwise, are no longer subject to purchase pursuant to an Option granted under the Plan, may again be subjected to an Option under the Plan. 5. Option Grants. Options shall be evidenced by Option agreements which shall be subject to the terms and conditions set forth in the Plan and such other terms and conditions not inconsistent herewith as the Committee may approve. (a) Initial Appointment Awards. As of the effective date of his or her initial appointment or election to the Board (or, if later, the effective date of the Plan) (the "Initial Appointment Date"), a Non-Employee Director shall receive a grant of an Option to purchase 50,000 shares of Common Stock (subject to adjustment pursuant to Section 13). (b) Annual Service Awards. On each Award Date (as hereinafter defined) occurring after a Non-Employee Director's Initial Appointment Date, such Non-Employee Director shall be granted, provided he or she continues to serve as a member of the Board on such date, an Option to purchase 25,000 shares of Common Stock (subject to serve as a member of the Board on such date, an Option to purchase 25,000 shares of Common Stock (subject to adjustment pursuant to Section 13). An "Award Date" means August 2, 2002, August 1, 2003 and August 3, 2004. 6. Option Price. The price (the "Option Price") at which shares of Common Stock may be purchased upon the exercise of an Option granted under the Plan shall be the fair market value of such shares on the date of grant of such Option. Solely for purposes of this Section 6, the fair market value of a share of Common Stock shall be deemed to be the average of the closing prices of the Common Stock on the Award Date, the 10 trading days immediately preceding the Award Date, and the 10 trading days immediately following the Award Date. 7. Term And Exercisability Of Options. Options shall be granted for a maximum term of 10 years. Subject to the other provisions of the Plan relating to exercisability of Options, or as otherwise provided by the Committee and evidenced in an Option agreement, the participant shall have the cumulative right as of the first, second, and third anniversaries of the date of grant, to purchase up to one-third, two-thirds, and 100%, respectively, of the Option Shares; provided, however, that in the event of a Change of Control (as such term is defined in the Hanover Direct, Inc. Key Executive Twenty-Four Month Compensation Continuation Plan), the participant shall have the cumulative right to purchase up to 100% of the Option Shares. 8. Termination Of Directorship. Except as otherwise provided in this Section 8, or as otherwise provided by the Committee and evidenced in an Option agreement, no person may exercise an Option more than three months after the first date on which he or she ceases to be a director of the Company. If a participant ceases to be a director of the Company by reason of death or disability, any Options held by him or her may be exercised within 12 months after the date he or she ceases to be a director of the Company. In no event may an Option be exercised after the expiration of the term of such Option. 9. Payment. Full payment of the purchase price for shares of Common Stock purchased upon the exercise, in whole or in part, of an Option granted under the Plan shall be made at the time of such exercise. The Option Price may be paid in cash or in shares of Common Stock valued at their fair market value on the date of exercise. Alternatively, an 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 2 of sale or loan proceeds necessary to pay the Option Price, and such other documents as the Committee may determine. No shares of Common Stock shall be issued or transferred to a participant until full payment therefor has been made, and a participant shall have none of the rights of a stockholder until shares are issued or transferred to him or her. 10. Nontransferability. Options granted under the Plan shall not be transferable other than by will or by the laws of descent and distribution, and, during a participant's lifetime, shall be exercisable only by him or her. Notwithstanding the foregoing, a participant may transfer any Option granted under the Plan to the participant's spouse, children, grandchildren, parents, and/or siblings or to one or more trusts for the benefit of such family members, if the agreement evidencing such Option so provides and the participant does not receive any consideration for the transfer. Any Option so transferred shall continue to be subject to the same terms and conditions that applied to such Option immediately prior to its transfer (except that such transferred Option shall not be further transferable by the transferee during the transferee's lifetime). 11. Issuance Of Shares. If a participant so requests, shares purchased upon the exercise of an Option may be issued or transferred in the name of the participant and another person jointly with the right of survivorship. 12. Status Of Options. Options granted under the Plan are nonqualified options not qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. 13. Changes In Capital Structure, Etc. In the event of any merger, share exchange, reorganization, consolidation, recapitalization, reclassification, distribution, stock dividend, stock split, reverse stock split, split-up, spin-off, or other similar transaction or event affecting the Common Stock, the Committee is authorized, to the extent it deems appropriate, to make substitutions or adjustments in the aggregate number and kind of shares of Common Stock reserved for issuance under the Plan, in the number, kind and price of shares of Common Stock subject to outstanding awards, and in the award limits under the Plan (or to make provision for cash payment to the holder of an Option). Outstanding Options shall be appropriately amended as to price and other terms in a manner consistent with the aforementioned adjustment to the shares of Common Stock subject to the Plan. Fractional shares resulting from any adjustment in Options pursuant to this Section 13 may be settled in cash or otherwise as the Committee shall determine. Notice of any adjustment shall be given by the Company to each holder of an Option which shall have been adjusted and such adjustment (whether or not such notice is given) shall be effective and binding for all purposes of this Plan. 14. Effective Date And Termination Of Plan. The Plan shall become effective on the date of its adoption by the Board or a duly authorized committee thereof, subject to the ratification of the Plan by the affirmative vote or consent of holders of a majority of the issued and outstanding shares of Common Stock. The Plan shall terminate 10 years from the date of its adoption or such earlier date as the Board or such committee may determine. Any Option 3 outstanding under the Plan at the time of its termination shall remain in effect in accordance with its terms and conditions and those of the Plan. 15. Amendment. The Board or a duly authorized committee thereof may amend the Plan in any respect from time to time; provided, however, that no amendment shall become effective unless approved by affirmative vote of the Company's shareholders if such approval is necessary or desirable for the continued validity of the Plan or if the failure to obtain such approval would adversely affect the compliance of the Plan with Rule 16b-3 or any successor rule under the Securities Exchange Act of 1934 or any other rule or regulation. No amendment may, without the consent of a participant, impair his or her rights under any Option previously granted under the Plan. The Board or a duly authorized committee thereof shall have the power, in the event of any disposition of substantially all of the assets of the Company, its dissolution, any merger or consolidation of the Company with or into any other corporation, or the merger or consolidation of any corporation into the Company, to amend all outstanding Options to terminate such Options as of such effectiveness. If the Board shall exercise such power, all Options then outstanding shall be deemed to terminate upon such effectiveness. 16. Legal And Regulatory Requirements. No Option shall be exercisable and no shares will be delivered under the Plan except in compliance with all applicable federal and state laws and regulations including, without limitation, compliance with the rules of all domestic stock exchanges on which the Common Stock may be listed. Any share certificate issued to evidence shares for which an Option is exercised may bear such legends and statements as the Committee shall deem advisable to assure compliance with federal and state laws and regulations. No Option shall be exercisable, and no shares will be delivered under the Plan, until the Company has obtained consent or approval from regulatory bodies, federal or state, having jurisdiction over such matters as the Committee may deem advisable. In the case of the exercise of an Option by a person or estate acquiring the right to exercise the Option by bequest or inheritance, the Committee may require reasonable evidence as to the ownership of the Option and may require consents and releases of taxing authorities that it may deem advisable. 4 EX-10.41 4 y58340ex10-41.txt AMENDMENT NO. 20 TO LOAN AND SECURITY AGREEMENT EXHIBIT 10.41 [Execution Version] TWENTIETH AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS TWENTIETH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment"), dated as of March 5, 2002, 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 KEYSTONE INTERNET SERVICES, INC., a Delaware corporation ("Keystone Internet"; and together with HDPI, Brawn, GBM, Gump's, LWI, HDV, Hanover Realty, TCS Factory, TCS Office, Tweeds LLC, Silhouettes, HCS LLC and Domestications, collectively, the "Borrowers" and each individually, a "Borrower" ), 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, Inc."), SCANDIA DOWN CORPORATION, a Delaware corporation ("Scandia"), KEYSTONE LIQUIDATIONS, INC., a Delaware corporation, formerly known as Tweeds of Vermont, Inc. ("Keystone Liquidations"), 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") and SAN DIEGO TELEMARKETING, LLC, a Delaware limited liability company ("San Diego LLC"; and together with Hanover, American Down, DM Advertising, Inc., Scandia, Keystone Liquidations, HHFG LLC, Kitchen & Home LLC, Domestications K&G LLC, Encore LLC, Clearance World, Scandia Down, LLC, erizon, inc., Hanover Brands, erizon.com, LaCrosse, LLC, collectively, "Guarantors" and each individually, a "Guarantor"). W I T N E S S E T H: WHEREAS, Borrowers, Guarantors and Lender are parties to the Loan and Security Agreement, dated November 14, 1995, as amended by First Amendment to Loan and Security Agreement, dated February 22, 1996, Second Amendment to Loan and Security Agreement, dated April 16, 1996, Third Amendment to Loan and Security Agreement, dated May 24, 1996, Fourth Amendment to Loan and Security Agreement, dated May 31, 1996, Fifth Amendment to Loan and Security Agreement, dated September 11, 1996, Sixth Amendment to Loan and Security Agreement, dated as of December 5, 1996, Seventh Amendment to Loan and Security Agreement, dated as of December 18, 1996, Eighth Amendment to Loan and Security Agreement, dated as of March 26, 1997, Ninth Amendment to Loan and Security Agreement, dated as of April 18, 1997, Tenth Amendment to Loan and Security Agreement, dated as of October 31, 1997, Eleventh Amendment to Loan and Security Agreement, dated as of March 25, 1998, Twelfth Amendment to Loan and Security Agreement, dated as of September 30, 1998, 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, Fifteenth Amendment to Loan and Security Agreement, dated as of March 24, 2000, Sixteenth Amendment to Loan and Security Agreement, dated as of August 8, 2000, Seventeenth Amendment to Loan and Security Agreement, dated as of January 5, 2001, Eighteenth Amendment to Loan and Security Agreement, dated as of November 12, 2001, and Nineteenth Amendment to Loan and Security Agreement, dated as of December 18, 2001 (as so amended, the "Loan Agreement"), pursuant to which Lender has made loans and advances to Borrowers; and WHEREAS, Borrowers and Guarantors have requested that Lender consent to, and enter into certain amendments to the Loan Agreement and agreements with respect to certain transactions as described herein in connection with, the corporate reorganization of certain Borrowers and Guarantors; and WHEREAS, the parties to the Loan Agreement desire to enter into 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: I. Definitions. A. Additional Definitions. As used herein or in any of the other Financing Agreements, the following terms shall have the meanings given to them below, and the Loan Agreement shall be deemed and is hereby amended to include, in addition and not in limitation, the following definitions: -2- 1. "CCV" shall mean Creative Capital Ventures, LLC, a Delaware limited liability company, and its successors and assigns. 2. "Hanover 2001 Reorganization" shall mean, individually and collectively, the declaration and payment of dividends, mergers, dissolutions, reorganization steps and transactions effected under the Hanover 2001 Reorganization Agreements. 3. "Hanover 2001 Reorganization Agreements" shall mean, collectively, the agreements, documents and instruments listed in Schedule 1 hereto, the Hanover Subsidiary 2001 Dissolution Agreements and all related agreements, documents and instruments executed, delivered or filed in connection with, or otherwise evidencing, each of the transactions consented to in Section 2 hereof, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 4. "Hanover Subsidiary 2001 Dissolution Agreements" shall mean, collectively, the certificates or agreements executed, delivered or filed in connection with, or otherwise evidencing, the dissolution of each of Tweeds LLC, Kitchen & Home LLC, Domestications K&G LLC, Henre and erizon.com, and all related agreements, documents and instruments, as the same now exist or may hereafter entered into, be amended, modified, supplemented, extended, renewed, restated or replaced. 5. "Henre" shall mean Henre, Inc., a Delaware corporation, and its successors and assigns. 6. "Intercompany Subordination Agreement" shall mean the Subordination Agreement, dated as of November 15, 1995, between Lender and Hanover Direct, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 7. "LWI/HDPI Merger" shall mean the merger of LWI Holdings, Inc. with and into Hanover Direct Pennsylvania, Inc., with Hanover Direct Pennsylvania, Inc. as the surviving corporation. 8. "Scandia Trademark License Agreements" shall mean the trademark license agreements between Scandia and the owner or lessor of certain retail stores party thereto regarding the sale and distribution of certain "Scandia Down" products, as the same now exist or may hereafter entered into, be amended, modified, supplemented, extended, renewed, restated or replaced. 9. "Scandia/HDV Merger" shall mean the merger of Scandia Down Corporation with and into Hanover Direct Virginia Inc., with Hanover Direct Virginia Inc. as the surviving corporation. B. Interpretation. All capitalized terms used herein and not defined herein shall have the meanings given to such terms in the Loan Agreement. -3- II. Consents to Hanover 2001 Reorganization. A. Consents to Proposed Dividends. Subject to the terms and conditions contained herein and in the Loan Agreement and in the other Financing Agreements, and notwithstanding anything to the contrary contained in Section 6.6 of the Loan Agreement, Lender consents, effective upon the earlier of the date hereof or the effective date of the applicable transaction of the Hanover 2001 Reorganization, to 1. the declaration and payment by LWI to Hanover Brands of a single non-cash dividend in the amount of $33,234,468 in the aggregate consisting of an intercompany receivable of LWI in such amount, from legally available assets therefor, and 2. the declaration and payment by Scandia to Hanover Brands of a single non-cash dividend in the amount of $1,671,062 in the aggregate consisting of an intercompany receivable of Scandia in such amount, from legally available assets therefor. B. Consents to Recapitalizations and Mergers. Subject to the terms and conditions contained herein and in the Loan Agreement and in the other Financing Agreements, and notwithstanding anything to the contrary contained in Sections 6.5, 6.6(a), 6.6(c) or 6.9 of the Loan Agreement, Lender consents, effective upon the earlier of the date hereof or the effective date of the applicable transaction of the Hanover 2001 Reorganization, to the following transactions: 1. the contribution by Hanover Brands to the equity of DM Advertising in the form of a. the assumption of certain intercompany indebtedness owed by DM Advertising to certain of its Affiliates in the amount of $32,420,701.53 in the aggregate, and b. the forgiveness of certain intercompany indebtedness owed by DM Advertising to Hanover Brands in the amount of $1,287,162.87 in the aggregate, and in consideration of such assumption and forgiveness of intercompany indebtedness, the assignment and transfer by DM Advertising to Hanover of an intercompany receivable of DM Advertising in the amount of $5,953,735 in the aggregate and the increase by DM Advertising of the capital account of Hanover Brands by $27,824,129.40, in each case, subject to the security interests and liens of Lender in the assets of Hanover Brands, all in accordance with the applicable Hanover 2001 Reorganization Agreements; 2. the contribution by erizon, inc. to the equity of Keystone Internet in the form of a. the assumption of certain intercompany indebtedness owed by Keystone Internet to certain of its Affiliates in the amount of $7,702,110.93 in the aggregate, and b. the forgiveness of certain intercompany indebtedness owed by Keystone Internet to erizon, inc. in the amount of $3,898 in the aggregate, and in consideration of such assumption and forgiveness of intercompany indebtedness, the increase by Keystone Internet of the amount of the capital account of Hanover Brands by $7,706,110.93, in each case, subject to the security interests and liens of Lender in the assets of Keystone Internet and erizon,inc., all in accordance with the applicable Hanover 2001 Reorganization Agreements; 3. the merger of Scandia with and into HDV, pursuant to the Scandia/HDV Merger, with HDV as the surviving corporation, all in accordance with the applicable Hanover 2001 Reorganization Agreements; -4- 4. immediately upon the effectiveness of the Scandia/HDV Merger, the contribution, assignment and transfer by HDV to Scandia Down, LLC of all of the right, title and interest of HDV in and to all assets and properties acquired by HDV from Scandia pursuant to the Scandia/HDV Merger, including, without limitation, the Scandia Trademark License Agreements and the trademark "Scandia Down", together with the goodwill symbolized thereby, in each case, subject to the security interests and liens of Lender therein, all in accordance with the applicable Hanover 2001 Reorganization Agreements; 5. the contribution, assignment and transfer by Hanover to Hanover Brands of all of Hanover's right, title and interest in and to the one hundred percent (100%) membership interest of CCV, and immediately thereafter, the contribution, assignment and transfer by Hanover Brands to HDV of all of Hanover Brands' right, title and interest in and to the one hundred percent (100%) membership interest in CCV, in each case, subject to the security interests and liens of Lender in the assets of Hanover Brands, all in accordance with the applicable Hanover 2001 Reorganization Agreements; 6. immediately upon the effectiveness of the contributions, assignments and transfer of the membership interest in CCV consented to in Section 2(b)(v) hereof, the change by CCV of its name to "D.M. Advertising, LLC", all in accordance with the applicable Hanover 2001 Reorganization Agreements; 7. the merger of BC Corporation of Tennessee, Inc., a Tennessee corporation, with and into The Horn & Hardart Company, Inc., a New York corporation, with The Horn & Hardart Company, Inc. as the surviving corporation, all in accordance with the applicable Hanover 2001 Reorganization Agreements; and 8. the merger of LWI with and into HDPI, pursuant to the LWI/HDPI Merger, with HDPI as the surviving corporation, all in accordance with the applicable Hanover 2001 Reorganization Agreements. C. Dissolutions. Subject to the terms and conditions contained herein and in the Loan Agreement and in the other Financing Agreements, and notwithstanding anything contained in Section 6.7 of the Loan Agreement to the contrary, Lender consents, effective upon the earlier of the date hereof or the effective date of the applicable transaction of the Hanover 2001 Reorganization, to the dissolution of each of Tweeds LLC, Kitchen & Home LLC, Domestications K&G LLC, Henre and erizon.com. III. Acknowledgments with respect to dividends, equity contributions and mergers pursuant to the Hanover 2001 Reorganization. Effective as of the earlier of the date hereof or effective date of completion of the Hanover 2001 Reorganization as to the respective parties thereto: A. Each Borrower and each Guarantor hereby acknowledges, confirms and agrees that, by operation of law and as provided in the Hanover 2001 Reorganization Agreements, as the case may be, and this Amendment: -5- 1. Lender shall continue to have valid and perfected security interests, liens and rights in and to all of the assets and properties transferred by Scandia to Hanover Brands and by LWI to Hanover Brands pursuant to the declaration and payment of the dividends consented to in Section 2(a) hereof, pursuant to the Hanover 2001 Reorganization Agreements or otherwise, and all such assets and properties shall be deemed included in the Guarantor Collateral, as the case may be, and such security interests, liens and rights and their perfection and priorities have continued and shall continue in all respects in full force and effect; 2. the intercompany indebtedness owed to Hanover Brands arising under the intercompany receivables that are assigned and transferred to Hanover Brands pursuant to the dividends consented to in Section 2(a) hereof and pursuant to the equity contribution consented to in Section 2(b)(i) hereof is and shall be subordinated to the prior right of Congress to receive the indefeasible payment in full of the Obligations in accordance with and subject to the terms and conditions of the Intercompany Subordination Agreement, and Hanover Brands shall not accept payments in respect of such indebtedness without the prior written consent of Congress; 3. the intercompany indebtedness owed to certain Affiliates assumed by Hanover Brands pursuant to the equity contribution consented to in Section 2(b)(i) hereof is and shall be subordinated to the prior right of Congress to receive the indefeasible payment in full of the Obligations in accordance with and subject to the terms and conditions of the Intercompany Subordination Agreement, and such Affiliates shall not accept payments in respect of such indebtedness without the prior written consent of Congress; 4. HDV, as the surviving corporation pursuant to the Scandia/HDV Merger, has continued and shall continue to be directly and primarily liable in all respects for the Obligations of Scandia arising prior to the effective time of the Scandia/HDV Merger; 5. Lender shall continue to have valid and perfected security interests, liens and rights in and to all of the assets and properties owned and acquired a. by HDV, as the surviving corporation of the Scandia/HDV Merger, and b. by each Borrower or Guarantor that is the purchaser, assignee or transferee of any such assets and properties, pursuant to the Hanover 2001 Reorganization Agreements or otherwise, and all such assets and properties shall be deemed included in the Collateral or the Guarantor Collateral, as the case may be, and such security interests, liens and rights and their perfection and priorities have continued and shall continue in all respects in full force and effect; 6. HDPI, as the surviving corporation pursuant to the LWI/HDPI Merger, has continued and shall continue to be directly and primarily liable in all respects for the Obligations of LWI arising prior to the effective time of the LWI/HDPI Merger; and 7. Lender shall continue to have valid and perfected security interests, liens and rights in and to all of the assets and properties owned and acquired a. by HDPI, as the surviving corporation of the LWI/HDPI Merger, and b. by each Borrower or Guarantor that is the purchaser, assignee or transferee of any such assets and properties, pursuant to the Hanover 2001 Reorganization Agreements or otherwise, and all such assets and properties shall be deemed included in the Collateral or the Guarantor Collateral, as the case may be, and such security -6- interests, liens and rights and their perfection and priorities have continued and shall continue in all respects in full force and effect; B. Without limiting the generality of the foregoing, 1. none of the transactions contemplated by the Hanover 2001 Reorganization Agreements shall in any way limit, impair or adversely affect the Obligations now or hereafter owed to Lender by any existing or former Borrowers or Guarantors or any security interests or liens in any assets or properties securing the same, 2. the security interests, liens and rights of Lender in and to the assets and properties of HDV, as the surviving corporation of the Scandia/HDV Merger, and HDPI, as the surviving corporation of the LWI/HDPI Merger, or any Borrower or Guarantor that is the recipient, assignee or transferee of any assets or properties contributed, assigned or transferred pursuant to the Hanover 2001 Reorganization Agreements, have continued and, upon and after the consummation of the Scandia/HDV Merger, the LWI/HDPI Merger, or such contribution, assignment or transfer, as the case may be, shall continue to secure all Obligations to Lender of HDV and HDPI, or the predecessor owner of such assets and properties, as the case may be, in addition to all other existing and future Obligations of HDV and HDPI, or such Borrower or Guarantor, as the case may be, to Lender. IV. Acknowledgments Regarding Subsidiary Dissolutions. Each of Borrowers and Guarantors hereby acknowledges, confirms and agrees that, upon the effectiveness of the dissolutions of the Borrower and Guarantors consented to under Section 2(c) hereof: A. The dissolutions of the Borrower and Guarantors consented to under Section 2(c) hereof shall not in any way limit, impair or adversely affect the Obligations now or hereafter owed to Lender by any continuing Borrower or Guarantor, including, without limitation, any such Obligations they have as shareholders of such dissolved Borrower and Guarantors pursuant to applicable law; and B. Lender shall continue to have valid and perfected security interests, liens and rights in and to all assets and properties of each existing or former Borrower or Guarantor whose dissolution has been consented to under Section 2(c) hereof. Such assets and properties shall continue to be deemed included in the Collateral or Guarantor Collateral, as applicable, and such security interests, liens and rights and their perfection and priorities shall continue in all respects in full force and effect. V. Allocation of Revolving Loans and Letter of Credit Accommodations. Each of Borrowers and Guarantors confirms, acknowledges and agrees that: A. as of and after the effective date of the Hanover 2001 Reorganization as to LWI, the portion of the Revolving Loans and Letter of Credit Accommodations to or for the account of LWI determined by Lender to be allocable to the Inventory and other Collateral of LWI before the consummation of the Hanover 2001 Reorganization shall be deemed to be Revolving Loans and Letter of Credit Accommodations of HDPI; B. as of and after the effective date of the Hanover 2001 Reorganization as to Tweeds LLC, the portion of the Revolving Loans and Letter of Credit Accommodations to or for -7- the account of Tweeds LLC determined by Lender to be allocable to the Inventory and other Collateral of Tweeds LLC before the consummation of the Hanover 2001 Reorganization shall be deemed to be Revolving Loans and Letter of Credit Accommodations of HDV; C. contemporaneously with any determination by Lender of the outstanding amount of Revolving Loans and Letter of Credit Accommodations to be allocated to HDPI as provided in Section 5(a) hereof, the outstanding amount of Revolving Loans and Letter of Credit Accommodations of the transferor Borrower shall be reduced by those amounts so allocated, but without thereby relieving the transferor Borrower of liability therefor; and D. contemporaneously with any determination by Lender of the outstanding amount of Revolving Loans and Letter of Credit Accommodations to be allocated to HDV as provided in Section 5(b) hereof, the outstanding amount of Revolving Loans and Letter of Credit Accommodations of the transferor Borrower shall be reduced by those amounts so allocated, but without thereby relieving the transferor Borrower of liability therefor. VI. Release. A. Release. 1. Each Borrower and Guarantor, on behalf of itself and its successors and assigns, hereby, jointly and severally, absolutely, unconditionally and irrevocably releases, remises and forever discharges Lender, its respective successors and assigns, and their respective present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Lender and all such other parties being hereinafter referred to collectively as the "Releasees" and individually as a "Releasee"), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set-off, demands and liabilities whatsoever arising in connection with the transactions contemplated by the Hanover 2001 Reorganization or the Hanover 2001 Reorganization Agreements or this Amendment (individually, a "Claim" and collectively, "Claims") of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which any Borrower or Guarantor, or any of its or his or their successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any nature, cause or thing whatsoever which arises at any time on or prior to the day and date of this Amendment, for or on account of, or in relation to, or in any way in connection with the Hanover 2001 Reorganization or the Hanover 2001 Reorganization Agreements or this Amendment. 2. Each Borrower and Guarantor understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release. 3. Each Borrower and Guarantor agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall -8- affect in any manner the final and unconditional nature of the release set forth in this Section 6(a). B. Covenant Not to Sue. Each Borrower and Guarantor, on behalf of itself and its successors and assigns, hereby absolutely, unconditionally and irrevocably, jointly and severally, covenants and agrees with each Releasee that it will not sue (at law, in equity, in any regulatory proceeding or otherwise) any Releasee on the basis of any Claim released, remised and discharged by any Borrower or Guarantor pursuant to Section 6(a) hereof. If any Borrower or Guarantor violates the foregoing covenant, each Borrower and Guarantor agrees to pay, in addition to such other damages as any Releasee may sustain as a result of such violation, all attorneys' fees and costs incurred by any Releasee as a result of such violation. VII. Exhibits. A. Exhibits A, B-1, B-3, B-4, C, G and H-3 to the Loan Agreement are hereby deleted in their entirety and replaced with the information set forth on Exhibits A, B-1, B-3, B-4, C, G and H-3 attached hereto. B. Exhibit A to the Subsidiary General Security Agreement is hereby amended to include, in addition and not in limitation, the information set forth on Exhibit D attached hereto. VIII. Representations, Warranties and Covenants. Each Borrower and Guarantor represents, warrants and covenants with, to and in favor of 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 Borrowers or Guarantors hereunder have been duly authorized, executed and delivered by all necessary action on the part of Borrowers and Guarantors 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 Borrowers or Guarantors, as the case may be, contained herein and therein constitute legal, valid and binding obligations of Borrowers and Guarantors, as the case may be, enforceable against them in accordance with their terms. (b) Neither the execution and delivery of the Hanover 2001 Reorganization Agreements, nor the consummation of the transactions contemplated by the Hanover 2001 Reorganization Agreements, nor compliance with the provisions of the Hanover 2001 Reorganization Agreements, shall result in the creation or imposition of any lien, claim, charge or encumbrance upon any of the Collateral, except in favor of Lender pursuant to this Amendment and the Financing Agreements as amended hereby. -9- (c) Neither the execution and delivery of the Hanover 2001 Reorganization Agreements, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof, (i) has violated or shall violate any Bulk Sales Act, Bulk Transfer Act or Article 6 of the UCC, if applicable, the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended, if applicable, or any Federal or State securities laws or any other law or regulation or any order or decree of any court or governmental instrumentality in any respect or (ii) does, or shall conflict with or result in the breach of, or constitute a default in any respect under any material mortgage, deed of trust, security agreement, agreement or instrument to which any of Borrowers or Guarantor is a party or may be bound, other than conflicts or defaults under certain real estate leases, intellectual property licenses and equipment leases, or (iii) shall violate any provision of the Certificate of Incorporation or Certificate of Formation, as applicable, or By-Laws or Operating Agreement, as applicable, of any Borrower or Guarantor. (d) No court of competent jurisdiction has issued any injunction, restraining order or other order which has prohibited or prohibits consummation of the Hanover 2001 Reorganization or any part thereof, and no governmental action or proceeding has been threatened or commenced seeking any injunction, restraining order or other order which seeks to void or otherwise modify the transactions described in the Hanover 2001 Reorganization Agreements. (e) As of the date hereof, each Borrower and Guarantor (i) is duly organized and validly existing in good standing under the laws of its State of incorporation or formation, as applicable, (ii) is duly licensed or qualified to do business as a foreign limited liability company or foreign corporation, as the case may be, and is in good standing in each of the jurisdictions set forth in Exhibit A annexed hereto, which are, as of the date hereof, the only jurisdictions wherein the character of the properties owned or licensed or the nature of the business of any such Borrower or Guarantor, makes such licensing or qualification to do business necessary; and (iii) has all requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted and will be conducted in the future. (f) The assets and properties of each Borrower and Guarantor are owned by it, free and clear of all security interests, liens and encumbrances of any kind, nature or description, as of the date hereof, except those security interests existing in favor of Lender and those granted pursuant hereto in favor of Lender, and except for Liens (if any) permitted under Section 6.4 of the Loan Agreement or the other Financing Agreements. (g) Upon the effectiveness of each of the mergers consented to under Section 2(b) hereof, each such merger has become effective in accordance with the terms of each of the applicable Hanover 2001 Reorganization Agreements applicable to it and of the applicable corporate statutes of the States of incorporation of each Borrower and each Guarantor that is a constituent corporation pursuant to the mergers so consented to. As of the respective date of the effectiveness of the respective mergers consented to under Section 2(b) hereof, (i) HDV was and continues to be the surviving corporation of the Scandia/HDV Merger, and (ii) HDPI was and continues to be the surviving corporation of the LWI/HDPI Merger. (h) Neither the dividend payments consented to in Section 2(a) hereof, nor the consummation of the mergers consented to under Section 2(b) hereof, nor the dissolution of -10- certain Guarantors as consented to under Section 2(c) hereof, nor the execution, delivery and/or filing of the applicable merger documents in respect of the Hanover 2001 Reorganization 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 if consummated or effected on or before the date hereof has resulted in or if consummated or effected after the date hereof shall result in the creation or imposition of any lien, claim, charge or incumbrance upon any of the Collateral, except in favor of Lender. (i) All actions and proceedings required by the Hanover 2001 Reorganization Agreements applicable to the declaration and payment of the dividends consented to in Section 2(a) hereof, the mergers consented to under Section 2(b) hereof and the Hanover Subsidiary 2001 Dissolution Agreements, applicable law and regulation, have been or shall be taken prior to the effectiveness of such dividends, mergers and dissolutions and all transactions required thereunder have been and shall be, or will be duly and validly consummated. (j) No court of competent jurisdiction has, or prior to the effectiveness thereof shall have, issued any injunction, restraining order or other order which prohibits the declaration or payment of the dividends as consented to under Section 2(a) hereof, the consummation of the mergers as consented to under Section 2(b) hereof or the dissolution of the Borrower and Guarantors as consented to under Section 2(c) hereof, and no governmental action or proceeding has been, or, prior to the effectiveness thereof, shall have been, threatened or commenced, seeking any injunction, restraining order or other order which seeks to void or otherwise modify the transactions described in the Hanover 2001 Reorganization Agreements applicable to the dividends consented to in Section 2(a) hereof or the mergers consented to in Section 2(b) hereof or in the Hanover Subsidiary 2001 Dissolution Agreements. (k) Each Borrower and Guarantor is solvent and will continue to be solvent after giving effect to the Hanover 2001 Reorganization and the transactions contemplated by the Hanover 2001 Reorganization Agreements, is able to pay its debts as they mature and has (and has reason to believe it will continue to have) sufficient capital (and not unreasonably small capital) to carry on its business and all businesses in which it is about to engage. After giving effect to the Hanover 2001 Reorganization, and after giving effect to the transactions contemplated by the Hanover 2001 Reorganization Agreements, the assets and properties of each Borrower and Guarantor at a fair valuation and at their present fair salable value are, and will be, greater than the indebtedness of each such Borrower and Guarantor, respectively, and including subordinated and contingent liabilities computed at the amount which, to the best of each such Borrower's and Guarantor's, represents an amount which can reasonably be expected to become an actual or matured liability. (l) Neither the declaration and payment of the dividends consented to under Section 2(a) hereof, nor the consummation of the mergers consented to under Section 2(b) hereof, nor the dissolution of the Borrower and Guarantors consented to under Section 2(c) hereof, nor the execution, delivery or filing of the Hanover 2001 Reorganization Agreements applicable to the dividends as consented to under Section 2(a) hereof or the mergers as consented to under Section 2(b) hereof, or the Hanover Subsidiary 2001 Dissolution Agreements or any other agreements, documents or instruments in connection therewith, nor the consummation of the transactions -11- therein contemplated, nor compliance with the provisions thereof before the date hereof or upon the effectiveness of such dividends, mergers and dissolutions (i) has violated or will violate any Federal or State securities laws, any State corporation law, or any other law or regulation or any order or decree of any court or governmental instrumentality in any respect, or (ii) does or will conflict with or result in the breach of, or constitute a default in any respect under any material mortgage, deed of trust, security agreement, agreement or instrument to which any existing or former Guarantor or Borrower is a party or may be bound, other than conflicts or defaults under certain real estate leases, intellectual property licenses and equipment leases, or (iii) does or will violate any provision of the Certificate of Incorporation or Certificate of Formation, as applicable, or By-Laws or Operating Agreement, as applicable, of any Borrower or Guarantor. (m) The aggregate amount of the actual and contingent indebtedness, liabilities and obligations, other than those owed to Lender or to any other Borrower or Guarantor (so long as such indebtedness, liabilities and obligations owed to such other Borrower or Guarantor constitute valid intercompany indebtedness that is not indirectly or beneficially owed to or held by a Person other than a Borrower or Guarantor), incurred by the Borrower and Guarantors dissolved or which will be dissolved as consented to under Section 2(c) hereof, including any such indebtedness, liabilities and obligations arising in connection with or relating to such dissolutions, shall not (i) as to Tweeds LLC, Henre or erizon.com, exceed $10,000, (ii) as to any of Domestications K&G LLC, exceed $106,100 or (iii) as to Kitchen & Home LLC, exceed $31,200. (n) No action of, or filing with, or consent of any governmental or public body or authority, other than the filing of UCC financing statements and filings with the United States Patent and Trademark Office, and no approval or consent of any other party, including, without limitation, Richemont or the Persons signatory parties to the Scandia Trademark License Agreements, is required to authorize, or is otherwise required in connection with, the execution, delivery and performance of this Amendment. (o) No changes or modifications are needed to update or amend the existing Evidence of Property Insurance and Certificate of Liability Insurance issued by the existing insurance broker or agent of Borrowers and Guarantors in favor of Lender after giving effect to the transactions contemplated hereby and by the Hanover 2001 Reorganization Agreements. (p) 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. (q) On or before March 22, 2002, Borrowers and Guarantors shall deliver, or caused to be delivered, to Lender, in form and substance satisfactory to Lender, (i) a Guarantee and Waiver by CCV in favor of Lender with respect to the Obligations of Borrowers, (ii) an amendment to the Loan Agreement with respect to the inclusion of CCV as a Guarantor under the Financing Agreements, (iii) copies of the formation and organizational documents, instruments and agreements of CCV as may be required by Lender, certified by the Secretary of -12- State of its jurisdiction of formation, (iv) such company resolutions and authorization documents in respect thereof that Lender may reasonably require, (v) an opinion of counsel to CCV, Borrowers and the other Guarantors with respect to the transactions contemplated by the Guarantee and the amendment, and such other matters as Lender shall reasonably request, addressed to Lender, and (vi) such other documents, instruments and agreements that Lender may reasonably request in connection with the transactions contemplated by with such Guarantee and Waiver and such amendment to the Loan Agreement. (r) After giving effect to the provisions of this Amendment, no Event of Default or Incipient Default exists or has occurred and is continuing. 9. 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 a photocopy of an executed original or executed original counterparts of this Amendment by facsimile (with the originals to be delivered within five (5) Banking Days after the date hereof), as the case may be, duly authorized, executed and delivered by Borrowers and Guarantors; (b) Lender shall have received, in form and substance satisfactory to Lender, (i) true, correct and complete photocopies of all of the Hanover 2001 Reorganization Agreements and (ii) evidence that (A) the Hanover 2001 Reorganization Agreements have been duly executed and delivered by and to the appropriate parties thereto and (B) the transactions contemplated by the Hanover 2001 Reorganization have been consummated prior to, or contemporaneously with, the execution of this Amendment; (c) Each Borrower and Guarantor 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 by such Borrower or Guarantor; (d) Lender shall have received, in form and substance satisfactory to Lender, Secretary's or Assistant Secretary's Certificates of Directors' Resolutions with Shareholders' Consent (other than in respect of Hanover) evidencing the adoption and subsistence of corporate resolutions approving the execution, delivery and performance by each Borrower and Guarantor that is a corporation of this Amendment and the agreements, documents and instruments to be delivered pursuant to this Amendment; -13- (e) Lender shall have received, in form and substance satisfactory to Lender, for each Borrower and Guarantor that is a limited liability company (i) a Management and Incumbency Certificate of each such company identifying all managers, officers or other persons authorized to act on behalf of such company, (ii) Company Resolutions of each such company, evidencing the adoption and subsistence of company resolutions approving the execution, delivery and performance by each Borrower and Guarantor that is a limited liability company of this Amendment and the agreements, documents and instruments to be delivered pursuant to this Amendment, in each case signed by all members of each such company, and (iii) Certificates of the Secretary or Assistant Secretary of each such company identifying all members of such company; (f) Lender shall have received an opinion of counsel to Borrowers and Guarantors with respect to the transactions contemplated by this Amendment and the Hanover 2001 Reorganization Agreements, and such other matters as Lender shall reasonably request, addressed to Lender, in form and substance and satisfactory to Lender; and (g) 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. 10. 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. 11. 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. 12. Governing Law. The validity, interpretation and enforcement of this Amendment in any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise shall be governed by the internal laws of the State of New York, without regard to any principle of conflict of laws or other rule of law that would result in the application of the law of any jurisdiction other than the State of New York. 13. 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. -14- 14. 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. -15- [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -16- 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: SVP ----------------------------------------- HANOVER DIRECT PENNSYLVANIA, INC., successor to the merger of LWI Holdings, Inc. with and into Hanover Direct Pennsylvania, Inc. BRAWN OF CALIFORNIA, INC. GUMP'S BY MAIL, INC. GUMP'S CORP. HANOVER DIRECT VIRGINIA INC., successor to the merger of Scandia Down HANOVER REALTY, INC. THE COMPANY STORE FACTORY, INC. THE COMPANY OFFICE, INC. SILHOUETTES, LLC HANOVER COMPANY STORE, LLC DOMESTICATIONS, LLC KEYSTONE INTERNET SERVICES, INC. By: /s/ Edward M. Lambert Title: Vice President By their signatures below, the undersigned Guarantors acknowledge and agree to be bound by the applicable provisions of this Amendment: HANOVER DIRECT, INC. By: /s/ Edward M. Lambert Title: EVP & CFO [SIGNATURES CONTINUE ON NEXT PAGE] -17- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AMERICAN DOWN & TEXTILE COMPANY D.M. ADVERTISING, INC. KEYSTONE LIQUIDATIONS, INC. HANOVER HOME FASHIONS GROUP, LLC ENCORE CATALOG, LLC CLEARANCE WORLD OUTLETS, LLC SCANDIA DOWN, LLC ERIZON, INC. HANOVER BRANDS, INC. LA CROSSE FULFILLMENT, LLC SAN DIEGO TELEMARKETING, LLC By: Edward M. Lambert Title: Vice President -18- EX-10.42 5 y58340ex10-42.txt AMENDMENT NO. 21 TO LOAN AND SECURITY AGREEMENT EXHIBIT 10.42 [Execution Version] TWENTY-FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS TWENTY-FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment"), dated March 21, 2002, 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"), 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"), 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 KEYSTONE INTERNET SERVICES, INC., a Delaware corporation ("Keystone Internet"; and together with HDPI, Brawn, GBM, Gump's, HDV, Hanover Realty, TCS Factory, TCS Office, Silhouettes, HCS LLC and Domestications, collectively, the "Borrowers" and each individually, a "Borrower" ), 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, Inc."), KEYSTONE LIQUIDATIONS, INC., a Delaware corporation, formerly known as Tweeds of Vermont, Inc. ("Keystone Liquidations"), HANOVER HOME FASHIONS GROUP, LLC, a Delaware limited liability company ("HHFG 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"), LACROSSE FULFILLMENT, LLC, a Delaware limited liability company ("LaCrosse, LLC") and SAN DIEGO TELEMARKIETING, LLC, a Delaware limited liability company ("San Diego LLC"; and together with Hanover, American Down, DM Advertising, Inc., Keystone Liquidations, HHFG LLC, Encore LLC, Clearance World, Scandia Down, LLC, erizon, inc., Hanover Brands and LaCrosse, LLC, collectively, the "Existing Guarantors" and each individually, an "Existing Guarantor"), and D.M. Advertising, LLC, a Delaware limited liability company ("DM Advertising, LLC"). Each Existing Guarantor, together with DM Advertising, LLC, shall hereinafter be referred to individually as a "Guarantor" and collectively as the "Guarantors". W I T N E S S E T H: WHEREAS, Borrowers, Existing Guarantors and Lender are parties to the Loan and Security Agreement, dated November 14, 1995, as amended by First Amendment to Loan and Security Agreement, dated February 22, 1996, Second Amendment to Loan and Security Agreement, dated April 16, 1996, Third Amendment to Loan and Security Agreement, dated May 24, 1996, Fourth Amendment to Loan and Security Agreement, dated May 31, 1996, Fifth Amendment to Loan and Security Agreement, dated September 11, 1996, Sixth Amendment to Loan and Security Agreement, dated as of December 5, 1996, Seventh Amendment to Loan and Security Agreement, dated as of December 18, 1996, Eighth Amendment to Loan and Security Agreement, dated as of March 26, 1997, Ninth Amendment to Loan and Security Agreement, dated as of April 18, 1997, Tenth Amendment to Loan and Security Agreement, dated as of October 31, 1997, Eleventh Amendment to Loan and Security Agreement, dated as of March 25, 1998, Twelfth Amendment to Loan and Security Agreement, dated as of September 30, 1998, 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, Fifteenth Amendment to Loan and Security Agreement, dated as of March 24, 2000, Sixteenth Amendment to Loan and Security Agreement, dated as of August 8, 2000, Seventeenth Amendment to Loan and Security Agreement, dated as of January 5, 2001, Eighteenth Amendment to Loan and Security Agreement, dated as of November 12, 2001, Nineteenth Amendment to Loan and Security Agreement, dated as of December 18, 2001 and Twentieth Amendment to Loan and Security Agreement, dated as of March 5, 2002 (as so amended, the "Loan Agreement"), pursuant to which Lender has made loans and advances to Borrowers; and WHEREAS, Borrowers and Existing Guarantors have requested that Lender consent to, and enter into certain amendments to the Loan Agreement with respect to the minimum amounts of Consolidated Working Capital, Consolidated Net Worth and EBITDA that Hanover and its Subsidiaries are required to maintain and to amend the definition of Consolidated Net Worth; and WHEREAS, Borrowers and Existing Guarantors have requested that DM Advertising, LLC become a Guarantor pursuant to the terms and conditions of the Loan Agreement, as amended hereby; and WHEREAS, the parties to the Loan Agreement desire to enter into 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. - 3 - (a) Additional Definition. As used herein and in the Loan Agreement and the other Financing Agreements, the term "DM Advertising, LLC" shall mean D.M. Advertising, LLC, formerly known as Creative Capital Ventures, LLC, a Delaware limited liability company, and its successors and assigns. (b) Amendment to Definition. All references to the term "Consolidated Net Worth" in the Loan Agreement and the other Financing Agreements are deemed amended and each such reference is hereby amended to mean, as to any Person, at any time, in accordance with generally accepted accounting principles, as in effect from time to time consistently applied, on a consolidated basis for such Person and its Subsidiaries, the amount equal to the result obtained by taking total assets and subtracting therefrom total liabilities of such Person and its Subsidiaries; provided, however, (a) that solely for purposes of calculating Consolidated Net Worth of Hanover and its Subsidiaries as at the end of Hanover's 1995 fiscal year, up to $4,500,000 in write-downs of Hanover's deferred taxes asset, as required pursuant to Financial Accounting Standards No. 109, due to losses incurred by Hanover and its Subsidiaries in such fiscal year, shall not be considered reductions of the deferred taxes asset of Hanover, (b) that for purposes of calculating Consolidated Net Worth of Hanover and its Subsidiaries, the outstanding Indebtedness for Borrowed Money evidenced by the $25,000,000 IMR Subordinated Note shall not be considered a liability of Hanover, and (c) that effective July 1, 2002, solely for purposes of calculating Consolidated Net Worth of Hanover and its Subsidiaries for the fiscal month ending July 2002 and every fiscal month thereafter, to the extent that goodwill or intangible assets (or both) of Hanover or its Subsidiaries is impaired under the provisions of Financial Accounting Standards No. 142 ("FAS No. 142"), such that Hanover is required pursuant to FAS No. 142 to take a charge to write off part or all of goodwill or intangible assets (or both) of Hanover or its Subsidiaries, then such write off of goodwill or intangible assets (or both) shall not be considered a reduction of total assets of such Subsidiaries or Hanover. (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; Acknowledgments with respect to Hanover 2001 Reorganization. (a) The Guarantee and Waiver, dated November 14, 1995, executed by the Existing Guarantors, other than Hanover and Borrowers, as of such date, in favor of Lender, as heretofore amended (the "Subsidiary Guarantee"), shall be deemed further amended to include DM Advertising, LLC as an additional Guarantor party signatory thereto. DM Advertising, LLC hereby expressly (i) assumes and agrees to be directly liable to Lender, jointly and severally with the other Guarantors signatories thereto and the Borrowers, for all Obligations (as defined in the Subsidiary Guarantee), (ii) agrees to perform, comply with and be bound by all terms, conditions and covenants of the Subsidiary Guarantee with the same force and effect as if DM Advertising, LLC had originally executed and been an original party signatory to the Subsidiary Guarantee, and (iii) agrees that Lender shall have all rights, remedies and interests with respect to DM - 4 - Advertising, LLC and its properties with the same force and effect as if it had originally executed and been an original party signatory to the Subsidiary Guarantee. (b) DM Advertising, LLC hereby expressly 1. assumes and agrees to be directly liable for all Obligations under, contained in, or arising out of the Loan Agreement, the General Security Agreement, dated November 14, 1995, by the Existing Guarantors, other than Hanover and Borrowers, as of such date, in favor of Lender, as heretofore amended (the "Subsidiary General Security Agreement"), and the other Financing Agreements applicable to all Guarantors and as applied to DM Advertising, LLC as a Guarantor, 2. agrees to perform, comply with and be bound by all terms, conditions and covenants of the Loan Agreement, the Subsidiary General Security Agreement and the other Financing Agreements applicable to all Guarantors and as applied to DM Advertising, LLC as a Guarantor with the same force and effect as if DM Advertising, LLC had originally executed and been an original Guarantor or Debtor, as the case may be, party signatory to the Loan Agreement, the Subsidiary General Security Agreement and the other Financing Agreements, and 3. agrees that Lender shall have all rights, remedies and interests, including security interests in the Collateral granted pursuant to Section 3 hereof, the Loan Agreement, the Subsidiary General Security Agreement, and the other Financing Agreements, with respect to DM Advertising, LLC and its properties and assets with the same force and effect as if DM Advertising, LLC had originally executed and had been an original Guarantor or Debtor, as the case may be, party signatory to the Loan Agreement, the Subsidiary General Security Agreement and the other Financing Agreements, and such agreements shall be deemed so amended. (c) Each Guarantor, including, without limitation, DM Advertising, LLC as a Guarantor pursuant hereto, hereby expressly and specifically ratifies, restates and confirms the terms and conditions of its respective Guarantee(s) in favor of Lender and its liability for all of the Obligations (as defined in its Guarantee(s)), and all other obligations, liabilities, agreements and covenants thereunder. (d) Each Borrower, and each Guarantor, including, without limitation, DM Advertising, LLC, hereby agrees that all references to Guarantor or Guarantors or other terms intended to refer to a Guarantor or Guarantors, such as Debtor or Debtors, contained in any of the Financing Agreements are hereby amended to include DM Advertising, LLC and each other person or entity at any time hereafter made a "Guarantor" under the Loan Agreement, as an additional Guarantor or Debtor, or other appropriate term of similar import, as the case may be. 3. Collateral. Without limiting the provisions of the Loan Agreement, the Subsidiary General Security Agreement, the other Financing Agreements and Section 2(b) hereof, as collateral security for the prompt payment and performance when due of all of the Obligations of DM Advertising, LLC to Lender, DM Advertising, LLC hereby grants to Lender, a continuing security interest in, and lien upon, and right of setoff against, and DM Advertising, LLC hereby pledges and assigns to Lender, all of its now owned and hereafter acquired and arising assets and properties, all of which shall be included in the definition of Collateral as set forth in the - 5 - Subsidiary General Security Agreement (which definition is hereby amended accordingly), including, without limitation, the following: (a) all present and future Accounts; (b) all Inventory; (c) all Equipment; (d) all Real Property; (e) all present and future books, records, ledger cards, computer programs and other property and general intangibles evidencing or relating to any of the above, any other collateral or any account debtor, together with the file cabinets or containers in which the foregoing are stored; and (f) all present and future products and proceeds of the foregoing, in any form, including, without limitation, any insurance proceeds and any claims against third persons for loss or damage to or destruction of any or all of the foregoing. 4. Consolidated Working Capital. Section 6.19(b) of the Loan Agreement is hereby deleted in its entirety and replaced with the following Section 6.19(b) and a new Section 6.19(c) as follows: "(b) Hanover shall, commencing with the fiscal month ending April 2000 and for each fiscal month thereafter in any fiscal year thereafter through and including the fiscal month ending February 2002, 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 ------ ------ March $20,000,000 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
- 6 - January $12,500,000 February $12,500,000
(c) Hanover shall, commencing with the fiscal month ending March 2002 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 ------ ------ March $20,000,000 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 $12,500,000 January $15,000,000 February $15,000,000"
5. Consolidated Net Worth. Section 6.20 (b) of the Loan Agreement is hereby deleted in its entirety and replaced with the following Section 6.20(b) and a new Section 6.20(c) as follows: "(b) Hanover shall commencing with the fiscal month ending April 2000 and for each fiscal month thereafter in any fiscal year thereafter though and including the fiscal month ending February 2002, 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 ------ ------ March $34,000,000 April $34,000,000 May $34,000,000 June $34,000,000 July $30,000,000 August $30,000,000
- 7 - September $30,000,000 October $30,000,000 November $30,000,000 December $37,500,000 January $37,500,000 February $37,500,000 (c) Hanover shall commencing with the fiscal month ending March 2002 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 ------ ------ March $36,000,000 April $35,000,000 May $35,000,000 June $35,000,000 July $35,000,000 August $34,000,000 September $32,500,000 October $32,500,000 November $32,500,000 December $35,000,000 January $37,000,000 February $36,500,000
6. EBITDA. Sections 6.31(c) and 6.31(d) of the Loan Agreement are hereby deleted in their entirety and replaced with the following: "(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) December 30, 2001
- 8 -
Fiscal Quarter End YTD Periods Cumulative for Fiscal Year 2002 Minimum EBITDA -------------------- -------------- through March 30, 2002 ($1,000,000) (ii) December 30, 2001 through June 29, 2002 $1,200,000 (iii) December 30, 2001 through September 28, 2002 $1,500,000 (iv) December 30, 2001 through December 28, 2002 $7,000,000
(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-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 2003 Minimum EBITDA -------------------- -------------- (i) December 29, 2002 ($1,000,000) through March 29, 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." 7. Amendment Fee. In addition to all other fees, charges, interest and expenses payable by Borrowers to Lender under the Loan Agreement and the other Financing Agreements, Borrowers shall pay to Lender the following additional fees: - 9 - (a) Borrowers shall pay to Lender, contemporaneously herewith, a closing fee in the amount of $75,000, which fee is fully earned as of the date hereof and may be charged into the loan account(s) of any Borrower. (b) Tranche B Term Loan Borrowers shall pay to Lender, contemporaneously herewith, a closing fee in the amount of $25,000, which fee is fully earned as of the date hereof and may be charged into the loan account(s) of any Tranche B Term Loan Borrower. 8. Exhibits. (a) Exhibits A, B-1, B-4 and C to the Loan Agreement are hereby deleted in their entirety and replaced with the information set forth on Exhibits A, B-1, B-4 and C attached hereto. (b) Exhibit A to the Subsidiary General Security Agreement is hereby amended to include, in addition and not in limitation, the information set forth on Exhibit D attached hereto. 9. Representations, Warranties and Covenants. Each Borrower and Guarantor represents, warrants and covenants 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 the Borrowers or Guarantors hereunder have been duly authorized, executed and delivered by all necessary action on the part of such Borrowers and Guarantors which are parties 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 Borrowers and Guarantors, as the case may be, contained herein and therein constitute legal, valid and binding obligations of Borrowers and Guarantors, as the case may be, enforceable against them in accordance with their terms. (b) As of the date hereof, each Borrower and Guarantor is duly organized and validly existing in good standing under the laws of its State of incorporation or formation, as applicable. (c) As of the date hereof, DM Advertising, LLC (i) is duly licensed or qualified to do business as a foreign limited liability company or foreign corporation, as the case may be, and is in good standing in each of the jurisdictions set forth in Exhibit A annexed hereto, which are, as of the date hereof, the only jurisdictions wherein the character of the properties owned or licensed or the nature of the business of DM Advertising, LLC, makes such licensing or - 10 - qualification to do business necessary; and (ii) has all requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted and will be conducted in the future. (d) The assets and properties of each Borrower and Guarantor are owned by it, free and clear of all security interests, liens and encumbrances of any kind, nature or description, as of the date hereof, except those security interests existing in favor of Lender and those granted pursuant hereto in favor of Lender, and except for Liens (if any) permitted under Section 6.4 of the Loan Agreement or the other Financing Agreements. (e) No action of, or filing with, or consent of any governmental or public body or authority, other than the filing of UCC financing statements, 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. (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) After giving effect to the provisions of this Amendment, no Event of Default or Incipient Default exists or has occurred and is continuing. 10. Conditions Precedent. Concurrently with the execution 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 a photocopy of an executed original or executed original counterparts of the following documents by facsimile (with the originals to be delivered within five (5) Banking Days after the date hereof), as the case may be: (i) this Amendment, duly authorized, executed and delivered by each Borrower and Guarantor; and (ii) a Guarantee and Waiver, duly authorized, executed and delivered by DM Advertising, LLC in favor of Lender with respect to the Obligations of Borrowers under the Financing Agreements; (b) Lender shall have received, in form and substance satisfactory to Lender, such UCC financing statements and other documents and instruments, in each case duly executed (if applicable) and delivered by Borrowers and Guarantors, which Lender in its sole discretion has - 11 - determined are necessary to perfect the security interests of Lender in all Collateral now or hereafter owned by DM Advertising, LLC; (c) Lender shall have received, in form and substance satisfactory to Lender (i) a copy of the Certificate of Formation or Articles of Organization of DM Advertising, LLC, and all amendments thereto, certified by the Secretary of State of its jurisdiction of formation as of the most recent practicable date certifying that each of the foregoing documents remains in full force and effect and has not been modified or amended, except as described therein, (ii) a copy of the Operating Agreement of DM Advertising, LLC, certified by the Secretary or Assistant Secretary of the company, and (iii) a certificate from the Secretary or Assistant Secretary of DM Advertising, LLC, dated the date hereof, certifying that each of the foregoing documents remains in full force and effect and has not been modified or amended, except as described therein; (d) Lender shall have received, in form and substance satisfactory to Lender, evidence, as of the most recent practicable date, that DM Advertising, LLC is duly qualified and in good standing in each jurisdiction set forth in Exhibit A annexed hereto; (e) Lender shall have received, in form and substance satisfactory to Lender (i) a Management and Incumbency Certificate of DM Advertising, LLC identifying all managers, officers or other persons authorized to act on its behalf, (ii) Company Resolutions of DM Advertising, LLC, evidencing the adoption and subsistence of company resolutions approving the execution, delivery and performance by DM Advertising, LLC of this Amendment and the agreements, documents and instruments to be delivered pursuant to this Amendment, in each case signed by all members of DM Advertising, LLC, and (iii) a Certificate of the Secretary or Assistant Secretary of DM Advertising, LLC identifying all members of DM Advertising, LLC; (f) Lender shall have received written consents from each of the Participants with respect to the transactions contemplated by this Amendment, each duly authorized, executed and delivered by such Participants; (g) Lender shall have received, in form and substance satisfactory to Lender, an opinion of counsel to Borrowers and Guarantors with respect to the transactions contemplated by this Amendment, the Guarantee and Waiver and such other matters as Lender shall reasonably request, addressed to Lender, in form and substance and satisfactory to Lender; and (h) Lender shall have received, in form and substance satisfactory 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. 11. Effect of this Amendment. This Amendment constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedes all prior oral or written communications, memoranda, proposals, negotiations, discussions, term sheets and commitments with respect to the subject matter hereof. Except as expressly provided herein, no - 12 - other changes or modifications to the Loan Agreement or any of the other Financing Agreements, or waivers of or consents under any provisions of any of the foregoing, are intended or implied by this Amendment, and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent that any provision of the Loan Agreement or any of the other Financing Agreements conflicts with any provision of this Amendment, the provision of this Amendment shall control. 12. Further Assurances. Borrowers and Guarantors shall execute and deliver such additional documents and take such additional action as may be reasonably requested by Lender to effectuate the provisions and purposes of this Amendment. 13. Governing Law. The validity, interpretation and enforcement of this Amendment in any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise shall be governed by the internal laws of the State of New York, without regard to any principle of conflict of laws or other rule of law that would result in the application of the law of any jurisdiction other than the State of New York. - 13 - 14. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 15. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. - 14 - 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: SVP ------------------------------ HANOVER DIRECT PENNSYLVANIA, INC. BRAWN OF CALIFORNIA, INC. GUMP'S BY MAIL, INC. GUMP'S CORP. HANOVER DIRECT VIRGINIA INC. HANOVER REALTY, INC. THE COMPANY STORE FACTORY, INC. THE COMPANY OFFICE, INC. SILHOUETTES, LLC HANOVER COMPANY STORE, LLC DOMESTICATIONS, LLC KEYSTONE INTERNET SERVICES, INC. By: /s/ Edward M. Lambert --------------------------------- Title: Vice President ------------------------------ By their signatures below, the undersigned Guarantors acknowledge and agree to be bound by the applicable provisions of this Amendment: HANOVER DIRECT, INC. By: /s/ Edward M. Lambert - ---------------------------- Title: EVP & CFO - ---------------------------- [SIGNATURES CONTINUE ON NEXT PAGE] - 15 - [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AMERICAN DOWN & TEXTILE COMPANY DM ADVERTISING, INC. KEYSTONE LIQUIDATIONS, INC. HANOVER HOME FASHIONS GROUP, LLC ENCORE CATALOG, LLC CLEARANCE WORLD OUTLETS, LLC SCANDIA DOWN, LLC ERIZON, INC. HANOVER BRANDS, INC. LA CROSSE FULFILLMENT, LLC SAN DIEGO TELEMARKETING, LLC D.M. ADVERTISING, LLC By: /s/ Edward M. Lambert - ---------------------------- Title: Vice President - ---------------------------- - 16 - EX-10.55 6 y58340ex10-55.txt ADDENDUM EXHIBIT 10.55 ADDENDUM TO ACCOUNT PURCHASE & CREDIT CARD MARKETING & SERVICES AGREEMENT This Addendum to Account Purchase & Credit Card Marketing & Services Agreement ("Addendum") is entered into by and between Capital One Services, Inc., a Delaware corporation ("COSI") and Capital One Bank, a Virginia banking corporation ("COB")(jointly and severally, or as appropriate as to a particular party's obligation, "Capital One") and Hanover Direct, Inc., a Delaware corporation ("HDI"), as of July 7, 1999. WHEREAS, Capital One and HDI entered into an Account Purchase & Credit Card Marketing & Servicing Agreement ("Agreement") as of March 9, 1999; and WHEREAS, Capital One and HDI now desire to amend certain provisions of the Agreement. NOW THEREFORE, the parties agree as follows: 1. The current definition of "Purchased Accounts" in the Agreement is hereby deleted in its entirety and replaced with the following definition: "Purchased Accounts = Accounts from the purchased Existing Portfolio on the Closing Date, excluding (i) Charged-off Accounts, (ii) all Gumps Department Store corporate credit accounts; (iii) all six-pay Gumps accounts; and (iv) all eighteen-pay Gumps accounts." 2. The current definition of "Charged-off Accounts" in the Agreement is hereby deleted in its entirety and replaced with the following: "Charged-off Accounts = Credit accounts issued under the Existing Agreement that have been charged-off on the books and records of the applicable issuer, net of recoveries, pursuant to Applicable Law and, in every event, (i) all accounts 180 days past due, (ii) all fraudulent accounts, (iii) all accounts with lost or stolen cards, (iv) all bankrupt accounts, (v) all accounts with deceased account holders, and (vi) any other instance mutually agreed upon by the parties." 3. The current definition of "Term" in the Agreement is hereby deleted in its entirety and replaced with the following definition: "Term = as defined in IV.A.l." 4. Section II.A.1 is hereby deleted in its entirety and replaced with the following: "Replacement. Capitol One shall provide services generally of a type provided previously by GECC with respect to HDI's private label credit card program, except that Capital One assumes no responsibility for any account programs serviced by GECC and closed as of the closing date, including, without limitation, the insurance sales and deferred billing programs. Capital One shall do this by (a) purchasing from HDI the Purchased Accounts at a price equal to 100% of the par value of the outstanding receivables of accounts and (ii) continuing to fund the portfolio's growth pursuant to the provisions of this Agreement." 5. A new Section II.B.3 is hereby inserted to read as follows, and the current Section II.B.3 will officially become Section II.B.4; the current Section II.B.4 will officially become II.B.5 and the current Section II.B.5 will officially become II.B.6: "HDI's Override Authority. Notwithstanding Section II.B.2 above, and solely for the Gumps Department Store accounts, Capital One shall not object to HDI overriding certain credit limits set by Capital provided that overrides are made solely pursuant to the Gumps Credit policy attached as Exhibit A. In those instances that HDI exercises such override authority and in the event Gumps accounts are later charged-off, HDI and Capital One agree that Capital One will be only responsible for the first one percent (1%) of the Gumps amounts so charged-off and HDI shall be solely responsible for all other charged-off losses". 6. A new Section II.B.4.(b) is hereby inserted to read as follows, and the current Section II.B.4.(b) will officially become Section II.B.4.(c) and the current Section II.4.3(c) will officially become II.B.4.(d): "Should Capital One offer a 9.9% annual prime rate (the "9.9 Card") to qualifying Accounts, HDI agrees to reduce the fee set forth in Section B.3.(a) from 0.625% of the quarterly average outstanding receivable balance (2.5% annualized) under the dual-line product, to .15% of the quarterly average outstanding receivable balance (.60% annualized), excluding Delinquent Accounts. Capital One agrees to limit the number of accounts holding the 9.9 Card to a maximum of 20,000. Capital One and HDI also agree 2 to evaluate the success of the 9.9 Card program 18 months after the Closing Date, unless terminated sooner by mutual agreement of the parties, and if either party determines to discontinue the program, the parties shall convert existing affected Accounts to a new program. 7. A new Section B.6 is hereby inserted as follows: "Additional Capital One Fees. At the end of each quarter, the parties hereby agree to calculate the amount of fees paid by each party during such quarter under Sections A.4 and B.3.(b). If during such period, fees paid by HDI to Capital One pursuant to Section A.4 exceed fees paid by Capital One to HDI pursuant to Section B.3.(b), Capital One agrees to pay HDI one-half of the amount of such excess. [By way of illustration only, if under Section A.4, HDI paid Capital One $1,000, and if under B.3.(b), Capital One paid HDI $500, then Capital One would pay HDI $250 ($500 subtracted from $1,000, divided by 2)]. If Capital One pays more fees to HDI during any quarter, Capital One is not obligated to pay HDI any further fees." 8. A new Section IV.B.3(b) is hereby to read as follows, and the current Section IV.B.3(b) will officially become Section IV.B.3(c), and the current Section IV.B.3(c) will officially become IV.B.3(d), and the current Section IV.B.3(d) will officially become IV.B.3(e): "reconcile with GECC, within 3 days of the Closing Date, any discrepancies between the Purchase Price paid and the outstanding amount of the receivables of the Purchased Accounts, as reflected on the Tape received from GECC on the Closing Date. If, as a result of this reconciliation, the estimated portion of the Purchase Price delivered to Capital One prior to the Closing Date from HDI is materially changed, Capital and HDI will "true-up" any such discrepancies." 9. A new Section IV.B.3(f) is hereby inserted as follows: "wire a portion of the Purchase Price, based on the June 2, 1999 Preliminary Tape, to Capital One no later than the day before the scheduled Closing Date. Such amount will represent an estimate of HDI's portion of the Purchase Price, which estimate will be agreed upon by HDI and Capital One. Upon receipt of a confirmation of HDI's funds, Capital One will wire GECC the Purchase Price on 3 the Closing Date. HDI and Capitol One agree to reconcile such amounts paid to GECC within 10 business days of Closing." 10. A new Section W. is hereby added to Section IV of the Agreement as follows: "W. SPECIFIC INDEMNIFICATION. In the event that the purchase and sale of the Existing Portfolio as contemplated in that certain Portfolio Purchase and Sale Agreement by and among HDI and GECC (the "GECC Agreement") is not consummated in accordance with the GECC Agreement due primarily to any act or omission of HDI, then, in addition to the obligations of HDI pursuant to Subsection J above, HDI agrees to indemnify and hold harmless Capitol One and its affiliates and the officers, directors, employees, agents and partners of Capitol One and its affiliates (collectively, the "Indemnified Parties"), from any liability, loss, cost, expense and damages (including, without limitation, punitive damages) paid or payable to GECC or on its behalf, and any interest thereon, including reasonable attorneys' fees (collectively, "Losses"), which results in any material part from or is caused in any material part by the notice letter sent to account holders by Capital One with the concurrence of HDI on or around May 17, 1999 ("Pre-Closing Letter") or any related changes in terms or benefits or any actions or omissions by HDI, any affiliate of HDI or any of their respective agents relating to the Pre-Closing Notice or any such changes in terms or benefits; provided that, in no event, shall HDI be obligated under this section to indemnify any Indemnified Party against any Losses to the extent such Losses result from the gross negligence or willful misconduct of the Indemnified Parties or from any violation of applicable law by the Indemnified Parties." All other terms and conditions of the Agreement remain in full force and effect. This Addendum may be executed in separate counterparts, which, when taken together, shall constitute the same agreement. 4 IN WITNESS WHEREOF, the parties have caused this Addendum to be duly executed and to be effective as of the date first written above. HANOVER DIRECT, INC. CAPITAL ONE SERVICES, INC. By: /s/ Rakesh K. Kaul By: /s/ Jory A. Berson ------------------------- --- --- ---- -- ------ Rakesh K. Kaul Jory A. Berson President & Chief Vice President, Marketing Executive Officer and Analysis CAPITAL ONE BANK By: /s/ Jory A. Berson --- --- ---- -- ------ Jory A. Berson Vice President, Marketing and Analysis 5 EX-10.77 7 y58340ex10-77.txt SAVINGS AND RETIREMENT PLAN EXHIBIT 10.77 HANOVER DIRECT SAVINGS AND RETIREMENT PLAN AMENDED AND RESTATED AS OF JULY 1, 1999 TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS...............................................................1 ARTICLE II PARTICIPATION AND ENTRY DATE..............................................8 2.01. Initial Eligibility..........................................................8 2.02. Plan Participation...........................................................8 2.03. Re-employment................................................................8 2.04. Change in Status.............................................................8 ARTICLE III CONTRIBUTIONS.............................................................9 3.01. Salary Deferral Contributions................................................9 3.02. After-Tax Contributions......................................................9 3.03. Method of Contribution.......................................................9 3.04. Matching Employer Contributions.............................................10 3.05. Discretionary Employer Contributions........................................10 3.06. Non-Discrimination Test.....................................................11 3.07. Forfeitures.................................................................16 3.08. Maximum Contributions.......................................................17 3.09. Time of Payment.............................................................17 3.10. Annual Additions Limitation.................................................17 3.11. Return of Contribution......................................................19 3.12. Rollover Contributions......................................................19 ARTICLE IV ADMINISTRATION OF FUNDS..................................................22 4.01. Investment of Funds.........................................................22 4.02. Investment Elections........................................................23 4.03. Change of Elections.........................................................23 4.04. Restrictions on Changes.....................................................23 4.05. Valuation of Assets.........................................................23 4.06. Voting of Shares............................................................23 4.07. Tender Offer Procedure......................................................23 4.08. ERISA Section 404(c) Plan...................................................24 4.09. Confidentiality.............................................................24 4.10. Fiduciary Designation.......................................................24 ARTICLE V RETIREMENT BENEFITS......................................................26
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PAGE ---- 5.01. Normal Retirement Benefit...................................................26 5.02. Deferred Retirement Benefit.................................................26 5.03. Disability Retirement Benefit...............................................26 5.04. Payment of Benefits.........................................................26 5.05. Additional Allocations on Retirement........................................27 5.06. Crediting of Investment Earnings............................................27 5.07. Company Stock...............................................................27 ARTICLE VI DEATH BENEFITS...........................................................28 6.01. Death Benefits..............................................................28 6.02. Additional Allocations on Death.............................................28 6.03. Beneficiary Designation.....................................................28 ARTICLE VII VESTING AND SEPARATION FROM SERVICE......................................30 7.01. Vesting of Accounts.........................................................30 7.02. Payment of Benefits.........................................................30 7.03. Reemployment After Distribution and Restoration Contributions...............31 ARTICLE VIII WITHDRAWALS AND LOANS....................................................32 8.01. Withdrawals While Employed..................................................32 8.02. Loans.......................................................................33 ARTICLE IX ADMINISTRATION...........................................................35 9.01. Plan Administrator..........................................................35 9.02. Administrative Procedures...................................................35 9.03. Other Plan Administrator....................................................35 9.04. Special Administrative Matters .............................................35 9.05. Claims Procedures...........................................................36 9.06. Expenses....................................................................36 ARTICLE X AMENDMENT, TERMINATION AND MERGERS.......................................38 10.01. Amendment...................................................................38 10.02. Plan Termination............................................................39 10.03. Permanent Discontinuance of Employer Contributions..........................39 10.04. Suspension of Employer Contributions........................................39 10.05. Mergers and Consolidations of Plans.........................................40
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PAGE ---- ARTICLE XI MISCELLANEOUS PROVISIONS.................................................41 11.01. Non-Alienation of Benefits..................................................41 11.02. No Contract of Employment...................................................42 11.03. Severability of Provisions..................................................42 11.04. Heirs, Assigns and Personal Representatives.................................42 11.05. Headings and Captions.......................................................42 11.06. Gender and Number...........................................................42 11.07. Funding Policy..............................................................42 11.08. Title to Assets.............................................................42 11.09. Payment to Minors, etc......................................................43 11.10. Military Service............................................................43 11.11. Forms.......................................................................43 11.12 Situs.......................................................................43 ARTICLE XII TOP-HEAVY PROVISIONS.....................................................44 12.01. Top-Heavy Plan..............................................................44 12.02. Minimum Contributions or Benefits...........................................47 12.03. Adjustment to Maximum Benefits..............................................48 12.04. Minimum Vesting.............................................................48 12.05. Discontinuance of Article...................................................49 SCHEDULE A: EFFECTIVE DATES..............................................................48 APPENDIX A: ADOPTING EMPLOYERS............................................................49
-iii- HANOVER DIRECT SAVINGS AND RETIREMENT PLAN AMENDED AND RESTATED AS OF JULY 1, 1999 WHEREAS, Hanover Direct, Inc. (hereinafter sometimes referred to as the "Company") has previously adopted the Hanover Direct Savings and Retirement Plan, as amended and restated as of July 1, 1999; and WHEREAS, the Company desires to amend the Plan to reflect tax law changes that became effective since the last restatement of the Plan and to reflect various plan design changes adopted by the Company's Board of Directors; NOW, THEREFORE, the Company hereby amends and restates the Plan, effective July 1, 1999 except as otherwise provided herein, as follows: ARTICLE I DEFINITIONS 1.01. "Account" shall mean with respect to a Participant all of the various accounts maintained to define such Participant's proportionate interest in the Trust Fund as follows: (a) A "Salary Deferral Contribution Account" shall be maintained for each Participant which includes the Salary Deferral Contributions made on behalf of the Participant, and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. (b) An "After-Tax Contribution Account" shall be maintained for each Participant who has made After-Tax Contributions to the Plan. The After-Tax Contribution Account includes the Participant's After-Tax Contributions, and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. (c) A "Matching Employer Contribution Account" shall be maintained for each Participant which reflects the Matching Employer Contributions allocated to the Participant and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. (d) A "Discretionary Employer Contribution Account" shall be maintained for each Participant which reflects the Discretionary Employer Contributions allocated to the Participant and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. (e) A "Rollover Contribution Account" shall be maintained for each Participant which reflects any rollover contribution made in accordance with Section 3.15 and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. 1.02. "Affiliated Organization" shall mean (i) any corporation on or after the date it becomes a member of a controlled group of corporations which includes the Company, as determined under the provisions of Section 414(b) of the Code, (ii) any trade or business, whether or not incorporated, on or after it comes under common control with the Company, as determined under Section 414(c) of the Code, (iii) any organization which is an affiliated service organization within the meaning of Section 414(m) of the Code, and (iv) any other entity required to be aggregated pursuant to regulations under Section 414(o) of the Code. 1.03. "Age" or "age" shall mean the chronological age attained by the Participant at his most recent birthday or as of such other date of reference as set forth in this Plan. 1.04. "Board of Directors" shall mean the board of directors of the Company. 1.05. "Break-in-Service" shall mean a plan Year during which an Employee has not completed more than five hundred (500) Hours of Service. For purposes of determining whether there has been a Break-in-Service an Employee shall be credited with Hours of Service for the period during which he or she is on a leave of absence pursuant to the Family and Medical Leave Act of 1993 as follows: (a) the Employee shall be credited with the number of Hours of Service he would normally be credited with but for the absence (or if the Employee's normal Hours of Service cannot be determined, eight Hours of Service for each day of the absence), (b) the total number of Hours of Service credited for the absence shall not exceed 501, and (c) the Hours of Service credited for the absence shall be credited to the Plan Year in which the absence begins if the Employee would be prevented from incurring a Break-in-Service in that Plan Year solely because of the crediting of Hours of Service in accordance with clauses (a) and (b) of this definition, or in any other case, the immediately following Plan Year. 1.06. "Code" means the Internal Revenue Code of 1986 as the same presently exists, and as it may hereafter be amended or clarified by regulations, rulings, notices or other publications of the Internal Revenue Service having legal effect. 1.07. "Compensation" shall mean, for any applicable period, the W-2 earnings of a Participant including bonuses, overtime, commissions and any Salary Deferral Contribution made on behalf of the Participant under this Plan, and any contributions made by salary reduction to a plan established in accordance with Section 125, 129 or 132(f) of the Code. Compensation shall exclude premiums paid to a life insurance plan of the Company for additional coverage above $50,000, the value of Company car or commutation allowances, reimbursements for expenses and any other fringe benefits. For any Plan Year commencing after December 31, 1988, Compensation shall not exceed $200,000, or such other maximum amount as set forth under Section 401(a)(17) of the Code, adjusted at the same time and in the same manner as under Section 415(d) of the Code, except that the dollar increase in effect on January 1 of any calendar year is effective for Plan Years beginning in such calendar year and the first adjustment to the $200,000 limitation is effected on January 1, 1990. If Compensation is determined over a Plan Year that contains fewer than 12 calendar months, 2 the annual compensation limit is an amount equal to the annual compensation limit for the calendar year in which the compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12. In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual Compensation limit. The OBRA '93 annual Compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual Compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under section 401(a)(17) of the Code shall mean the OBRA '93 annual Compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining an employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA '93 annual Compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual Compensation limit is $150,000. 1.08. "Contribution" shall mean any or all of the various types of contributions made under the Plan by Participants or the Employer, as described below: (a) "Salary Deferral Contribution" shall mean that portion of the Contribution made to the Plan on behalf of a Participant by his Employer through a salary reduction agreement, as described under Section 3.01. (b) "After-Tax Contribution" shall mean that portion of a Participant's Contribution to the Plan which he elects to make independent of a salary reduction agreement, as described under Section 3.02. Effective April 1, 1996, no further After-Tax Contributions may be made to the Plan. (c) "Matching Employer Contribution" shall mean a Contribution made by an Employer as described under Section 3.04, based on a Participant's Salary Deferral Contribution. (d) "Discretionary Employer Contribution" shall mean a Contribution made by an Employer which is unrelated to any Participant Contributions, as described under Section 3.05. 1.09. "Contribution Percentage" shall mean the percentage determined by dividing (i) the Salary Deferral Contribution made by or on behalf of a Participant for the applicable period by (ii) his compensation as defined under Code Section 414(s). "ADP" shall sometimes be used herein to refer to the average Contribution Percentage with respect to Salary Deferral Contributions or 3 amounts treated as Salary Deferral Contributions. "ACP" shall sometimes be used herein to refer to the average Contribution Percentage with respect to Matching Employer Contributions. 1.10. "Date of Employment" shall mean the first date on which an Employee is credited with an Hour of Service for the Employer. 1.11. "Disability" shall mean a physical or mental condition of such severity and probable prolonged duration as to cause the Participant to be unable to continue his duties as an Employee. The existence of any Disability shall be determined by a physician chosen by the Plan Administrator, based on medical evidence of a physical or mental impairment that can be expected to last more than 12 months or result in death, or on other uniform and non-discriminatory criteria as established by the Plan Administrator. Notwithstanding the foregoing, eligibility for Social Security Disability benefits or for long term disability benefits under an insured plan sponsored by the Employer shall be deemed conclusive proof of disability. 1.12. "Effective Date" of this Plan shall mean April 1, 1983. The effective date of this amended and restated Plan is July 1, 1999, except as otherwise indicated on Schedule A or otherwise provided in the Plan. The benefits, if any, of any Employee who ceased employment by retirement, termination, death, or otherwise before such date shall, except as otherwise provided in the Plan or otherwise required by law, be determined in accordance with the provisions of the Plan as in effect at the time his employment ceased. 1.13. "Eligible Employee" shall mean an Employee who has attained age twenty-one (21) and has completed either a Qualifying Period of Service or one Year of Service. For purposes of this section, a "Qualifying Period of Service" means a period of at least six months and less than one year commencing on an Employee's Date of Employment during which period the Employee has performed at least one thousand (1,000) Hours of Service. Notwithstanding the foregoing, the term "Eligible Employee" shall not include any person whose terms and conditions of employment are determined by collective bargaining with a third party and with respect to whom inclusion in this Plan has not been provided for in the collective bargaining agreement setting forth those terms and conditions of employment, nor shall the term "Eligible Employee" include any independent contractor or a leased employee. An Eligible Employee shall not include an individual not on the Employer's payroll (including any individual classified at the time as an independent contractor, even if such individual's relationship to the Employer is subsequently determined by an agency, a court, or the Employer to have been that of a common law employee). 1.14. "Employee" shall mean any employee of the Employer or an Affiliated Organization, including a leased employee as defined under Section 414(n) of the Code. The term "leased employee" means any person (other than an employee of the recipient organization) who pursuant to an agreement between the recipient organization and any other person ("leasing organization") has performed services for the recipient organization (including related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for at least one (1) year, and such services are performed under the primary direction or control of the recipient. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. 4 A leased employee shall not be considered an employee of the recipient organization if: (i) such employee is covered by a money purchase pension plan providing immediate participation, full and immediate vesting and a nonintegrated employer contribution rate of at least ten (10%) percent of compensation (as defined in Section 415(c)(3) of the Code, but including amounts contributed by the employer pursuant to a salary reduction agreement which are excludable from the employee's gross income under Section 125, Section 402(a)(8), Section 401(h) or Section 403(b) of the Code). Also, the leased employees must not constitute more than twenty percent (20%) of the recipient organization's Non-Highly Paid workforce. 1.15. "Employer" shall mean Hanover Direct, Inc. (hereinafter sometimes referred to as the "Company"), its predecessor, The Horn & Hardart Company, and the Company's subsidiaries and affiliates and any successor entities thereto which adopt this Plan. Such adopting Employers shall be set forth in Appendix A attached at the end of this document. 1.16. "Entry Date" shall mean the first day of any calendar month. 1.17. "ERISA" means the Employee Retirement Income Security Act of 1974 (P.L. 93-406), including all amendments thereto. 1.18. "Fund" or "Trust Fund" shall mean all of the assets of the Plan held by the Trustees (or any nominees thereof) at any time under the Trust Agreement. 1.19. "Highly-Paid Employee" shall mean, with respect to any Plan Year, any Employee who (i) was a 5% owner (as defined in Section 416(i)(1)(B)(i) of the Code) at any time during the Plan Year or the preceding Plan Year, or (ii) for the preceding Plan Year had Compensation in excess of $80,000 (as adjusted at the same time and in the same manner as under Section 415(d) of the Code to reflect increases in the cost of living). For purposes of this definition, Compensation shall mean compensation as defined in Section 414(q)(7) of the Code from the Employer or an Affiliated Organization. The provisions of this Section 1.19 shall be subject to such additional requirements as may be described in Section 414(q) of the Code and the regulations thereunder, which shall override any aspects of this Section 1.19 inconsistent therewith. 1.20. "Hour of Service" shall mean the following: (a) An Hour of Service is each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer or an Affiliated Organization during the Plan Year. (b) An Hour of Service is each hour for which an Employee is paid, or entitled to payment (either directly or indirectly), by the Employer or an Affiliated Organization on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), lay-off, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence: (i) No more than 501 Hours of Service shall be credited under this paragraph (b) to an Employee on account of any single continuous period during which the Employee performs no 5 duties (whether or not such period occurs in a single Plan Year) except as the following provisions may result in a credit of more than 501 Hours of Service: (1) If an Employee receives full pay during any authorized leave of absence, and he returns to work after such absence, he shall be credited with an Hour of Service for each hour for which he was paid. (2) If an Employee is on a paid sick leave, he shall receive an Hour of Service for each hour that he would have normally worked during such leave. (3) If an Employee is absent in military service, and he retained re-employment rights under the law, and he completed requirements under the law as to re-employment and was re-employed, he shall be credited with an Hour of Service for each hour that he would have normally worked had he not entered military service solely for purposes of determining his vested rights; and (4) If an Employee transfers to an employment status which is ineligible to participate in this Plan, he will continue to be credited with Hours of Service as described above, for purposes of determining his vested rights. However, he will receive no Hours of Service for purposes of determining his right to receive a Contribution to his Account after the date of his change in employment status. (ii) An hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed, is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workers compensation, unemployment compensation or disability insurance laws; and (iii) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. (c) An hour worked at overtime or premium pay will count as only one Hour of Service under the Plan. (d) An Hour of Service is each hour for which back pay, irrespective of mitigation of damages, is either awarded to or agreed to by the Employer. The same Hours of Service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (d). Crediting of Hours of Service for each pay awarded shall be subject to the limitations set forth in paragraphs (a), (b) and (c). (e) An Hour of Service shall also be credited for reasons other than the performance of duties in accordance with Department of Labor Regulations, Section 2530.200b-2(b). Further, the computation periods used for purposes of crediting Hours of Service shall be in accordance with Department of Labor Regulations, Section 2530.200b-2(c). If an Employer does not maintain hourly records with respect to any Employee, such Employee shall be credited with forty-five (45) Hours of Service for each week in which he is entitled to be credited with an Hour of Service. 6 1.21. "Named Fiduciary" shall mean the Employer, the Trustees and the Plan Administrator. Each named Fiduciary shall have only those particular powers, duties, responsibilities and obligations as are specifically given him under the Plan and/or the Trust Agreement. 1.22. "Normal Retirement Date" shall mean the date on which the Participant has attained age 65. 1.23. "Participant" shall mean any person who is eligible to receive benefits under the Plan. The term "Participant" shall include an Active Participant (each Eligible Employee who has satisfied the participation requirements of Section 2.01 as of an applicable Entry Date or who has made a Rollover Contribution), Terminated Vested Participants (former Employees who are entitled at some future date to the distribution of benefits from this Plan), and Inactive Participants (former Participants who are not Terminated Vested Participants and who continue to be employed in a non-covered class by an Employer or by an Affiliated Organization). 1.24. "Plan" shall mean the Hanover Direct Savings and Retirement Plan as set forth herein, and as the same may from time to time hereafter be amended. 1.25. "Plan Administrator" or "Administrator" shall mean the Employer, or the persons or committee named as such pursuant to the provisions of Article IX hereof. 1.26. "Plan Year" shall mean a twelve (12) month period beginning on January 1st and ending on each December 31st. 1.27. "Reduced Compensation" shall mean Compensation reduced by any Salary Deferral Contributions made by the Participant and also reduced by any contributions made by salary reduction to a plan established in accordance with Section 125 or 129 of the Code. 1.28. "Trust Agreement" shall mean the Hanover Direct Savings and Retirement Trust Agreement as the same presently exists and as it may from time to time hereafter be amended. 1.29. "Trustees" shall mean the party or parties so designated pursuant to the Trust Agreement. 1.30. "Valuation Date" shall mean each business day on which the New York Stock Exchange is open for business and any other day of the Plan Year as determined by the Plan Administrator. 1.31. "Wage Base" shall mean the amount of compensation with respect to which old age and survivors' insurance benefits would be provided for a Participant under the Social Security Act, as in effect for the calendar year in which the Plan Year commences. 1.32. "Year of Service" shall mean a Plan Year in which an Employee has at least one thousand (1,000) Hours of Service. In addition, solely for purposes of determining whether an Employee is eligible to become a Participant after his initial year of employment under Section 2.01, a Year of Service shall be credited to an Employee who has at least one thousand (1,000) Hours of Service during the initial twelve (12) month period commencing with such Employee's Date of Employment. 7 All Years of Service shall be counted regardless of whether or not such years are continuous, subject to Appendix A attached at the end of this document. ARTICLE II PARTICIPATION AND ENTRY DATE 2.01. Initial Eligibility. Each Eligible Employee who is a Participant immediately prior to the effective date of this amended and restated Plan shall continue to participate as of such effective date. Each other Employee shall be eligible to become a Participant on the Entry Date coincident with or next following the date he first becomes an Eligible Employee. 2.02. Plan Participation. Each Employee who is eligible to participate in accordance with Section 2.01 shall complete such forms and provide such data as are reasonably required by the Plan Administrator as a precondition to Plan participation. In order to receive a Salary Deferral Contribution, a Participant must enter into a salary reduction agreement to be effective as of an Entry Date, electing to reduce his salary by an amount equal to his Salary Deferral Contribution. A Participant's Salary Deferral Contribution for any Plan Year shall not exceed $10,000 or such higher maximum contribution for a taxable year as may be permitted under Section 402(g) of the Code. The Plan Administrator shall determine the minimum and/or maximum permitted rate of salary reduction. Any maximum permitted salary reduction may apply to all Participants or solely to those Participants who are Highly-Paid Employees. The election of a Salary Deferral Contribution shall not, in any way, be contingent upon any other election made under the Plan. By becoming a Participant, an Employee shall for all purposes be deemed conclusively to have assented to the provisions of the Plan, the corresponding Trust Agreement and to all amendments to such instruments. 2.03. Re-employment. In the event an Employee terminates employment, and is re-employed, he shall be eligible to be admitted or readmitted as an Active Participant on the date of his re-employment or, if later, the Entry Date coincident with or next following the date he becomes an Eligible Employee. 2.04. Change in Status. In the event that a person who has been an Employee in an employment status not eligible for participation in this Plan subsequently becomes eligible by reason of a change in status, he shall be eligible to become a Participant on the Entry Date coincident with or next following the date on which he becomes an Eligible Employee. 8 ARTICLE III CONTRIBUTIONS 3.01. Salary Deferral Contributions. The Employer will make a Salary Deferral Contribution to the Plan for each Active Participant who has entered into a salary reduction agreement, in accordance with Section 2.02, as determined by such salary reduction agreement. "Excess Elective Deferrals" shall mean any Salary Deferral Contributions which exceed the dollar limitation under Code Section 402(g). Such Excess Elective Deferrals shall be treated as annual additions under the Plan unless they are distributed in accordance with this Article. A Participant may assign to this Plan any Excess Elective Deferrals made during a taxable year of the Participant by providing fifteen (15) days' written notification to the Administrator of the amount of the Excess Elective Deferrals to be assigned to this Plan. Such notice shall be provided no later than the first March 1st following the close of the individual's tax year. Excess Elective Deferrals with respect to the combination of Excess Elective Deferrals and deferrals under another plan of deferred compensation of an Employer or an Affiliated Organization may automatically be returned to the Participant. Notwithstanding any other provision of the Plan, Excess Elective Deferrals, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15th to any Participant to whose Account Excess Elective Deferrals were assigned for the preceding year and who claims Excess Elective Deferrals for such taxable year. Excess Elective Deferrals shall be adjusted for any income or loss. The income or loss allocable to Excess Elective Deferrals is the income or loss allocable to the Participant's Account for the taxable year multiplied by a fraction, the numerator of which is such Participant's Excess Elective Deferrals for the year and the denominator of which is the Participant's Salary Deferral Contribution Account without regard to any income or loss occurring during such taxable year. 3.02. After-Tax Contributions. Prior to April 1, 1996 Participants were permitted to elect to make After-Tax Contributions to the Trust for each Plan Year in amounts not less than one percent (1%) of Compensation, nor more than ten percent (10%) of Compensation for such Plan Year. Effective April 1, 1996, no further After-Tax Contributions may be made to the Plan. 3.03. Method of Contribution. Salary Deferral Contributions may be made by periodic payroll deductions or on such other basis as shall be determined from time to time by the Plan Administrator. Nothing contained herein shall preclude the Plan Administrator from not allowing Salary Deferral Contributions to be made by any Participant to enable the nondiscrimination test of Section 3.06 to be met or from limiting the 9 number of payroll periods in a Plan Year during which such Contributions are permitted. A Participant may file with the Plan Administrator at any time an election to increase or decrease his Salary Deferral Contribution, or to discontinue his Salary Deferral Contribution, which election shall be effective as soon as practicable following the receipt thereof. No contributions may be made by or on behalf of any Participant during any period that he is receiving long term disability benefits, worker's compensation benefits or while the Participant is on a leave of absence for which no Compensation is being paid from the Employer. 3.04. Matching Employer Contributions. An Employer may elect, in its sole discretion, to make Matching Employer Contributions for a Plan Year for each Active Participant on whose behalf Salary Deferral Contributions have been made during the Plan Year. For any Plan Year, the Matching Employer Contributions (including any forfeitures reallocated in accordance with Section 3.10) shall be allocated to the Accounts of such Active Participants for the Plan Year in the same proportion as the amount of Salary Deferral Contributions (not in excess of six percent (6.0%) of the Participant's Compensation) for each such Active Participant for such Plan Year bears to the total Salary Deferral Contribution (as so limited) for all such Active Participants for such Plan Year. 3.05. Discretionary Employer Contributions. For any Plan Year, an Employer may elect, in its sole discretion, to make an additional Discretionary Employer Contribution to the Plan. If a Discretionary Employer Contribution is made, then it shall be allocated as of the last day of the Plan Year to the Account of each Active Participant who (i) retired at or after age 65, retired due to a Disability or died during such Plan Year or (ii) (a) had at least 1,000 Hours of Service during such Plan Year and (b) is actively employed as of the last day of such Plan Year, including any such Participant who did not make Salary Deferral Contributions for such Plan Year. An individual who is terminated prior to the last day of a Plan Year, but who is receiving severance pay as of such date, shall not be deemed to be actively employed as of the last day of a Plan Year. The amount allocated to each such Participant shall be an amount chosen by the Company to be allocated under (a) below. If any Discretionary Employer Contribution remains, such amount shall be allocated in accordance with (b) below. (a) An amount shall be allocated equal to a percentage of each such Participant's Compensation earned while a Participant for such Plan Year, plus the same percentage of the excess of (i) such Participant's Compensation earned while a Participant for the Plan Year above (ii) the Wage Base for such Plan Year. However, the percentage of Compensation used for allocations above the Wage Base shall not exceed 5.7% (or such other percentage which equals the maximum percentage permitted under Code Section 401(l)). (b) Any remaining Discretionary Employer Contribution shall be allocated to each such Participant in proportion to the ratio that each such Participant's Compensation earned while a Participant bears to such eligible Compensation of all eligible Participants for the Plan Year. 10 3.06. Non-Discrimination Tests Regarding Salary Deferrals. (a) Nondiscrimination Tests. For each Plan Year, at least one of the following nondiscrimination tests shall be satisfied: (i) The ADP of eligible Highly-Paid Employees for such Plan Year shall not be more than 125% of the ADP of all eligible Non-Highly Paid Employees for the prior Plan Year; and (ii) The ADP of eligible Highly-Paid Employees for the Plan Year shall not be more than two percentage points higher than, nor more than 200% of, the ADP of all eligible Non-Highly Paid Employees for the prior Plan Year. For purposes of the nondiscrimination tests, an Employee is "eligible" if he is eligible for Salary Deferral Contributions for all or part of the Plan Year being tested. (b) Definition of ADP. (i) General Rule. For each group being tested, "ADP" means the average of the following percentages (calculated separately for each group member): Salary Deferral Contributions on behalf of a group member divided by the Compensation of that group member ("Actual Deferral Ratio"). The ADP for each group and the Actual Deferral Ratio for each Employee shall be calculated to the nearest one-hundredth of one percent. The Actual Deferral Ratio of an Eligible Employee who does not have any Salary Deferral Contributions is zero. If the Participant is a Highly-Paid Employee, his Salary Deferral contributions under any other Section 401(k) plan of the Employer shall be included in determining his ADP for the Plan. The ADP shall reflect any adjustments required by Notice 98-1 and any superseding guidance issued by the Internal Revenue Service. (ii) Definition of Compensation. For purposes of determining a Participant's Actual Deferral Ratio, his Compensation shall be as defined in Section 1.07. (iii) Excess Salary Deferrals. Excess Elective Deferrals shall be counted in determining the Participant's Actual Deferral Ratio. However, Salary Deferral Contributions by a Non-Highly Paid Employee that exceed the dollar limit of Code Section 402(g) shall not be counted to the extent the Salary Deferral Contributions are made under plans sponsored by the Employer. (c) Salary Deferrals Which Must Be Counted. All Salary Deferral Contributions which satisfy both of the following requirements for a Plan Year must be counted for purposes of determining the ADP for that Plan Year: (i) The Salary Deferral Contributions are allocated to a Participant's Account as of a date within the Plan Year; and (ii) The Salary Deferral Contributions (A) relate to Compensation which would have been received by the Participant in the Plan Year if the Participant had not elected to have the Salary Deferral Contributions made on his behalf; or (B) are attributable to services rendered during the Plan Year and for which the Participant would have been paid within 2 1/2 months after the end of the Plan Year. 11 However, to the extent Salary Deferral Contributions are counted as Matching Employer Contributions for purposes of satisfying the nondiscrimination tests described in Section 3.07, the Salary Deferral Contributions shall not be counted under this subsection for purposes of the nondiscrimination tests described in subsection (a). Also, any Salary Deferral Contributions which are returned to the Participant under Section 3.13 shall not be counted. (d) Aggregation. Two or more qualified plans which are treated as a single plan for purposes of Section 401(a)(4) or Section 410(b) of the Code shall be treated as a single plan for purposes of this Section. In addition, any other qualified plans (other than an employee stock ownership plan) which are maintained by Employer or an Affiliated Organization may be treated as a single plan for purposes of this Section. Any plans aggregated under this section must have the same Plan Year. (e) Special Rules for Early Participation. If the Employer elects to apply Section 410(b)(4)(B) of the Code in determining whether the Plan meets the requirements of Section 410(b) of the Code, the Employer may exclude from consideration for purposes of this Section all Eligible Employees (other than Highly-Paid Employees) who have not performed a Year of Service. (f) Corrective Action. If necessary to satisfy the nondiscrimination tests described in subsection (a), the Employer may distribute the excess contributions to Highly-Paid Employees using the procedure described in Section 3.08. If such corrective action is taken within 2-1/2 months after the end of the Plan Year in which the excess contributions are made, no penalty shall be assessed. If the corrective action is not taken within the 2-1/2 month period, an excise tax equal to 10% of the excess contributions may be imposed on the Employer. (g) Records. The Employer shall maintain records demonstrating compliance with the nondiscrimination tests set forth in this Section. 3.07. Nondiscrimination Tests Regarding Matching Employer Contributions. (a) Nondiscrimination Tests. For each Plan Year, at least one of the following nondiscrimination tests shall be satisfied. (i) The ACP of eligible Highly Compensated Employees for such Plan Year shall not be more than 125% of the ACP of all eligible Non-Highly Paid Employees for such prior Plan Year; or (ii) The ACP of eligible Highly-Paid Employees for such Plan Year shall not be more than two percentage points higher than, nor more than 200% of, the ACP of all eligible Non-Highly Paid Employees for the prior Plan Year. For purposes of the nondiscrimination tests, an Employee is "eligible" for a Plan Year if he is eligible to receive a Matching Employer Contribution for the Plan Year. (b) Definition of ACP. (i) General Rule. For each group being tested, "ACP" means the average of the following percentages (calculated separately for each group member): Matching Employer 12 Contributions on behalf of a group member, divided by the Compensation of that group member ("Actual Contribution Ratio"). The Actual Contribution Ratio for each Employee and the ACP for each group shall be calculated to the nearest one-hundredth of one percent. If a Participant is a Highly Compensated Employee, any matching contributions made on his behalf in any other qualified plan maintained by the Employer shall be included in determining his Actual Contribution Ratio for the Plan. The ACP shall reflect any adjustments required by Notice 98-1 and any superseding guidance issued by the Internal Revenue Service. (ii) Definition of Compensation. For purposes of determining a Participant's Actual Contribution Ratio, his Compensation shall be determined in the same manner as described in Section 1.07. (c) Matching Employer Contributions Which Must Be Counted. Matching Employer Contributions that satisfy the following conditions are counted for purposes of satisfying the nondiscrimination tests for the Plan Year being tested: (i) The Matching Employer Contributions are allocated to a Participant's Account as of a date within the Plan Year; (ii) The Matching Employer Contributions are made on account of Pay Deferral Contributions for the Plan Year; and (iii) The Matching Employer Contributions are not used to satisfy the minimum contribution requirement of Section 12.02. (d) Aggregation. Two or more qualified plans which are treated as a single plan for purposes of Section 401(a)(4) or Section 410(b) of the Code shall be treated as a single plan for purposes of this Section. In addition, any other qualified plans (other than an employee stock ownership plan) which are maintained by the Employer or an Affiliated Organization may be treated as a single plan for purposes of this Section. Any plans aggregated under this section must have the same Plan Year. (e) Special Rule for Early Participation. If Employer elects to apply Section 410(b)(4)(B) of the Code in determining whether the Plan meets the requirements of Section 410(b) of the Code, the Employer may exclude from consideration for purposes of this section all Eligible Employees (other than Highly-Paid Employees) who have not performed a Year of Service. (f) Corrective Action. If necessary to satisfy the nondiscrimination tests described in subsection (a), the Employer shall forfeit the nonvested portion and distribute the vested portion of the excess Matching Employer Contributions to Highly Compensated Employees using the procedure described in Section 3.08. If a corrective distribution described in this subsection (f) is made within 2-1/2 months after the end of the Plan Year for which the excess contributions are made, no penalty shall be assessed. If the corrective distribution is not made within the 2-1/2 month period, an excise tax equal to 10% of the excess Matching Employer Contributions may be imposed on the Employer. If corrective action is not taken by the end of the Plan Year following the Plan Year in which the excess contributions are made, the Plan may violate Section 401(a)(4) of the Code. 13 (g) Records. Employer shall maintain records demonstrating compliance with the nondiscrimination tests set forth in this Section. 3.08. Procedure for Corrective Distributions to Satisfy the Nondiscrimination Tests. If for any Plan Year the ADP, the ACP, or the sum of the ADP and the ACP for Participants who are Highly-Paid Employees exceeds the maximum percentages determined under Sections 3.06, 3.07 and 3.09, amounts shall be returned or distributed not later than the last day of the following Plan Year as follows: (a) First, if the ADP of Participants who are Highly-Paid Employees exceeds the maximum under Section 3.06 for a Plan Year, the excess contributions shall be distributed to the Participants to whom such excess contributions are allocated in accordance with this Section 3.08(a). Excess contributions shall be allocated to the Highly-Paid Employees with the largest amounts of Employer contributions taken into account in calculating the ADP test for the Plan Year, beginning with the Highly-Paid Employee with the largest amount of such Employer contributions and continuing in descending order until all the excess contributions have been allocated. For purposes of the preceding sentence, the "largest amount" shall be determined after distribution of any excess Salary Deferral Contributions. A Participant's Actual Deferral Ratio shall be reduced by returning to him a portion (or all) of his Salary Deferral Contributions for that Plan Year. The amount of Salary Deferral Contributions to be returned to the Participant shall be reduced by the amount of any Salary Deferral Contributions previously returned to him with respect to that Plan Year under Section 3.01. (b) Second, in the case of a Participant to whom Salary Deferral Contributions are returned under clause (a), the amount of his Matching Employer Contributions attributable to those Salary Deferral Contributions shall be forfeited and shall reduce the amount of contributions of the Employer. For this purpose, any Salary Deferral Contributions returned shall be deemed to consist first of unmatched Salary Deferral Contributions to the extent thereof. (c) Third, if the ACP of Participants who are Highly Compensated Employees exceeds the maximum under Section 3.07 for a Plan Year, the excess aggregate contributions shall be allocated to the Highly-Paid Employees with the largest amounts of Employer contributions taken into account in calculating the ACP test for the Plan Year, beginning with the Highly Compensated Employee with the largest amount of such Employer contributions and continuing in descending order until all the excess aggregate contributions have been allocated. For purposes of the preceding sentence, the "largest amount" shall be determined after distribution of any excess Matching Employer Contributions. The portion of the excess aggregate contribution allocated to a Highly-Paid Employee in this manner shall be first be reduced by the amount of any Matching Employer Contributions previously forfeited by him with respect to that Plan Year pursuant to Section 3.08(b). Any remaining amount of such excess Matching Employer Contribution shall be (i) forfeited to the extent such contribution would not have been vested as of the end of the Plan Year with respect to which such Matching Employer Contribution was made, and (ii) distributed to such Highly-Paid Employee to the extent such contribution would not have been vested as of the end of such Plan Year. (d) Fourth, if the ADP and ACP of Participants who are Highly-Paid Employees (each determined after reduction, if any, under Section 3.08(a) or (c), respectively) would result in a 14 violation of the rule preventing the multiple use of the alternative limitation under Section 3.09, the ADP of Highly-Paid Employees shall be reduced in the same manner as in Section 3.08(a) until the rule in Section 3.09 is no longer violated. As used in this Plan, "excess contributions" means the excess of the aggregate amount of Employer contributions actually taken into account in determining the ADP of Highly-Paid Employees for the Plan Year over the maximum amount of such contributions permitted by the nondiscrimination test in Section 3.06 (determined by hypothetically reducing contributions made on behalf of Highly-Paid Employees in order of the Actual Deferral Ratios, beginning with the highest of such percentages). "Excess aggregate contributions" means the excess of the aggregate amount of Employer contributions actually taken into account in determining the ACP of Highly-Paid Employees for the Plan Year over the maximum amount of such contributions permitted by the nondiscrimination test in Section 3.07 (determined by hypothetically reducing contributions made on behalf of Highly-Paid Employees in order of the Actual Contribution Ratios, beginning with the highest of such percentages). The amount of a Participant's Salary Deferral Contributions and Matching Employer Contributions which are returned or forfeited under paragraph (a), (b), (c), or (d) of this Section 3.08 shall be adjusted as determined by the Plan Administrator for allocable gains and losses (in accordance with Income Tax Regulations under Sections 401(k) and 401(m) of the Code) for the Plan Year with respect to which the contributions were made. 3.09. Restriction on Multiple Use of Alternative Nondiscrimination Test. (a) Purpose of Section. This Section contains rules limiting the multiple use of the alternative test for complying with the nondiscrimination rules applying to Salary Deferral Contributions and Matching Employer Contributions. The alternative test is described in Section 3.06.4(a)(ii) and Section 3.07(a)(ii). (b) Application of Section. The limit contained in this Section applies if all of the following conditions are satisfied with regard to a Plan Year. (i) One or more Highly Compensated Employees of Employer or an Affiliated Organization are eligible for both Salary Deferral Contributions and Matching Employer Contributions. (ii) The nondiscrimination test described in Section 3.06(a)(i) is not satisfied; (iii) The nondiscrimination test described in Section 3.07(a)(i) is not satisfied; (iv) The sum of the ADP and the ACP for eligible Highly-Paid Employees exceeds the "aggregate limit" described in subsection (c). All plans which are aggregated for purposes of Section 3.06 or 3.07 shall be treated as a single plan for purposes of this Section. 15 (c) Aggregate Limit. The "aggregate limit" shall be calculated as follows: (i) Calculate the ADP described in Section 3.06(b) for Non-Highly Paid Employees who were eligible to participate in the Plan during the Plan Year. (ii) Calculate the ACP described in Section 3.07(b) for Non-Highly Paid Employees who were eligible to participate in the Plan during the Plan Year. (iii) Determine the sum of the following amounts: (A) Multiply the larger of the percentages in subsection (c)(i) or subsection (c)(ii) by 125%. (B) Add 2% to the smaller of the percentages in subsection (c)(i) or subsection (c)(ii). However, if the smaller percentage is less than 2%, multiply it by two rather than adding 2%. (iv) Determine the sum of the following amounts: (A) Multiply the smaller of the percentages in subsection (c)(i) or subsection (c)(ii) by 125%. (B) Add 2% to the larger of the percentages in subsection (c)(i) or subsection (c)(ii). However, if the smaller percentage is less than 2%, multiply it by two rather than adding 2%. (v) The "aggregate limit" is the larger of the amounts calculated in subsections (c)(iii) and (c)(iv). (d) Corrective Action. If the limit in this Section would not otherwise be satisfied, Employer shall reduce the Salary Deferral Contributions of the Highly-Paid Employees until the limit is satisfied. The reduction shall be made using the procedure described in Section 3.08. 3.10. Forfeitures. As of the end of each Plan Year, any forfeitures occurring during such Plan Year resulting from an Employee's termination of employment and election to receive a distribution prior to being one hundred percent (100%) vested in accordance with Section 7.01 shall first be applied to restore the previously forfeited accounts, if applicable, of former Terminated Vested Participants who have been reemployed. If a Participant elects to defer his distribution the resulting forfeiture (subject to Section 7.03) shall occur after a Participant incurs five consecutive one year Breaks-in-Service. Any remaining portion of the total forfeiture not applied in accordance with the preceding paragraph shall be used to reduce a Matching Employer Contribution and shall be allocated to remaining Active Participants in the same manner as provided under Section 3.04. Should a Participant who is 0% vested in his Matching Employer Contribution and Discretionary Employer Contribution Accounts under Section 7.01 terminate employment, he shall 16 cease to be a Participant (unless reemployed) and the resulting forfeiture of his Matching and Discretionary Employer Contribution Accounts shall be deemed a full distribution of such Accounts. If a terminated Participant who was 0% vested in his Matching Employer Contribution and Discretionary Employer Contribution Accounts and was deemed to have received a distribution is subsequently reemployed by the Employer prior to the occurrence of five consecutive one year Breaks-in-Service after the date of his termination of employment, any amount forfeited shall be reinstated to his Account. 3.11. Maximum Contributions. Notwithstanding the above, the total amount of Salary Deferral Contributions, Matching Employer Contributions and Discretionary Employer Contributions for any Plan Year shall not exceed an amount equal to fifteen percent (15%) of the total Reduced Compensation of all Participants for such Plan Year. The excess, if any, of fifteen (15%) percent of the total Compensation of all Participants earned in any year commencing before January 1, 1987 above the actual aggregate Employer Contributions for such years may be added to the total contribution provided the Plan was then in effect. 3.12. Time of Payment. Matching Employer Contributions and Discretionary Employer Contributions may be made at any time on or before the date required for deduction of such Contributions on the Employer's Federal income tax return. 3.13. Annual Additions Limitation. (a) Notwithstanding the above provisions of this Article, in no event shall the annual additions to a Participant's Account exceed the maximum amount permitted under Section 415 of the Code, and all provisions of such Section are hereby incorporated in the Plan by reference. The term "limitation year", as defined under the Code, shall mean the Plan Year. As soon as administratively feasible after the end of the limitation year, the maximum permissible amount for the limitation year will be determined on the basis of the Participant's Compensation for the limitation year. If due to the maximum permitted above or as a result of the allocation of forfeitures there is an excess amount, the excess will be disposed of in the following order: (1) If the Participant is covered by the Plan at the end of the limitation year, the excess amount in the Participant's Account will be used to reduce Employer Contributions (including any allocation of forfeitures) for such Participant in the next limitation year, and each succeeding limitation year if necessary; or (2) If the Participant is not covered by the Plan at the end of a limitation year, the excess amount will be held unallocated in a suspense account. 17 The suspense account will be applied to reduce future Employer Contributions for all remaining Participants in the next limitation year, and each succeeding limitation year if necessary. If a suspense account is in existence at any time during a limitation year pursuant to this Section, such account will not receive an allocation of the trust's investment gains and losses. If a suspense account is in existence at any time during a particular limitation year, all amounts in the suspense account, must be allocated and reallocated to Participant's Accounts before any Employer or any employee contributions may be made to the Plan for that limitation year. Excess amounts may not be distributed to Participants or former Participants, except as provided below. Notwithstanding the method for disposing of excess amounts as indicated above, in the case where a reasonable error is made so that the limitations of Section 415 are violated, the Plan may distribute Salary Deferral Contributions (within the meaning of Section 402(g)(3) of the Code) to the extent that the distribution would reduce the excess amounts in the Participant's Account. These amounts are disregarded for purposes of the ADP and ACP tests. (b) This Section 3.13(b) shall apply for Plan Years commencing prior to January 1, 2000. The term Defined Contribution Fraction shall mean a fraction, the numerator of which is the sum of the annual additions to the Participant's Account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior limitation years (including the annual additions attributable to the Participant's nondeductible employee contributions to all defined benefit plans maintained by the Employer, whether or not terminated, and the annual additions attributable to all welfare benefits funds, as defined in Section 419(e) of the Code, and individual medical accounts, as defined in Section 415(l)(2) of the Code, maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior limitation years of service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any limitation year is the lesser of 125 percent of the dollar limitation determined under Sections 415(b) and (d) of the Code in effect under Section 415(c)(1)(A) of the Code or 35 percent of the Participant's compensation for such year. If the Employee was a participant, as of the end of the first day of the first limitation year beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 5, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last limitation year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plan made after May 5, 1986, but using the Code Section 415 limitation applicable to the first limitation year beginning on or after January 1, 1987. The annual addition for any limitation year beginning before January 1, 1987 shall not be recomputed to treat all employee contributions as annual additions. The term "Defined Benefit Fraction" shall mean a fraction, the numerator of which is the sum of the Participant's projected annual benefits under all the defined benefit plans (whether or not 18 terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the limitation year under Sections 415(b) and (d) of the Code or 140 percent of the highest average compensation, including any adjustments under Section 415(b) of the Code. Notwithstanding the above, if the Participant was a participant, as of the first day of the first limitation year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 5, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the participant had accrued as of the close of the last limitation year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of section 415 for all limitation years beginning before January 1, 1987. 3.14. Return of Contribution. Except as provided in Section 3.13 and paragraphs (a), (b), (c), (d), (e) and (f) of this Section, and notwithstanding any other provision of this Plan or of the Trust Agreement, the Employer irrevocably divests itself of any interest or reversion whatsoever in any sums contributed by it to the Trust Fund, and it shall be impossible for any portion of the Trust Fund to be used for, or diverted to, any purpose other than for the exclusive benefit of Participants or their Beneficiaries. (a) If a contribution by the Employer is conditioned upon initial qualification of the Plan or any amendment thereto under Section 401 of the Code, and the Plan or any amendment thereto under Section 401 of the Code, and the Plan or amendment does not so qualify, the contribution shall be returned to the Employer within one year of the date of denial of such qualification or of the failure to qualify. (b) If a contribution made by the Employer is based upon a good faith mistake of fact, the contribution shall be returned to the Employer within one year after the payment of the contribution. (c) If a contribution which is intended to be deductible for Federal income tax purposes is determined to not be deductible and part or all of the deduction is disallowed, the contribution, to the extent disallowed, shall be returned to the Employer within one year after the disallowance of the deduction. (d) Earnings attributable to any mistaken or non-deductible contribution may not be returned to the Employer, but losses attributable thereto must reduce the amount to be so returned. (e) If the withdrawal of the amount attributable to the mistaken or nondeductible contribution would cause the balance of the individual Account of any Participant to be reduced to less than the balance which would have been in the Account had the mistaken or nondeductible amount not been contributed, then the amount to be returned to the Employer must be limited so as to avoid such reduction. In the case of a reversion due to initial disqualification of the Plan, the entire assets of the Plan attributable to Employer contributions may be returned to the Employer. 19 (f) A contribution may be returned to the Employer or an Employee, whichever is applicable, in order to satisfy the requirements of Section 3.06. 3.15. Rollover Contributions. (a) Direct Inter-Plan Transfers. Any Employee (including Employees who are not yet Eligible Employees) may, no less than 15 days following notification to the Plan Administrator of such action, direct the appropriate funding agency of any qualified retirement plan of the Employer, a former employer, or of an Individual Retirement Account (IRA) which was established solely as a repository for a distribution from a qualified plan of a former employer (provided the Employee certifies that he made no contributions to such IRA) to distribute directly to the Trustee such Participant's entire interest in the distributing plan or IRA, exclusive of any after-tax contributions made by the Participant as an employee or participant thereunder, provided that the transferor plan or IRA is not subject to the requirements of Section 401(a)(11) of the Code. Any amount presented by a Participant to the Trustees within sixty (60) days of the receipt shall be treated, upon receipt by the Trustee, as having been received directly from the appropriate officer or fiduciary of the distributing plan or IRA. (b) Cash Transfers. Only cash may be transferred in accordance with paragraph (a) of this Section. Property other than cash cannot be transferred. (c) Investment of Rollover Contribution Accounts. Rollover Contribution Accounts shall be invested as provided under Section 4.01 of the Plan. (d) Direct Rollovers. This paragraph applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this paragraph, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. Such distribution may commence less than 30 days after the notice required under section 1.411(a)-1(k) of the Income Tax Regulations is given, provided that (i) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (ii) the Participant, after receiving the notice, affirmatively elects a distribution. For purposes of this Section, the following definitions shall apply: Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under section 401(a)(9) of the Code; any hardship withdrawal; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). Solely for purposes of the preceding sentence, a 20 withdrawal shall be considered a hardship withdrawal only to the extent it represents amounts withdrawn from a Participant's Salary Deferral Contribution Account, and only to the extent the withdrawal would not be available to the Participant at such time under any provision of the Plan other than Section 8.01(c). Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. Distributee: A distributee includes an employee or former employee. In addition, the employee's or former employee's surviving spouse and the employee's or former employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. Direct rollover: A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee. 21 ARTICLE IV ADMINISTRATION OF FUNDS 4.01. Investment of Funds. Participant Accounts will be invested by the Plan Trustee, in accordance with Participant directions as described below and in Section 4.02 and 4.03, in such investment funds as may be offered under the Plan from time to time. The available investment alternatives may include any or all of the alternatives described below: (a) Common or capital stocks, bonds, convertible debentures or preferred stocks, money market investments and other short term corporate and government investments and fixed debt obligations of corporations and of the Federal, state and local government, or any pooled or mutual fund invested in such instruments. (b) One or more guaranteed interest funds which shall be invested under a contract (or contracts) with a bank, or an insurance company licensed in the state in which an office of the Employer is domiciled and whereby terms of such contract guarantee both the repayment of principal and the payment of interest at a predetermined minimum rate for a fixed period of time. Any such contract is subject to approval of the Plan Administrator and may be renewed or discontinued in its discretion. Should such contract be discontinued and should the Plan Administrator not enter into or instruct the Trustee to enter into a successor contract providing similar guarantees as to principal and interest, then any Participant whose Account was invested under the contract shall be given the opportunity to make a new investment election. (c) Any other managed fund which the Plan Administrator deems appropriate for investment of plan assets. (d) A fund invested in shares of common stock of the Company. Any dividends received on such shares shall be reinvested in this fund. Contributions designated for the fund, or dividends paid on shares held in the fund, shall be temporarily invested in a short-term investment fund while the Trustee awaits the opportunity to purchase additional shares. The shares of common stock of the Company from time to time required to be acquired for the purposes of this Plan shall be acquired by the Trustees by purchase in the open market at prevailing prices, or, if directed by the Company, by contribution in kind or by purchase privately from the Company or any other person at a price per share equal to the closing market price per share at which the shares of common stock of the Company were sold on the last business day preceding the day of the purchase; it being understood that shares purchased from the Company may be either treasury shares or authorized but unissued shares, if the Company shall make such shares available for that purpose. The Plan Administrator may, in its discretion, discontinue the use of any investment alternatives maintained under the Plan, without obligation to substitute new alternatives, provided that Participants with Accounts invested in a discontinued investment alternative are given an opportunity to make an election to transfer the affected portion of their Accounts to another investment alternative permitted under the Plan. 22 4.02. Investment Elections. Each Participant shall designate, in such manner as the Plan Administrator shall specify, in which investment alternative or combination of alternatives his Contributions shall be invested; provided, however, that the portion invested in any alternative which he elects shall be 5% or any multiple thereof, or such other percentage as designated by the Plan Administrator, subject to the maximum of 100%. Each Participant shall, upon request, be furnished with written confirmation of such instructions. 4.03. Change of Elections. Each Participant may (Subject to Section 4.04), by following such procedure as the Plan Administrator shall prescribe, make either of the following types of investment election changes at any time: (i) alter his election with respect to the investment of his future contributions, or (ii) alter his election with respect to the investment alternatives in which his prior contributions have been invested and direct the Trustee to transfer all or any portion of the balance in his Account to any investment alternative or combination of alternatives. Any such election changes shall be effective as soon as practicable after receipt by the Plan Administrator. 4.04. Restrictions on Changes. The Plan Administrator may, in its sole discretion, establish restrictions, limitations or prohibitions with respect to changes in investment elections, or transfers, permitted under the Plan. Any such restrictions, limitations or prohibitions which may apply to elections related to, or transfers among, any or all investment funds maintained under the Plan, shall be communicated in advance of their applicability to Plan Participants, and shall apply in a non-discriminatory manner to all Participants in similar circumstances. 4.05. Valuation of Assets. As of each Valuation Date, the assets of the Trust shall be valued at fair market value and any gains or losses shall be allocated to the same investment alternatives in which they arose. 4.06. Voting of Shares. Before each annual or special meeting of shareholders of the Company, the Company shall cause the Trustee to send to each Participant whose Account is invested in common stock of the Company, a copy of the proxy solicitation material therefor, together with a form providing confidential instructions to the Trustee on how to vote the shares of Company stock held within the Participant's Account. Upon receipt of such instructions in conformance with said proxy solicitation material, the Trustee shall vote the shares of Company stock as instructed. Instructions received from individual Participants by the Trustee shall be held in strictest confidence and shall not be divulged or released to any person, including officers or Employees of an Employer. The Trustees shall vote the shares of the Company stock for which no instructions have been received in the same proportion as the shares for which instructions have been received. 4.07. Tender Offer Procedure. 23 In the event an offer is received by the Trustee (including, but not limited to, a tender offer or exchange offer) to purchase any shares of Company stock held by the Trustee in the Trust, the Company shall cause the Trustee to send to each Participant whose Account is invested in Company stock such information as will be distributed to shareholders of the Company in connection with such offer, and to notify each Participant in writing of the number of shares of Company stock which are then credited to such Participant's Account. The Trustee shall provide to each Participant a form requesting confidential directions as to the manner in which the Trustee is to respond to the offer with respect to shares of Company stock allocated to such Participant's Account. Upon timely receipt of such directions, the Trustee shall respond as directed with respect to the tender or exchange of such shares. Instructions received from individual Participants by the Trustee shall be held in the strictest confidence and shall not be divulged or released to any person, including officers or Employees of an Employer. The Trustee shall not tender or exchange shares of Company stock allocated to a Participant's Account for which the Trustee has not received directions from the Participant. A Participant who has directed the Trustee to tender or exchange shares of Company stock allocated to such Participant's Account may, at any time prior to the offer withdrawal date, direct the Trustee to withdraw such shares from the offer prior to the withdrawal deadline, in which case the Trustee shall carry out such directive. In the event that shares of Company stock held in a Participant's Account are tendered or exchanged pursuant to this Section 4.08, the proceeds received upon the acceptance of such tender or exchange shall be credited to such Participant's Account, and shall be invested in the manner determined by the Company or as otherwise provided in the Plan. 4.08. ERISA Section 404(c) Plan. The Plan is intended to constitute a plan described in Section 404(c) of ERISA and shall be administered in accordance with such intent. Beginning with the Plan Year commencing January 1, 1994, the Plan shall be administered in compliance with Department of Labor Regulations Section 2550.440c-1. 4.09. Confidentiality. Information relating to the purchase, holding, and sale of Company stock in a Participant's Account and the exercise of voting, tender, and similar rights with respect to such stock by Participants and their beneficiaries shall be maintained in accordance with such procedures as the Administrator shall establish designed to safeguard the confidentiality of such information, except to the extent necessary to comply with Federal laws or state laws not preempted by ERISA. 4.10. Fiduciary Designation. Effective for Plan Years commencing on or after January 1, 1994, the Administrator is designated as the Plan fiduciary responsible for ensuring that the procedures implemented pursuant to Section 4.10 are sufficient to safeguard the confidentiality of information described in that Section, that such procedures are being followed, and that an independent fiduciary is appointed to carry out activities which the Administrator determines involve a potential for undue influence by 24 any Employer upon Participants and beneficiaries with regard to the direct or indirect exercise of shareholder rights with respect to Company stock. 25 ARTICLE V RETIREMENT BENEFITS 5.01. Normal Retirement Benefit. A Normal Retirement Benefit shall be payable with respect to any Participant retiring at his Normal Retirement Date. The Normal Retirement Benefit shall be equal to the Participant's Account determined as of the Valuation Date coincident with or following the Participant's Normal Retirement Date as of which the distribution is processed, which shall be as soon as administratively practicable after the distribution is requested or required to be distributed, as applicable. Payment shall commence no later than sixty (60) days following the last day of the Plan Year in which the Participant's Normal Retirement Date occurs. 5.02. Deferred Retirement Benefit. A Deferred Retirement Benefit shall be payable with respect to any Participant retiring after his Normal Retirement Date and shall be equal to the Participant's Account determined as of the Valuation Date following the Participant's actual retirement as of which the distribution is processed. 5.03. Disability Retirement Benefit. A Disability Retirement Benefit shall be payable with respect to any Participant who has suffered a Disability and who retires from service of the Employer by reason of such Disability. The Disability Retirement Benefit shall be equal to the Participant's Account determined as of the Valuation Date coincident with or following the date of the Participant's termination due to Disability as of which the distribution is processed. Such a Participant may also elect to be paid in accordance with the provisions of Section 7.02. 5.04. Payment of Benefits. Any benefit under this Article shall be made in a lump sum payment no later than sixty days following the close of the Plan Year in which the Participant's retirement occurs. If, after a Participant terminates employment, the total value of his vested Account is less than $5,000, the Administrator may direct the Trustee to cash-out the Participant's benefit in a single lump sum after any Valuation Date coincident with or following the date of his or her termination of employment, without any requirement for such Participant's consent. For Active Participants, benefit payments as mandated by Code Section 401(a)(9) shall not commence later than: (i) in the case of a Participant who (a) attains age 70-1/2 after 1999 or before 1988 and is not a 5% owner or (b) made a designation under Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982, April 1 of the calendar year following the later of the calendar 26 year in which the Participant attains age 70-1/2 or the calendar year in which the Participant retires; and (ii) in the case of any other Participant, April 1 of the calendar year following the calendar year in which the Participant attains age 70-1/2; provided, however, that a Participant (other than a 5 percent owner) who attains age 70-1/2 after 1995 and before 2000 may elect by April 1 (or by December 31, 1997 in the case of a Participant attaining age 70-1/2 in 1996) of the calendar year following the year in which the Participant attains age 70-1/2 to defer the commencement of distributions until the calendar year following the calendar year in which such Participant retires. For purposes of this Section 5.04, a Participant shall be deemed to be a 5 percent owner if he was a 5 percent owner (as defined in Section 416(i)(1)(B)(i) of the Code) at any time during the five Plan Year period ending in the calendar year in which he attains age 70-1/2. All distributions required under this Section shall be determined and made in accordance with the Proposed or, if applicable, Final Regulations under Code Section 401(a)(9), including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the Proposed or Final Regulations. With respect to distributions under the Plan made in calendar years beginning on or after January 1, 2002, the Plan will apply the minimum distribution requirements of Section 401(a)(9) of the Code that were proposed in January 2001, notwithstanding any provision of the Plan to the contrary. This amendment shall continue in effect until the end of the last calendar year beginning before the effective date of final regulations under Section 401(a)(9) of the Code or such other date specified in guidance published by the Internal Revenue Service. 5.05. Additional Allocations on Retirement. Any allocation for a Participant, made as of a Valuation Date subsequent to the date of his retirement, shall be paid to such Participant, or his beneficiary, as soon after such Valuation Date as is practical. 5.06. Crediting of Investment Earnings. Investment earnings shall be credited to a Participant's Account through the Valuation Date coincident with or preceding the date that distribution of the Account is made. No earnings shall be credited after such Valuation Date. 5.07. Company Stock. A Participant may elect to have the portion, if any, of his vested Account attributable to a fund invested in common stock of the Company distributed all in cash or all in kind. In the case of an in-kind distribution, the value of fractional shares shall be paid in cash. 27 ARTICLE VI DEATH BENEFITS 6.01. Death Benefits. In the event of the death of an Active Participant or of a Terminated Vested Participant who has not yet received payment of his Account, the Account shall be paid to his Beneficiary in a single lump sum. Any payment under this Section shall be paid as soon as practicable at the Beneficiary's election and no later than five (5) years after the Participant's death. The distribution shall be equal to the Participant's Account as of the Valuation Date as of which the distribution is processed. 6.02. Additional Allocations on Death. Any allocation for a Participant, made as of a Valuation Date subsequent to the date of his death, shall be paid to such Participant's Beneficiary as soon after such Valuation Date as is practical. 6.03. Beneficiary Designation. "Beneficiary" shall mean the person or persons, trust or estate named to receive any death benefits which may become payable under the Plan, and shall include any contingent beneficiary. If a Participant has a qualified spouse, then such spouse shall automatically be the Beneficiary eligible to receive the Account of the Participant pursuant to the Participant's death, unless the Participant names an alternate Beneficiary, and the qualified spouse consents in writing to the Participant's naming of an alternate Beneficiary, which consent must acknowledge the effect of such designation and be witnessed by a representative of the Plan Administrator, or attested to by a notary public. For purposes of this paragraph, a qualified spouse is a spouse to whom the Participant is married at the date of death and to whom the Participant has been married for at least one year. Each Participant shall have the right by written notice to the Plan Administrator, in the form prescribed by the Plan Administrator, to designate, and from time to time to change the designation of, one or more Beneficiaries and contingent beneficiaries to receive any benefit which may become payable under the Plan pursuant to his death, provided his qualified spouse, if any, consents to the designation of an alternate Beneficiary as set forth in the preceding sentence. A qualified spouse may also expressly permit a Participant subsequently to change an alternative beneficiary designation without any further spousal consent. If it is established to the satisfaction of a Plan representative that there is no qualified spouse or that such spouse cannot be located, an alternative beneficiary designation will be deemed a proper election without any spousal consent. Any consent by a qualified spouse obtained under this provision (or establishment that the consent of a qualified spouse may not be obtained) shall be effective only with respect to such spouse. A consent that permits designations by the Participant without any requirement of further consent by the qualified spouse must acknowledge that such spouse has the right to limit consent to a 28 specific beneficiary, and a specific form of benefit where applicable, and that the spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior beneficiary designation may be made by a Participant without the consent of the qualified spouse at any time before the commencement of benefits. The number of revocations shall not be limited. In the event that a Participant who does not have a qualified spouse as described above fails to designate a Beneficiary to receive a benefit under the Plan that becomes payable pursuant to his death, or in the event that the Participant is predeceased by all automatic or designated primary and contingent beneficiaries, the death benefit shall be payable to the Participant's estate. 29 ARTICLE VII VESTING AND SEPARATION FROM SERVICE 7.01. Vesting of Accounts. A Participant shall at all times be fully (100%) vested in his Salary Deferral Contribution Account, After-Tax Contribution Account, Rollover Contribution Account and in any restoration contributions made pursuant to Section 7.03. Except as otherwise provided in this Section 7.01, a Participant shall be vested in his Matching Employer Contribution Account and his Discretionary Employer Contribution Account based on his Years of Service in accordance with the following table:
Years of Service Vesting Percentage ---------------- ------------------ Less than 1 0% 1 but less than 2 33% 2 but less than 3 67% 3 or more 100%
A Participant who ceased employment by retirement, termination, death, or otherwise before July 1, 1999 shall be vested in his Matching Employer Contribution Account and his Discretionary Employer Contribution Account based on his Years of Service in accordance with the following table:
Years of Service Vesting Percentage ---------------- ------------------ Less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100%
Notwithstanding the foregoing, an Active Participant shall be 100% vested in his Account at his Normal Retirement Date, the date of his retirement due to Disability or the date of his death. 7.02. Payment of Benefits. An Active Participant who is vested in his Account and terminates employment prior to his Normal Retirement Date shall be deemed a Terminated Vested Participant. Payment of his vested Account shall be made in a single lump sum no later than sixty (60) days following the end of the Plan Year in which Participant's Normal Retirement Date occurs. However, any such Participant may elect to receive payment of his vested Account as soon as practicable after he submits an election. A Terminated Vested Participant's Account shall continue to be credited with investment 30 earnings through the Valuation Date on which the distribution is processed. No earnings shall be credited after such Valuation Date. The failure of a Participant to make such an election shall be deemed to be an election to defer commencement of benefits. If, after a Participant terminates employment, the total value of his vested Account is less than $5,000, the Administrator may direct the Trustee to cash-out the Participant's benefit in a single lump sum as of any Valuation Date coincident with or following the date of his or her termination of employment, without any requirement for such Participant's consent. 7.03. Re-employment After Distribution and Restoration Contributions. Any former Participant who once again qualifies as an Active Participant and who has received a distribution of any portion of his vested Account attributable to his prior participation in this Plan may restore to the Trustee the full amount of the distribution he previously received which was derived from Employer Contributions. In order to reinstate his full Matching or Discretionary Employer Contribution Account, a reemployed Participant must repay the full amount of the distribution from such Accounts prior to the earlier of (i) the fifth anniversary of the date such participant is reemployed or (ii) five consecutive one year Breaks-in-Service after the date of distribution. Any Participant who fails to make his restoration contribution within such time period shall waive his right to the portion of his Account which was not vested when he received his distribution. 31 ARTICLE VIII WITHDRAWALS AND LOANS 8.01. Withdrawals While Employed. In-service withdrawals shall be made upon 15 days' notice in the following order: (a) A Participant may withdraw all or any portion of his After-Tax Contribution Account. Such withdrawal shall come first from After-Tax Contributions made prior to January 1, 1987. Next, such withdrawal shall be allocated proportionately between the Participant's After-Tax Contributions made after December 31, 1986 and the investment earnings on such contributions. A Participant may then withdraw the investment earnings on his After-Tax Contributions made prior to January 1, 1987. (b) A Participant may withdraw any portion of his Rollover Contribution Account upon attainment of age 59 1/2 or in the event of a financial hardship as described below. (c) A Participant may withdraw his Salary Deferral Contribution Account for any reason after he has attained Age 59 1/2 and prior to Age 59 1/2 solely in the event of a financial hardship, and solely to the extent required to satisfy the hardship. The amount that may be distributed due to a hardship may include the amount necessary to pay income taxes or penalties resulting from the distribution. Such hardship must be an immediate and heavy financial need of the Participant where such Participant lacks other available resources. Expenses in connection with a death in a Participant's immediate family would constitute such an immediate and heavy financial need and the following conditions would automatically be deemed an immediate and heavy financial need: (i) expenses for medical care as described under Code Section 213(d) incurred by the Participant, his spouse or his dependents or expenses necessary to obtain such medical care; (ii) costs directly related to the purchase of a primary residence (excluding mortgage payments); (iii) payment of tuition, related educational fees, and room and board expenses for the next twelve months of post-secondary education for the Employee or his spouse, children or dependents; (iv) payment to prevent eviction of the Participant from a primary residence or foreclosure of mortgage on his primary residence; and (v) any other occurrence as authorized by the IRS through Regulations, Rulings, Notices and other documents of general applicability. A Participant must submit a written certification on the form prescribed by the Plan Administrator that the hardship distribution is necessary to satisfy an immediate and heavy financial need. The written certification must indicate that the need cannot reasonably be relieved through 32 reimbursement or compensation by insurance or otherwise, by liquidation of the employee's assets, by cessation of Salary Deferral Contributions or After Tax Contributions (if applicable) under the Plan or by other distributions or nontaxable loans from plans maintained by the Employer or any other employer, or by borrowing from commercial sources on reasonable commercial terms in an amount sufficient to satisfy the need. The Employer must not have actual knowledge to the contrary that the need cannot reasonably be relieved as described above. A Participant may not withdraw any investment earnings included in his Salary Deferral Contribution Account which were accumulated after December 31, 1988. A Participant may not withdraw any portion of his Matching Employer Contribution Account or Discretionary Employer Contribution Account for any reason prior to his retirement or other termination of employment. In no event will any hardship withdrawal of Salary Deferral Contributions be granted until any applicable distributions and loans have been taken from this Plan and from all other qualified retirement plans of the Employer. 8.02. Loans. (a) Loans to Active Participants from their Accounts in amounts of not less than $500 shall be allowed upon 15 days' notice. No more than one Plan loan may be outstanding to each Participant at any time. (b) No Participant shall, under any circumstances, be entitled to loans in excess of the lesser of (i) 50% of his vested Account as of the Valuation Date coincident with or immediately preceding the date on which the loan is made, and (ii) $50,000 less the highest outstanding loan balance over the 12-month period immediately preceding the issuance of the loan. For purposes of this paragraph, all outstanding loans to a Participant under this Plan or any other qualified retirement plan of the Employer shall be aggregated. (c) Any loan to a Participant shall be evidenced by the Participant's promissory note and secured by the pledge of the Participant's Account in the Trust Fund and by the pledge of such further collateral as the Trustee deems necessary or desirable to assure repayment of the borrowed amount and all interest payable thereon in accordance with the terms of the loan. (d) Interest shall be charged at an annual rate equal to the prime interest rate in effect as of the date the loan is processed, plus one percent (1%). The rate may be revised from time to time, but no more frequently than quarterly. The Administrator shall have sole discretion in determining the interest rate, and its decision shall be final and binding. Principal repayments and interest payments shall be credited to the Account of the Participant to whom the loan was made. (e) Loans shall be for such term as the Participant elects, except that loans shall not be for a period in excess of five (5) years unless they are made for the purposes of purchasing the primary residence of the Participant. In no event shall a loan be for a period in excess of thirty (30) years or such longer period of time as established by the Administrator to be used on a uniform and nondiscriminatory basis. 33 (f) Loans shall be repaid in approximately level installments made no less frequently than quarterly. The Plan Administrator may require that loans be repaid by payroll deduction or any other convenient manner. The manner and frequency of payment shall be determined by the Plan Administrator. (g) If not repaid in full, the unpaid portion of any outstanding loans (including interest thereon) shall be deducted at retirement, death, disability or other termination of employment from any benefit to which a Participant (or his beneficiary) is entitled under this Plan, and any other security pledge shall be sold as soon as is practicable after such default by the Trustee at private or public sale. The proceeds of such sale shall be applied first to pay the expenses of conducting the sale, including reasonable attorney's fees, and then to pay any sums due from the borrower to the Trust Fund, with such payment to be applied first to accrued interest and then to principal. The Participant shall remain liable for any deficiency, and any surplus remaining shall be paid to the Participant. (h) If a required periodic payment is not made within 90 days of the date it was due, this shall be deemed a default and foreclosure on the note and attachment of security will not occur until a distributable event occurs in the Plan. 34 ARTICLE IX ADMINISTRATION 9.01. Plan Administrator. The Plan shall be administered by the Employer in accordance with its provisions and for purposes of such Plan administration the Employer is hereby deemed to be Plan Administrator within the meaning of ERISA. All aspects of Plan administration shall be the responsibility of the Plan Administrator except those specifically delegated to the Trustees or other parties in accordance with provisions of the Plan or Trust Agreement. 9.02. Administrative Procedures. The Administrator shall have discretionary authority based on a reasonable interpretation of the Plan to determine the eligibility for benefits and the benefits payable under the Plan, and shall have discretionary authority to construe all terms of the Plan, including uncertain terms, to determine questions of fact and law arising under the Plan and make such rules as may be necessary for the administration of the Plan. Any determination by the Plan Administrator shall be given deference in the event it is subject to judicial review, and shall be overturned only if it is arbitrary and capricious or an abuse of discretion. The Administrator may require Participants to apply in writing for benefits hereunder and to furnish satisfactory evidence of their date of birth and such other information as may from time to time be deemed necessary. The Plan Administrator shall appoint the Trustees, Investment Managers, or any other professional advisors as the Administrator, in is sole discretion, deems necessary or appropriate. 9.03. Other Plan Administrator. Anything to the contrary notwithstanding, the Employer may appoint a committee or an individual or individuals, whether or not employed by the Employer, to carry out any of the duties of the Plan Administrator. Such duties may include, but are not limited to, determining the eligibility of any Employee for any benefits and the amount of such benefits under the Plan, maintaining custody of all documents and elections made by an Employee, directing the investment of any payment made by an Employer within any limits which may be imposed by the Employer, and retaining suitable agents and advisors. Any committee or individual shall be considered an agent of the Employer with respect to the Plan and shall be indemnified by the Employer against any and all claims, losses, damages, expenses and liabilities arising from any action or failure to act, except when the same is determined to be due to the gross negligence or willful misconduct of such individual or a member of a committee. 9.04. Special Administrative Matters. In the event of any error in the administration of the Plan that would be correctable under the Administrative Policy Regarding Self-Correction, or any successor program thereto, the Employer may take such action as may be necessary to correct the error and retain the tax-qualified status of 35 the Plan. If such action involves the addition of assets to the Plan, such assets shall be allocated in such manner as is necessary to correct the error. 9.05. Claims Procedures. (a) If any claim of a Participant or Beneficiary (hereinafter referred to as "Claimant") is partially or totally denied, the Plan Administrator shall advise the Claimant in writing of the method of computation of his benefit, if any, and the specific reason for the denial. This written notice will be provided to the Claimant within a reasonable period of time (generally within 90 days) after the Administrator's receipt of the claim. The Administrator shall also furnish the Claimant at that time with: (i) a specific reference to pertinent Plan provisions, (ii) a description of any additional material or information necessary for the Claimant to perfect his claim, if possible, and an explanation of why such material or information is needed, and (iii) an explanation of the Plan's claim review procedure. If a notice of denial of the claim, or a request for additional time to process the claim due to special circumstances, is not furnished to the Claimant within the 90-day period, the claim shall be deemed denied. The Claimant may then proceed to the review stage described in the following paragraphs. (b) The Claimant shall, if he desires further review, file a written request for reconsideration with the Administrator. This written request must be filed no later than 60 days after receipt of the information stated in (a) above. (c) So long as the Claimant's request for review is pending (including the 60 day period in (b) above), the Claimant or his duly authorized representative may review pertinent Plan documents and may submit issues and comments in writing to the Administrator. (d) A final and binding decision shall be made by the Administrator within 60 days of the filing by the Claimant of his request for reconsideration, provided, however, that if the Administrator, in its discretion, determines that a hearing with the Claimant or his representative present is necessary or desirable, this period shall be extended an additional 60 days. (e) The Administrator's decision shall be conveyed to the Claimant in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the Claimant, with specific references to the pertinent Plan provisions on which the decision is based. 9.06. Expenses. Expenses of the Plan shall be paid from the Trust Fund unless the Employer elects to pay such expenses. Notwithstanding the foregoing, (i) the per-Participant quarterly administrative fee charged by the Plan's outside recordkeeper, to the extent attributable to Active Participants and Inactive Participants, shall be paid by the Employer, and to the extent attributable to Terminated 36 Vested Participants shall be paid by the Trust Fund and charged against the Accounts of such Participants; and (ii) any loan fees shall be paid by the Trust Fund and charged against the respective Accounts to which such fees relate. 37 ARTICLE X AMENDMENT, TERMINATION AND MERGERS 10.01. Amendment. The provisions of this Plan may be amended at any time and from time to time by the Employer, provided, however, that: (a) no amendment shall increase the duties or liabilities of the Plan Administrator or of the Trustee without the consent of such party; (b) no amendment shall deprive any Participant or beneficiary of a deceased Participant of any of the benefits to which he is entitled under this Plan with respect to contributions previously made, nor shall any amendment decrease the balance in any Participant's Account. For purposes of this paragraph, a plan amendment which has the effect of decreasing the balance of a Participant's Account or eliminating an optional form of benefit with respect to benefits attributable to service before the amendment shall be treated as reducing an accrued benefit; (c) no amendment shall provide for the use of funds or assets held to provide benefits under this Plan other than for the benefit of Employees and their beneficiaries or provide that funds may revert to the Employer except as permitted by law; and (d) no amendment may change the vesting schedule with respect to any Participant, unless each Participant with three or more Years of Service is permitted to elect to have the vesting schedule which was in effect before the amendment used to determine his vested benefit. The period during which the election may be made shall commence with the date the amendment is adopted or deemed to be made and shall end on the latest of: (1) 60 days after the amendment is adopted; (2) 60 days after the amendment becomes effective; or (3) 60 days after the Participant is issued written notice of the amendment by the Employer or Plan Administrator. In the case of an Employee who is a Participant as of the later of the date such amendment is adopted or the date it becomes effective, the nonforfeitable percentage (determined as of such date) of such Employee's right to his Employer-derived accrued benefit will not be less than his percentage computed under the Plan without regard to such amendment. Each amendment shall be approved by the Board of Directors by resolution and shall be filed with the Trustee. 38 10.02. Plan Termination. (a) Right Reserved. While it is the Employer's intention to continue the Plan indefinitely the right is, nevertheless, reserved to terminate the Plan in whole or in part. Termination or partial termination of the Plan shall result in full and immediate vesting of each affected Participant in his entire Account, and there shall not thereafter be any forfeitures with respect to any Participant for any reason. Notwithstanding any other provision of this Plan, complete or partial termination of the Plan shall not be conditioned solely upon any resolution or other action of the Company, the Board of Directors or any other party. (b) Effect on Retired Persons, etc. Termination of the Plan shall have no effect upon payment of benefits due to former Participants, their beneficiaries and their estates. The Trustee shall retain sufficient assets to complete any such payments due and shall have the right, upon direction by the Employer, to make such payments as of the effective date of the Plan termination. (c) Effect on Remaining Participants, etc. The Employer shall instruct the Trustees either (i) to continue to manage and administer the assets of the Trust for the benefit of the Participants and their beneficiaries pursuant to the terms and provisions of the Trust Agreement, or (ii) to pay over to each Participant (and vested former Participant) the value of his vested account, and thereupon to dissolve the Trust. Upon termination of this Plan, if the Employer or any Affiliated Organization does not maintain a successor plan, the Participant's Account may, without the Participant's consent, be distributed to the Participant. However, if any entity within the same controlled group as the Employer maintains a successor plan then the Participant's Account will be transferred, without the Participant's consent, to the other plan. For purposes of this Section 10.02(c), a successor plan is any other defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code or a simplified employee pension as defined in Section 408(k) of the Code) maintained by the Employer or any Affiliated Organization unless fewer than two percent of the Active Participants as of the time of the Plan's termination are or were eligible under such defined contribution plan at any time during the 24-month period beginning 12 months before the time of the termination. 10.03. Permanent Discontinuance of Employer Contributions. While it is the Employer's intention to make substantial and recurrent contributions to the Trust Fund pursuant to the provisions of this Plan, the right is, nevertheless, reserved at any time permanently to discontinue Employer contributions. Such permanent discontinuance shall be established by resolution of the Board of Directors and shall have the effect of a termination of the Plan, except that the Trustee shall not have authority to dissolve the Trust Fund except upon adoption of a further resolution by the Board of Directors to the effect that the Plan is terminated and upon receipt from the Employer of instructions to dissolve the Trust Fund pursuant to Section 10.02(c) hereof. 10.04. Suspension of Employer Contributions. The Employer shall have the right at any time, and from time to time, to suspend Employer contributions to the Trust Fund pursuant to this Plan. Such suspension shall have no effect on the 39 operation of the Plan unless the Board of Directors determines by resolution that such suspension shall be permanent. A permanent discontinuance of contributions will be deemed to have occurred as of the date of such resolution or such earlier date as is therein specified. 10.05. Mergers and Consolidations of Plans. In the event of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each Participant shall have a benefit in the surviving or transferee plan (determined as if such plan were then terminated immediately after such merger, etc.) that is equal to or greater than the benefit he would have been entitled to receive immediately before such merger, etc. in the Plan in which he was then a Participant (had such Plan been terminated at that time). For the purposes hereof, former Participants and beneficiaries shall be considered Participants. 40 ARTICLE XI MISCELLANEOUS PROVISIONS 11.01. Non-Alienation of Benefits. None of the payments, benefits or rights of any Participant or beneficiary shall be subject to any claim of any creditor, and in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attachment, garnishment, trustee's process, or any other legal or equitable process available to any creditor of such Participant or beneficiary. Notwithstanding the foregoing, the Plan Administrator shall assign or recognize an alternate payee with respect to all or a portion of a Participant's benefit, as may be required in accordance with a Qualified Domestic Relations Order, as such term is defined and as such action by the Plan Administrator may be required under Section 414 of the Code and regulations issued pursuant thereto. The Administrator shall develop such guidelines and procedures as it deems appropriate to determine, in accordance with Section 414 of the Code, and regulations issued pursuant thereto, whether, and in what manner, to comply with any document it receives which is intended to be a Qualified Domestic Relations Order. No Participant or beneficiary shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he may expect to receive, contingently or otherwise, under this Plan, except the right to designate a beneficiary or beneficiaries as hereinbefore provided. The first sentence of this Section 11.01 shall not apply to the offset of a Participant's benefits hereunder against an amount that the Participant is required to pay to the Plan; if (a) the order or requirement to pay arises: (i) under a judgment of conviction for a crime involving such plan; (ii) under a civil judgment (including a consent order or decree) entered by a Court in an action brought in connection with a violation (or alleged violation) of Part 4 of Title I of ERISA; (iii) pursuant to a settlement agreement between the Secretary of Labor and the participant, or a settlement between the PBGC (and the participant, in connection with a violation (or alleged violation) of Part 4 of Title I of ERISA by a fiduciary, or any other persons; or (iv) the judgment, order, decree or settlement agreement expressly provides for the offset of all or a part of the amount ordered or required to be paid to the Plan against a participant's benefits hereunder; and (b) if the Participant has a spouse at the time at which the offset is to be made: (i) Either such spouse has consented in writing to such offset and such consent is witnessed by a notary public or a representative of the Plan (or it is established to the 41 satisfaction of the Plan representative that such consent may not be obtained by reason of circumstance described in Code ss.417(a)(2)(B)); or (ii) such spouse is ordered or required in such judgment, order, decree or settlement to pay an amount to the plan in connection with a violation of Part 4 of Title I or ERISA. 11.02. No Contract of Employment. Neither the establishment of the Plan, nor any modification thereof, nor the creation of any fund, trust or account, nor the payment of any benefits shall be construed as giving any Participant or Employee, or any person whomsoever, the right to be retained in the service of the Employer, and all Participants and other Employees shall remain subject to discharge to the same extent as if the Plan had never been adopted. 11.03. Severability of Provisions. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Plan shall be construed and enforced as if such provisions had not been included. 11.04. Heirs, Assigns and Personal Representatives. This Plan shall be binding upon the heirs, executors, administrators, successors and assigns of the parties, including each Participant and beneficiary, present and future. 11.05. Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. 11.06. Gender and Number. Except where otherwise clearly indicated by context, the masculine and the neuter shall include the feminine and the neuter, the singular shall include the plural, and vice-versa. 11.07. Funding Policy. The Plan Administrator, in consultation with the Employer, shall establish and communicate to the Trustees a funding policy consistent with the objectives of this Plan and of the corresponding Trust. Such policy shall reflect due regard for the emerging liquidity needs of the Trust. Such funding policy shall also state the general investment objectives of the Trust and the philosophy upon which maintenance of the Plan is based. 11.08. Title to Assets. No Participant or beneficiary shall have any right to, or interest in, any assets of the Trust Fund upon termination of his employment or otherwise, except as provided from time to time under this Plan, and then only to the extent of the benefits payable under the Plan to such Participant out of 42 the assets of the Trust Fund. All payments of benefits as provided for in this Plan shall be made from the assets of the Trust Fund, and neither the Employer nor any other person shall be liable therefor in any manner. 11.09. Payment to Minors, etc. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person's guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Trustees, the Plan Administrator, the Employer and all other parties with respect thereto. 11.10. Military Service. Notwithstanding any provision of the Plan to the contrary, contributions, benefits, and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. Loan repayments will be suspended under the Plan as permitted by Section 414(u)(4) of the Code. 11.11. Forms. Notwithstanding any provision in the Plan to the contrary, salary reduction agreements, cancellations or amendments thereto, loans, investment elections, and any other elections by a Participant may, to the extent not otherwise prohibited by law, be accomplished by electronic or telephonic means pursuant to procedures and systems approved by the Plan Administrator. 11.12. Situs. This Plan shall, to the extent not preempted by ERISA or other Federal law, be construed according to the laws of the state where the principal office of the Company is domiciled (without regard to its conflict of laws principles unless the context requires otherwise), where such state statutes may be applicable to an employee benefit plan. 43 ARTICLE XII TOP-HEAVY PROVISIONS 12.01. Top-Heavy Plan. For any Plan Year commencing in 1984 or thereafter, the Plan shall be a Top-Heavy Plan, as such term is defined under Section 416 of the Internal Revenue Code, if the Value of Accumulated Benefits for Key Employees under all Aggregated Plans exceeds 60% of the Value of Accumulated Benefits for all Group Participants under all Aggregated Plans, determined as of the Determination Date immediately preceding such Plan Year. If the Plan is a Top-Heavy Plan for a Plan Year and, as of the Determination Date immediately preceding such Plan Year, the Value of Accumulated Benefits for Key Employees under all Aggregated Plans exceeds 90% of the Value of Accumulated Benefits for all Group Participants under all Aggregated Plans, then the Plan shall be a Super Top-Heavy Plan for such Plan Year. For such purposes, the terms "Key Employees" and "Group Participants" shall include all persons who are or were Key Employees or Group Participants during the Plan Year ending on such Determination Date or during any of the four (4) immediately preceding Plan Years. The value of Accounts and the present value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in Section 416 of the Code for the first and second plan years of a defined benefit plan. The Accounts and accrued benefits of a Participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one Hour of Service with any Employer maintaining the Plan at any time during the 5-year period ending on the Determination Date will be disregarded. The calculation of the top-heavy ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Section 416 of the Code. Deductible employee contributions will not be taken into account for purposes of computing the top-heavy ratio. When aggregating plans the value of Accounts and accrued benefits will be calculated with reference to the determination dates that fall within the same calendar year. The accrued benefit of a participant other than a Key Employee shall be determined under (a) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section 411 (b)(1)(c) of the Code. For purposes of this Article, the following definitions shall apply in addition to those set forth in Article I: "Affiliated Employer Group" shall mean the Employer and each other employer which must be aggregated with the Employer for purposes of Section 414(b), 414(c) or 414(m) of the Code. "Aggregated Plans" shall mean (i) all plans of the Employer or an Affiliated Employer Group which are required to be aggregated with the Plan, and (ii) all plans of the Employer or an 44 Affiliated Employer Group which are permitted to be aggregated with the Plan and which the Plan Administrator elects to aggregate with the Plan, for purposes of determining whether the Plan is a Top-Heavy Plan. A plan shall be required to be aggregated with the Plan if such plan includes as a participant a Key Employee (and the beneficiary of such employee) or if such plan enables any plan of the Employer or of a member of the Affiliated Employer Group in which a Key Employee participates to qualify under Section 401(a)(4) or Section 410 of the Code. A plan of the Employer or the Affiliated Employer Group shall be permitted to be aggregated with the Plan if such plan satisfies the requirements of Sections 401(a)(4) and 410 of the Code, when considered together with the Plan and all plans which are required to be aggregated with the Plan. No plan shall be aggregated with the Plan unless it is a qualified plan under Section 401 of the Code. The required aggregation group shall include plans terminated within the five year period ending on the Determination Date. "Annual compensation" shall mean compensation as defined in Section 415(c)(3) of the Code but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the Employee's gross income under Section 125, Section 402(a)(8), Section 402(h) or Section 403(b) of the Code. "Determination Date" shall mean the date as of which it is determined whether a plan is a Top-Heavy Plan or Super Top-Heavy Plan for the Plan Year immediately following such Determination Date. The Determination Date for the Plan shall be: (a) in the case of a defined benefit plan, the date as of which the actuarial valuation of the Plan, as used for determination of minimum funding standards under Section 412 of the Code, is performed; and (b) in the case of a defined contribution plan, the last day of the Plan Year. "Group Participant" shall mean anyone who is or was a participant in any plan included in the Aggregated Plans during the Plan Year which includes the Determination Date or any of the four (4) immediately preceding Plan Years, and who received compensation from an Employer during the five (5) year period ending on the Determination Date. Any beneficiary of a Group Participant who has received, or is expected to receive, a benefit from a plan included in the Aggregated Plans shall be considered a Group Participant solely for purposes of determining whether the Plan is a Top-Heavy Plan or Super Top-Heavy Plan. "Key Employee" shall mean any employee or former employee of the Employer or of an Affiliated Employer Group who during the Plan Year which includes the Determination Date, or during any of the four (4) Plan Years immediately preceding such Plan Year, was: (a) an officer of the Employer whose compensation is at least $45,000 (or such higher amount as is permitted in accordance with the Code); or (b) a five percent (5%) owner of the Employer; or (c) a one percent (1%) owner of the Employer whose total annual compensation from the Affiliated Employer Group exceeds $150,000; or 45 (d) an employee whose compensation equals or exceeds $30,000 (or such higher amount as may be defined under Section 415(c)(1)(A) of the Code), and whose ownership interest in the Affiliated Employer Group is among the ten largest. In no event shall a partner of an unincorporated employer be considered an officer under paragraph (a) above. Further, the number of officers counted under (a) above as of any Determination Date shall not exceed the lesser of: (1) the greater of (i) ten percent (10%) of the total number of employees of the Affiliated Employer Group, and (ii) three (3); and (2) fifty (50). If the application of the preceding paragraph results in a reduction in the number of officers to be included as Key Employees, then individuals who are officers shall be eliminated from the group of Key Employees beginning with the individual who had the lowest one-year compensation in the five (5) year period including the Plan Year which includes the Determination Date, and the four (4) immediately preceding Plan Years, and eliminating each individual with the next higher one-year compensation in such period, until the maximum number of officers remain in the Key Employee group. In addition, the beneficiary of a Key Employee shall be deemed to be a Key Employee. "Non-Key Employee" shall mean an Employee who is not a Key Employee. An Employee who was a Key Employee in a previous Plan Year but who is no longer a Key Employee in the current Plan Year shall not be considered a Non-Key Employee for the current Plan Year. "Value of Accumulated Benefits" shall mean (a) in the case of a Group Participant or beneficiary covered under a defined benefit plan, the sum of (i) the present value of the accrued pension benefit (as such term is defined under the applicable plan) of the Group Participant or beneficiary determined as of the Determination Date using reasonable actuarial assumptions as to interest and mortality, and taking into account any non-proportional subsidies in accordance with regulations issued by the Secretary of the Treasury; plus (ii) the sum of any amounts distributed to the Group Participant and his beneficiary during the plan year ending on the Determination Date and during the four (4) immediately preceding plan years. (b) in the case of a Group Participant or beneficiary covered under a defined contribution plan, the sum of the accounts of the Group Participant or beneficiary under the plan as of the plan's Determination Date derived from: (1) employee contributions credited to such accounts and investment earnings thereon; and 46 (2) employer contributions credited to such accounts and investment earnings thereon; and (3) rollover contributions made prior to January 1, 1984, and investment earnings thereon; and (4) any contributions which would have been credited to such accounts on or before the Determination Date, but which were waived as provided under the Code and resulted in a funding deficiency; and (5) any amount distributed from the accounts described in (1) through (4) above during the Plan Year ending on the Determination Date, and the four (4) immediately preceding Plan Years. If the Plan is determined to be a Top-Heavy Plan or Super Top-Heavy Plan as of any Determination Date, then it shall be subject to the rules set forth in the remainder of this Article for the Plan Year next following such Determination Date. If, as of a subsequent Determination Date, the Plan is determined to no longer be a Top-Heavy Plan or Super Top-Heavy Plan, then the rules set forth in the remainder of this Article shall no longer apply, except where expressly indicated otherwise. Notwithstanding the foregoing, if the Plan changes from being a Super Top-Heavy Plan to a Top-Heavy Plan, the rules applicable to a Top-Heavy Plan shall apply. "Year of Super Top-Heavy Service" shall mean a Year of Service of a Participant which commenced in a Plan Year during which the Plan was a Super Top-Heavy Plan. "Year of Top-Heavy Service" shall mean a Year of Service of a Participant which commenced in a Plan Year during which the Plan was a Top-Heavy Plan. 12.02. Minimum Contributions or Benefits. For any Plan Year in which the Plan is a Top-Heavy Plan the minimum rate of contributions and forfeitures allocated to the account of any Participant shall be the lesser of: (i) The highest rate of employer contributions and forfeitures (determined as a percentage of compensation as defined under Section 415 of the Code) allocated to the account of any Key Employee; and (ii) 3% of such compensation. Notwithstanding the above paragraph, if a Participant is also a participant in another defined contribution plan of the Affiliated Employer Group, all or a portion of the allocation described above may be provided under such other plan and the allocation provided under this Plan shall be eliminated or reduced accordingly. If the Employee is a Participant in one or more defined benefit plans of the Affiliated Employer Group, all or a portion of the minimum required benefits or allocations under Section 416 of the Code may be provided under such plans as set forth in regulations issued by the Secretary of the Treasury, and the minimum allocation provided in the preceding paragraph shall be eliminated or reduced accordingly. Employer contributions resulting from a salary reduction election by an Employee shall not be counted toward meeting the minimum 47 required allocations under this Section. Matching Employer Contributions may be used to satisfy the minimum required allocations under this Section, if such contributions are not counted under the ACP test described in Section 3.06. Participants who are Non-Key Employees and who are not separated from service as of the last day of the Plan Year, and who have (1) failed to complete 1000 Hours of Service (or the equivalent), (2) declined to make mandatory contributions to the Plan, or (3) been excluded from the Plan because such individual's compensation is less than a stated amount, are considered Participants solely for purposes of this Section. The minimum allocation required to the extent required to be nonforfeitable under Section 416(b) may not be forfeited under Section 411(a)(3)(B) or 411(a)(3)(D). 12.03. Adjustment to Maximum Benefits. For Plan Years commencing prior to January 1, 2000, if the Plan is a Top-Heavy Plan for any Plan Year, then the maximum benefit which can be provided under Section 3.13 shall be determined by substituting " 1.00" for "1.25" in the applicable fractions. However, if the Plan is not a Super Top-Heavy Plan for such Plan Year, then the preceding sentence shall not apply provided that "4%" (or such higher rate as is required by Internal Revenue Service Regulations) is substituted for "3%" in the first paragraph of Section 12.02. 12.04. Minimum Vesting. If the Plan is determined to be a Top-Heavy Plan for any Plan Year, then an Active Participant's vested interest in his Account determined as of the first day of such Plan Year, and determined as of any future date while the Plan continues to be a Top-Heavy Plan, shall be no less than as determined under the following Table:
Years of Service Vesting Percentage ---------------- ------------------ Less than 2 years None 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 years or more 100%
If the Plan subsequently is determined no longer to be a Top-Heavy Plan, then the above minimum vesting schedule shall not apply to any portion of a Participant's Account which is accrued after the first day of the first Plan Year in which the Plan is no longer a Top-Heavy Plan, provided that the Account for any Participant with three (3) or more Years of Service as the first date as of which the Plan is no longer a Top-Heavy Plan shall continue to be vested in accordance with a schedule not less than the minimum vesting schedule applicable during the period that the Plan was a Top-Heavy Plan. 48 The minimum vesting schedule applies to all benefits within the meaning of Section 411(a)(7) of the Code except those attributable to employee contributions, including benefits accrued before the effective date of Section 416 and benefits accrued before the Plan became top-heavy. 12.05. Discontinuance of Article. In the event that the provisions of this Article are no longer required to qualify the Plan under the Code, then this Article XII shall thereupon be void without the necessity of further amendment of the Plan. 49 IN WITNESS WHEREOF, and as evidence of the adoption of the foregoing, the Company has caused this instrument to be executed by a duly authorized officer as of this 16th day of February, 2001. HANOVER DIRECT, INC. By: /s/ Edward M. Lambert 02-16-2002 Title: EVP/COO 50 SCHEDULE A EFFECTIVE DATES The provisions of this amended and restated Plan are effective July 1, 1999, except as otherwise provided in the Plan or below: 1. The following provision is effective December 12, 1994: a. Section 11.10 (military service). 2. The following provision is effective January 1, 1996: a. Section 5.04 (required minimum distributions). 3. The following provisions are effective January 1, 1997: a. Section 1.07 (elimination of family attribution rules from Compensation definition). b. Section 1.14 (definition of leased employee). c. Section 1.19 (definition of Highly-Paid Employee). d. Sections 3.06-3.09 (non-discrimination testing). 4. The following provision is effective January 1, 2000: a. Section 3.12(d) (direct rollovers). 5. The following provision is effective January 1, 2001: a. Section 1.07 (Compensation definition modified to include amounts described in Section 132(f) of the Code). 51 HANOVER DIRECT SAVINGS AND RETIREMENT PLAN APPENDIX A: ADOPTING EMPLOYERS 1. The Company's subsidiary, Gump's Holdings, Inc., adopts this Plan as a participating Employer effective July 12, 1993. For purposes of determining Hours of Service and Years of Service, an Employee shall be credited with all service commencing July 12, 1993. 2. The Company's subsidiary, Gump's, Inc., adopts this Plan as a participating Employer effective July 12, 1993. For purposes of determining Hours of Service and Years of Service, an Employee shall be credited with all service commencing July 12, 1993. 3. The Company's subsidiary, Gumps By Mail, Inc., adopts this Plan as a participating Employer effective July 12, 1993. For purposes of determining Hours of Service and Years of Service, an Employee shall be credited with all service commencing July 12, 1993. 4. The Company's subsidiary, Tweeds Inc., adopts this Plan as a participating Employer effective January 1, 1994. For purposes of determining Hours of Service and Years of Service, an Employee shall be credited with all service with Tweeds Inc. rendered prior to the date of its acquisition by the Company. 5. The Company's subsidiary, The Company Manufacturing, Inc., which has succeeded to the business formerly carried on by The Company Store, adopts this Plan as a participating Employer effective January 1, 1994. For purposes of determining Hours of Service and Years of Service, an Employee shall be credited with all service with The Company Store rendered prior to the date of its acquisition by the Company. 52 APPENDIX B: SPECIAL VESTING RULES FOR EMPLOYEES OF LWI HOLDINGS, INC. Notwithstanding anything to the contrary contained in Section 7.01 of the Plan, the vested percentage of each Participant who is a "Continuing Employee" (as such term is defined in Section 3.12(a) of the Asset Purchase Agreement among the Company, LWI Holdings, Inc., HSN LP, HSN Improvements, LLC and HSN Catalogue Services, Inc., dated as of June 13, 2001, as amended (the "Asset Purchase Agreement")) in such Participant's Matching Employer Contribution Account and Discretionary Employer Contribution Account under this Plan shall be 100%, effective as of the "Closing Date" (as such term is defined in Section 1.4 of the Asset Purchase Agreement). 53 EX-10.78 8 y58340ex10-78.txt AMENDMENT NO. 1 TO SAVINGS AND RETIREMENT PLAN EXHIBIT 10.78 FIRST AMENDMENT TO THE HANOVER DIRECT SAVINGS AND RETIREMENT PLAN (AS AMENDED AND RESTATED AS OF JULY 1, 1999) The Hanover Direct Savings and Retirement Plan (As Amended and Restated as of July 1, 1999) is hereby amended effective March 1, 2002 by deleting Section 3.04 thereof and substituting the following therefor: "3.04 Matching Employer Contributions. "An Employer may elect, in its sole discretion, to make Matching Employer Contributions for a Plan Year for each Active Eligible Participant (as hereinafter defined) on whose behalf Salary Deferral Contributions have been made during the Plan Year. For purposes of this Section 3.04, an "Active Eligible Participant" means (i) with respect to Salary Deferral Contributions made prior to March 1, 2002, an Active Participant, and (ii) with respect to Salary Deferral Contributions made on or after March 1, 2002, an Active Participant who is employed by an Employer on the last day of the Plan Year and has at least 1,000 Hours of Service during the Plan Year. "For any Plan Year, the Matching Employer Contributions (including any forfeitures reallocated in accordance with Section 3.10) shall be allocated to the Accounts of such Active Eligible Participants for the Plan Year in the same proportion as the amount of Salary Deferral Contributions (not in excess of six percent (6.0%) of the Participant's Compensation) for each such Active Participant for such Plan Year bears to the total Salary Deferral Contribution (as so limited) for all such Active Participants for such Plan Year. For purposes of the preceding sentence, Salary Deferral Contributions and Compensation shall be taken into account only with respect to periods when a Participant is an Active Eligible Participant." IN WITNESS WHEREOF, Hanover Direct, Inc. has adopted this instrument this ___ day of ____________, 2002. HANOVER DIRECT, INC. ----------------------- By: EX-21.1 9 y58340ex21-1.txt SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT NAME -- STATE OF INCORPORATION
COMPANY STATE OF INCORPORATION - ------- ---------------------- American Down and Textile Company Wisconsin Brawn of California, Inc. California Clearance World Outlets, LLC Delaware Desius, LLC Delaware D.M. Advertising, Inc. New Jersey D.M. Advertising, LLC Delaware Domestications, LLC Delaware Encore Catalog, LLC Delaware erizon, Inc. Delaware Gump's By Mail, Inc. Delaware Gump's Corp. California Hanover Brands, Inc. Delaware Hanover Company Store, LLC Delaware Hanover Direct Pennsylvania, Inc. Pennsylvania Hanover Direct Virginia Inc. Delaware Hanover Gifts, Inc. Virginia Hanover Home Fashions Group, LLC Delaware Hanover Realty, Inc. Virginia Keystone Internet Services, Inc. Delaware Keystone Liquidations, Inc. Delaware LaCrosse Fulfillment, LLC Delaware San Diego Telemarketing, LLC Delaware Scandia Down, LLC Delaware Silhouettes, LLC Delaware The Company Office, Inc. Delaware The Company Store Factory, Inc. Delaware The Horn & Hardart Company, Inc. New York
EX-23.1 10 y58340ex23-1.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Annual Report on Form 10-K of our report dated March 16, 2002 and in previously filed Registration Statement Nos. 2-92383, 2-94286, 33 52059, 33-52061, 33-52353, 33-52687, 33-58756, 33-58758, 33-58760, 33-66394, 333-3871, 333-02743, 333-03871, 333-13817, 333-25141, 333-51433, 333-80007, 333-91687 and 333-91689. Arthur Andersen LLP New York, New York March 28, 2001 EX-99.1 11 y58340ex99-1.txt REPRESENTATION LETTER EXHIBIT 99.1 [LETTERHEAD OF HANOVER DIRECT, INC.] March 27, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Hanover Direct, Inc. Ladies and Gentlemen: Arthur Andersen LLP ("Andersen") has audited the balance sheets of Hanover Direct, Inc. (the "Company") as of December 29, 2001 and December 30, 2000, and the related consolidated statements of income (loss), shareholders' equity (deficit) and cash flows for each of the three fiscal years in the period ended December 29, 2001 (collectively, the "Financial Statements"). The Financial Statements are included in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001, which will be filed with the Commission on March 28, 2002. Pursuant to Temporary Note 3T to Article 3 of Regulation S-X, the Company has obtained a letter of representation from Andersen that the audit was subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards and that there was appropriate continuity of Andersen personnel working on audits and availability of national office consultation. Availability of personnel at foreign affiliates of Andersen is not relevant to the audit. Very truly yours, /s/ Edward M. Lambert Edward M. Lambert Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----