<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1994
REGISTRATION NO. 33-52353
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HANOVER DIRECT, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
DELAWARE 1500 Harbor Boulevard 13-0853260
(State or other jurisdiction of Weehawken, New Jersey 07087 (I.R.S. Employer
incorporation or organization) (201) 863-7300 Identification Number)
</TABLE>
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
MICHAEL P. SHERMAN, ESQ.
HANOVER DIRECT, INC.
1500 HARBOR BOULEVARD
WEEHAWKEN, NEW JERSEY 07087
(201) 863-7300
(Name, address, including zip code,
and telephone number, including area
code, of agent for service)
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COPIES TO:
<TABLE>
<S> <C>
MONTE E. WETZLER, ESQ. VALERIE FORD JACOB, ESQ.
WHITMAN BREED ABBOTT & MORGAN FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
200 PARK AVENUE ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10166 NEW YORK, NEW YORK 10004
(212) 351-3000 (212) 820-8000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy
nor shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 25, 1994
P R O S P E C T U S
10,000,000 SHARES
[HANOVER LOGO]
COMMON STOCK
---------------------
Of the 10,000,000 shares of Common Stock offered hereby, 5,845,396 are
being issued and sold by Hanover Direct, Inc. ("Hanover" or the "Company") and
4,154,604 are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Shareholders.
The Common Stock of the Company is listed on the American Stock Exchange
(the "AMEX") under the symbol "HNV." On March 10, 1994, the last reported sale
price of the Common Stock as reported on the AMEX was $7 per share. See "Price
Range of Common Stock."
SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PROCEEDS TO
PRICE TO PROCEEDS TO SELLING
PUBLIC UNDERWRITING COMPANY(2) SHAREHOLDERS(2)
DISCOUNT(1)
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<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
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Total(3).......................... $ $ $ $
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</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities under the Securities Act
of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company and a Selling Shareholder
estimated at $520,000 and $280,000, respectively.
(3) The Company and a Selling Shareholder have granted the several Underwriters
30-day options to purchase up to 1,500,000 additional shares of Common
Stock solely to cover over-allotments, if any. If such options are
exercised in full, the total Price to Public, Underwriting Discount,
Proceeds to Company and Proceeds to Selling Shareholders will be
$ , $ , $ and $ , respectively. See
"Underwriting."
---------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1994.
---------------------
MERRILL LYNCH & CO. ALEX. BROWN & SONS
INCORPORATED
---------------------
The date of this Prospectus is , 1994.
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
(INSIDE FRONT COVER 2)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(LOGO) (PHOTOGRAPH 1) (LOGO) (PHOTOGRAPH 2) (LOGO) (PHOTOGRAPH 3) (LOGO)
The Company
is a leading
direct specialty
retailer that
publishes a
(PHOTOGRAPH 4) (LOGO) (PHOTOGRAPH 5) (LOGO) (PHOTOGRAPH 6) portfolio of (PHOTOGRAPH 7)
fourteen branded
specialty catalogs
offering home
furnishings,
general
merchandise
and apparel.
(LOGO) (PHOTOGRAPH 8) (LOGO) (PHOTOGRAPH 9) (LOGO) (PHOTOGRAPH 10) (LOGO)
</TABLE>
<PAGE> 5
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3, of which this Prospectus
constitutes a part (together with any amendments thereto, the "Registration
Statement"), under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in schedules and exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission and to
which reference is hereby made for further information with respect to the
Company and the Common Stock offered hereby. Statements made in this Prospectus
concerning the contents of any documents referred to herein are not necessarily
complete. With respect to each such document filed with the Commission as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference.
The Registration Statement, including the exhibits thereto, and the
financial statements and notes filed as a part thereof, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington D.C. 20549, and at the regional offices
of the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington D.C.
20549.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission referred to above. In addition, copies of such reports, proxy
statements and other information concerning the Company may also be inspected
and copied at the offices of the AMEX at 86 Trinity Place, New York, New York
10006 on which exchange the Common Stock is listed and traded.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated in this Registration Statement by reference: (a) the Annual Report
on Form 10-K for the fiscal year ended January 1, 1994 and (b) the Current
Reports on Form 8-K dated February 17, 1994 and March 10, 1994.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 and 5(d) of the Exchange Act, prior to the termination of the offering
of the Common Stock, shall be deemed to be incorporated by reference in this
Registration Statement and to be a part of the Registration Statement from the
respective date of filing of each such document. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is, or is deemed to be, incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request, a copy of any or all of
the documents incorporated by reference herein, other than certain exhibits to
such documents. Requests for such documents should be directed to Michael P.
Sherman, Executive Vice President, General Counsel and Secretary, Hanover
Direct, Inc., 1500 Harbor Boulevard, Weehawken, New Jersey 07087. The Company's
telephone number is (201) 863-7300.
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus or incorporated by reference herein. Unless the context
indicates otherwise, all references in this Prospectus to the Company include
the Company, its predecessors, including The Horn & Hardart Company, a Nevada
corporation ("H&H"), and The Hanover Companies, a Nevada corporation ("THC"),
and its consolidated subsidiaries. Unless otherwise indicated, all information
in this Prospectus assumes the over-allotment options granted to the
Underwriters are not exercised. With respect to financial information of the
Company, all references herein to a year or years shall refer to the fiscal year
or years of the Company.
THE COMPANY
The Company is a leading direct specialty retailer that publishes a
portfolio of 14 branded specialty catalogs offering home furnishings, general
merchandise and apparel. The Company's goal for each of its catalogs is to be a
leader in its market niche. To achieve this goal, the Company employs marketing
and merchandising strategies designed to meet the distinctive needs of each
catalog's target customers. The Company's catalogs include Domestications, the
nation's leading specialty home textile catalog, which has grown rapidly with
revenues increasing from approximately $30 million in 1987 to approximately $311
million in 1993. The Company's portfolio of catalogs also includes Colonial
Garden Kitchens, a leading specialty catalog with the largest 12-month customer
list in its category featuring worksaving and lifestyle enhancing items for the
kitchen and home. During 1993, the Company mailed approximately 322 million
catalogs and had total revenues of approximately $643 million. The Company
maintains a proprietary customer list, containing approximately 19 million names
of customers who have made purchases from at least one of the Company's catalogs
within the past 36 months. Since 1991, approximately seven million names have
been added to the list. Approximately seven million of the names on the list
represent customers who have made purchases from at least one of the Company's
catalogs within the last 12 months.
The Company seeks to develop distinct brand identities for each of its
catalogs. To achieve this goal, the Company has adopted a decentralized
operating structure so that all significant decisions, including those regarding
market positioning and strategy, merchandising, circulation levels, catalog
design and inventory management, are made on an individual catalog basis.
However, the Company gains substantial operating efficiencies and cost savings
by centrally operating the purchasing, telemarketing, fulfillment, distribution
and certain administrative functions for all of its catalogs.
The Company's goal is to become the nation's leading direct specialty
retailer and preferred retail source for its customers. The Company's growth
strategy includes: (i) internal catalog growth and development; (ii) strategic
acquisitions; (iii) strategic ventures; (iv) development of international market
opportunities; and (v) exploration of growth prospects in electronic interactive
media.
During 1993, the Company acquired three brand-name catalogs, Gump's, the
well known San Francisco retailer and a leading upscale catalog marketer of
exclusive gifts, The Company Store, an upscale direct marketer of down
comforters and other down and related products for the home, and Tweeds, the
European inspired women's fashion catalog. In addition, in January 1994, the
Company entered into a licensing agreement (the "Sears Agreement") with Sears,
Roebuck and Co. ("Sears") to produce specialty catalogs for the 23 million Sears
customers no longer being served by the recently discontinued Sears catalog.
The Company believes that direct marketing offers several advantages over
traditional retail stores including the convenience, safety and efficiency of
home shopping. These benefits are increasingly important as a result of changing
demographics including the growing number of dual income families and the aging
of the population. From 1987 through 1992, total U.S. catalog sales grew more
rapidly than retail store sales, at an average annual rate of approximately 8%.
The Company believes that direct marketing sales will continue to grow more
rapidly than retail store sales.
4
<PAGE> 7
RELATIONSHIP WITH NAR
In the fall of 1991, NAR Group Limited, a British Virgin Islands
corporation (together with its affiliates, "NAR"), effectively gained control of
the Company. Upon completion of the offering of the shares of Common Stock
offered hereby (the "Offering"), NAR will own 46,841,528 shares of Common Stock
and warrants and options to purchase 5,053,735 shares of Common Stock
constituting 54.3% of the outstanding Common Stock of the Company on a
fully-diluted basis (approximately 53.7% if the Underwriters' over-allotment
option is exercised in full). NAR is a private investment holding company that
is a joint venture between the family of Alan G. Quasha, a Director and the
Chairman of the Board of the Company, and Compagnie Financiere Richemont A.G., a
Swiss public company engaged in tobacco, luxury goods and other businesses
("Richemont"). Richemont is the ultimate parent of a family of some of the
world's leading luxury goods trademarks, including Cartier, Piaget, Baume &
Mercier, Alfred Dunhill and Montblanc. See "The Company -- History and
Organization -- Restructuring," "Management -- General," "Principal and Selling
Shareholders" and "Relationship with NAR."
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered
By the Company.............. 5,845,396 shares
By the Selling
Shareholders............. 4,154,604 shares
Common Stock to be Outstanding
after the Offering.......... 95,651,765 shares(a)
Use of Proceeds............... The net proceeds will be used for general corporate
purposes, including the expansion of the Company's business.
See "Use of Proceeds."
American Stock Exchange
symbol...................... HNV
</TABLE>
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(a) Includes 5,563,985 shares reserved for issuance under outstanding warrants
and options exercisable within 60 days of March 10, 1994. Excludes 1,100,994
shares reserved for issuance under outstanding options which are not
currently exercisable and 2,737,493 shares reserved for issuance upon the
exercise of options that may be granted in the future under the Company's
stock option plans.
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data for the fiscal years 1989 through
1993 have been derived from the consolidated financial statements of the Company
(successor to H&H) and its subsidiaries, which statements have been audited by
Arthur Andersen & Co., independent public accountants, whose report on certain
of such financial statements is included elsewhere and incorporated by reference
in this Prospectus. Certain reclassifications have been made to the financial
data for the fiscal years prior to 1993 in order to conform with the fiscal 1993
presentation.
In September 1993, the Company was formed in connection with mergers
involving the Company, H&H and THC, a wholly owned subsidiary of H&H. The
mergers were accounted for similarly to a pooling-of-interests, and,
accordingly, the Company's summary consolidated financial data include the
results of H&H and THC for all applicable periods presented.
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------------------
1989 1990 1991 1992 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues............................. $ 382,637 $ 555,770 $ 623,650 $ 586,562 $ 642,511
Operating income (loss).............. 9,703 10,190 (26,078) 14,402 19,076
Income (loss) from continuing
operations......................... 187 (2,136) (51,081) 1,048 17,337
Income (loss) before extraordinary
items and cumulative effect of
accounting change for income
taxes.............................. (8,959) (118,057) (72,200) 1,048 17,337
Net income (loss).................... (8,959) (115,911) (65,285) 20,249 17,337
Preferred stock dividends............ -- -- (466) (3,197) (4,093)
Net income (loss) applicable to
common shareholders................ (8,959) (115,911) (65,751) 17,052 13,244
Income (loss) per share from
continuing operations.............. $ .01 $ (.15) $ (3.16) $ (.06) $ .17
Income (loss) per share before
extraordinary items and cumulative
effect of accounting change for
income taxes....................... (.63) (8.39) (4.46) (.06) .17
Net income (loss) per share.......... (.63) (8.24) (4.03) .44 .17
Weighted average number of shares
outstanding........................ 14,145,416 14,068,460 16,287,723 38,467,015 77,064,131
</TABLE>
<TABLE>
<CAPTION>
AS OF JANUARY 1, 1994
-------------------------
ACTUAL AS ADJUSTED(A)
-------- --------------
<S> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA (END OF PERIOD):
Working capital...................................................... $ 25,476 $ 63,419
Total assets......................................................... 188,838 226,781
Total debt........................................................... 36,160 36,160
Shareholders' equity................................................. 45,868 83,811
</TABLE>
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(a) Adjusted to reflect the sale by the Company of 5,845,396 shares of Common
Stock offered hereby at an assumed price of $7.00 per share, less estimated
underwriting discount and offering expenses.
6
<PAGE> 9
INVESTMENT CONSIDERATIONS
In addition to all the other information contained in this Prospectus and
the documents incorporated by reference, prospective purchasers should consider
the investment considerations set forth below prior to deciding whether to
invest in the Common Stock offered hereby.
FUTURE OPERATING RESULTS
The Company's continued revenue growth and positive net income will depend
on its ability to increase catalog sales and to effectively monitor and control
costs. There can be no assurance that the Company's future operations will
generate net income. Furthermore, future operating results depend upon many
factors, including general economic conditions, the ability of the Company to
continue to attract and retain customers successfully, the level of competition
and its ability to successfully identify, forecast and respond to customer
preferences and fashion trends. See "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations."
The Company's Domestications catalog is the nation's leading specialty home
textile catalog with revenues of approximately $311 million in 1993, which
constitute approximately 48% of the Company's revenues in 1993. A decrease in
profitability of Domestications would have a material adverse effect upon the
Company's financial position and results of operations.
RECENT ACQUISITIONS AND NEW BUSINESS DEVELOPMENTS
The Company acquired three businesses during 1993: (i) in May, the Company
acquired the assets of Gump's, the well known San Francisco retailer and a
leading upscale catalog marketer of exclusive gifts; (ii) in August, the Company
acquired the assets of The Company Store, an upscale direct marketer of down
comforters and other down and related products for the home; and (iii) in
September, the Company acquired the stock of Tweeds, the European inspired
women's fashion catalog. None of these companies was profitable at the time of
its acquisition by the Company. In addition, these acquisitions present
relatively new market niches for the Company and the Company must successfully
integrate and develop these newly acquired companies. There can be no assurance
that the Company will be able to successfully integrate or develop these new
businesses or improve their profitability. See "The Company -- Recent Strategic
Acquisitions and Ventures" and "Business -- Growth Strategy -- Strategic
Acquisitions."
In addition, in January 1994, the Company entered into the Sears Agreement
to produce specialty catalogs for the 23 million customers of the recently
discontinued Sears catalog. The Sears Agreement represents the culmination of
successful test marketing by Sears and the Company during 1993. The Sears
Agreement contains increasing performance standards which must be met by the
Company and which allow Sears to terminate the Sears Agreement upon
noncompliance. There can be no assurance that the Company will be able to meet
such performance standards. See "The Company -- Recent Strategic Acquisitions
and Ventures -- Sears" and "Business -- Growth Strategy -- Strategic
Ventures -- Sears Agreement."
COMPUTER SYSTEMS CONVERSION
The Company is currently in the process of upgrading its management
information systems by implementing new integrated software and migrating from a
centralized mainframe to mid-range mini-computers. The Company currently
estimates that the total cost to install and implement the new systems,
including the cost of dedicated internal personnel, will be approximately $13 to
$15 million. The Company plans to bring the new systems on-line for several
catalogs in 1994 (during which time it will maintain its existing systems for
its other catalogs) with the balance of the Company's catalogs to be brought
on-line in 1995. There can be no assurance that the new systems will be
implemented as currently scheduled or that they will achieve the goals
established by the Company, in which case the Company's financial position or
results of operations may be adversely affected. See "Business -- Management
Information Systems."
7
<PAGE> 10
NEW FULFILLMENT FACILITY
The Company owns an interest in the Roanoke, Virginia fulfillment center
which services its Tweeds catalog. The Company plans to consolidate additional
Apparel Group catalogs into this facility and to construct in 1994 an additional
500,000 square foot state-of-the-art facility on a separate site in Roanoke
which, upon its completion, will handle all of Domestications fulfillment needs.
The Company estimates that the total cost of this consolidation effort and the
construction of the new facility will be approximately $18 million, the funds
for which may be derived from this Offering. See "Use of Proceeds." Although the
Company has carefully planned the transition to these facilities in phases,
significant delays or serious unanticipated difficulties arising from the
transition could adversely affect the Company's financial position or results of
operations. See "Business -- Distribution."
FOREIGN SOURCING
Approximately 10% of the Company's merchandise is purchased directly from
foreign suppliers. Although the Company believes that it has established close
relationships with its principal manufacturing sources, the Company's future
success will depend in some measure upon its ability to maintain such
relationships.
The Company's business is subject to the risks generally associated with
conducting business abroad, including adverse fluctuations in currency exchange
rates (particularly those of the U.S. dollar against certain foreign
currencies), changes in import duties or quotas, the imposition of taxes or
other charges on imports, disruptions or delays in shipments and transportation,
labor disputes and strikes. The occurrence of any one or more of the foregoing
could adversely affect the Company's financial position or results of
operations. To date, these factors have not caused any material disruption of
the Company's operations. Also, the Company conducts business with most of its
vendors in United States currency and has not experienced any material
difficulties as a result of any foreign, political, economic or social
liabilities.
INCREASES IN COSTS OF MAILING, PAPER AND PRINTING
Postal rate increases and paper and printing costs affect the cost of the
Company's order fulfillment and catalog and promotional mailings. In 1993, the
Company mailed approximately 322 million catalogs and the aggregate cost of
mailing catalogs and other promotional materials, including printing and paper
costs, totalled approximately $158 million. The Company has contracted for its
paper needs through the end of 1994 and believes its paper costs are competitive
at the present time. However, no assurance can be given that the Company will
not be subject to a significant increase in paper costs. The Company anticipates
a postal rate increase in 1995. Increases in postal rates or paper and printing
costs could have a material negative impact on the Company's financial position
and results of operations to the extent that the Company is unable to pass such
increase directly on to customers or to offset such increase by raising selling
prices or by implementing more efficient printing, mailing, delivery and order
fulfillment systems. See "Business -- Business Strategy -- Leverage Centers."
CONSUMER SPENDING
The success of the Company's operations depends upon a number of factors
relating to consumer spending, including future economic conditions affecting
disposable consumer income such as employment, business conditions, interest
rates and taxation. There can be no assurance that weak economic conditions or
changes in the retail environment or other economic factors that impact the
level of consumer spending would not have a material adverse impact on the
Company.
COMPETITION
The mail order catalog business is highly competitive. The Company's
catalogs compete with other mail order catalogs and retail stores, including
department stores, specialty stores and discount stores. A number of the
Company's competitors have substantially greater financial, distribution and
marketing resources than the Company. The recent substantial sales growth in the
direct marketing industry has encouraged the entry of
8
<PAGE> 11
many new competitors and an increase in competition from established companies.
See "Business -- Competition."
RELATIONSHIP WITH NAR
Upon completion of the Offering, NAR will own 54.3% of the Company's
outstanding Common Stock on a fully-diluted basis (approximately 53.7% if the
Underwriters' over-allotment option is exercised in full). Although pursuant to
a stock purchase agreement between the Company and NAR, NAR has agreed to
nominate only six of the Company's 11 Directors until 1996, NAR will have the
power to elect the entire Board of Directors and, except as otherwise provided
by law or the Company's Certificate of Incorporation, to approve any action
requiring shareholder approval without a shareholders meeting. See "The
Company -- History and Organization -- Restructuring," "Management -- General,"
"Principal and Selling Shareholders" and "Relationship with NAR."
SHARES ELIGIBLE FOR FUTURE SALE
There will be 90,087,780 shares of Common Stock outstanding immediately
following the Offering (91,062,780 if the Underwriters' over-allotment option is
exercised in full). Of such amount, 38,870,968 shares (39,845,968 if the
Underwriters' over-allotment option is exercised in full) will be tradeable
without restriction and the remainder will be "restricted securities" under the
Securities Act, and may only be sold pursuant to a registration statement under
the Securities Act or an applicable exemption from the registration requirements
of the Securities Act, including Rule 144 thereunder. Certain shareholders
owning 50,562,209 restricted shares and warrants and options currently
exercisable for 7,894,595 shares have agreed with the Underwriters not to sell
or otherwise dispose of any shares for 180 days after the date of this
Prospectus without the prior consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated on behalf of the Underwriters. The Company has agreed not to sell
or otherwise dispose of any shares for 180 days after the date of this
Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated on behalf of the Underwriters, except in certain
circumstances including shares issued 90 days after the date of this Prospectus
in connection with an acquisition. A Selling Shareholder owning 654,603
restricted shares has agreed with the Underwriters not to sell or otherwise
dispose of any shares for 90 days after the date of this Prospectus without the
prior consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of
the Underwriters. In addition, NAR, Sun Life Insurance Company of America ("Sun
Life") and certain executive officers of the Company are entitled to certain
rights with respect to registration of their shares of Common Stock under the
Securities Act. Sales of substantial amounts of Common Stock in the public
market could adversely affect the market price. NAR and such executive officers
have advised the Company that they do not currently intend to sell any shares of
Common Stock owned by them. No predictions can be made as to the effect, if any,
that market sales of such shares or the availability of such shares for future
sale will have on the market price of shares of Common Stock prevailing from
time to time. The prevailing market price of Common Stock after the Offering
could be adversely affected by future sales of substantial amount of Common
Stock by existing shareholders. See "Shares Eligible for Future Sale."
RESTRICTIONS ON DIVIDENDS
The Company is restricted from paying dividends on its Common Stock or from
acquiring any of its capital stock by certain debt covenants contained in
agreements to which the Company is a party. See "Dividend Policy."
9
<PAGE> 12
THE COMPANY
The Company is a leading direct specialty retailer that publishes a
portfolio of 14 branded specialty catalogs offering home furnishings, general
merchandise and apparel. The Company's goal for each of its catalogs is to be a
leader in its market niche. To achieve this goal, the Company employs marketing
and merchandising strategies designed to meet the distinctive needs of each
catalog's target customers. The Company's catalogs include Domestications, the
nation's leading specialty home textile catalog, which has grown rapidly with
revenues increasing from approximately $30 million in 1987 to approximately $311
million in 1993. The Company's portfolio of catalogs also includes Colonial
Garden Kitchens, a leading specialty catalog with the largest 12-month customer
list in its category featuring worksaving and lifestyle enhancing items for the
kitchen and home. During 1993, the Company mailed approximately 322 million
catalogs and had total revenues of approximately $643 million. The Company
maintains a proprietary customer list, containing approximately 19 million names
of customers who have made purchases from at least one of the Company's catalogs
within the past 36 months. Since 1991, approximately seven million names have
been added to the list. Approximately seven 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.
HISTORY AND ORGANIZATION
History. The Company's direct marketing subsidiary, founded in 1934,
initially operated as a chain of specialty retail women's fashion stores in
Pennsylvania and nearby states under the name Lana Lobell. In 1950, it published
its first catalog offering women's fashion by mail and, by the end of the
decade, a majority of the subsidiary's revenues was derived from catalog sales.
In 1962, the subsidiary first published Hanover House, a catalog featuring
gifts, seasonal, household and novelty items. The Company's direct marketing
subsidiary was acquired in 1972 by The Horn & Hardart Company ("H&H"), a
restaurant company founded in 1911. The Company's direct marketing subsidiary
continued its growth through internal development of new and existing catalogs
utilizing its proprietary customer list as well as through acquisitions of other
catalog companies.
Restructuring. The Company incurred a substantial amount of debt in
connection with the growth of its restaurant business in the 1970s and 1980s.
The Company began restructuring its business in 1989 by disposing of the real
estate assets and operations related to its restaurant business and focusing on
its direct marketing operations. As the Company began the disposition of its
restaurant operations, management believed that the underlying asset values
would at least enable it to repay the debts secured thereby. However, the
Company's withdrawal from the restaurant business coincided with a severe
decline in real estate values in the northeastern United States and elsewhere in
the country. Accordingly, the Company failed to generate sufficient cash
proceeds to repay all of the associated debt. As a result, a high level of debt
remained which placed an excessive burden on the cash flows of the direct
marketing business, the Company's only source of internally generated cash. By
early 1991, vendors and factors were restricting the availability of trade
credit on normal terms, hampering the Company's ability to purchase merchandise.
Because of strong demand for the merchandise in the Company's catalogs and its
inability to obtain adequate trade credit with which to purchase merchandise,
the Company's backorder level increased substantially and it incurred operating
losses in 1990 and 1991. In response, the Company began to take additional
actions and explore financial alternatives available to it to solve its cash
flow problems, including the sale of an equity interest in the Company.
In the fall of 1991, NAR acquired a 48.9% interest in the Company through
an equity investment of $40 million and the extension of a line of credit of up
to $30 million (later increased to $50 million) and implemented a restructuring
program consisting of operational changes, debt reduction and the disposition of
substantially all of the Company's remaining non-direct marketing assets. The
Company reported a loss from continuing operations of approximately $51.1
million in 1991, including $15.3 million of nonrecurring charges, due to
liquidity problems caused by the cash needs of the Company and a loss on
disposal of discontinued operations of $21.1 million.
By the end of 1992, through a series of transactions, including a rights
offering, a sale of preferred stock and exchange offers, and the sale of
substantially all of its restaurant and real estate properties, the Company
10
<PAGE> 13
reduced its debt and lease obligations (excluding working capital debt) by
$182.8 million from September 1991. As a result of these transactions, NAR
increased its equity investment by approximately $38.1 million and its interest
in the Company to approximately 56%.
Establishment of New Business Objectives. Subsequent to NAR acquiring
control of the Company, the following key goals were established: (1) develop
distinct brand identities for each of the Company's specialty catalogs; (2)
decentralize the Company's operating structure; (3) identify and utilize the
cost savings and operating efficiencies created by the high sales volumes
generated on a combined basis from the Company's multiple specialty catalogs;
(4) motivate Company employees by linking compensation to both individual and
overall Company performance and encourage employee stock ownership; (5) grow the
Company's catalog business through: (i) internal catalog growth and development;
(ii) strategic acquisitions; (iii) strategic ventures; (iv) development of
international market opportunities; and (v) exploration of growth prospects in
electronic interactive media; and (6) upgrade the Company's management
information systems to better support the growth of its direct marketing
business. Progress has been made toward achieving all of these goals and is
reflected in the Company's financial results. In 1992, due to the impact of the
financial restructuring and operational changes that began in the fourth quarter
of 1991, income from continuing operations improved by approximately $52 million
from a loss of approximately $51 million in 1991 to income of approximately $1
million in 1992. In 1993, income from operations improved approximately $16.3
million to $17.3 million.
Reorganization. In September 1993, the Company changed its name to Hanover
Direct, Inc. and eliminated its two-tier holding company structure. This
reorganization was accounted for similarly to a pooling-of-interests, and,
accordingly, the Company's financial data include the results of H&H and THC for
all applicable periods presented.
RECENT STRATEGIC ACQUISITIONS AND VENTURES
During 1993 and 1994 the Company made the following five strategic
acquisitions:
Gump's. In May 1993, the Company acquired substantially all of the assets
of Gump's Inc., the well known San Francisco retailer and a leading upscale
catalog marketer of exclusive gifts, for a total purchase price of $13.2
million, consisting of $6.9 million in cash and $6.3 million of Common Stock.
Financing for the cash portion of the purchase price was obtained from the sale
of Gump's accounts receivables, cash acquired from Gump's and $1.5 million from
the Company's revolving credit facility. The Company is relocating Gump's retail
store to a new location in downtown San Francisco, which is scheduled to open in
the fall of 1994.
The Company Store. In August 1993, the Company acquired in Chapter 11
bankruptcy proceedings substantially all of the assets of Company Store
Holdings, Inc., an upscale direct marketer of down comforters and other down and
related products for the home sold under The Company Store and Scandia Down
names, for a total purchase price of $7 million, consisting of the issuance of
$4.6 million of notes and $2.4 million of Common Stock.
Tweeds. In September 1993, the Company purchased all of the outstanding
shares of common and preferred stock of Tweeds, Inc. which owns Tweeds, the
European inspired women's fashion catalog, for a total purchase price of $8.8
million, consisting of the assumption of $5.1 million of liabilities, $.1
million in cash and $3.6 million of Common Stock.
Safety Zone. In September 1993, the Company acquired 20% of the
outstanding common stock of Aegis Safety Holdings, Inc. ("Aegis"), a direct
marketer of safety and anti-hazard products through The Safety Zone catalog. The
consideration for the acquisition was the provision by the Company of certain
catalog fulfillment and production services for The Safety Zone catalog at the
Company's cost until August 1998, subject to certain early termination
provisions. The Company also acquired an option to increase its ownership to 50%
of Aegis' common stock until the end of 1996. Aegis has an option to require the
Company to acquire all of Aegis' then outstanding stock after December 31, 1998
if the Company has exercised its option and certain other conditions have been
satisfied. The Company has agreed to extend a secured working
11
<PAGE> 14
capital line of up to $1 million to Aegis. Aegis had approximately $9 million in
net sales for the eleven months ended January 1, 1994.
Boston Publishing. In February 1994, the Company acquired a 20%
ownership interest in Boston Publishing Company, Inc. ("BPC"), the publisher of
The Museum Collection, a catalog featuring reproductions, replicas and
adaptations of items contained in museum collections, and Finishing Touches, a
catalog featuring items for the home, in consideration for providing $3.0
million of secured working capital financing, a $.75 million short-term loan and
a $.5 million convertible term loan. As part of the acquisition the Company will
provide BPC with access to the Company's proprietary customer list and catalog
production assistance. BPC had approximately $12 million (unaudited) in revenues
in 1993.
In addition, the Company has recently entered into the following strategic
venture:
Sears. In January 1994, the Company entered into the Sears Agreement with
the direct marketing subsidiary of Sears to produce specialty catalogs for the
23 million customers of the recently discontinued Sears catalog. The specialty
catalogs include: Show Place, based on the Domestications catalog, Great
Kitchens, based on the Colonial Garden Kitchens catalog, and Beautiful Style,
based on the Silhouettes catalog. See "Business -- Merchandising and Catalog
Format." The Sears Agreement has an initial three-year term with automatic
renewals thereafter. Profits and losses from the venture are to be shared
between the parties on an equal basis. As part of the Sears Agreement, the
Company issued to Sears a performance warrant to purchase 3.5 million shares of
Common Stock in 1999 if the licensed business with Sears has revenues of at
least $250 million and earnings before interest and taxes of at least $30
million in 1998. Alternately, Sears will be entitled to purchase 7 million
shares of Common Stock in 1999 if the licensed business with Sears has revenues
of at least $500 million and earnings before interest and taxes of at least $60
million in 1998. If neither of these goals is achieved, the performance warrant
will expire unexercised in 1999. The Company will be required to value the
performance warrant at such time as it is deemed to have become measurable for
accounting purposes because the required events have become probable or have
occurred (which may be prior to the date the warrant is exercisable under the
Sears Agreement) (the "Measurement Date"). The value would be the difference, if
any, between the closing market price of the Common Stock at the Measurement
Date and the exercise price of the performance warrant, multiplied by the
applicable number of shares. The value would be amortized from the Measurement
Date through 1998 and would be subject to change each reporting period based on
the closing market price of the Common Stock as of such reporting date. The
warrant exercise price is $10.57 per share. The Company is obligated to meet
various operational performance standards under the Sears Agreement. If the
Company is unable to meet these standards, Sears would be entitled to terminate
the Sears Agreement. The Company is also entitled to terminate the Sears
Agreement in certain circumstances, including if Sears fails to comply with any
material provision of the Sears Agreement. See "Investment
Considerations -- Recent Acquisitions and New Business Developments" and
"Business -- Business Strategy -- Strategic Ventures -- Sears Agreement."
The Company is incorporated in Delaware with its principal executive office
at 1500 Harbor Boulevard, Weehawken, New Jersey 07087. The Company's telephone
number is (201) 863-7300.
12
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,845,396 shares of
Common Stock offered by the Company, after deducting estimated offering expenses
and underwriting discount, will be approximately $37,942,700 (approximately
$44,358,200 if the Underwriters' over-allotment option is exercised in full).
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholders.
The Company intends to use the net proceeds (including any net proceeds
received as a result of the exercise of the over-allotment option by the
Underwriters) for general corporate purposes, including the expansion of the
Company's business, consisting of upgrading and increasing its fulfillment
capacity, purchasing new management information systems and making potential
future acquisitions. See "Business -- Properties" and "-- Management Information
Systems." Pending any specific application of the net proceeds, a portion of the
net proceeds will be applied to reduce outstanding indebtedness under the
Company's $52.5 million three year revolving credit facility which expires in
May 1996 (the "Revolving Credit Facility") and the balance will be added to
working capital and invested in short-term interest bearing obligations. At
March 9, 1994, the Company's interest rate under the Revolving Credit Facility
was 8% and the principal amount outstanding thereunder was $25.5 million.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the AMEX under the symbol "HNV". The
following table sets forth the high and low sale prices of the Common Stock
reported on the AMEX Composite Tape for the periods shown.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1992
First Quarter.............................................................. $3 $1 1/2
Second Quarter............................................................. 2 1/8 1 5/8
Third Quarter.............................................................. 2 1/4 1 3/8
Fourth Quarter............................................................. 2 7/8 1 5/8
1993
First Quarter.............................................................. 4 2 /16
Second Quarter............................................................. 4 1/2 2 3/4
Third Quarter.............................................................. 5 1/2 4 /16
Fourth Quarter............................................................. 7 5/8 4 1/2
1994
First Quarter (through March 10, 1994)..................................... 7 3/4 5 7/8
</TABLE>
As of March 10, 1994, there were approximately 4,359 holders of record of
the Common Stock. On March 10, 1994, the last reported sale price of the Common
Stock on the AMEX was $7.00 per share.
DIVIDEND POLICY
The Company is restricted from paying dividends on its Common Stock or from
acquiring any of its capital stock by certain debt covenants contained in
agreements to which the Company is a party. Cash dividends have not been paid on
the Common Stock since 1967.
13
<PAGE> 16
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at January 1, 1994 and as adjusted to reflect the net proceeds from the
sale of the 5,845,396 shares of Common Stock offered by the Company (assuming
the Underwriters' over-allotment option is not exercised) (based upon the market
price of $7.00 per share representing the Common Stock on March 10, 1994). See
"Use of Proceeds."
<TABLE>
<CAPTION>
AT JANUARY 1, 1994
-----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
LONG-TERM DEBT:
Revolving Credit Facility............................................ $ 230 $ 230
9.25% senior subordinated notes due 1998............................. 20,000 20,000
Industrial Revenue bonds due 2003.................................... 8,000 8,000
Notes, debentures and other.......................................... 5,906 5,906
--------- -----------
Total long-term debt.............................................. 34,136 34,136
--------- -----------
SHAREHOLDERS' EQUITY:
6% Series A convertible preferred stock, $10 stated value, 234,900
shares authorized, issued and outstanding......................... $ 2,378 $ 2,378
Common Stock, $.66 2/3 par value, authorized 150,000,000 shares;
83,136,542 shares issued and 82,933,177 shares outstanding;
90,291,145 shares issued and 90,087,780 shares outstanding, as
adjusted(a)....................................................... 55,423 60,193(c)
Capital in excess of par value....................................... 209,834 243,007(c)
Accumulated deficit.................................................. (215,805) (215,805)
Less: Treasury stock and other(b).................................... (5,962) (5,962)
--------- -----------
Total shareholders' equity........................................ 45,868 83,811
--------- -----------
Total capitalization............................................ $ 80,004 $ 117,947
--------- -----------
--------- -----------
</TABLE>
- ---------------
(a) Excludes 5,563,985 shares of Common Stock issuable upon exercise of
outstanding options and warrants exercisable within 60 days of March 10,
1994.
(b) Includes deferred compensation and notes receivable from the sale of Common
Stock.
(c) Includes the exercise of warrants to purchase 1,309,207 shares in a
"net-issue" exchange.
14
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data for the fiscal years 1989 through 1993 have
been derived from the consolidated financial statements of the Company
(successor to H&H) and its subsidiaries, which have been audited by Arthur
Andersen & Co., independent public accountants, whose report on certain of such
financial statements is included elsewhere and incorporated by reference in this
Prospectus. The following information should be read in conjunction with
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations" and such financial statements, including the related
notes thereto, included elsewhere herein. Certain reclassifications have been
made to financial data for fiscal years prior to fiscal 1993 in order to conform
with the fiscal 1993 presentation.
In September 1993, the Company was formed in connection with two mergers
involving the Company, H&H and THC, a wholly owned subsidiary of H&H. The
mergers were accounted for similarly to a pooling-of-interests, and,
accordingly, the Company's selected consolidated financial data include the
results of H&H and THC for all applicable periods presented.
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------------------
1989 1990 1991 1992 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................. $ 382,637 $ 555,770 $ 623,650 $ 586,562 $ 642,511
Operating income (loss).............. 9,703 10,190 (26,078) 14,402 19,076
Interest expense, net................ 11,084 11,426 18,341 13,135 2,757
Other income (expense)............... 1,868 -- (6,437) -- 888
Income (loss) from continuing
operations......................... 187 (2,136) (51,081) 1,048 17,337
(Loss) from discontinued
operations......................... (9,146) (115,921) (21,119) -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
items and cumulative effect of
accounting change for income
taxes.............................. (8,959) (118,057) (72,200) 1,048 17,337
Extraordinary items.................. -- 2,146 6,915 9,201 --
Cumulative effect of accounting
change for income taxes............ -- -- -- 10,000 --
---------- ---------- ---------- ---------- ----------
Net income (loss).................... (8,959) (115,911) (65,285) 20,249 17,337
Preferred stock dividends(a)......... -- -- 466 3,197 4,093
---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to
common shareholders................ $ (8,959) $ (115,911) $ (65,751) $ 17,052 $ 13,244
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Primary and fully diluted:
Income (loss) per share from
continuing operations........... $ .01 $ (.15) $ (3.16) $ (.06) $ .17
Income (loss) per share from
discontinued operations......... (.64) (8.24) (1.30) -- --
---------- ---------- ---------- ---------- ----------
Income (loss) per share before
extraordinary items............. (.63) (8.39) (4.46) (.06) .17
Extraordinary items per share...... -- .15 .43 .24 --
Cumulative effect of accounting
change for income taxes per
share........................... -- -- -- .26 --
---------- ---------- ---------- ---------- ----------
Net income (loss) per share
applicable to common
shareholders....................... $ (.63) $ (8.24) $ (4.03) $ .44 $ .17
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average number of shares
outstanding........................ 14,145,416 14,068,460 16,287,723 38,467,015 77,064,131
BALANCE SHEET DATA (END OF PERIOD):
Working capital (deficit)............ $ 42,176 $ 8,913 $ (37,636) $ 31,566 $ 25,476
Total assets......................... 324,148 234,761 162,800 134,352 188,838
Total debt........................... 179,251 155,649 127,918 43,362 36,160
Preferred stock of subsidiary........ -- -- 35,247 32,842 --
Shareholders' equity (deficit)....... 53,813 (61,484) (113,632) (19,758) 45,868
</TABLE>
- ---------------
(a) There were no cash dividends paid to holders of Common Stock in any of the
respective periods.
15
<PAGE> 18
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 Statement of Income:
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------
1991 1992 1993
----- ----- -----
<S> <C> <C> <C>
Revenues........................................................ 100.0% 100.0% 100.0%
Cost of sales and operating expenses............................ 65.6 65.1 63.6
Selling expenses................................................ 28.0 23.6 24.6
General and administrative expenses............................. 9.2 8.9 8.9
Income (loss) from operations................................... (4.2) 2.5 3.0
Interest expense, net........................................... 2.9 2.2 .4
Income (loss) from continuing operations before income taxes.... (8.2) .2 2.7
Income tax provision (credit)................................... -- -- --
Income (loss) from continuing operations........................ (8.2)% .2% 2.7%
</TABLE>
RESULTS OF OPERATIONS
1993 Compared with 1992
Net Income. The Company reported net income of $17.3 million or $.17 per
share for the year ended January 1, 1994, compared to net income of $1.0 million
(before extraordinary items and cumulative effect of accounting change) or a
loss of $.06 per share in 1992. Net income for 1992 after extraordinary items
and cumulative effect of accounting change was $20.2 million or $.44 per share.
Per share amounts are expressed after deducting preferred dividends of $3.2
million in 1992 and $4.1 million in 1993.
Revenues. Revenues increased 9.5% from $587 million in 1992 to $643
million in 1993. The higher revenues were due to a 10% increase in revenues
relating to continuing catalogs, which include the initial test marketing of the
Sears venture which began in mid-1993 and resulted in the Sears Agreement in
January 1994. Additionally, approximately $47 million of the increase was
generated by the acquisition of Gump's, The Company Store and Tweeds in the
second half of 1993. Revenues from discontinued catalogs were $63 million and
$19.7 million in 1992 and 1993, respectively.
Non-Apparel revenues increased 23% from $395 million in 1992 to $484
million in 1993. This increase is a result of $38 million of revenues generated
by Gump's and The Company Store which were acquired in the third quarter of 1993
and a 14% increase in revenues related to continuing catalogs. Substantially all
of the increase in revenues from continuing catalogs is related to
Domestications, Colonial Garden Kitchens and Tapestry, of which approximately
40% is attributable to the Sears venture. Revenues from discontinued catalogs
(assuming such catalogs were discontinued at the beginning of 1992) were $10
million and $6.4 million in 1992 and 1993, respectively.
Apparel revenues declined 17% from $192 million in 1992 to $159 million in
1993. Revenues from discontinued catalogs were $53 million and $13 million in
1992 and 1993, respectively, while continuing catalog revenues declined by 2%
from 1992. Additionally, the acquisition of Tweeds in the fourth quarter of 1993
contributed $9 million to revenues. As discussed below, the Company is
continuing to restructure its Apparel catalogs.
The Company mailed approximately 322 million catalogs in 1993, a 13%
increase over 1992, with variations in mailing strategies and volumes amongst
the catalogs. Additionally, the Company was able to increase its average order
size by 9%. Revenues also improved as the Company reduced its order cancellation
and return rates compared to 1992, principally as a result of improving its
in-stock inventory position.
Operating Costs and Expenses. Cost of sales and operating expenses as a
percentage of revenues decreased from 65.1% in 1992 to 63.6% in 1993. The
improvement was attributable to an increase in product margin due to changes in
the sales mix as well as lower inventory markdowns in 1993 and lower shipping
costs
16
<PAGE> 19
due to more efficient shipping methods. Shipping costs were also positively
impacted by fewer split-shipments due to the improved in-stock inventory
position.
Selling expenses increased from 23.6% of revenues in 1992 to 24.6% of
revenues in 1993, representing an increase of $19.3 million. This increase was
due to lower response rates, related principally to an aggressive customer
acquisition campaign primarily in Domestications (which increased the size of
its 12 month customer list by 14%) and from the addition of the selling expenses
for the Gump's retail store. Selling expenses include catalog creation and
mailing costs and rentals of mailing lists from third parties, as well as retail
selling expenses.
General and administrative expenses represented 8.9% of revenues in 1992
and 1993. Such expenses increased $5.3 million, or 10.2%, from 1992 to 1993,
including $5.8 million of expenses for the three companies acquired in 1993.
General and administrative expenses were reduced by lower bad debt expense and
lower credit card commissions, offset by increases in merchandise and marketing
personnel.
Income (Loss) from Operations. Income from operations increased from $14.4
million in 1992, or 2.5% of revenues, to $19.1 million in 1993, or 3.0% of
revenues. Income from operations excluding the discontinued catalogs was $24.6
million in 1992 (comprised of $21.9 million and $2.7 million for Non-Apparel and
Apparel, respectively) compared to $26.7 million in 1993 (comprised of $25.8
million and $.9 million for Non-Apparel and Apparel, respectively). Of this, the
three companies acquired in 1993 generated income from operations of $3 million.
Losses from discontinued catalogs were $9.0 million in 1992 compared to $4.3
million in 1993.
The restructuring of the Apparel catalogs continued in 1993 as the catalog
mix was changed further, with two catalogs being discontinued and the
acquisition of Tweeds, Inc. In order to improve operating results, each Apparel
catalog is being more sharply focused on its target audience and overhead and
circulation levels for certain catalogs have been reduced.
Interest and Other Income (Expense). Interest expense decreased
approximately $8.5 million from $13.4 million in 1992 to $4.9 million in 1993,
due to the Company's financial restructuring which began in the fourth quarter
of 1991 and included a debt reduction of $67 million from the beginning of 1992
to the end of 1993. Interest income was $2.2 million in 1993, an increase of
$1.9 million from 1992, due primarily to the interest portion of a Federal
income tax refund received in fiscal 1993.
Other income of $.9 million in 1993 represents a settlement of a claim in
bankruptcy from a brokerage firm with which the Company had previously had a
contract.
Income Taxes. In 1992 the Company adopted Statement of Financial
Accounting Standards No. 109 -- Accounting for Income Taxes ("SFAS 109"). In
accordance with this statement, the Company recognized a deferred tax asset of
$10 million reflecting the cumulative effect of this accounting change for the
estimated future benefit expected to be realized from the utilization of net
operating loss carryforwards ("NOLs") and deductible temporary differences. The
deferred tax asset consisted of a $63 million gross deferred tax asset less a
$53 million valuation allowance that was established to reflect the annual
limitation on the utilization of certain of the NOLs and an assumed limitation
on the utilization of the remaining deferred tax asset. Realization of the
future tax benefits is dependent on the Company's ability to generate taxable
income within the carryforward period. Future levels of operating income and
taxable income are dependent, in part, upon general economic conditions,
competitive pressures on sales and margins, and other factors beyond the
Company's control.
In 1992 management determined that, based on the successful completion of
the financial restructuring, future operating income of the Company would be
sufficient to utilize $30 million of deductible timing differences and NOLs
prior to their expiration. (See "Results of Operations -- 1992 Compared with
1991" for additional details.) At January 1, 1994, the Company had $147 million
of NOLs and has maintained the $30 million amount of expected future operating
income that will more likely than not utilize the NOLs prior to their
expiration. Management believes that, although the 1993 operating results might
justify a higher amount, in view of its history of operating losses, the $30
million represents a reasonable conservative estimate of the future utilization
of the NOLs and the Company will continue to evaluate the likelihood of future
profit and the necessity of future adjustments to the deferred tax asset
valuation allowance.
17
<PAGE> 20
The Federal income tax provision was $5.9 million in 1993 which was offset
by the utilization of certain NOLs. In addition, the Revenue Reconciliation Act
of 1993 raised the 1993 corporate income tax rate from 34% to 35%, and, as a
result, the Company recognized an additional deferred tax benefit of $.6 million
in 1993. In addition, the Company recorded a state tax provision of $.2 million
in 1992 and $.5 million in 1993.
Shareholders' Equity. The number of shares of Common Stock outstanding
increased by 13,396,345 in 1993 due to: (i) 1,150,733 shares issued in
connection with the Company's equity and incentive plans; (ii) 2,615,928 shares
issued in connection with the acquisitions of Gump's, The Company Store and
Tweeds; (iii) 2,278,128 shares issued upon the conversion of the 7.5% Cumulative
Convertible Preferred Stock; (iv) 18,937,169 shares issued in connection with
the exchange of the Class B 8% Cumulative Preferred Stock and Class B Common
Stock (of which 12,270,503 shares were exchanged); and (v) 684,890 shares issued
as dividends on the Class B 8% Cumulative Preferred Stock. At January 1, 1994,
there were 82,933,177 shares of Common Stock outstanding compared to 69,536,832
shares outstanding at December 26, 1992.
The dividends of $3.2 million in 1992 and $4.1 million in 1993 represent
dividend requirements on the two preferred stocks. These preferred stocks were
converted into Common Stock in 1993, which resulted in the elimination of future
dividends.
1992 Compared with 1991
Net Income. The Company generated net income of $17.1 million, or $.44 per
share, in 1992 compared to a net loss of $65.8 million, or $4.03 per share in
1991. Included in the 1992 net income are $9.2 million of extraordinary gains
resulting from the exchange offers (compared to extraordinary gains of $6.9
million in 1991) and $10 million due to the cumulative effect of the change in
the method of accounting for income taxes. The year ended December 28, 1991
included provisions for losses on disposal of discontinued operations of $21.1
million and restructuring and other non-recurring charges of $15.3 million.
Income (Loss) From Operations. Income from continuing operations improved
$52.1 million from a loss of $51.1 million in 1991 to income of $1 million in
1992. This improvement reflects the impact of the financial restructuring and
operational changes that began in the fourth quarter of 1991 with NAR's
investment in the Company. The financial restructuring has allowed the Company
to eliminate $142.8 million in debt and $40 million of lease obligations and
dispose of its discontinued restaurant operations. Without this cash drain, the
Company's liquidity has significantly improved. The operational changes included
the decentralization of the Company which resulted in a strategic review
throughout the organization of all catalogs, costs and service levels. As a
result, seven catalogs (six Apparel and one Non-Apparel) were discontinued in
late 1991 and early 1992. In 1991 and 1992, these catalogs had a combined loss
from operations of $16.2 and $6.7 million, respectively, on revenues of $97
million and $25 million, respectively. The elimination of these catalogs enabled
the Company to redirect its resources into its core catalogs, thereby improving
its inventory position for the remaining catalogs and allowing for investment in
infrastructure improvements. Revenues from continuing catalogs increased
approximately $35 million or 7% from 1991 to 1992.
The Company's improved liquidity, as well as the elimination of the
uncertainty as to whether the Company would be able to satisfy its debt
obligations, enabled it to normalize its relationships with vendors. This
resulted in higher inventory receipts on a timely basis which significantly
reduced backorder levels and the associated costs. In addition, net interest
expense was reduced in fiscal 1992 by $5.2 million ($9 million on an annualized
basis) as a result of the debt and equity transactions. These reasons, as well
as the elimination of the $15.3 million of non-recurring restructuring,
transaction and other costs resulted in the significant turnaround in the
Company's operating results.
Revenues. Revenues decreased $37 million, or 5.9%, compared to 1991 as the
Company focused on its profitable catalogs and discontinued seven poorer
performing catalogs in late 1991 and early 1992. Revenues from continuing
catalogs increased 7% from $527 million in 1991 to $562 million in 1992. The
Company mailed approximately 375 million catalogs in 1991 compared to
approximately 285 million in 1992, a 24% decrease, but was able to increase its
average order size and response rates. Revenues were also improved as the
Company reduced its order cancellation and return rates by two percentage points
compared to 1991,
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<PAGE> 21
principally as a result of the normalization of the backorder levels which
peaked at approximately $58 million in 1991 to a low of $11 million at the end
of 1992.
Non-Apparel revenues increased 3% from $383 million in 1991 to $395 million
in 1992. Revenues from continuing catalogs increased 7% to $394 million in 1992.
Revenues from discontinued catalogs were $15.6 million and $.7 million in 1991
and 1992, respectively.
Apparel revenues declined 20% from $240 million in 1991 to $192 million in
1992, although revenues from continuing catalogs increased 6% to $168 million.
Revenues of the discontinued catalogs were $82 million and $24 million in 1991
and 1992, respectively.
Operating Costs and Expenses. Cost of sales and operating expenses as a
percentage of revenues decreased from 65.6% in 1991 to 65.1% in 1992, although
gross margin decreased $9.7 million from 1991 to 1992. The improvement in margin
percentage was attributable to reducing shipping costs by 1% of revenues as
there were less split-shipments and other operational inefficiencies associated
with the 1991 backorder situation. Partially offsetting these improvements was a
change in the sales mix from higher margin fashion merchandise to lower margin
home textile merchandise.
Selling expenses decreased $35.9 million in 1992, of which approximately
$23 million was due to lower circulation resulting from discontinuing certain
catalogs. Selling expenses decreased as a percentage of revenues from 28.0% in
1991 to 23.6% in 1992 due to improved customer order response rates and lower
paper costs.
General and administrative expenses decreased $5.4 million, or 9.4%, from
1991 to 1992. Such expenses decreased as a percentage of sales, from 9.2% in
1991 to 8.9% in 1992. The decrease in expense was due to lower bad debt expense
($1.3 million), lower credit card commissions ($2 million) and reduced space
advertising activity ($2 million). These decreases were partially offset by
increases in consulting and internal development costs for management
information systems and to support the decentralized organization ($2.2
million).
Interest and Other Income (Expense). Interest expense was $13.4 million in
1992, a decrease of $7.1 million over 1991, as a result of debt reduction due to
the rights offering relating to the H&H Common Stock (the "Rights Offering") and
two separate exchange offers for the Company's 14% senior subordinated
debentures due 1997 (the "14% Debentures") and the Company's 7 1/2% convertible
subordinated debentures due 2007 (the "7 1/2% Debentures" and the two exchange
offers being referred to herein as the "Exchange Offers"). Future interest
expense will be reduced on an annualized basis by $9 million, as a result of
this debt reduction. The closing of the transactions in 1991 had the effect of
reducing interest expense due to the retirement of $15.1 million of 7 1/2%
Debentures, the repayment of $5 million of principal amount of 8% Subordinated
Notes due 1994 (the "8% Notes"), as well as a reduction of the interest rate
from 11% to 8% thereon.
Interest income was $.2 million in 1992, a decrease of $1.9 million from
1991. The decrease is due to the Company's overall liquidity position in which
funds were not available to invest in interest bearing instruments.
Extraordinary Items. In 1991, the Company recognized a $6.9 million
extraordinary gain with respect to the retirement of $15.1 million of its 7 1/2%
Debentures. The Company recorded extraordinary gains of $9.2 million in 1992
from the exchange of $11.9 million of 7 1/2% Debentures and $23.4 million of 14%
Debentures into equity.
Income Taxes. At December 26, 1992, the Company had tax NOLs totalling
$142 million, which expire through 2007. Certain transactions the Company
entered into during 1991 resulted in an ownership change with respect to the
Company and, thus, in the imposition of an annual limitation of approximately $4
million on the amount of future taxable income of the Company which may be
offset by the Company's pre-change NOLs. The Company's available NOLs for tax
purposes consists of $98 million of pre-change NOLs (subject to this limitation)
and $44 million of post-change NOLs (not subject to this limitation).
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<PAGE> 22
SFAS 109 requires that the tax benefit of such NOLs be recorded as an asset
to the extent that management assesses the utilization of such NOLs to be "more
likely than not". The deferred tax asset of $10 million recognized in 1992
consists of a $63 million gross deferred tax asset (principally, the expected
tax benefit of the NOLs discussed above) less a $53 million valuation allowance.
The Company believes, based upon successful completion of the financial
restructuring, the disposal of unprofitable discontinued operations, the
Company's history of prior operating earnings in its direct marketing business
and its expectations for the future, that the operating income of the Company
will be sufficient to utilize a substantial portion of the NOLs prior to their
expiration. Since the realization of the future tax benefits is dependent on the
Company's ability to generate taxable income within the carryforward period
(through 2007), the Company believes it would be imprudent to record the entire
benefit, based on income projections through 2007, due to the Company's recent
operating losses. The Company does believe that an appropriate measure of its
current earnings level is to adjust its 1992 income before extraordinary gains
of $1 million by $9 million, which represents the annual interest expense on the
debt that has been retired. Using this $10 million income as a base and three
years as a reasonable time frame, income would not have to grow from its current
level in order to generate the $30 million necessary to utilize NOLs sufficient
to realize the $10 million benefit that was recorded in 1992.
Shareholders' Equity. Net income for the year ended December 26, 1992 was
$17.1 million, or $0.44 per share, as compared to a net loss of $65.8 million,
or $4.03 per share in 1991. Net income from continuing operations in 1992 was $1
million, or a loss of $.06 per share after deducting preferred dividends of $3.2
million, compared to a net loss of $51.1 million, or $3.16 per share in 1991.
Extraordinary items in 1992 were $9.2 million or $.24 per share, compared
to $6.9 million or $.43 per share in 1991. The cumulative effect of accounting
change for income taxes in 1992 was $10 million, or $.26 per share as compared
to no cumulative adjustment in 1991. For the year ended December 26, 1992 there
was no income or loss from discontinued operations compared to a loss of $21.1
million, or $1.30 per share in 1991.
The number of shares of Common Stock outstanding increased in 1992
principally due to the Rights Offering in which 14,396,798 shares were issued,
the Exchange Offers in which 7,548,465 shares were issued and the exchange of
the preferred stock by NAR for 20 million shares of H&H Common Stock. At
December 26, 1992 there was a total of 69,535,089 shares of H&H Class B Common
and H&H Common Stock outstanding compared to 28,537,471 at December 28, 1991.
The dividends of $3.2 million in 1992 represent dividend requirements on
the two preferred stocks that were issued in October 1991 and September 1992. In
1991, the dividend accretion was $.5 million, representing the two months during
which the 8% preferred stock was outstanding in 1991.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $2.6 million in cash and cash equivalents at each of
December 26, 1992 and January 1, 1994. Working capital and the current ratio
were $25.5 million and 1.24 to 1 at January 1, 1994 versus $31.6 million and
1.42 to 1 at December 26, 1992. The Company had substantially paid down its
long-term revolving credit facility at January 1, 1994, compared to a balance of
$21.2 million outstanding at December 26, 1992.
The Company generated $28.0 million in cash from operations in 1993. Cash
was used primarily to support increases of: (i) $12.1 million of inventory as
part of the Company's strategy to increase its in-stock position at the time
customer orders are received; (ii) $5.3 million in prepaid catalog costs to
support the spring mailing activity; and (iii) $4.2 million in capital
expenditures, primarily for its new management information system, while $21.0
million was used for the paydown the Company's revolving credit facility. These
uses of cash were primarily financed by a $24.5 million increase in accounts
payable and operating profits. With the significant improvement in the Company's
financial condition in 1993, it has been successful in restoring normal trade
terms with its vendors, which has resulted in greater leverage of its accounts
payable.
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<PAGE> 23
The Company experiences seasonality in its working capital requirements and
fluctuations in the revolving credit facility will occur, usually within the
first and fourth quarters of the year.
With the Company's financial restructuring completed and the corresponding
improvement in its financial condition, the Company focused in 1993 on
refinancing its remaining indebtedness, simplifying its capital structure and
embarking on a program of investing in infrastructure improvements to support
its growth objectives.
Refinancing of Indebtedness. In May 1993, the Company refinanced its
revolving credit facility that had been previously provided by a subsidiary of
NAR with a new three-year $40 million facility with an independent financial
institution. In October 1993, the Company increased the maximum credit available
to $52.5 million to include Gump's, The Company Store and Tweeds as borrowers
under the facility. A subsidiary of NAR has provided a secured limited guarantee
of $10 million which allows the Company to borrow in excess of its availability
based on a formula, up to the facility's limit. This limited guarantee was
reduced by approximately $5.1 million during the fourth quarter of 1993, and the
guarantee will be eliminated in March 1994 based on the Company's 1993 operating
results. At January 1, 1994, the Company's borrowing base formula would have
enabled the Company to borrow approximately $40 million, compared to the $.2
million that was outstanding.
In August 1993, the Company issued $20 million of 9.25% Senior Subordinated
Notes (the "9.25% Notes") in a private placement with an insurance company. The
Company retired its outstanding $12.4 million of 8% Notes that were due in
October 1994 and $.8 million of its 14% Debentures using the proceeds of the
9.25% Notes, with the remainder to be used for the purchase of additional
fulfillment and warehouse capacity. The Company is required to redeem $6 million
of the 9.25% Notes without penalty by February 15, 1994 (subsequently amended to
May 1, 1994) if the Company has not established or acquired a new distribution
facility by such date.
In 1993, the Company acquired three companies for $.1 million of its own
cash, $4.6 million of debt and $12.3 million of Common Stock. In addition, the
Company has agreed to provide an aggregate of up to $4 million of secured
working capital financing, a $.75 million short-term loan and a $.5 million
convertible note to two entities in which it has acquired an equity interest.
Simplification of Capital Structure. In September 1993, through a series
of mergers involving H&H and THC, the Company changed its name to Hanover
Direct, Inc. and eliminated its two-tier holding company structure.
On December 13, 1993, the Company converted its 7.5% Cumulative Convertible
Preferred Stock into 2,278,128 shares of Common Stock. The holders of the 7.5%
Cumulative Convertible Preferred Stock were paid all accrued and unpaid
dividends in cash amounting to $197,000. On January 1, 1994, 12,270,503 shares
of Class B Common Stock and 40,000 shares of Class B 8% Cumulative Preferred
Stock were exchanged into 18,937,169 shares of Common Stock. All accrued and
unpaid dividends totalling $886,000 were paid in cash in February 1994. As a
result of these transactions, the Company has eliminated approximately $4
million of future annual preferred stock dividend requirements.
On December 10, 1993, the Company issued 234,900 shares of its 6% Series A
Preferred Stock (the "6% Preferred Stock") for an installment note in the amount
of $2.4 million that it had assumed in its acquisition of Tweeds.
As a result of these transactions, the Company's capital structure consists
of 82,933,177 shares of Common Stock and 234,900 shares of 6% Preferred Stock at
January 1, 1994.
Infrastructure Investments. To improve its infrastructure and to support
its growth objectives, the Company intends to construct a new 500,000 square
foot fulfillment center costing approximately $18 million in Roanoke, Virginia
to support the Domestications business and has acquired a 50% interest in a
partnership which owns the 175,000 square foot Tweeds fulfillment center, into
which the Company plans to consolidate its Apparel Group.
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<PAGE> 24
Additionally, the Company is currently in the process of upgrading its
management information systems by implementing new integrated software which it
expects to be fully operational in 1995 and is migrating from a centralized
mainframe to mid-range mini-computers at a total estimated cost of approximately
$13 to $15 million. As of January 1, 1994, the Company has incurred costs of
approximately $5.3 million as part of this plan, including capital leases
aggregating $2.4 million to be paid over four years.
Effects of Inflation. The Company normally experiences increased cost of
sales and operating expenses as a result of the general rate of inflation in the
economy. Operating margins are generally maintained through selective price
increases where market conditions permit. The Company's inventory is mail-order
merchandise which undergoes sufficiently high turnover so that the cost of goods
sold approximates replacement cost. Because sales are not dependent upon a
particular supplier or product brand, the Company can adjust product mix to
mitigate the effects of inflation on its overall merchandise base.
22
<PAGE> 25
BUSINESS
GENERAL
The Company is a leading direct specialty retailer that publishes a
portfolio of 14 branded specialty catalogs offering home furnishings, general
merchandise and apparel. The Company's goal for each of its catalogs is to be a
leader in its market niche. To achieve this goal, the Company employs marketing
and merchandising strategies designed to meet the distinctive needs of each
catalog's target customers. The Company's catalogs include Domestications, the
nation's leading specialty home textile catalog, which has grown rapidly with
revenues increasing from approximately $30 million in 1987 to approximately $311
million in 1993. The Company's portfolio of catalogs also includes Colonial
Garden Kitchens, a leading specialty catalog with the largest 12-month customer
list in its category featuring worksaving and lifestyle enhancing items for the
kitchen and home. During 1993, the Company mailed approximately 322 million
catalogs and had total revenues of approximately $643 million. The Company
maintains a proprietary customer list, containing approximately 19 million names
of customers who have made purchases from at least one of the Company's catalogs
within the past 36 months. Since 1991, approximately seven million names have
been added to the list. Approximately seven million of the names on the list
represent customers who have made purchases from at least one of the Company's
catalogs within the last 12 months.
The Company seeks to develop distinct brand identities for each of its
catalogs. To achieve this goal, the Company has adopted a decentralized
operating structure so that all significant decisions, including those regarding
market positioning and strategy, merchandising, circulation levels, catalog
design and inventory management, are made on an individual catalog basis.
However, the Company gains substantial operating efficiencies and cost savings
by centrally operating the purchasing, telemarketing, fulfillment, distribution
and certain administrative functions for all of its catalogs.
The Company's goal is to become the nation's leading direct specialty
retailer and preferred retail source for its customers. The Company's growth
strategy includes: (i) internal catalog growth and development; (ii) strategic
acquisitions; (iii) strategic ventures; (iv) development of international market
opportunities; and (v) exploration of growth prospects in electronic interactive
media.
During 1993, the Company acquired three brand-name catalogs, Gump's, the
well known San Francisco retailer and a leading upscale catalog marketer of
exclusive gifts, The Company Store, an upscale direct marketer of down
comforters and other down and related products for the home sold under The
Company Store and Scandia Down names, and Tweeds, the European inspired women's
fashion catalog. In addition, in January 1994, the Company entered into the
Sears Agreement to produce specialty catalogs for the 23 million Sears customers
no longer being served by the recently discontinued Sears catalog.
The Company believes that direct marketing offers several advantages over
traditional retail stores including the convenience, safety and efficiency of
home shopping. These benefits are increasingly important as a result of changing
demographics including the growing number of dual income families and the aging
of the population. From 1987 through 1992, total U.S. catalog sales grew more
rapidly than retail store sales, at an average annual rate of approximately 8%.
The Company believes that direct marketing sales will continue to grow more
rapidly than retail store sales.
BUSINESS STRATEGY
The Company's goal is to become the nation's leading direct specialty
retailer and preferred retail source for its customers. To achieve this goal,
the Company's strategy is to build brand loyalty to each of its catalogs by
satisfying targeted customers through a focused merchandise assortment,
appropriate price points and personalized service. Key elements of the Company's
business strategy are as follows:
Development of Brand Recognition and Catalog Identity. The Company seeks
to develop distinct brand identities for each of its specialty catalogs by
offering a focused selection of merchandise that meets the needs and preferences
of its target customers and increasingly includes exclusive or hard to find
items. Each of the Company's catalogs targets specific market segments and
develops and executes its own merchandising and
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<PAGE> 26
marketing strategy. Through extensive market research and ongoing testing of new
products and concepts, the Company determines, on a catalog by catalog basis,
the appropriate price points, service levels, mailing plans and presentation of
its products. In addition, selected catalogs offer private label or exclusive
merchandise, including products designed by the Company, which further enhance
the brand identity of the catalog.
Decentralized Merchandising and Marketing. To ensure maximum focus on each
of its target customer groups and to respond effectively to changing product
trends and customer tastes, key decisions including market positioning and
strategy, merchandising, circulation levels, catalog design and inventory
management are made separately for each catalog, by a management team
responsible solely for the performance of a single catalog. A significant
portion of the compensation of the key members of each management team is tied
directly to the performance of their respective catalog.
Leverage Centers. The Company's large sales volume enables it to achieve
cost savings and create operating efficiencies for all of its catalogs through
"leverage centers" in telemarketing, paper and printing purchases, postage,
fulfillment, database management and management information services. The
Company is able to purchase printing services, paper and telephone time at
prices lower than those available to smaller direct marketing businesses. In
addition, each of the Company's catalogs has access to the Company's proprietary
customer list. During 1993, the Company embarked on a program to improve the
functioning of and increase the capacity of its telemarketing and distribution
facilities. The Company is also in the process of updating its management
information systems and anticipates that the new systems will be fully installed
and operational during 1995.
Employee Incentives. The Company considers its employees critical to its
long-term success. To create an atmosphere of teamwork and to more closely align
the interests of its employees with those of its shareholders, the Company gives
all employees with at least one year of service the opportunity to buy a
specified number of shares of Common Stock at a 40% discount to the market price
through its All-Employee Equity Incentive Plan. A majority of eligible employees
are shareholders of the Company.
GROWTH STRATEGY
The Company's growth strategy includes: (i) internal catalog growth and
development; (ii) strategic acquisitions; (iii) strategic ventures; (iv)
development of international market opportunities; and (v) exploration of growth
prospects in electronic interactive media.
Internal Catalog Growth and Development. The Company focuses on increasing
the sales of and improving the profitability of its existing catalogs through
strategies designed to capitalize on market opportunities. Such strategies may
include changing catalog circulation, product presentation and product
offerings. The Company tests new products, formats and mailing strategies for
each of its catalogs on an ongoing basis, while underperforming catalogs are
either repositioned to improve profitability or ultimately discontinued. In
1984, the Company launched the Domestications catalog because it perceived a
significant market opportunity for a home textiles catalog. Since such time,
Domestications revenues have increased to approximately $311 million in 1993.
The Company is also experiencing significant growth in other catalogs including
Colonial Garden Kitchens and Tapestry. Since 1992, the Company has discontinued
seven underperforming catalogs.
In addition, from time to time the Company identifies market opportunities
to introduce new branded niche catalogs. The Company typically develops these
new catalogs at competitively advantageous costs by capitalizing on its existing
merchandising and operational expertise, leverage centers and proprietary
customer list. The Company is currently testing a new upscale kitchen and home
product catalog called Kitchen & Home and currently is developing a new fashion
catalog featuring women's sportswear and casual career apparel which will be
designed by the Company and sold under private labels at prices below those
found on similar quality items in department stores. The Company expects to
begin test mailing this catalog this summer.
Strategic Acquisitions. The Company's leverage centers and proprietary
customer list position it to take advantage of the consolidation currently
taking place in the catalog industry. The Company generally seeks to
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<PAGE> 27
acquire catalogs that it believes have established their own brand identity and
can achieve substantially improved profitability by taking advantage of the
operating efficiencies and cost savings provided by the Company's leverage
centers. In 1993, the Company acquired Gump's, the well known San Francisco
retailer and a leading upscale catalog marketer of exclusive gifts, The Company
Store, an upscale direct marketer of down comforters and other down and related
products for the home, and Tweeds, the European inspired women's fashion catalog
featuring relaxed fashions uniquely designed by Tweeds' in-house staff. See "The
Company -- Recent Strategic Acquisitions and Ventures."
The Company acquired a 20% interest in each of Aegis, a direct marketer of
safety and anti-hazard products, and BPC, the publisher of The Museum
Collection, a catalog featuring reproductions, replicas and adaptations of items
contained in museum collections, and Finishing Touches, a catalog featuring
items for the home. As part of the acquisitions, the Company provides Aegis with
certain catalog fulfillment and production services and will provide BPC with
catalog production assistance. See "The Company -- Recent Strategic Acquisitions
and Ventures."
Strategic Ventures. The Company actively pursues opportunities to acquire
equity or other profit-sharing interests in direct marketing ventures. The
Company believes it can offer its co-venturers the use of its large proprietary
customer list, the operating efficiencies and cost savings of its leverage
centers and its merchandising and marketing expertise. The Company has recently
entered into the following strategic venture:
Sears Agreement. In January 1994, the Company entered into the Sears
Agreement to produce specialty catalogs for the 23 million customers of the
recently discontinued Sears catalog. Profits and losses from the venture are to
be shared between the parties on an equal basis. The catalogs currently being
mailed under the program are based on existing Company catalogs and contain a
title page with the Sears name and logo. The specialty catalogs include: Show
Place, based on the Domestications catalog, Great Kitchens, based on the
Colonial Garden Kitchens catalog, and Beautiful Style, based on the Silhouettes
catalog. See "Business -- Merchandising and Catalog Format." The Company and
Sears are currently testing additional catalogs to add to the program. The
Company has sampled a portion of the 23 million names on the Sears list and
found that a vast majority of such names did not otherwise appear on the
Company's 19 million name proprietary customer list. Customers are able to
purchase merchandise using the Sears credit card in addition to the other
methods of payment offered by the Company. The Company also is using its
purchasing, telemarketing, fulfillment and distribution facilities as well as
its management information systems to serve the Sears customers. See "The
Company -- Recent Strategic Acquisitions and Ventures -- Sears."
International Market Opportunities. The Company is currently exploring the
potential for its catalogs in international markets and has registered a number
of its more significant trademarks in several foreign jurisdictions. The
Company's international expansion could take many forms, including the mailing
of existing catalogs overseas or entering into strategic ventures with foreign
partners. The Company has performed limited catalog testing in Canada and
Mexico. The Company currently is exploring new business opportunities in Europe
and Brazil.
Electronic Interactive Media. The Company believes providing home shopping
services via electronic interactive media could be a significant outgrowth of
its direct marketing business and that its experience and expertise in direct
marketing will be directly applicable to retailing via electronic interactive
media. Examples of electronic interactive media retailing that the Company is
exploring include home shopping television, shopping through on-line computer
databases, computer/CD-ROM and other magnetic media. The Company believes that
electronic interactive media retailing is a natural strategic extension of its
direct marketing expertise because the Company already: (i) markets its products
directly to consumers in the convenience of their homes; (ii) utilizes extensive
telemarketing, centralized fulfillment and distribution facilities; and (iii)
manages its operations through a central pool of inventory.
The Company is currently exploring a number of opportunities in electronic
interactive media retailing. These opportunities range from test marketing its
catalogs on selected cable channels to developing home shopping programming for
major television and home shopping networks. The Company currently is
negotiating agreements to conduct several limited tests. In March 1994, the
Company entered into a contract
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<PAGE> 28
with CUC International Inc. ("CUC") in order to participate in an interactive
shop-at-home test. For purposes of the test, CUC's customers will be able to
purchase certain (or selected) merchandise offered for sale in the Company's
catalogs using interactive technology developed by CUC. The in-house computer
hardware and software will be provided by CUC and its marketing partners to
subscribers. The Company will provide merchandising and fulfillment services
during the test. The service is expected to be made available to approximately
20,000 homes in California and Florida and to last at least one year. In
addition, during the spring of 1994, the Company expects to launch a test pilot
with the Via TV home shopping channel in which a 30 minute show featuring the
Hanover House catalog will be aired in three different day parts every two
weeks. Via TV currently reaches approximately four million homes and intends to
grow to ten million homes within the next year.
MERCHANDISING AND CATALOG FORMAT
Each of the Company's specialty catalogs targets distinct market segments
and develops and executes its own merchandising strategy based on a focused
assortment of merchandise that is designed to meet the needs and preferences of
its target customers. Through market research and ongoing testing of new
products and concepts, the Company determines, on a catalog by catalog basis,
the appropriate price points, service levels, mailing plans and presentation of
its products. The Company has placed an increasing emphasis on the use of
exclusive or private label products in a number of its catalogs, including
Domestications, Tweeds and The Company Store, to further enhance the brand
identity of these catalogs.
The Company's specialty catalogs typically range in size from an average of
44 to 100 pages with four to six new editions per year depending on the
seasonality and fashion content of the products offered. Each edition may be
mailed several times each year with slight variations in format and content.
Depending on the catalog's product focus, approximately 30% to 70% of the
merchandise assortment in each edition is seasonal or new items. Catalogs
featuring women's fashions generally have the highest new product introduction
rate. Each catalog employs the services of an outside creative agency or has its
own creative staff which is responsible for the design, layout, copy, feel and
theme of the book. Generally, the initial sourcing of new merchandise for a
catalog begins two to six months before the catalog is mailed. Currently, all
Company catalogs are circulated through the United States Postal Service, but
the Company is participating in tests of alternative delivery systems of
catalogs other than through the United States Postal Service.
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<PAGE> 29
During 1993, the Company streamlined its catalog operations into two main
groups, Apparel and Non-Apparel. The total Company revenues for 1993 and the
percent of total Company revenues for 1993 for each of the Company's catalogs
are set forth below:
<TABLE>
<CAPTION>
1993 PERCENT OF
REVENUES(A) TOTAL REVENUES
-------------- --------------
<S> <C> <C>
(IN THOUSANDS)
NON-APPAREL GROUP
Domestications................................................. $310,573 48.3%
Hanover House.................................................. 41,869 6.5
Colonial Garden Kitchens....................................... 39,604 6.2
Tapestry....................................................... 31,584 4.9
Gump's(b)(c)................................................... 22,653 3.5
The Company Store(b)........................................... 15,244 2.4
Mature Wisdom.................................................. 13,420 2.1
Other(d)....................................................... 2,478 .4
Discontinued Catalogs.......................................... 6,451 1.0
-------------- ------
Total Non-Apparel...................................... $483,876 75.3%
-------------- ------
APPAREL GROUP
International Male............................................. $ 44,759 7.0 %
Silhouettes.................................................... 25,268 3.9
Simply Tops.................................................... 23,988 3.7
Essence By Mail................................................ 16,475 2.6
Undergear...................................................... 12,825 2.0
Tweeds(b)...................................................... 9,280 1.5
Sale catalogs and other(e)..................................... 12,773 2.0
Discontinued Catalogs.......................................... 13,267 2.0
-------------- ------
Total Apparel.......................................... $158,635 24.7%
-------------- ------
Total Company(f)....................................... $642,511 100.0%
-------------- ------
-------------- ------
</TABLE>
- ---------------
(a) Revenues are net of returns.
(b) Revenues were recorded for these catalogs from the dates of their respective
acquisitions in 1993.
(c) Represents revenues from both the Gump's catalog and retail store.
(d) Represents revenues from the outlet store and surplus inventory liquidation.
(e) Represents revenues from sale catalogs, the outlet stores and surplus
inventory liquidation.
(f) Excludes The Safety Zone which is accounted for on the equity method.
Non-Apparel Group. The catalogs comprising the Non-Apparel Group are as
follows:
DOMESTICATIONS: Domestications is the nation's leading specialty home
textiles catalog and the preferred fashion decorating sourcebook for
today's value-oriented and style-conscious consumer. Domestications
features sheets, towels, comforters, tablecloths and other items for the
home. The catalog has enjoyed significant growth and success, experiencing
a 48% compound annual growth rate during the period from 1987 to 1993. The
layout and presentation of Domestications has a decorator look offering
coordinated decorating ideas for the home. Over 60% of the items offered in
the catalog are exclusive or private label, designed by its in-house staff.
The Company believes that the Domestications target consumer wants stylish
and fashionable merchandise that complements her lifestyle, yet is in
keeping with her desire for value. The Domestications catalog is also
mailed to Sears customers under the name Show Place.
HANOVER HOUSE: Hanover House features gifts, seasonal, household and
novelty items. Hanover House is currently being repositioned to upgrade its
presentation and product mix.
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<PAGE> 30
COLONIAL GARDEN KITCHENS: Colonial Garden Kitchens is a leading
specialty catalog with the largest 12-month buyer list in its category
featuring work saving and lifestyle enhancing items for the kitchen and
home. The Colonial Garden Kitchens catalog is also mailed to Sears
customers under the name Great Kitchens. The Company is currently testing a
new upscale kitchen and home product catalog called Kitchen & Home.
TAPESTRY: Tapestry is a value-oriented home accessories catalog
featuring flatware, dinnerware, furniture, rugs and other home decorating
items.
GUMP'S: Gump's is the well known San Francisco retailer and a leading
upscale catalog marketer of exclusive gifts.
THE COMPANY STORE: The Company Store is an upscale direct marketer of
down comforters and other down and related products for the home.
MATURE WISDOM: Mature Wisdom is one of the leading general merchandise
catalogs catering to the needs of older customers featuring fashions,
health care products and other items for greater ease of living.
THE SAFETY ZONE: The Safety Zone is a direct marketer of safety and
anti-hazard products in which the Company has a 20% interest.
Apparel Group. The catalogs comprising the Apparel Group are as follows:
INTERNATIONAL MALE: International Male is an authority for unique
men's fashion with an international flair.
UNDERGEAR: Undergear is a leader in activewear, workout wear and
fashion underwear for men.
SILHOUETTES: Silhouettes is a women's fashion catalog featuring
special occasion and career fashions in sizes 14 to 26. The Silhouettes
catalog is also being mailed to Sears customers under the name Beautiful
Style.
SIMPLY TOPS: Simply Tops is a source for unique apparel, supplying
moderate-priced clothing to women interested in embellished clothing which
makes a statement.
ESSENCE BY MAIL: Essence By Mail is the original catalog featuring
women's fashions and home decorating items reflecting African-American
culture and is a 50% joint venture with Essence Communications, Inc.,
publisher of Essence magazine.
TWEEDS: Tweeds is a European inspired women's fashion catalog
featuring relaxed fashions uniquely designed by its in-house staff.
MARKETING AND DATABASE MANAGEMENT
The Company maintains one of the largest proprietary customer lists in the
industry containing approximately 19 million names of customers who have
purchased from one of the Company's catalogs within the past 36 months. The list
contains name, gender, residence and historical transaction data (including
catalog(s) purchased from, product classifications, recency of purchase, average
order size and payment method). This database is selectively enhanced with
demographic, socioeconomic, lifestyle and purchase behavior overlays from other
sources.
The Company utilizes proprietary modelling and sophisticated segmentation
analysis, on a catalog by catalog basis, to devise catalog marketing and
circulation strategies which are intended to maximize the contribution by
customer by catalog. This analysis is the basis for the Company's determination
of which of the Company's 14 catalogs (and how frequently) will be mailed to a
particular customer as well as the promotional incentive content of the
catalog(s) such customer receives.
In addition to mailing to customers who exist on its database, the Company
has an ongoing prospect acquisition program designed to attract new customers on
a cost effective basis. The primary source of new
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<PAGE> 31
customers for the Company's catalogs is lists that have been rented from other
mailers and compilers. Prior to mailing to these non proprietary lists, the
lists are edited using statistical segmentation tools to enhance their probable
performance. Other sources of new customers include space advertisements,
promotional inserts in outbound merchandise packages and friend's name cards
inserted in mailed catalogs.
During 1993, the Company mailed approximately 322 million catalogs. Of the
approximately 19 million names on the Company's proprietary customer list,
approximately seven million customers, or approximately 37%, have made at least
one purchase from one of the Company's catalogs within the preceding 12 months.
TELEMARKETING AND CUSTOMER SERVICE
Excellence in customer service is a critical element of the Company's goal
to become the preferred choice for its customers. The Company designs its
service standards to exceed its customers' expectations and supports this with
an unconditional merchandise guarantee. Under the Company's return policy, a
customer may return merchandise for a refund, exchange or replacement if not
satisfied for any reason. The Company's return rate for 1993 was approximately
13% of gross shipments.
In 1993, the Company received approximately 64% of its orders through its
toll-free telephone service. The Company maintains telemarketing facilities in
San Diego, California, Hanover, Pennsylvania, DeSoto, Texas, Roanoke, Virginia
and LaCrosse, Wisconsin that offer convenient customer access seven days per
week, 24 hours per day. The telemarketing facilities utilize state-of-the-art
telephone switching equipment which enables the Company to route calls between
telemarketing centers and enhance prompt customer service. During 1993, the
Company's telemarketing centers processed approximately 11.7 million calls and
received approximately 5.6 million orders. The remaining calls included requests
for copies of catalogs, order status inquiries and other general inquiries. At
peak capacity, the Company's approximately 1,000 full and part time
telemarketing service representatives are capable of handling approximately
11,000 calls per hour.
The Company trains its telemarketing service representatives to be
courteous, efficient and knowledgeable about the Company's products. Each
telemarketing service representative initially receives 40 hours of training in
selling skills, 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 meeting
customer service standards. While primarily trained with product knowledge to
serve customers of one or more specific catalogs, telemarketing service
representatives also receive cross-training which enables them to take overflow
calls from other catalogs. The Company utilizes customer surveys as an important
measure of performance and customer satisfaction.
The Company's computerized database provides its telemarketing service
representatives with information concerning a customer's previous orders,
permitting the service representative to establish a personalized dialogue with
the customer. Telemarketing service representatives are provided selling
information which they are trained to use to describe promotional items. With
the installation of the new management information systems in 1994,
telemarketing service representatives will be able to provide customers with
more detailed inventory information.
DISTRIBUTION
The Company maintains distribution centers in Hanover, Pennsylvania,
DeSoto, Texas, Roanoke, Virginia and LaCrosse, Wisconsin. The Company's long
range plan is to maximize efficiencies in merchandise handling and distribution
by consolidating the warehousing and distribution of like items in specific
fulfillment centers. The Company plans to consolidate the Apparel Group catalogs
into the Tweeds Roanoke facility and to construct in 1994 an additional 500,000
square foot state-of-the-art facility on a separate site in Roanoke which, upon
its completion, will handle all of Domestications fulfillment needs. The
Company's facilities processed approximately 13 million packages in 1993.
The Company obtains rate discounts from the United States Postal Service by
automatically weighing each parcel and sorting and trucking packages to a number
of United States Postal Service drop points throughout the country. The
Company's size enables it to efficiently handle packages in this manner. From
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<PAGE> 32
time to time, the Company uses United Parcel Service, Federal Express and other
expedited delivery services. The Company, on average, shipped approximately
48,000 packages per day in 1993.
PURCHASING
The Company's large sales volume permits it to achieve a variety of
purchasing efficiencies, including the ability to obtain prices and terms which
are more favorable than those available to smaller companies. Major goods and
services used by the Company are purchased or leased from selected suppliers by
its central buying staff. These goods and services include: paper, catalog
printing and printing related services such as order forms and color
separations, communication systems including telephone time and switching
devices, packaging materials, expedited delivery services, computers and
associated network software and hardware. The Company's objective is to achieve
favorable "total costs" reflecting a long-term mutual commitment by the Company
and each supplier for competitive rates and terms as well as the quality, future
maintenance, replacement and modification needs of the Company.
The Company typically enters into annual agreements for paper and printing
with a limited number of suppliers. These agreements permit periodic price
increases or decreases based on prevailing market conditions, changes in
supplier costs and continuous productivity improvements. The Company's telephone
systems are typically contracted for on a three to four year basis. During 1993,
the Company purchased approximately 55 thousand tons of paper and approximately
60 million minutes of telephone time. The Company believes it has developed and
maintains strong relationships with suppliers for key goods and services.
PRODUCT SOURCING
The Company acquires products for resale in its catalogs from numerous
domestic and foreign vendors. No single source supplied more than 8% of the
Company's products in 1993. 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.
MANAGEMENT INFORMATION SYSTEMS
The Company is currently in the process of upgrading its management
information systems by implementing new integrated software and migrating from a
centralized mainframe to mid-range mini-computers. The migration of the
Company's business applications is the first phase of the Company's overall
systems plan developed with the assistance of outside consultants which defines
the mid-and long-term systems and computing strategy for the Company. As part of
this plan, the Company has purchased and will be installing new integrated
software for use in managing all phases of the Company's operations. The new
software is an upgraded version of existing software installed in over 60 mail
order companies which has been designed to meet the Company's requirements as a
high volume publisher of multiple catalogs. The Company plans to bring the new
systems on-line for several catalogs in 1994 with expected completion in 1995.
Delivery, installation and implementation are expected to commence shortly. The
Company currently estimates that the total cost to install and implement the new
systems, including the cost of dedicated internal personnel, will be
approximately $13 to $15 million. See "Investment Considerations -- Computer
Systems Conversion."
The new software system is an on-line, real-time system which includes
order processing, fulfillment, inventory management, list maintenance and
reporting. The implementation of the software will provide the Company with a
flexible system that offers highly sophisticated data manipulation, a high
degree of marketing-oriented and fulfillment functionality and extensive
reporting capabilities. The new management information systems are designed to
permit the Company to achieve substantial improvements in the way its financial,
merchandising, inventory and accounting functions are performed. The new system
was selected to support the Company's decentralized operating structure because
it can be customized for and by each catalog unit.
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<PAGE> 33
CREDIT MANAGEMENT
The Company's customers are able to purchase merchandise using checks or
money orders, the Company's credit cards or third party credit cards. Several of
the Company's catalogs, including Domestications, International Male and Gump's,
offer their own credit cards. Approximately 73% of 1993 sales were paid using
third party credit cards, 19% were paid for with checks or money orders and 8%
were paid with the Company's credit cards.
In December 1992, the Company entered into a three year $75 million credit
facility with General Electric Credit Corporation ("GECC") which provides for
the sale and servicing of accounts receivable originating from the Company's
revolving credit cards. The Company is obligated to repurchase uncollectible
accounts and is required to maintain a specified percentage of all outstanding
receivables sold under the program as a deposit with GECC to service its
obligations under the agreement. The Company is required to pay certain
servicing fees to GECC and the Company earns the finance charge income that GECC
charges to the accounts. GECC's servicing responsibilities include credit
processing, collections, billing/payment processing, reporting and credit card
issuance.
At January 1, 1994, $47 million of outstanding accounts receivable were
being serviced under this agreement, of which $13 million was retained as
deposits.
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 and making purchasing adjustments as necessary and by promotional
sales. Additionally, the Company sells excess inventory in its special sale
catalogs, its outlet stores and to jobbers.
SEASONALITY
Although the Company experiences quarterly variations in sales, such
variations are due primarily to fluctuations in circulation levels rather than
seasonality and are further ameliorated by the Company's diversified portfolio
of catalogs. The Company traditionally mails more catalogs in the second half of
the year.
COMPETITION
The mail order catalog business is highly competitive. The Company's
catalogs compete with other mail order catalogs and retail stores, including
department stores, specialty stores and discount stores. Competitors also exist
in each of the Company's catalog specialty areas, including Spiegel and
Chadwick's of Boston in women's fashion; Spiegel, Touch of Class, Linen Source,
Lands' End, Coming Home and Horchow in home furnishings; Lillian Vernon, Taylor
Gift, Williams Sonoma, Chef's Corner, Harriet Carter and Dr. Leonards in general
merchandise; and Bachrach's, Collections, Road Runner Sports and J. Crew in
men's fashions. The Company also considers general catalog companies such as
J.C. Penney and retail stores as part of its competition. A number of the
Company's competitors have substantially greater financial, distribution and
marketing resources than the Company. The recent substantial sales growth in the
direct marketing industry has encouraged the entry of many new competitors and
an increase in competition from established companies. The Company believes that
the principal bases upon which it competes are quality, value, service, product
offerings, catalog design, convenience, efficiency and safety.
TRADEMARKS
Each of the Company's catalogs has its own federally registered trademark.
Domestications, Tapestry, Hanover House, Colonial Garden Kitchens, Mature
Wisdom, International Male, Undergear, Silhouettes, Simply Tops, Gump's, Tweeds,
The Company Store, Fashion Favorites, Fashion Galaxy and Outtakes are registered
trademarks of the Company. Essence is a trademark used by the Company under
license by Essence Communications, Inc. Show Place, Great Kitchens and Beautiful
Style are trademarks of Sears. The Company
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also owns numerous trademarks, copyrights and service marks on its logos,
products and catalog offerings. The Company has also protected various
trademarks internationally. The Company vigorously protects such marks and
believes there is substantial goodwill associated with them.
GOVERNMENT REGULATION
The Company is subject to Federal Trade Commission regulations governing
its advertising and trade practices, Consumer Product Safety Commission
regulations governing the safety of the products it sells in its catalogs and
other regulations relating to the sale of merchandise to its customers. The
Company is also subject to the Department of Treasury-Customs regulations with
respect to any goods it imports. To date, such governmental regulations have not
had a material adverse effect on the Company's business.
The imposition of a sales and use tax collection obligation on out-of-state
catalog companies in states to which they ship products is the subject of a case
recently decided by the United States Supreme Court. While the Court reaffirmed
an earlier decision which 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.
PROPERTIES
The Company's corporate headquarters are located in a modern
84,700-square-foot facility in Weehawken, New Jersey. The facility houses
merchandising and marketing personnel, an art department including photographic
studios, catalog production personnel and corporate and administrative offices.
The Weehawken facility is leased for a 15-year term expiring in 2005.
The Company also occupies a leased office building in Hanover, Pennsylvania
and five warehouse/fulfillment locations in the Hanover area providing a total
of approximately 1,163,000 square feet of space, including its principal
fulfillment center consisting of a twenty acre leasehold with a 265,000 square
foot warehouse and other improvements. The other four warehouse/fulfillment
locations are leased pursuant to short-term leases. The Company intends to
consolidate all or most of the facilities with short-term leases into its new
fulfillment center that will be constructed for Domestications in Roanoke,
Virginia.
Administrative offices in Hanover, Pennsylvania are located in a two-story
building of 123,300 square feet, with a lease expiring in 1994, which contains
renewal options for three five-year periods. Brawn of California, Inc., occupies
30,000 square feet of new office space in San Diego, California pursuant to a
fifteen-year lease that expires in 2004.
Gump's occupies 4,700 square feet of office space in addition to 49,800
square feet of space for its retail store in San Francisco, California. In
addition, Gump's occupies a leased warehouse/fulfillment center in DeSoto, Texas
of approximately 43,000 square feet. This lease expires in 1995.
The Company Store occupies 185,000 square feet for its warehouse center
pursuant to a short-term lease. Additionally, a 150,000 square foot
manufacturing and assembly facility and 58,000 square foot telemarketing and
customer service facility in LaCrosse are owned.
In January 1994, the Company purchased a 50% interest in Blue Ridge
Associates (the "Partnership"), a partnership which owns the Tweeds Roanoke,
Virginia fulfillment center. The Company made a capital contribution of $1.1
million to the Partnership. In addition, the Partnership and the Company entered
into a 15 year lease covering the facility. Under the terms of the lease
agreement and subject to certain conditions specified therein, the Partnership,
as lessor, agreed to expand the facility by not less than 100,000 square feet in
accordance with plans and specifications reasonably acceptable to the parties.
The expanded facility will be leased to the Company on the same terms as the
existing facility, subject to an adjustment in the amount of rent payments and
the expiration date.
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The following chart lists each of the Company's principal properties:
<TABLE>
<CAPTION>
OWNED
OR APPROXIMATE CATALOG
LOCATION LEASED SQUARE FOOTAGE USE(A)
- ----------------------------------- ------- -------------- -----------------------------------
<S> <C> <C> <C>
WAREHOUSE AND DISTRIBUTION CENTERS
Emigsville, PA................... Leased 144,000
Hanover, PA...................... Owned 264,000
Hanover, PA...................... Leased 433,300
Landsville, PA................... Leased 23,000
York, PA......................... Leased 319,000
DeSoto, TX....................... Leased 43,000 Gump's(b)
Roanoke, VA...................... Leased 175,000 Tweeds(c)
LaCrosse, WI..................... Leased 185,000 The Company Store
Roanoke, VA...................... Owned 500,000 Domestications distribution
facility to be constructed in 1994
on a 53 acre site
CORPORATE AND ADMINISTRATIVE
OFFICES
San Diego, CA.................... Leased 30,000 Men's Apparel(d)
San Francisco, CA................ Leased 4,700 Gump's
Edgewater, NJ.................... Leased 65,000 Tweeds
Weehawken, NJ.................... Leased 84,700 Corporate Headquarters
TELEMARKETING AND CUSTOMER SERVICE
Hanover, PA...................... Leased 123,300
LaCrosse, WI..................... Owned 58,000(e)
RETAIL STORES
Beverly Hills, CA................ Leased 1,200 Scandia Down
Costa Mesa, CA................... Leased 1,200 Scandia Down
San Diego, CA.................... Leased 3,800 Men's Apparel
San Francisco, CA................ Leased 49,800 Gump's(f)
West Hollywood, CA............... Leased 3,600 Men's Apparel
Hanover, PA...................... Leased 12,500 Outlet Store
LaCrosse, WI..................... Leased 13,000 The Company Store
Oshkosh, WI...................... Leased 2,000 The Company Store
Kenosha, WI...................... Leased 5,500 The Company Store
Madison, WI...................... Leased 5,500 The Company Store
MANUFACTURING AND ASSEMBLY
LaCrosse, WI..................... Owned 150,000 The Company Store
</TABLE>
- ---------------
(a) Unless otherwise noted, the facility services multiple catalogs.
(b) Also a telemarketing center for Gump's.
(c) Also a telemarketing center for Tweeds. The Company owns a 50% interest in
the Partnership which owns this property.
(d) Also a telemarketing center for Men's Apparel.
(e) Also used for executive offices for The Company Store.
(f) Also used for Gump's executive offices. To be replaced by a new store in the
fall of 1994.
The Company also leases 18 properties, all of which are subleased. All of
such properties are part of the Company's discontinued restaurant operations.
EMPLOYEES
As of December 31, 1993, the Company employed approximately 2,280 persons
on a full time basis and approximately 530 persons on a part time basis.
Approximately 120 employees of The Company Store manufacturing facility are
members of the International Ladies Garment Workers Union. The Company believes
its relations with its employees are good.
LEGAL PROCEEDINGS
The Company is involved in various routine lawsuits of a nature which is
deemed customary and incidental to its businesses. In the opinion of management,
the ultimate disposition of such actions will not have a material adverse effect
on the Company's financial position or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- -------------------------------------------------------
<S> <C> <C>
Alan G. Quasha................ 44 Chairman of the Board and Director
Jack E. Rosenfeld............. 55 President, Chief Executive Officer and Director
Michael P. Sherman............ 41 Executive Vice President-Corporate Affairs, General
Counsel and Secretary
Wayne P. Garten............... 41 Executive Vice President and Chief Financial Officer
Edward J. O'Brien............. 50 Senior Vice President and Treasurer
David E. Ullman............... 36 Vice President-Controller
Ralph Destino................. 57 Director
J. David Hakman............... 52 Director
S. Lee Kling.................. 65 Director
Theodore H. Kruttschnitt...... 51 Director
Jeffrey Laikind............... 58 Director
Elizabeth Valk Long........... 43 Director
Edmund R. Manwell............. 51 Director
Geraldine Stutz............... 65 Director
Robert F. Wright.............. 68 Director
</TABLE>
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
Alan G. Quasha has been President of Quadrant Management, Inc., an indirect
wholly-owned subsidiary of NAR which manages NAR's U.S. assets, since its
formation in early 1988. From 1980 to September 1991, he was a partner in the
New York City law firm of Quasha Wessely & Schneider. In addition to his
Directorship at the Company, Mr. Quasha serves as a director of Harken Energy
Corporation, E-Z Serve Corporation, Tejas Power Corporation and NAR. Mr. Quasha
is also a director of Richemont. Mr. Quasha, a designee of NAR, was elected a
Director of the Company and Chairman of the Board in October 1991.
Jack E. Rosenfeld has served as President and Chief Executive Officer of
the Company since October 1990. Mr. Rosenfeld previously served as Executive
Vice President of the Company from May 1988 until October 1990. From 1987
through April 1988, Mr. Rosenfeld was President of Rosenfeld & Co., a consulting
firm and provided consulting services to the Company. Mr. Rosenfeld is also a
director of PSC, Inc., a manufacturer of bar code equipment and Electric Fuel,
Ltd., a developer and manufacturer of electronic batteries and fueling systems
for motor vehicles. Mr. Rosenfeld was elected a Director of the Company in 1974.
Michael P. Sherman has served as Executive Vice President-Corporate Affairs
of the Company since 1990 and as General Counsel and Secretary of the Company
since 1986. Mr. Sherman also served as Senior Vice President of the Company from
1986 through 1990. Mr. Sherman joined the Company in 1983 and was elected Vice
President-Assistant Secretary of the Company in the same year.
Wayne P. Garten has served as Executive Vice President of the Company since
October 1990 and as Chief Financial Officer of the Company since 1989. Mr.
Garten also served as Senior Vice President of the Company from 1989 through
1990. Mr. Garten joined the Company in 1983 and was elected Vice President of
the Company in 1984. Mr. Garten was elected Vice President-Finance of the
Company in 1989.
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<PAGE> 37
Edward J. O'Brien has served as Senior Vice President and Treasurer of the
Company since 1991. Mr. O'Brien joined the Company in 1986 and was elected Vice
President of the Company in 1988.
David E. Ullman joined the Company in August 1991 and was promoted to Vice
President-Controller in December 1992. Prior to joining the Company, Mr. Ullman
was with Arthur Andersen & Co. for ten years, most recently as a manager in the
Audit and Business Advisory Group.
Ralph Destino has been the Chairman of Cartier, Inc., a luxury goods store,
since 1985. Cartier, Inc. is a subsidiary of Richemont, an affiliate of NAR. Mr.
Destino also serves as a director of The Leslie Fay Companies, a manufacturer of
dresses, suits, coats and sportswear which filed for protection under the U.S.
bankruptcy laws. Mr. Destino, a designee of NAR, was elected a Director of the
Company in October 1991.
J. David Hakman has been the Chief 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 is also the Chairman and
a director of AFD Acquisition Corp., which filed for protection under Chapter 11
of the U.S. Code in June 1991 and emerged from Chapter 11 in September 1993. Mr.
Hakman was appointed a Director of the Company in May 1989 and was elected a
Director of the Company in October 1991.
S. Lee Kling is Chairman of the Board of Kling Rechter & Co., a merchant
banking company. He served as Chairman and a director of Landmark Bancshares
Corporation, a bank holding company in St. Louis, Missouri, from 1974 through
1991, when it merged with Magna Group Inc. He served as Landmark's Chief
Executive Officer from 1974 through 1990. Mr. Kling serves on the Boards of
Directors of E-Systems, Inc., a diversified electronics company, Falcon
Products, Inc., a manufacturer of commercial furniture, Bernard Chaus Inc., a
sportswear manufacturer and distributor, Top Air Manufacturing Co., a
manufacturer of agricultural equipment, Lewis Galoob Toys, Inc., a toy company,
Magna Group, Inc., National Beverage Corp. and NationsMart Corp. Mr. Kling was
elected as a Director of the Company in 1983.
Theodore H. Kruttschnitt has been the owner and sole proprietor of
California Innkeepers, Burlingame, California, an owner/operator of hotels and
motor hotels, since May 1970. Mr. Kruttschnitt is also Chairman of the Board of
Burlingame Bancorp, a commercial bank holding company, and serves on the Board
of Directors of Cooper Development Company, a firm which invests in personal
care products businesses. Mr. Kruttschnitt was appointed a Director of the
Company in May 1989 and was elected a Director of the Company in October 1991.
Jeffrey Laikind has been a Managing Director of Prudential Securities
Investment Management (formerly Prudential Bache Securities Inc.), a money
management firm, since 1985. Mr. Laikind is also a director of NAR and a member
of the advisory board of Quadrant. Mr. Laikind, a designee of NAR, was elected a
Director of the Company in October 1991.
Elizabeth Valk Long has been the President of TIME Magazine since July 1991
and a senior vice president of Time Inc., periodical and book publishers, since
April 1989. She served as the publisher of TIME from July 1991 until September
1993; the publisher of PEOPLE from November 1988 until July 1991; and the
publisher of LIFE Magazine from December 1986 until November 1988. Ms. Long, a
designee of NAR, was elected a Director of the Company in October 1991.
Edmund R. Manwell is Senior Partner at the law firm of Manwell & Milton,
San Francisco, California. Mr. Manwell has been associated with this firm since
1982. Mr. Manwell also serves as a director of Dreyer's Grand Ice Cream, Inc.
Mr. Manwell was appointed a Director of the Company in May 1989 and was elected
a Director of the Company in October 1991.
Geraldine Stutz has been the President and Publisher of Panache Press at
Random House Inc., a publishing company, since 1986. She was previously the
Chief Executive Officer and Managing Partner of Henri Bendel, a New York
specialty store. Ms. Stutz also serves as a director of Tiffany & Co. and the
Jones Apparel Group. Ms. Stutz, a designee of NAR, was elected a Director of the
Company in October 1991.
Robert F. Wright has been the President of Robert F. Wright Associates,
Inc., business consultants, since 1988. Prior thereto, he was a senior partner
of the accounting firm Arthur Andersen & Co. Mr. Wright is a
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<PAGE> 38
director of Reliance Standard Life Insurance Company and affiliates, Williams
Real Estate Co., Inc. and The Navigator Group, Inc., a casualty and property
insurance company. Mr. Wright also serves on the advisory board of Quadrant
Management, Inc., an indirect wholly-owned subsidiary of NAR. Mr. Wright, a
designee of NAR, was elected a Director of the Company in October 1991.
GENERAL
The Company's Board of Directors is divided into three classes of Directors
serving three-year terms. One class of Directors is elected by the shareholders
at each annual meeting to serve until the third annual meeting or until their
successors are elected and qualified. In the case of a vacancy, Directors are
appointed by the Directors then in office to serve the remainder of the term.
Pursuant to Nomination and Standstill Agreement between Theodore H.
Kruttschnitt, J. David Hakman and Edmund R. Manwell and the Company, the Board
was expanded to 11 members and Mr. Kruttschnitt was appointed as a Class III
Director, Mr. Hakman as a Class I Director and Mr. Manwell as a Class II
Director. The Company also agreed to nominate each of Messrs. Kruttschnitt,
Hakman and Manwell for election upon the expiration of their respective terms
provided Mr. Kruttschnitt continues to own certain specified levels of Common
Stock. Pursuant to an agreement with Mr. Kruttschnitt, upon completion of this
Offering Mr. Kruttschnitt will resign as a Director of the Company.
Pursuant to the Stock Purchase Agreement, dated October 25, 1991, between
the Company and NAR (the "Stock Purchase Agreement"), the Company agreed to
recommend in its proxy statement for each annual or special meeting of
shareholders at which directors are to be elected during the five year period
from October 25, 1991, and at each such shareholders' meeting, as part of the
management slate for election to the Board of Directors, such number of persons
designated by NAR as will result in the Board's including six persons designated
by NAR. In addition, NAR agreed that for a period of five years from October 25,
1991, so long as the Board of Directors of the Company consists of 11 persons of
whom six are designees of NAR, it will not nominate or propose for nomination or
elect persons to the Board if as a result more than six persons designated by it
would be on the Board at any one time except following an acquisition by a third
party of 20% or more of the voting stock or total assets of the Company. Messrs.
Destino, Laikind, Quasha and Wright and Ms. Stutz and Ms. Long were designated
pursuant to such agreement and were nominated and elected to serve as directors
of the Company at the Company's 1991 Special Meeting of Shareholders.
The Board of Directors has standing Executive, Audit, Stock Option and
Executive Compensation and Nominating Committees.
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.
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<PAGE> 39
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of March 10, 1994, and as adjusted
to reflect the sale of 5,845,396 shares by the Company and 4,154,604 shares by
the Selling Shareholders in the Offering. The information includes beneficial
ownership by each Selling Shareholder, each person (or group of affiliated
persons) who is known to the Company to own beneficially more than 5% of the
Common Stock, by each of the Company's Directors and executive officers, and by
all Directors and executive officers as a group. The persons named on the table
have sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
------------------------- SHARES BEING --------------------------
NAME SHARES PERCENT(A) OFFERED SHARES PERCENT(B)
- ------------------------------------- ---------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Alan G. Quasha(c).................... 51,895,263(d) 58.1% -- 51,895,263(d) 54.5%
c/o Quadrant Management, Inc.
127 East 73rd Street
New York, NY 10021
NAR Group Limited(e)................. 51,895,263(d) 58.1 -- 51,895,263(d) 54.5
c/o P.M.M. Services
(B.V.I.) Limited
P.O. Box 438
Road Town, Tortola,
British Virgin Islands
Theodore H. Kruttschnitt(f).......... 5,320,887(h) 6.3 3,500,000 1,820,887(h) 2.0
1350 Bayshore Boulevard
Suite 850
Burlingame, CA 94010
Jack E. Rosenfeld(i)................. 3,849,598(j) 4.6 -- 3,849,598(j) 4.3
c/o Hanover Direct, Inc.
1500 Harbor Boulevard
Weehawken, NJ 07087
Sun Life Insurance Company of
America............................ 1,309,207 1.6 654,604 654,603 *
1999 Avenue of the Stars
Los Angeles, CA 90067
Ralph Destino(g)..................... 20,000(k) * -- 20,000(k) *
J. David Hakman(f)................... 28,434(l) * -- 28,434(l) *
S. Lee Kling(m)...................... 18,511 * -- 18,511 *
Jeffrey Laikind(g)................... 82,000(n) * -- 82,000(n) *
Edmund R. Manwell(f)................. 33,628(n) * -- 33,628(n) *
Geraldine Stutz(g)................... 59,649(n) * -- 59,649(n) *
Elizabeth Valk Long(g)............... 30,000(n) * -- 30,000(n) *
Robert F. Wright(g).................. 70,000(n) * -- 70,000(n) *
Michael P. Sherman(o)................ 236,798(p) * -- 236,798(p) *
Wayne P. Garten(q)................... 227,976(r) * -- 227,976(r) *
Edward J. O'Brien(s)................. 84,060 * -- 84,060 *
David E. Ullman(t)................... 5,253 * -- 5,253 *
Directors and executive officers as a
group (15 persons)................. 10,086,794(u) 11.9 -- 6,566,794(u) 7.3
</TABLE>
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<PAGE> 40
- ---------------
<TABLE>
<S> <C>
* Less than 1%
(a) Percentages computed on the basis of 84,242,384 shares of Common Stock outstanding
as of March 10, 1994 in accordance with Rule 13d-3 promulgated under the Exchange
Act.
(b) Percentages computed on the basis of 90,087,780 shares of Common Stock to be
outstanding after the Offering (see also note j).
(c) Elected a Director and Chairman of the Board of the Company in October 1991. All of
the shares beneficially owned by NAR could also be deemed to be beneficially owned
by Alan G. Quasha, due to his shared investment and voting power with NAR. Excludes
options for 20,000 shares exercisable within 60 days.
(d) Includes warrants and options for 5,053,735 shares exercisable within 60 days.
(e) All of the shares beneficially owned by NAR could also be deemed to be beneficially
owned by Alan G. Quasha, due to his shared investment and voting power with NAR.
(f) Appointed a Director of the Company in May 1989.
(g) Elected a Director of the Company in October 1991.
(h) Includes options for 15,000 shares exercisable within 60 days. Amendment No. 8 to
the Statement on Schedule 13D filed by Mr. Kruttschnitt with the Commission on
September 29, 1992 indicates that Mr. Kruttschnitt is a member of a group which
includes Mr. J. David Hakman and Mr. Edmund R. Manwell.
(i) President, Chief Executive Officer and a Director of the Company since October
1990.
(j) Includes options for 2,627,210 shares exercisable within 60 days.
(k) Options exercisable within 60 days.
(l) Includes options for 15,000 shares exercisable within 60 days.
(m) Elected a Director of the Company in 1983.
(n) Includes options for 20,000 shares exercisable within 60 days.
(o) Served as the Executive Vice President-Corporate Affairs of the Company since 1990.
(p) Includes options for 31,500 shares exercisable within 60 days.
(q) Served as Executive Vice President and Chief Financial Officer of the Company since
October 1990.
(r) Includes options for 32,150 shares exercisable within 60 days.
(s) Served as Senior Vice President and Treasurer of the Company since 1991.
(t) Served as Vice President Controller of the Company since December 1992.
(u) Excludes 46,841,528 shares and warrants and options for 5,053,735 shares
beneficially owned by NAR but could also be deemed to be beneficially owned by Alan
G. Quasha. Includes options for 20,000 shares exercisable within 60 days and owned
by Alan G. Quasha.
</TABLE>
RELATIONSHIP WITH SUN LIFE
In May 1991, the Company obtained a $10 million 12% short-term working
capital line (the "Interim Credit Agreement") from Sun Life. In connection with
the transaction, the Company paid a fee of 1.25% and issued warrants to Sun Life
to purchase 973,713 shares of Common Stock at $4.00 per share which were
subsequently adjusted to allow for the purchase of 1,610,644 shares at $2.42 per
share in connection with the anti-dilution provision of the warrant agreement.
The Interim Credit Agreement was paid off in October 1991.
In July 1991, the Company issued additional warrants to Sun Life to
purchase 291,667 shares of Common Stock at $5.25 per share which were
subsequently adjusted to allow for the purchase of 349,601 shares at $2.19 per
share in accordance with the anti-dilution provision of the warrant agreement in
order to induce Sun Life to enter into an Intercreditor Agreement with the
Company.
Pursuant to the terms of these warrants, Sun Life may require the Company
to register the warrants or the shares of Common Stock acquired upon exercise of
the warrants.
In August 1993, the Company issued $20 million of 9.25% Senior Subordinated
Notes in a private placement with Sun Life. The Company is required to redeem $6
million of the 9.25% Notes without penalty by May 1, 1994 if the Company has not
established or acquired a new distribution facility by such date.
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<PAGE> 41
In March 1994, Sun Life exercised all of its warrants and purchased
1,309,207 shares in a "net-issue" exchange, 654,604 of which will be sold in the
Offering.
RELATIONSHIP WITH NAR
Upon completion of the Offering, NAR will own 46,841,528 shares of Common
Stock and warrants and options to purchase 5,053,735 shares of Common Stock
constituting 54.3% of the outstanding Common Stock of the Company on a fully
diluted basis (approximately 53.7% if the Underwriters' over-allotment option is
exercised in full). Although pursuant to the Stock Purchase Agreement, NAR has
agreed to nominate only six of the Company's 11 Directors until 1996, NAR has
the power to elect the entire Board of Directors and, except as otherwise
provided by law or the Company's Certificate of Incorporation, to approve any
action requiring shareholder approval without a shareholders meeting. See
"Management -- General." NAR is a private investment holding company that is a
joint venture between the family of Alan G. Quasha, a Director and the Chairman
of the Board of the Company, and Richemont. Richemont is the ultimate parent of
a family of some of the world's leading luxury goods trademarks, including
Cartier, Piaget, Baume & Mercier, Alfred Dunhill and Montblanc. NAR's U.S.
assets are managed by Quadrant Management, Inc., an indirect wholly-owned
subsidiary of NAR ("Quadrant") whose management has participated in a number of
restructurings in a variety of industries since 1980. See "Principal and Selling
Shareholders." NAR obtained control of the Company in the fall of 1991. See "The
Company -- History and Organization -- Restructuring."
The Company has entered into a consulting arrangement with Quadrant
pursuant to which it renders management consulting, business advisory and
investment banking services to the Company for annual compensation of $750,000.
Such agreement was in effect during 1993 and has been renewed for 1994.
A subsidiary of NAR has provided a secured limited guarantee of $10 million
which allows the Company to borrow in excess of its availability under the
Credit Facility based on a formula, up to the facility's limit of $52.5 million.
This limited guarantee was reduced by approximately $5.1 million during the
fourth quarter of 1993, and the Company's expects the guarantee to be eliminated
in the first quarter of 1994 based on the Company's fiscal year-end results.
DESCRIPTION OF CAPITAL STOCK
The following general summary of the material terms of the capital stock of
the Company does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the pertinent portions of the Company's
Certificate of Incorporation.
GENERAL
The authorized capital stock of the Company consists of 150,000,000 shares
of Common Stock, 12,270,503 shares of Class B Common Stock, par value $.01 per
share (the "Class B Common Stock"), 40,000 shares of Class B 8% Cumulative
Preferred Stock, par value $.01 and stated value $1,000 per share (the "Class B
Preferred"), 861,900 shares of 7.5% Cumulative Convertible Preferred Stock, par
value $.01 and stated value $20 per share (the "7.5% Preferred"), 234,900 shares
of Series A Convertible Additional Preferred Stock, par value $.01 per share
(the "Series A Preferred Stock"), and 4,765,100 shares of Additional Preferred
Stock, par value $.01 per share (the "Additional Preferred"). On December 13,
1993, the Company converted all the outstanding shares of 7.5% Preferred into
shares of Common Stock. Pursuant to an Option Agreement, dated as of July 20,
1992, the Company exercised its right to require the exchange, as of January 1,
1994, of the 40,000 shares of Class B Preferred and the 12,270,503 shares of
Class B Common Stock outstanding for 18,937,169 shares of Common Stock. As of
January 1, 1994, there were 82,933,177 shares of Common Stock and 234,900 shares
of Series A Preferred Stock outstanding.
COMMON STOCK
General. There are no redemption or sinking fund provisions applicable to
the shares of Common Stock and such shares are not entitled to any preemptive
rights.
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<PAGE> 42
Voting. Each holder of Common Stock is entitled to one vote for each share
registered in the holder's name on the books of the Company. Since none of the
shares of Common Stock have cumulative voting rights, the holders of more than
50% of the shares can elect all the Directors of the Company in each class of
Directors, if they so choose, and, in that event, the holders of the remaining
shares will not be able to elect any of the Directors. The Board of Directors of
the Company is divided into three classes of Directors, serving staggered
three-year terms. See "Management -- General."
Dividends. Subject to the prior rights of holders of any then issued and
outstanding preferred stock, the holders of Common Stock are entitled to receive
such dividends as may be declared from time to time by the Board of Directors of
the Company from the assets of the Company which are legally available therefor.
Liquidation. Upon the liquidation, dissolution or winding-up of the
Company, holders of Common Stock are entitled to receive, pro rata, after the
prior rights of creditors and holders of any preferred stock have been
satisfied, all the remaining assets of the Company available for distribution.
Transfer Agent and Registrar. Chemical Bank is the Transfer Agent and
Registrar for the Common Stock.
ADDITIONAL PREFERRED
Additional Preferred may be issued at such times, to such persons and for
such consideration as the Board of Directors may determine to be in the
Company's best interest without (except as otherwise required by law) further
authority from the shareholders. Such shares of authorized and unissued
Additional Preferred may be issued with such designations, voting powers,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations and restrictions of such rights, as the Company's
Board of Directors may authorize, including but not limited to: (i) the
distinctive designation of each series and the number of shares that will
constitute such series; (ii) the voting rights, if any, of shares of such
series; (iii) the dividend rate on the shares of such series, any restriction,
limitation or condition upon the payment of such dividends, whether dividends
shall be cumulative and the dates on which dividends are payable; (iv) the
prices at which, and the terms and conditions on which, the shares of such
series may be redeemed, if such shares are redeemable; (v) the purchase or
sinking fund provisions, if any, for the purchase or redemption of shares of
such series; (vi) any preferential amount payable upon shares of such series in
the event of the liquidation, dissolution or winding-up of the Company or the
distribution of its assets; and (vii) the prices or rates of conversion at
which, and the terms and conditions on which, the shares of such series may be
converted into other securities, if such shares are convertible.
SERIES A PREFERRED STOCK
Dividends. The holders of record of shares of Series A Preferred Stock are
entitled to receive preferential cumulative dividends, when and as declared by
the Board of Directors of the Company out of funds legally available therefor,
at a rate of 6% of the stated value per annum. Dividends on the Series A
Preferred Stock commenced to accrue on September 30, 1993.
Liquidation Preference. In the event of any distribution of assets upon
any liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Company, the holder of each share of the then outstanding
Series A Preferred Stock shall be entitled to receive out of the assets of the
Company, whether such assets are capital, surplus or earnings, an amount equal
to the then stated value of each share of Series A Preferred Stock, before any
payments or distributions are made to, or set aside for, any other equity
security of the Company other than any other series of preferred stock. If the
assets of the Company are insufficient to pay such amounts in full, then the
entire assets of the Company shall be distributed pro rata to the holders of
shares of preferred stock after the holders of the Class B Preferred and the
7.5% Preferred have been paid in full. Neither a consolidation, merger or other
business combination of the Company with or into another corporation or other
entity nor a sale or transfer of all or part of the Company assets for cash,
securities or other property shall be considered a liquidation, dissolution or
winding up of the Company.
40
<PAGE> 43
Conversion. On September 30, 1994, each holder of the Series A Preferred
Stock shall automatically, without any action being required on the part of such
holder, have one-third of each such holders holdings of Series A Preferred Stock
(the "First Conversion Allotment") converted into a number of shares of Common
Stock of the Company determined by dividing the then stated value of the shares
by the Conversion Price. On September 30, 1995, each holder of the Series A
Preferred Stock shall automatically, without any action being required on the
part of such holder, have one-half of each such holders holdings of Series A
Preferred Stock (the "Second Conversion Allotment") converted into a number of
shares of Common Stock determined by dividing the then stated value of the
shares by the Conversion Price. On September 30, 1996, all shares of the Series
A Preferred Stock that remain outstanding (the "Final Conversion Allotment")
shall automatically, without any action being required on the part of the
holders thereof, be converted into a number of shares of Common Stock determined
by dividing the then stated value of the shares by the Conversion Price. Each of
September 30, 1994, September 30, 1995 and September 30, 1996 is referred to
herein as a "Conversion Date." The "Conversion Price" shall be an amount equal
to the average of the per-share closing prices (regular way) for a round lot of
the Common Stock on the AMEX (or, if the Common Stock is then not listed for
trading on the AMEX, such other exchange or system on which the Common Stock
shall from time to time be traded) on each of the five trading days immediately
preceding a Conversion Date.
No fractional shares or scrip representing fractional shares of Common
Stock shall be issued upon conversion of Series A Preferred Stock. Instead of
any fractional share of Common Stock that would otherwise be issuable upon
conversion of any shares of Series A Preferred Stock, the Company will pay a
cash adjustment in respect of such fractional interest in an amount equal to the
same fraction of the Conversion Price per share of Common Stock.
Redemption. The Company shall have the right to redeem the First
Conversion Allotment at any time prior to September 20, 1994, the Second
Conversion Allotment at any time prior to September 20, 1995 and the Final
Conversion Allotment at any time prior to September 20, 1996 at the liquidation
value (initial stated value plus accrued but unpaid dividends) of such shares
payable in cash.
Voting Rights. The holders of the Series A Preferred Stock shall not have
any voting rights except as may be required by law.
Preemptive Rights. The Series A Preferred Stock is not entitled to any
preemptive or subscription rights in respect of any securities of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 90,087,780 shares
of Common Stock outstanding (91,062,780 if the Underwriters' over-allotment
option is exercised in full). Of these shares, 38,870,968 shares (39,845,968 if
the Underwriters' over-allotment option is exercised in full) will be tradeable
without restriction and the remainder will be "restricted securities" under the
Securities Act, and may only be sold pursuant to a registration statement under
the Securities Act or an applicable exemption from the registration requirements
of the Securities Act, including Rule 144 and thereunder. NAR, Sun Life and
certain executive officers of the Company are entitled to certain rights with
respect to registration of their shares of Common Stock under the Securities
Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of the Company, who has
beneficially owned restricted shares for at least two years, will be entitled to
sell in any three-month period a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of the Common Stock
(approximately 900,878 shares immediately after this Offering) or (ii) the
average weekly trading volume of the Common Stock on the AMEX during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Commission. Sales pursuant to Rule 144 are also subject to
certain other requirements relating to manner of sale, notice and availability
of current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the three months immediately preceding the sale is
entitled to sell restricted shares pursuant to Rule 144(k) without regard to
41
<PAGE> 44
the limitations described above, provided that three years have expired since
the later of the date on which such restricted shares were acquired from the
Company or the date they were acquired from an affiliate of the Company.
Certain shareholders who own 50,562,209 restricted shares have agreed with
the Underwriters not to sell or otherwise dispose of any shares for 180 days
after the date of this Prospectus without the prior consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated on behalf of the Underwriters. The Company
has agreed not to sell or otherwise dispose of any shares for 180 days after the
date of this Prospectus without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated on behalf of the Underwriters, except in
certain circumstances including shares issued 90 days after the date of this
Prospectus in connection with an acquisition. A Selling Shareholder who owns
654,603 restricted shares has agreed with the Underwriters not to sell or
otherwise dispose of any shares for 90 days after the date of this Prospectus
without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated on behalf of the Underwriters.
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
person that, for U.S. federal income tax purposes, is a non-resident alien
individual, a foreign corporation, a foreign partnership or a foreign estate or
trust (a "non-U.S. holder"). This discussion does not consider specific facts
and circumstances that may be relevant to a particular holder's tax position
(including the tax position of certain U.S. expatriates) and therefore does not
address all aspects of U.S. federal tax that may be relevant to non-U.S. holders
in light of their specific circumstances. Nor does this discussion deal with
U.S. state and local or non-U.S. tax consequences of the ownership or
disposition of Common Stock. Furthermore, the following discussion is based on
provisions of the U.S. Internal Revenue Code of 1986, as amended, and
administrative and judicial interpretations as of the date hereof, all of which
are subject to change. Each prospective holder of Common Stock is urged to
consult a tax advisor with respect to the U.S. federal tax consequences of
acquiring, holding and disposing of Common Stock as well as any tax consequences
that may arise under the laws of any U.S. state or municipality or other tax
jurisdiction.
DIVIDENDS
Dividends paid to a non-U.S. holder of Common Stock will be subject to
withholding of U.S. federal income tax at a 30% rate or such lower rate as may
be specified by an applicable income tax treaty, unless the dividends are
effectively connected with the conduct of a trade or business within the United
States or, if an income tax treaty applies, are attributable to a U.S. permanent
establishment of such holder. Dividends that are effectively connected with such
holder's conduct of a trade or business in the United States or, if an income
tax treaty applies, are attributable to a U.S. permanent establishment of such
holder, are subject to tax at rates applicable to U.S. citizens, resident aliens
and domestic U.S. corporations, and are not generally subject to withholding.
Any such effectively connected dividends received by a non-U.S. corporation may,
under certain circumstances: (i) be entitled to the benefit of a dividends
received deduction under U.S. federal income tax law; and (ii) be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Under current U.S. Treasury regulations, dividends paid to an address in a
foreign country may be presumed to be paid to a resident of that country (unless
the payor has knowledge to the contrary) for purposes of the withholding
discussed above and, under the current interpretation of the U.S. Treasury
regulations, for purposes of determining the applicability of a tax treaty rate.
Under proposed U.S. Treasury regulations, not currently in effect, however, a
non-U.S. holder of Common Stock who wishes to claim the benefit of an applicable
treaty rate would be required to satisfy applicable certification and other
requirements.
A non-U.S. holder of Common Stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
U.S. Internal Revenue Service.
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<PAGE> 45
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of Common Stock unless: (i) the
gain is effectively connected with a trade or business of the non-U.S. holder in
the United States; (ii) in the case of a non-U.S. holder who is an individual
and holds the Common Stock as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year of the sale and the gain
from such sale is considered to be derived from sources within the United States
under applicable U.S. federal tax principles; or (iii) the Company has been at
some time during the five-year period ending on the date of the disposition of
the Common Stock a "U.S. real property holding corporation" for federal income
tax purposes and the non-U.S. holder held, directly or indirectly at any time
during such five-year period, more than 5% of the Common Stock. Gain from the
sale of Common Stock held as a capital asset by an individual non-U.S. holder
will generally not be considered to be derived from sources within the United
States for the purposes of the foregoing unless either: (i) such individual's
"tax home" for United States federal income tax purposes is in the United
States; or (ii) such gain is attributable to an office or other fixed place of
business maintained by such individual within the United States. The Company has
not been at any time during the five-year period ending on the date of this
registration statement and does not anticipate becoming a "U.S. real property
holding corporation" for federal income tax purposes.
In addition, in certain circumstances, capital gain realized on the sale of
Common Stock may be exempted from United States taxation under an applicable
income tax treaty.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual non-U.S. holder at
the time of death will generally be included in such holder's gross estate for
U.S. federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise.
U.S. INFORMATION REPORTING REQUIREMENT AND BACKUP WITHHOLDING TAX
U.S. information reporting requirements, other than the reporting of
dividend payments for purposes of the withholding tax noted above, and backup
withholding tax generally will not apply to dividends paid to non-U.S. holders
that are either subject to the 30% withholding discussed above or that are not
so subject because an applicable tax treaty reduces such withholding. Otherwise,
backup withholding of U.S. federal income tax at a rate of 31% may apply to
dividends paid with respect to the Common Stock to holders that are not "exempt
recipients" and that fail to provide certain information (including the holder's
U.S. taxpayer identification number) in the manner required by U.S. law and
applicable regulations or to report certain payments which are taxable for
United States federal income tax purposes. Under current U.S. Treasury
regulations, the payor of the dividends may generally rely on the payees'
address outside the United States in determining that the withholding or
applicable treaty exemption provisions discussed above apply, and, consequently,
that the backup withholding provisions do not apply. Under proposed U.S.
Treasury regulations, not currently in effect, however, a payor of dividends
would be permitted to rely on an applicable treaty exemption as the basis for an
exemption from the backup withholding provisions only if the recipient satisfies
applicable certification requirements.
As a general proposition, U.S. information reporting and backup withholding
requirement will not apply to a payment made outside the United States of the
proceeds of a sale of Common Stock through an office outside the United States
of a non-U.S. broker. However, U.S. information reporting requirements (but,
currently, not backup withholding) will apply to a payment made outside the
United States of the proceeds of a sale of Common Stock through an office
outside the United States of a broker that is a U.S. person, that derives 50% or
more of its gross income for certain periods from the conduct of a trade or
business in the United States, or that is a "controlled foreign corporation"
determined under United States federal income tax law, unless the broker has
documentary evidence in its records that the holder is a non-U.S. holder and
certain conditions are met, or the holder otherwise establishes an exemption.
Payment by a U.S. office of a broker of the proceeds of a sale of Common Stock
is currently subject to both U.S. backup withholding and information
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<PAGE> 46
reporting unless the holder certifies non-U.S. status under penalties of perjury
or otherwise establishes an exemption.
A non-U.S. holder generally may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing the appropriate claim for
refund with the U.S. Internal Revenue Service.
These backup withholding and information reporting rules are under review
by the Treasury Department and their application to the Common Stock could be
changed by the enactment of new requirements.
44
<PAGE> 47
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
Alex. Brown & Sons Incorporated are acting as representatives (the
"Representatives") of each of the Underwriters named below (the "Underwriters").
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company, the Selling Shareholders and the
Underwriters, the Company, for its own account, and the Selling Shareholders
have agreed to sell to the Underwriters, and each of the Underwriters has
severally agreed to purchase from the Company and the Selling Shareholders, the
number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
-----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
Alex. Brown & Sons Incorporated.......................................
-----------
Total.................................................... 10,000,000
-----------
-----------
</TABLE>
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the shares of
Common Stock being sold pursuant to such agreement if any shares are purchased.
Under certain circumstances, the commitments of non-defaulting Underwriters may
be increased.
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose initially to offer the shares of Common Stock to
the public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share of Common Stock. The Underwriters may allow, and such dealers
may reallow, a discount not in excess of $ per share of Common Stock on sales
to certain other dealers. After the Offering, the public offering price,
concession and discount may be changed.
The Company and a Selling Shareholder have granted options to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to an aggregate of 1,500,000 additional shares of
Common Stock at the public offering price set forth on the cover page of this
Prospectus, less the underwriting discount. The Underwriters may exercise this
option only to cover over-allotments, if any, made on the sale of the Common
Stock offered hereby. To the extent that the Underwriters exercise this option,
each Underwriter will be obligated, subject to certain conditions, to purchase
the number of additional shares of Common Stock proportionate to such
Underwriter's initial amount reflected in the foregoing table.
The Company and certain other shareholders of the Company, prior to the
Offering, have agreed not to sell or otherwise dispose of any shares of Common
Stock or securities convertible into or exchangeable or exercisable for Common
Stock (except for shares offered pursuant to the Offering) without the prior
written consent of Merrill Lynch on behalf of the Underwriters for a period of
180 days (and in the case of one Selling Shareholder, 90 days) after the date of
this Prospectus; provided, however, that the Company may issue shares of Common
Stock or securities convertible into or exchangeable or exercisable for Common
Stock (i) 90 days after the date of this Prospectus as consideration for the
acquisition by the Company of stock or assets of another entity or (ii) to the
eligible participants in the Company's stock plans pursuant to the terms
thereof. See "Shares Eligible for Future Sale."
45
<PAGE> 48
More than 10% of the net proceeds of the Offering are expected to repay a
loan made by Merrill Lynch to Theodore H. Kruttschnitt. Accordingly, the
Offering is being conducted in accordance with Section 44(c)(8) of the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Whitman Breed Abbott & Morgan, New York, New York.
Certain legal matters will be passed upon for the Underwriters by Fried, Frank,
Harris, Shriver & Jacobson (a partnership including professional corporations),
New York, New York.
EXPERTS
The consolidated balance sheets of Hanover Direct, Inc. (successor to The
Horn & Hardart Company) and subsidiaries as of January 1, 1994 and December 26,
1992, and the related consolidated statements of income (loss), shareholders'
(deficit) equity and cash flows for each of the three fiscal years in the period
ended January 1, 1994 and schedules included and incorporated by reference in
this prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen & Co., independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports. Reference is made to said reports, which include an explanatory
paragraph with respect to the change in its method of accounting for income
taxes as discussed in Notes 1 and 10 to the consolidated financial statements.
The consolidated balance sheets of Company Store Holdings, Inc. and
subsidiaries (Debtors-in-Possession) as of August 1, 1992 and July 27, 1991, and
the related consolidated statements of operations, shareholders' investment
(deficit) and cash flows for each of the three years in the period ended August
1, 1992 incorporated by reference in this prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen & Co., independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports. Reference is made to said
reports which include an explanatory paragraph that describes Company Store
Holdings, Inc.'s filing for bankruptcy and its ability to continue as a going
concern, discussed in Note 2 to the consolidated financial statements.
The financial statements of Tweeds, Inc. as of and for the years ended June
30, 1991 and July 30, 1990 which are incorporated herein by reference, have been
so included in reliance upon the report of Deloitte & Touche, independent
auditors (of which the report contains explanatory language with respect to the
substantial doubt about the entity's ability to continue as a going concern),
incorporated herein by reference, given upon the authority of said firm as
experts in auditing and accounting.
The balance sheets of Tweeds, Inc. as of January 31, 1993 and February 2,
1992, and the related statements of operations, stockholders' equity and cash
flows for the year ended January 31, 1993, and the period from July 1, 1991 to
February 2, 1992 incorporated by reference in this Prospectus and elsewhere in
the Registration Statement have been audited by KPMG Peat Marwick, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of Gump's Inc. at February 27, 1993
and February 29, 1992 and February 23, 1991 and for each of the three years in
the period ended February 27, 1993, incorporated by reference in this Prospectus
and Registration Statement have been audited by Ernst & Young, independent
auditors, as set forth in their reports thereon (which contain an explanatory
paragraph with respect to the Company's ability to continue as a going concern)
appearing elsewhere herein are incorporated by reference. Such consolidated
financial statements are included in reliance upon the authority of such firm as
experts in accounting and auditing.
46
<PAGE> 49
Domestications(R), Tapestry(R), Hanover House(R), Colonial Garden
Kitchens(R), Mature Wisdom(R), International Male(R), Undergear(R),
Silhouettes(R), Simply Tops(R), Gump's(R), Tweeds(R), and The Company Store(R)
are federally registered trademarks of the Company. This prospectus also
contains other registered and unregistered trademarks and service marks owned by
the Company and by others.
<PAGE> 50
HANOVER DIRECT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets as of December 26, 1992 and January 1, 1994............... F-3
Consolidated Statements of Income (Loss) for the Years Ended December 28, 1991,
December 26, 1992 and January 1, 1994............................................... F-5
Consolidated Statements of Shareholders' (Deficit) Equity for the Years Ended
December 28, 1991, December 26, 1992 and January 1, 1994............................ F-6
Consolidated Statements of Cash Flows for the Years Ended December 28, 1991,
December 26, 1992 and January 1, 1994............................................... F-7
Notes to Consolidated Financial Statements for the Years Ended December 28, 1991,
December 26, 1992 and January 1, 1994............................................... F-8
Schedule II -- Amounts Receivable from Related Parties and Underwriters, Promoters and
Employees other than Related Parties for the Years Ended December 28, 1991,
December 26, 1992 and January 1, 1994............................................... S-1
Schedule VIII -- Valuation and Qualifying Accounts for the Years Ended December 28,
1991,
December 26, 1992 and January 1, 1994............................................... S-2
</TABLE>
F-1
<PAGE> 51
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) (successor to The Horn & Hardart Company,
see Note 1 to the Consolidated Financial Statements) and subsidiaries as of
December 26, 1992 and January 1, 1994, and the related consolidated statements
of income (loss), shareholders' (deficit) equity and cash flows for each of the
three fiscal years in the period ended January 1, 1994. These financial
statements and the schedules referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules referred to below based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hanover Direct, Inc. and
subsidiaries as of December 26, 1992 and January 1, 1994, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 1, 1994 in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 10 to the Consolidated Financial Statements,
effective December 29, 1991 the Company changed its method of accounting for
income taxes.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
financial statement schedules are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state 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 & CO.
New York, New York
February 28, 1994
F-2
<PAGE> 52
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 26, 1992 AND JANUARY 1, 1994
<TABLE>
<CAPTION>
DECEMBER 26, JANUARY 1,
1992 1994
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................ $ 2,553 $ 2,583
Accounts receivable, net of allowance for doubtful accounts
of $2,892 in 1992 and $2,509 in 1993.......................... 22,840 19,043
Inventories...................................................... 58,270 80,429
Deferred tax asset, net.......................................... 2,800 2,975
Prepaid catalog costs............................................ 18,277 25,571
Other current assets............................................. 2,058 2,374
------------ ----------
Total Current Assets..................................... 106,798 132,975
------------ ----------
Property and Equipment, at cost
Land............................................................. 205 1,171
Buildings and building improvements.............................. 4,462 7,862
Leasehold improvements........................................... 5,696 6,242
Furniture, fixtures and equipment................................ 16,309 22,551
Construction in progress......................................... -- 5,434
------------ ----------
26,672 43,260
Accumulated depreciation and amortization........................ (15,761) (18,341)
------------ ----------
Net Property and Equipment............................... 10,911 24,919
------------ ----------
Excess of Cost Over Net Assets of Acquired Businesses, net......... 8,710 18,463
Deferred Tax Asset, net............................................ 7,200 7,656
Other Assets, net.................................................. 733 4,825
------------ ----------
Total Assets............................................. $134,352 $ 188,838
------------ ----------
------------ ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 53
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 26, 1992 AND JANUARY 1, 1994
<TABLE>
<CAPTION>
DECEMBER 26, JANUARY 1,
1992 1994
------------ ----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Current portion of long-term debt and capital lease obligations.... $ 73 $ 2,024
Accounts payable................................................... 49,741 78,905
Dividends payable.................................................. -- 886
Accrued liabilities................................................ 21,363 20,653
Customer prepayments and credits................................... 4,055 5,031
------------ ----------
Total Current Liabilities.................................. 75,232 107,499
------------ ----------
Noncurrent Liabilities:
Long-term debt..................................................... 43,184 32,313
Capital lease obligations.......................................... 105 1,823
Other.............................................................. 2,747 1,335
------------ ----------
Total Noncurrent Liabilities............................... 46,036 35,471
------------ ----------
Total Liabilities.......................................... 121,268 142,970
------------ ----------
Commitments and Contingencies
Preferred Stock:
7.5% cumulative, convertible, $.01 par value, authorized 861,900
shares; issued 529,114 shares in 1992........................... 6,526 --
Class B 8% cumulative, convertible, $.01 par value, authorized and
issued 40,000 shares in 1992.................................... 26,316 --
------------ ----------
Total Preferred Stock...................................... 32,842 --
------------ ----------
Shareholders' (Deficit) Equity:
6% Preferred Stock, convertible, $10 stated value, authorized
5,000,000 shares; issued 234,900 shares in 1993................. -- 2,378
Class B Common Stock, $.01 par value, authorized and issued
12,270,503 shares in 1992....................................... 123 --
Common Stock, $.66 2/3 par value, authorized 150,000,000 shares;
issued 58,154,584 shares in 1992 and 83,136,542 shares in
1993............................................................ 38,774 55,423
Capital in excess of par value..................................... 178,149 209,834
Accumulated deficit................................................ (229,049) (215,805)
------------ ----------
(12,003) 51,830
Less:
Treasury stock, at cost (2,169,713 shares in 1992
and 1,120,032 shares in 1993)................................... (7,170) (3,130)
Notes receivable from sale of Common Stock......................... -- (1,774)
Deferred compensation.............................................. (585) (1,058)
------------ ----------
Shareholders' (Deficit) Equity..................................... (19,758) 45,868
------------ ----------
Total Liabilities and Shareholders' (Deficit) Equity....... $134,352 $ 188,838
------------ ----------
------------ ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 54
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 28, 1991, DECEMBER 26, 1992 AND JANUARY 1, 1994
<TABLE>
<CAPTION>
1991 1992 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES....................................................... $623,650 $586,562 $642,511
-------- -------- --------
Operating costs and expenses:
Cost of sales and operating expenses......................... 409,098 381,716 408,387
Selling expenses............................................. 174,401 138,494 157,811
General and administrative expenses.......................... 57,329 51,950 57,237
Restructuring expenses....................................... 8,900 -- --
-------- -------- --------
649,728 572,160 623,435
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS.................................. (26,078) 14,402 19,076
Interest expense............................................. (20,525) (13,379) (4,925)
Interest income.............................................. 2,184 244 2,168
Other income (expense)....................................... (6,437) -- 888
-------- -------- --------
Income (loss) from continuing operations before income taxes... (50,856) 1,267 17,207
Income tax provision (benefit)................................. 225 219 (130)
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS....................... (51,081) 1,048 17,337
Provision for loss on disposal of discontinued operations...... (21,119) -- --
-------- -------- --------
Income (loss) before extraordinary items and cumulative effect
of accounting change......................................... (72,200) 1,048 17,337
Extraordinary items............................................ 6,915 9,201 --
Cumulative effect of accounting change for income taxes........ -- 10,000 --
-------- -------- --------
NET INCOME (LOSS).............................................. (65,285) 20,249 17,337
Preferred stock dividends...................................... (466) (3,197) (4,093)
-------- -------- --------
Net income (loss) applicable to Common Shareholders............ $(65,751) $ 17,052 $ 13,244
-------- -------- --------
-------- -------- --------
Net income (loss) per share:
Income (loss) from continuing operations..................... $ (3.16) $ (0.06) $ 0.17
(Loss) from discontinued operations.......................... (1.30) -- --
-------- -------- --------
Income (loss) before extraordinary items and cumulative
effect of accounting change............................... (4.46) (0.06) 0.17
Extraordinary items............................................ 0.43 0.24 --
Cumulative effect of accounting change for income taxes........ -- 0.26 --
-------- -------- --------
Net income (loss) per share.................................... $ (4.03) $ 0.44 $ 0.17
-------- -------- --------
-------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 55
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 28, 1991, DECEMBER 26, 1992 AND JANUARY 1, 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK
CLASS B 8% PREFERRED STOCK PREFERRED STOCK CLASS B COMMON STOCK
CUMULATIVE 7.5% CUMULATIVE SERIES A, 6.0% $.01 PAR VALUE
------------------ ------------------ ---------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- -------- -------- ------- ------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 29, 1990................ 0 $ 0 0 $ 0 0 $ 0 0 $ 0
Net loss....................................
Issuance of warrants........................
Executive employment contracts..............
Shares to 401k savings plan.................
Payment on notes receivable.................
Issuance of Class B Common Stock............ 13,333,334 133
Amortization of deferred compensation.......
Termination of Employee Stock Ownership
Plan.......................................
------- -------- -------- ------- ------- ------ ----------- ------
BALANCE AT DECEMBER 28, 1991................ 0 $ 0 0 $ 0 0 $ 0 13,333,334 $133
Net income..................................
Issuance of Common Stock to and redemption
of Class B Common Stock by NAR............. (13,333,334) (133)
Issuance of Class B Common Stock............ 12,270,503 123
Amortization of deferred compensation.......
Issuance of Common Stock in connection with
Rights Offering............................
14% Exchange Offer..........................
7 1/2% Exchange Offer.......................
Stock Dividend to NAR.......................
Issuance of Common Stock....................
Transfer of ESOP shares to treasury.........
------- -------- -------- ------- ------- ------ ----------- ------
BALANCE AT DECEMBER 26, 1992................ 0 $ 0 0 $ 0 0 $ 0 12,270,503 $123
Net income..................................
Mergers of H&H & THC into
Hanover Direct, Inc........................ 40,000 25,516 569,532 7,158
Exchange of Class B 8% Preferred and Common
Stock...................................... (40,000) (25,516) (12,270,503) (123)
Conversion of 7.5% Preferred Stock.......... (569,532) (7,158)
Issuance of Preferred Stock................. 234,900 2,342
Stock dividends............................. 36
Amortization of deferred compensation.......
Issuance of Common Stock....................
------- -------- -------- ------- ------- ------ ----------- ------
BALANCE AT JANUARY 1, 1994.................. 0 $ 0 0 $ 0 234,900 $2,378 0 $ 0
------- -------- -------- ------- ------- ------ ----------- ------
------- -------- -------- ------- ------- ------ ----------- ------
<CAPTION>
NOTES
COMMON STOCK CAPITAL RECEIVABLE
$.66 2/3 PAR VALUE IN EXCESS TREASURY STOCK FROM SALE
-------------------- OF PAR ACCUM. --------------------- OF COMMON
SHARES AMOUNT VALUE (DEFICIT) SHARES AMOUNT STOCK
---------- ------- --------- --------- ---------- -------- ---------
<S> <C> <C>
BALANCE AT DECEMBER 29, 1990................ 14,812,863 $ 9,874 $ 124,228 $(180,350) (900,943) $ (7,865) $ (270)
Net loss.................................... (65,751)
Issuance of warrants........................ 3,286
Executive employment contracts.............. 1,281,458 854 6,287 (1,281,458) (3,845)
Shares to 401k savings plan................. (56) 12,502 109
Payment on notes receivable................. 270
Issuance of Class B Common Stock............ 1,867
Amortization of deferred compensation.......
Termination of Employee Stock Ownership
Plan.......................................
---------- ------- --------- --------- ---------- -------- ---------
BALANCE AT DECEMBER 28, 1991................ 16,094,321 $10,728 $ 135,612 $(246,101) (2,169,899) $(11,601) $ 0
Net income.................................. 17,052
Issuance of Common Stock to and redemption
of Class B Common Stock by NAR............. 20,000,000 13,334 24,146
Issuance of Class B Common Stock............ 410
Amortization of deferred compensation.......
Issuance of Common Stock in connection with
Rights Offering............................ 14,396,798 9,603 11,086
14% Exchange Offer.......................... 4,099,625 2,733 5,123
7 1/2% Exchange Offer....................... 3,448,840 2,299 5,773 45,006 393
Stock Dividend to NAR....................... (3,764) 601,233 5,249
Issuance of Common Stock.................... 115,000 77 (237)
Transfer of ESOP shares to treasury......... (646,053) (1,211)
---------- ------- --------- --------- ---------- -------- ---------
BALANCE AT DECEMBER 26, 1992................ 58,154,584 $38,774 $ 178,149 $(229,049) (2,169,713) $ (7,170) $ 0
Net income.................................. 13,244
Mergers of H&H & THC into
Hanover Direct, Inc........................
Exchange of Class B 8% Preferred and Common
Stock...................................... 18,937,169 12,625 13,014
Conversion of 7.5% Preferred Stock.......... 2,278,128 1,519 5,639
Issuance of Preferred Stock.................
Stock dividends............................. (438) 684,890 2,946
Amortization of deferred compensation.......
Issuance of Common Stock.................... 3,766,661 2,505 13,470 364,791 1,094 (1,774)
---------- ------- --------- --------- ---------- -------- ---------
BALANCE AT JANUARY 1, 1994.................. 83,136,542 $55,423 $ 209,834 $(215,805) (1,120,032) $ (3,130) $(1,774)
---------- ------- --------- --------- ---------- -------- ---------
---------- ------- --------- --------- ---------- -------- ---------
<CAPTION>
DEFERRED
COMP. TOTAL
-------- ---------
BALANCE AT DECEMBER 29, 1990................ $ (7,101) $ (61,484)
Net loss.................................... (65,751)
Issuance of warrants........................ 3,286
Executive employment contracts.............. (1,297) 1,999
Shares to 401k savings plan................. 53
Payment on notes receivable................. 270
Issuance of Class B Common Stock............ 2,000
Amortization of deferred compensation....... 1,145 1,145
Termination of Employee Stock Ownership
Plan....................................... 4,850 4,850
-------- ---------
BALANCE AT DECEMBER 28, 1991................ $ (2,403) $(113,632)
Net income.................................. 17,052
Issuance of Common Stock to and redemption
of Class B Common Stock by NAR............. 37,347
Issuance of Class B Common Stock............ 533
Amortization of deferred compensation....... 607 607
Issuance of Common Stock in connection with
Rights Offering............................ 20,689
14% Exchange Offer.......................... 7,856
7 1/2% Exchange Offer....................... 8,465
Stock Dividend to NAR....................... 1,485
Issuance of Common Stock.................... (160)
Transfer of ESOP shares to treasury......... 1,211 0
-------- ---------
BALANCE AT DECEMBER 26, 1992................ $ (585) $ (19,758)
Net income.................................. 13,244
Mergers of H&H & THC into
Hanover Direct, Inc........................ 32,674
Exchange of Class B 8% Preferred and Common
Stock...................................... 0
Conversion of 7.5% Preferred Stock.......... 0
Issuance of Preferred Stock................. 2,342
Stock dividends............................. 2,544
Amortization of deferred compensation....... 599 599
Issuance of Common Stock.................... (1,072) 14,223
-------- ---------
BALANCE AT JANUARY 1, 1994.................. $ (1,058) $ 45,868
-------- ---------
-------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 56
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 28, 1991, DECEMBER 26, 1992 AND JANUARY 1, 1994
<TABLE>
<CAPTION>
1991 1992 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................. $(65,285) $ 20,249 $ 17,337
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization...................................... 11,568 5,188 4,122
Noncash portion of loss provision.................................. 19,516 -- --
Noncash portion of extraordinary gains............................. (6,915) (9,201) --
Noncash portion of cumulative effect of an accounting change....... -- (10,000) --
Noncash portion of ESOP termination................................ 4,734 -- --
Noncash portion of contract settlement............................. 2,652 -- --
Deferred taxes..................................................... -- -- (631)
Other, net......................................................... 216 368 (33)
Changes in assets and liabilities, net of effects of acquired
businesses and dispositions of assets:
Payment for repurchase of mail order customer receivables.......... -- (35,301) --
Net proceeds from sale of mail order customer receivables.......... 11,332 37,008 --
Accounts receivable, net........................................... (4,427) 13,321 8,907
Inventories........................................................ 10,662 (9,854) (12,081)
Prepaid catalog costs.............................................. 12,606 9,470 (5,305)
Other current assets............................................... 3,254 (671) 282
Accounts payable................................................... (23,937) (17,292) 24,530
Accrued liabilities................................................ (9,811) (12,821) (10,650)
Dividend payable................................................... -- -- 886
Customer prepayments and credits................................... -- (3,508) 684
-------- -------- --------
Net cash provided (used) by operating activities..................... (33,835) (13,044) 28,048
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash........................................ 557 5,765 --
Acquisitions of property and equipment............................. (1,320) (1,431) (4,239)
Purchase of businesses............................................. -- -- (100)
Net proceeds from sales of property................................ 3,025 17,256 --
Other, net......................................................... (647) -- (313)
-------- -------- --------
Net cash provided (used) by investing activities..................... 1,615 21,590 (4,652)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under revolving credit facility....................... $ -- $ -- $(20,965)
Proceeds from issuance of debt..................................... 21,602 9,583 20,000
Net proceeds from issuance of Preferred Stock and Class B Common
Stock............................................................ 29,281 27,533 --
Payments of long-term debt and capital lease obligations........... (18,060) (68,720) (19,856)
Proceeds from Rights Offering...................................... -- 19,748 --
Cash dividends paid................................................ -- -- (890)
Payment of debenture issuance costs................................ (2,665) (825) --
Payment of debt issuance costs..................................... -- -- (1,560)
Loan to ESOP....................................................... (1,050) -- --
Proceeds from issuance of Common Stock............................. -- -- 912
Other, net......................................................... (1,593) -- (1,007)
-------- -------- --------
Net cash provided (used) by financing activities..................... 27,515 (12,681) (23,366)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents................. (4,705) (4,135) 30
Cash and cash equivalents at the beginning of the year............... 11,393 6,688 2,553
-------- -------- --------
Cash and cash equivalents at end of the year......................... $ 6,688 $ 2,553 $ 2,583
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid...................................................... $ 21,325 $ 12,547 $ 4,883
Income taxes paid.................................................. 755 226 71
Issuance of warrants............................................... 3,286 -- --
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 57
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 28, 1991, DECEMBER 26, 1992 AND JANUARY 1, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Merger -- Hanover Direct, Inc. ("HDI") was formed in connection with the
September 8, 1993 merger (the "Merger") involving HDI, The Horn & Hardart
Company ("H&H") and The Hanover Companies ("THC"), a wholly-owned subsidiary of
H&H. The Merger consisted of the merger of H&H into HDI, followed by the merger
of THC into HDI. The purpose of the Merger was to create a single corporation to
replace the then-existing two-tier structure whereby H&H and THC were both
subject to the filing requirements of Section 13 of the Securities Exchange Act
of 1934, as amended. The financial statements of THC had previously been
included in the consolidated financial statements of H&H.
The Merger was consummated by (i) the exchange to holders of shares of H&H
Common Stock shares of HDI Common Stock, (ii) the exchange to holders of shares
of THC 7.5% Preferred Stock shares of HDI's 7.5% Preferred Stock, and (iii) the
exchange to holders of shares of THC Class B Preferred Stock shares of HDI's
Class B Preferred Stock, each such distribution being on a one-for-one-basis.
The Merger was accounted for similarly to a pooling-of-interests and,
accordingly, HDI's Consolidated Financial Statements include the results of H&H
and THC for all applicable periods presented.
Principles of Consolidation -- The Consolidated Financial Statements
include the accounts of HDI and all subsidiaries (the "Company"). Intercompany
transactions and balances have been eliminated. Certain prior year amounts have
been reclassified to conform to the current year presentation.
Fiscal Year -- The Company operates on a 52/53 week fiscal year. The years
ended December 28, 1991 and December 26, 1992 were 52 week years. The year ended
January 1, 1994 was a 53 week year.
Inventories -- Inventories consist principally of merchandise held for
resale and are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
Prepaid Catalog Costs -- Costs related to mail order catalogs and
promotional material are amortized over their estimated productive lives, based
on projected net shipments, not exceeding six months.
Depreciation and Amortization -- Depreciation and amortization of property
and equipment are provided on the straight-line method at rates based on the
lesser of the estimated useful lives of the assets or terms of leases as
follows: buildings and building improvements, 30 years; furniture, fixtures and
equipment, 3-10 years; and leasehold improvements, over the terms of the related
leases. Expenditures for maintenance and repairs are charged to operations as
incurred; major improvements are capitalized.
Construction in Progress -- Construction in progress includes the costs to
upgrade the Company's management information systems. These costs will be
depreciated and amortized over five years or the life of any leases, whichever
is shorter, and depreciation will commence when the assets are placed in
service. The Company capitalized $5.3 million of such costs as of January 1,
1994.
Excess of Cost Over Net Assets of Acquired Businesses -- Excess of cost
over the net assets of acquired businesses is being amortized on a straight-line
basis over periods up to forty years. Accumulated amortization was $3,458,000
and $3,878,000 at December 26, 1992 and January 1, 1994, respectively.
Mailing Lists -- The costs of acquired mailing lists are amortized over a
five year period. Mailing lists, included in Other Assets, amounted to $89,000
and $2,274,000 at December 26, 1992 and January 1, 1994, respectively, and are
carried net of accumulated amortization of $6,020,000 and $6,295,000,
respectively.
Change in Accounting for Income Taxes -- Effective December 29, 1991
(beginning of fiscal year 1992), the Company adopted Statement of Financial
Accounting Standards No. 109 -- Accounting for Income Taxes ("SFAS 109"). This
standard requires, among other things, recognition of future tax benefits,
measured by enacted rates, attributable to deductible temporary differences
between financial statement and income tax
F-8
<PAGE> 58
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bases of assets and liabilities and to tax net operating loss carryforwards, to
the extent that realization of such benefits is "more likely than not".
Cash and Cash Equivalents -- For purposes of the Consolidated Statements of
Cash Flows, the Company considers all highly liquid temporary investments with
an original maturity of less than ninety days as cash equivalents.
Net Income (Loss) Per Share -- Net income (loss) per share was computed
using the weighted average number of common shares outstanding. The weighted
average number of shares used in the calculation for both primary and fully
diluted net income (loss) per share in 1991 and 1992 were 16,287,723 and
38,467,015 shares, respectively. For 1993 the weighted average number of shares
for primary and fully diluted net income (loss) per share were 75,625,330 and
77,064,131 shares, respectively. Common share equivalents for purposes of net
income (loss) per share are stock options and warrants.
Supplemental Earnings Per Share -- Assuming that the rights offering and
exchange offers discussed in Notes 2 and 7 had been consummated at the beginning
of fiscal year 1992, the weighted average number of shares outstanding would
have been 68,795,471, and earnings per share for 1992 would have been as
follows:
Income from continuing operations.................................$.09
Net income........................................................$.37
The supplemental earnings per share was calculated assuming that the
Company eliminated $9 million of interest on the debt that was retired and the
Company incurred additional dividends on $.8 million on the preferred stock.
Assuming that the conversions of the 7.5% Preferred Stock and the exchange
of the Class B 8% Preferred Stock and the Class B Common Stock had been
consummated at the beginning of fiscal year 1993, the weighted average number of
shares outstanding for primary and fully diluted earnings per share would have
been 84,408,807 and 85,847,608 and earnings per share would have been $.21 and
$.20, respectively. This supplemental earnings per share calculation assumes
that the Company eliminated $4.1 million of preferred stock dividends.
Supplemental Disclosure of Noncash Activities
<TABLE>
<CAPTION>
1992 1993
------- --------
<S> <C> <C>
(IN THOUSANDS)
Exchange of THC 8% Cumulative Preferred Stock and issuance of
20,000,000 shares of Common Stock............................... $35,847 $ --
------- --------
------- --------
Exchange of 14% Senior Subordinated Debentures for Common Stock
and THC 7.5% Preferred Stock.................................... $18,575 $ --
------- --------
------- --------
Exchange of 7 1/2% Convertible Subordinated Debentures for Common
Stock and THC 7.5% Preferred Stock.............................. $11,900 $ --
------- --------
------- --------
Dividend on 7.5% Preferred Stock paid-in-kind..................... $ -- $ 610
------- --------
------- --------
Dividend on Class B 8% Preferred Stock paid in Common Stock....... $ -- $ 2,508
------- --------
------- --------
Exchange of 8.0% Class B Preferred Stock for Common Stock......... $ -- $ 25,516
------- --------
------- --------
Exchange of Class B Common Stock for Common Stock................. $ -- $ 123
------- --------
------- --------
Exchange of 7.5% Convertible Preferred Stock for Common Stock..... $ -- $ 7,158
------- --------
------- --------
Issuance of 6.0% Preferred Stock.................................. $ -- $ 2,342
------- --------
------- --------
Capital Lease Obligations......................................... $ -- $ 2,541
------- --------
------- --------
Issuance of Common Stock for notes receivable..................... $ -- $ 1,915
------- --------
------- --------
</TABLE>
F-9
<PAGE> 59
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1992 1993
------- --------
(IN THOUSANDS)
<S> <C> <C>
Acquisition of businesses:
Fair value of assets acquired................................... $ 38,578
Fair value of liabilities assumed............................... (26,180)
Common stock issued............................................. (12,298)
--------
Net cash paid................................................... $ 100
--------
--------
</TABLE>
There were no significant noncash activities in 1991.
2. TRANSACTIONS WITH NAR GROUP LIMITED
On October 25, 1991 the Company's shareholders approved several
transactions among the Company, THC and NAR Group Limited ("NAR") pursuant to
which NAR acquired 13,333,334 shares of Class B Common Stock of the Company and
40,000 shares of 8% Cumulative Preferred Stock of THC (the "Hanover Preferred
Stock"), for an aggregate purchase price of $40 million. The purchase price was
paid by the surrender by NAR of $15.1 million principal amount of the Company's
7 1/2% Convertible Subordinated Debentures due March 1, 2007 (valued under the
Purchase Agreement at $7.5 million) plus $31.3 million in cash (representing the
difference between $32.5 million and the sum of (i) accrued interest on the
debentures and (ii) $1 million of reimbursable expenses payable to NAR under the
stock purchase agreement). NAR also received warrants to purchase 1,210,901
shares of the Company's Common Stock at exercise prices ranging from $4.00 to
$5.25 per share and expiring in five years. The exercise prices were
subsequently adjusted to prices ranging from $2.19 to $2.42 per share in
accordance with the anti-dilution provisions of the warrant agreements.
The Company entered into this transaction in July 1991, expecting that this
transaction would close by September 30, 1991 so it could apply the proceeds to
repay an interim borrowing which matured on the same date. Unforeseeable delays
prevented the Company from obtaining required consents from certain creditors
which were conditions to closing the transactions. As a result of these delays,
the Company was required to satisfy the maturing interim borrowing out of
working capital. Using working capital to satisfy these borrowings caused
increased strain on the Company's already poor cash flow which further strained
its relationship with its vendors. The Company closed the above transactions on
October 25, 1991 and received an equity infusion of approximately $40 million. A
working capital line of credit of approximately $30 million had previously been
made available to the Company by a subsidiary of NAR. Although the Company
believed that the resulting capital provided to it would be sufficient to return
the Company to profitability and enable the Company to pay off $46.1 million of
debt that was due in October 1992, it became apparent thereafter, that due to
the Company's high debt service requirements and other operational difficulties,
it still did not possess the sufficient liquidity to obtain the necessary
merchandise on a timely basis. The Company, therefore, required additional
capital to permit it to maintain satisfactory credit relations with its vendors
and other trade creditors, as well as to satisfy the debt that was due in
October 1992.
The stock purchase agreement had granted NAR an option to cause the Company
to conduct a rights offering in the event that the Company did not achieve
certain earnings in the fourth quarter of 1991. In the event that NAR exercised
that option it would have been committed to purchase any shares of Common Stock
not subscribed for in such Rights Offering by the Company's other shareholders.
Thus, it appeared to the Company that the most likely source of additional
capital was NAR. Because the Company had a significant loss in the fourth
quarter of 1991, in December 1991 NAR indicated to the Company that it would not
exercise its option to cause the Company to conduct a Rights Offering but
indicated that it would be willing to make an additional equity investment in
the Company on terms other than those contemplated by the agreement.
F-10
<PAGE> 60
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1992, the Company and NAR entered into a Definitive Agreement, the
terms of which were subsequently approved by the Company's shareholders on
September 23, 1992, at which time the following transactions were consummated:
- NAR exchanged its 40,000 shares of the Hanover Preferred Stock and
13,333,334 shares of the Class B Common Stock for 20 million shares of
Common Stock of the Company.
- NAR purchased 12,270,503 shares of the Company's Class B Common Stock and
40,000 shares of a newly-created Class B 8% Cumulative Preferred Stock
(the "Class B Preferred Stock"), for an aggregate purchase price of $28.4
million. Pursuant to the terms of the Preferred Stock, the Company had the
right to require the exchange of the Hanover Preferred Stock and the Class
B Common Stock into 18,937,169 shares of Common Stock at any time after
the date on which the per-share closing price had been greater than $6.00
for 20 consecutive trading days.
- The Company conducted a rights offering (the "Rights Offering") in which
the Company's shareholders (other than NAR) subscribed to 7,636,905 shares
of Common Stock at $1.50 per share for an aggregate of $11.5 million. NAR
purchased the remaining 6,759,893 shares not subscribed for $1.50 per
share for an aggregate of approximately $10 million. NAR received a
standby commitment fee of $177,000 and an underwriting fee of $405,000
representing 4% of the offering price of all shares it purchased that were
not purchased by other shareholders in the Rights Offering.
On January 1, 1994, the Company exercised its right to require the exchange
of 40,000 shares of the Class B Preferred Stock and 12,270,503 shares of the
Class B Common Stock into 18,937,169 shares of Common Stock.
3. ACQUISITIONS
Gump's
In July 1993, the Company acquired substantially all of the mail order and
retail assets of Gump's, Inc. ("Gump's"). Gump's is an upscale catalog marketer
of exclusive gifts and the legendary San Francisco retailer. The consideration
given for the assets acquired was $13.2 million and consisted of $6.9 million in
cash and 1,327,330 shares of Common Stock valued at $4.78 per share or $6.3
million. The $6.9 million of cash used for the purchase of the assets was
comprised of (i) proceeds of the sale of Gump's accounts receivable aggregating
$2.8 million; (ii) $2.6 million of Gump's cash acquired by the Company as part
of the assets acquired; and (iii) $1.5 million of additional credit under the
Company's revolving credit facility, as amended.
In connection with the above transaction, the Company amended its agreement
with General Electric Capital Corp. ("GECC") for the sale and servicing of
accounts receivable to include the Gump's accounts receivable under its $75
million facility. The Company also amended its revolving credit facility to
increase the maximum credit available by $5 million for Gump's and to include
two wholly-owned subsidiaries of the Company as borrowers under the revolving
credit facility.
The Company Store
In August 1993, the Company acquired certain assets of Company Store
Holdings, Inc. ("CSH"), The Company Store, Inc., Scandia Down Corporation and
Southern California Comfort Corporations (collectively, "The Company Store").
The Company Store is a direct marketer of down comforters, other down products
and home furnishings.
The consideration given for the assets acquired was $7 million and
consisted of (i) 516,824 shares of the Company's Common Stock, valued at $4.64
per share, or $2.4 million, and (ii) two promissory notes in the aggregate
principal amount of $1.1 million issued by a subsidiary of the Company, with
interest thereon at six percent (6%) per annum due on October 31, 1994 and $3.5
million principal amount of secured notes issued
F-11
<PAGE> 61
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by certain subsidiaries of the Company with interest thereon at six percent (6%)
per annum, with principal and interest payments payable monthly on a fifteen
year amortization, with the remaining balance due and payable on August 31,
1998.
In October 1993, the Company amended its revolving credit facility to
increase the maximum credit available by $5 million for The Company Store and to
include The Company Store as a borrower under the facility.
Tweeds
In September 1993, the Company acquired all of the outstanding shares of
Tweeds, Inc. Tweeds is a well-known European-inspired women's fashion catalog.
The purchase price was $8.8 million and consisted of: (i) $.1 million in
cash; (ii) 771,774 shares of the Company's Common Stock, valued at $4.60 per
share, or $3.6 million and (iii) the assumption of $5.1 million of liabilities.
In October 1993, the Company amended its revolving credit facility to increase
its maximum credit available by $2.5 million for Tweeds and to include Tweeds as
a borrower under the facility.
Accounting for Acquisitions
The acquisitions of Gump's, The Company Store and Tweeds have been
accounted for using the purchase method of accounting with an estimated excess
of cost over net assets of acquired businesses of approximately $10.2 million
recorded, based upon the fair values of the assets acquired and liabilities
assumed. In addition, the Company recorded $2.5 million representing the fair
value of acquired mailing lists. The operating results of the acquired companies
are included in consolidated net income from their respective dates of
acquisition.
The following represents the unaudited pro forma results of operations for
the years ended December 26, 1992 and January 1, 1994 as if these three
acquisitions had occurred at the beginning of fiscal years 1992 and 1993 (in
thousands except per share amounts):
<TABLE>
<CAPTION>
(UNAUDITED)
1992 1993
-------- --------
<S> <C> <C>
Revenues....................................................... $733,454 $723,749
-------- --------
-------- --------
Income (loss) before extraordinary items and cumulative effect
of accounting change for income taxes........................ $ (3,720) $ 10,160
-------- --------
-------- --------
Net income applicable to Common Shareholders................... $ 12,284 $ 6,067
-------- --------
-------- --------
Per Share:
Income (loss) per share before extraordinary items and
cumulative effect of accounting change for income taxes... $ (.17) $ .08
Extraordinary items............................................ .23 --
Cumulative effect of accounting change for income taxes........ .24 --
-------- --------
Net income..................................................... $ .30 $ .08
-------- --------
-------- --------
</TABLE>
The pro forma information does not purport to be indicative of the results
that actually would have been obtained if the operations were combined during
the periods presented, and is not intended to be a projection of future results
or trends.
F-12
<PAGE> 62
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Safety Zone
In September 1993, the Company acquired 20% of the outstanding common stock
of Aegis Safety Holdings, Inc. ("Aegis"), a direct marketer of safety and
anti-hazard products through The Safety Zone catalog. The consideration for the
investment was the provision by the Company of certain catalog fulfillment and
financial services to Aegis at the Company's cost until August 1998, subject to
certain early termination provisions. The Company also acquired an option to
purchase an additional 460,714 shares at $7.00 per share, subject to
anti-dilution provisions which would increase its ownership to 50% of Aegis
common stock. This option expires at the end of 1996. Aegis has an option to
require the Company to acquire all of Aegis' then outstanding stock after
December 31, 1998 if the Company has exercised its option and certain other
conditions have been satisfied. The Company has agreed to extend a secured
working capital line of up to $1 million to Aegis in 1994. Aegis had
approximately $9 million in net sales for the eleven months ended January 1,
1994.
Boston Publishing Company
In February 1994, the Company entered into an agreement with Boston
Publishing Company, Inc. ("BPC") whereby the Company acquired a 20% equity
interest in BPC and agreed to provide certain catalog related services to the
Boston based publisher. The Company will also provide BPC with a secured
three-year revolving credit facility of up to $3 million, a secured $.75 million
short-term loan, and a $.5 million five year convertible note. The note is
convertible into equity representing approximately 4% of BPC. The Company also
acquired an option to acquire an additional 1,536,345 shares at $2.08 per share
subject to anti-dilution provisions which would increase its ownership to 50% in
BPC. The BPC shareholders will have the right to require the Company to purchase
their shares in fiscal year 1997 under certain circumstances.
BPC publishes the Museum Collections catalog featuring unique, well-valued
museum replicas, reproductions and adaptations; and the Finishing Touches
catalog, featuring decorative merchandise for the home. BPC had approximately
$12 million (unaudited) in revenues in 1993.
The investments in Aegis and BPC are accounted for by the equity method of
accounting.
4. SEARS LICENSING AGREEMENT
In January 1994, the Company entered into a licensing agreement (the "Sears
Agreement") with the direct marketing subsidiary of Sears Roebuck and Co.
("Sears"), to produce specialty catalogs for customers of the recently
discontinued Sears catalog. The specialty catalogs include: Show Place, based on
the Domestications catalog, Great Kitchens, based on the Colonial Garden
Kitchens catalog, and Beautiful Style, based on the Silhouettes catalog. The
Sears Agreement has an initial three-year term and continues thereafter unless
terminated by either party. Profits and losses from the venture are to be shared
between the parties on an equal basis.
The Company also issued to Sears a performance warrant to purchase 3.5
million shares of Common Stock in 1999 if the licensed business with Sears has
revenues of at least $250 million and earnings before interest and taxes of at
least $30 million in 1998. Alternately, Sears will be entitled to purchase 7
million shares of Common Stock in 1999 if the licensed business with Sears has
revenues of at least $500 million and earnings before interest and taxes of at
least $60 million in 1998. If neither of these goals are achieved, the
performance warrant will expire unexercised in 1999. The Company will be
required to value the performance warrant at such time as it is deemed to have
become measurable for accounting purposes because the required events have
become probable or have occurred (which may be prior to the date the warrant is
exercisable under the Sears Agreement) (the "Measurement Date"). The value would
be the difference, if any, between the closing market price of the Common Stock
at the Measurement Date and the exercise price of the
F-13
<PAGE> 63
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
performance warrant, multiplied by the applicable number of shares. The value
would be amortized from the Measurement Date through 1998 and would be subject
to change each reporting period based on the closing market price of the Common
Stock as of such reporting date. The warrant exercise price is $10.57 per share.
The Company is obligated to meet various operational performance standards and
if the Company is unable to meet these standards, Sears would be entitled to
terminate the agreement. The Company is also entitled to terminate the agreement
in certain circumstances, including if Sears fails to comply with any material
provision of the Sears Agreement.
5. ACCOUNTS RECEIVABLE, NET
On December 22, 1992, the Company repurchased all receivables then owned by
certain trusts ($52.7 million), and concurrently entered into an agreement with
an unrelated third party which provides for the sale and servicing of accounts
receivable originating from the Company's revolving credit card.
The Company remains obligated to repurchase uncollectible accounts pursuant
to the recourse provisions of the agreement and is required to maintain a
specified percentage of all outstanding receivables sold under the program as a
deposit with the third party to secure its obligations under the agreement. The
Company is required to pay certain servicing fees to the third party and the
Company earns the finance charge income that is charged to the accounts.
The uncollected balances of accounts receivable sold under this program
were $51.3 million, of which $15.3 million represents deposits under the
agreement and $2.7 million are accounts not purchased under the agreement which
are included in Accounts receivable at December 26, 1992. At January 1, 1994,
the uncollected balances of accounts receivable under this program were $47.0
million, of which $13.0 million represents deposits under the agreement. The
total reserve balance maintained for the repurchase of uncollectible accounts
was $5.5 million and $3.1 million at December 26, 1992 and January 1, 1994,
respectively, of which $3.5 million and $1.7 million, respectively, are included
in Accrued liabilities and the remaining balance is included in the allowance
for doubtful accounts.
Receivables sold under this agreement are considered financial instruments
with off-balance sheet risk as defined in Statement of Financial Accounting
Standards No. 105.
Because the Company's sales are primarily made to individual customers
located throughout the United States, the Company believes there are no
concentrations of credit risks.
6. ACCRUED LIABILITIES
Accrued liabilities consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
26, JANUARY 1,
1992 1994
----------- ----------
<S> <C> <C>
Compensation............................................ $ 3,298 $ 3,642
Interest................................................ 1,033 746
Insurance............................................... 1,434 736
Reserve for future sales returns........................ 3,901 4,911
Reserve for repurchase of accounts receivable sold with
recourse.............................................. 3,500 1,735
Net liabilities of discontinued operations.............. 4,944 977
Other................................................... 3,253 7,906
----------- ----------
$ 21,363 $ 20,653
----------- ----------
----------- ----------
</TABLE>
F-14
<PAGE> 64
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 26, JANUARY 1,
1992 1994
------------ ----------
<S> <C> <C>
Revolving Credit Facility................................ $ 21,195 $ 230
Industrial Revenue Bonds with variable interest rates
averaging 4.3% in 1992 and 3.7% in 1993 due 2003....... 8,000 8,000
6% Notes Payable due 1994................................ -- 1,100
6% Mortgage Notes Payable due 1998....................... -- 3,452
9.25% Senior Subordinated Notes due 1998................. -- 20,000
7 1/2% Convertible Subordinated Debentures due 2007...... 751 751
14% Senior Subordinated Debentures....................... 825 --
8% Subordinated Notes.................................... 12,360 --
Other.................................................... 76 56
------------ ----------
43,207 33,589
Less current portion..................................... 23 1,276
------------ ----------
Noncurrent portion....................................... $ 43,184 $ 32,313
------------ ----------
------------ ----------
</TABLE>
Revolving Credit Facility
On May 5, 1993, the Company consummated a three-year, $40 million credit
facility with a financial institution, replacing the previous facility with
Quadrant Capital Corporation ("QCC"), a subsidiary of NAR, that had been entered
into in 1991. The new facility (the "Revolving Credit Facility") provides for
cash borrowings and letters of credit based on eligible inventory, with a $10
million sublimit for letters of credit. The interest rate on the funds borrowed
under the Revolving Credit Facility is the prime rate of Philadelphia National
Bank plus two percent per annum. Subsequent to May 5, 1993, the Company amended
the Revolving Credit Facility to include Gump's, The Company Store and Tweeds,
as borrowers under the agreement and the limit was increased to $52.5 million.
The facility is guaranteed by the Company and is secured by inventory and other
assets of its principal operating subsidiaries. In addition, a subsidiary of NAR
provided a secured limited guarantee of $10 million which allowed the Company to
borrow funds in excess of its availability, based on a formula, up to the
facility's limit. The guarantee is reduced based upon availability under the
agreement and the Company's cash flow, as defined, and accordingly, was reduced
by $5.1 million in the fourth quarter of 1993 and will be eliminated in March
1994.
The loan agreement contains working capital and net worth covenants, debt
incurrence restrictions, dividend restrictions, and prepayment penalties.
The face amount of unexpired documentary letters of credit at December 26,
1992 and January 1, 1994 were $1.7 million and $5.7 million, respectively. In
addition, the Company had issued $5.7 million of standby letters of credit at
December 26, 1992.
Industrial Revenue Bonds due 2003
The Industrial Revenue Bonds are due on December 1, 2003 and are secured by
the related assets purchased from the proceeds of the bonds and by an
irrevocable letter of credit in the amount of $8.6 million. The obligations are
guaranteed by the Company.
F-15
<PAGE> 65
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6% Notes Payable due 1994
In connection with the purchase of The Company Store, a subsidiary of the
Company entered into two secured promissory notes in the aggregate amount of
$1.1 million. The promissory notes bear interest at 6% per annum and are due
October 31, 1994. The promissory notes are secured by equipment of The Company
Store.
6% Mortgage Notes Payable due 1998
In connection with the purchase of The Company Store, certain subsidiaries
of the Company entered into two secured notes in the aggregate amount of $3.5
million with interest at 6% per annum with principal and interest payments
payable monthly on a fifteen year amortization with the remaining balance due on
August 31, 1998. The mortgage notes payable are non-recourse notes and are not
guaranteed by the Company. The mortgage notes payable are secured by the
manufacturing and office facilities of The Company Store.
9.25% Senior Subordinated Notes due 1998
On August 17, 1993, the Company issued $20 million of 9.25% Senior
Subordinated Notes due 1998 ("9.25% Notes") in a private placement with an
insurance company. The Company utilized the funds to retire approximately $14
million of other subordinated debt. Under the terms of the 9.25% Notes, the
Company must redeem $6 million without penalty by February 15, 1994,
(subsequently amended to May 1, 1994) if the Company has not established or
acquired a new distribution facility by such date.
The 9.25% Notes mature on August 1, 1998 and require quarterly interest
payments. The 9.25% Notes require that the Company maintain certain minimum net
worth, working capital, debt to earnings and fixed charge coverage ratios. Under
the terms of the related Registration Rights Agreement, the Company is required
to file a "shelf" registration statement under the Securities Act of 1933, by
February 13, 1994 (subsequently extended until March 15, 1994) and use its best
effort to cause the registration to be declared effective by June 13, 1994.
7 1/2% Convertible Subordinated Debentures due 2007
On September 23, 1992, the Company consummated an exchange offer with
holders of these debentures, pursuant to which the Company issued 40,500 shares
of its Common Stock and 13,500 shares of 7.5% Preferred Stock (hereinafter
defined) in exchange for $540,000 of the debentures that were tendered. This
resulted in an extraordinary gain of $.3 million in 1992.
On November 9, 1992, the Company, with the consent of a majority of holders
of these debentures, amended the indenture to allow, for the 30 day period
ending on December 4, 1992, holders of the debentures to be able to convert
their debentures into Common Stock at a conversion price of $3.33 per share
instead of $10.31 per share. As a result, the Company converted approximately
$11.4 million of these debentures into 3,408,340 shares of Common Stock and
recorded an extraordinary gain of approximately $1.6 million based on the fair
market value of the shares issued.
14% Senior Subordinated Debentures
In 1992, the Company defaulted with respect to the payment of interest on
these debentures. The Company and holders of 75% of the 14% Debentures entered
into an exchange agreement (the "14% Exchange Offer") by which such holders
would exchange their debentures for a combination of cash and 7.5% Preferred
Stock (hereinafter defined) and Common Stock of the Company. On September 23,
1992, the Company consummated the 14% Exchange Offer resulting in the exchange
of $23.5 million (of the $24.3 million) of 14% Debentures outstanding for $4.85
million in cash and 4,099,625 shares of its Common
F-16
<PAGE> 66
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock and 403,088 shares of 7.5% Cumulative Convertible Preferred Stock ("7.5%
Preferred Stock"). A subsidiary of QCC owned and exchanged approximately $1.7
million or 7% of these debentures.
The Company recorded an extraordinary gain in 1992 of approximately $6.2
million as a result of the 14% Exchange Offer. The gain was calculated based on
the cash and the fair market value of the securities issued in exchange for the
debt retired, net of approximately $1.3 million in transaction costs. The gain
also includes interest that was forgiven as part of the 14% Exchange Offer
amounting to approximately $3.7 million.
The defaulted interest was paid to the remaining bondholders on November 4,
1992 and the Company was no longer in default. On August 17, 1993, the Company
paid off the remaining $825,000 of 14% debentures with proceeds from the 9.25%
Notes.
8% Subordinated Notes
The 8% Subordinated Notes were due on October 15, 1994. They had originally
been due in October, 1991, and carried an interest rate of 11%. In connection
with the restructuring of the Company's debt obligations in 1991, these notes
were partially paid down by $5.0 million, and extended to 1994 with the interest
rate lowered to 8%. The Company was required to pay an amount equal to 3% per
year if, at final maturity or earlier redemption, NAR's compound annual rate of
return on the Company's Common Stock, together with any dividends on the Class B
Preferred, had exceeded 20% after adjustment to eliminate general market changes
as reflected in movements of the Dow Jones Industrial Average. The Company
redeemed all of the outstanding notes at the face amount plus accrued interest
on August 17, 1993, with the proceeds of the 9.25% Notes.
General
At January 1, 1994, the aggregate annual principal payments required on all
long-term debt were as follows (in thousands): 1994 -- $1,276, 1995 -- $161,
1996 -- $437, 1997 -- $181, 1998 -- $22,783 and thereafter $8,751.
8. CAPITAL STOCK
On September 8, 1993 HDI was formed through a series of mergers involving
H&H and THC. The Merger was consummated by (i) the exchange to holders of shares
of H&H Common Stock shares of the HDI's Common Stock, (ii) the exchange to
holders of shares of THC 7.5% Preferred Stock shares of 7.5% Preferred Stock,
and (iii) the exchange to holders of shares of THC Class B Preferred Stock
shares of the HDI's Class B Preferred Stock, each such distribution being on a
one-for-one-basis.
On December 13, 1993, the Company converted all of the 7.5% Preferred Stock
into 2,278,128 shares of Common Stock. The holders of the 7.5% Preferred Stock
were paid all outstanding dividends in cash amounting to $197,000. These shares
had been issued in connection with the 1992 7 1/2% Exchange Offer. Each share
was convertible into four shares of Common Stock at the time on which the
per-share closing price of the Common Stock on the American Stock Exchange
exceeded $6.00 for 20 trading days in a consecutive 30 day trading period, which
occurred on November 11, 1993.
On January 1, 1994, 12,270,503 shares of Class B Common Stock and 40,000
shares of Class B Preferred Stock were exchanged into 18,937,169 shares of
Common Stock.
Dividends on the Class B Preferred Stock aggregated $3.3 million in fiscal
1993 and were paid through the issuance of 684,890 shares of Common Stock and
$693,000 in cash. The Common Stock issued in connection with these dividends was
valued at the average per-share closing price of the Common Stock during the 20
consecutive trading days immediately preceding the date on which the dividends
were paid. On
F-17
<PAGE> 67
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
January 1, 1994, the Company had accrued dividends payable of $886,000 on the
Class B Preferred Stock which were paid in cash on February 22, 1994.
6% Series A Convertible Preferred Stock
On December 10, 1993, in connection with the Company's acquisition of
Tweeds, the Company entered into an exchange agreement with a major vendor of
Tweeds. Under the exchange agreement, the Company issued 234,900 shares of its
6% Series A Preferred Stock (6% Preferred Stock) for an installment note, dated
March 29, 1993, as amended, in the amount of approximately $2.4 million issued
by Tweeds. Dividends on the 6% Preferred Stock began accruing on September 30,
1993.
The 6% Preferred Stock shall be converted into Common Stock of the Company
over a three year period on September 30, 1994, 1995, and 1996. The conversion
price shall be an amount equal to the average of the per share closing prices
for the five trading days proceeding the conversion dates.
The 6% Preferred Stock has a stated value of $10 per share and has a
liquidation preference of an amount equal to the stated value of each share of
the 6% Preferred Stock plus accrued dividends or $2,385,000 at January 1, 1994.
The Company has the right to redeem the 6% Preferred Stock at its initial stated
value plus accrued dividends, payable in cash.
Warrants
The warrants outstanding at January 1, 1994, are as follows:
<TABLE>
<CAPTION>
WARRANTS EXERCISE EXPIRATION
ISSUED PRICE DATE
- --------- -------- ----------
<S> <C> <C>
3,151,945 $ 2.42 05/08/96
349,601 2.19 05/10/96
3,157,884 2.91 07/08/96
334,550 2.19 07/10/96
- ---------
6,993,980
- ---------
- ---------
</TABLE>
Of the above warrants issued, 5,033,735 warrants are held by NAR and
affiliates.
In addition, as previously discussed, the Company issued to Sears a
performance warrant to purchase up to 7 million shares of Common Stock in 1999.
This performance warrant is not reflected in the above table.
At January 1, 1994, there were 82,933,177 shares of Common Stock and
234,900 shares of 6% Series A Preferred Stock outstanding. Additionally, an
aggregate of 18,367,717 shares of Common Stock were reserved for (i) the
exercise of outstanding options (535,250), (ii) the exercise of outstanding
warrants (13,993,980) including the Sears performance warrant discussed above,
(iii) the Executive Equity Incentive Plan (1,736,170), (iv) the Restricted Stock
Award Plan (314,200), and (v) the All Employee Equity Investment Plan
(1,788,117).
Other Transactions
In July 1993, the Company filed a Form S-3 with the Securities and Exchange
Commission registering 3,750,000 shares of the Company's Common Stock for the
purpose of the Gump's acquisition and future business combination transactions.
As of January 1, 1994, 2,615,928 shares have been issued in connection with the
Gump's, The Company Store and Tweeds acquisitions.
On February 16, 1994, the Company entered into an agreement with Sun Life
Insurance Company of America ("Sun Life") whereby Sun Life will exercise its
1,960,245 warrants in a cashless or net-issue exchange with the Company and the
Company will issue 1,309,207 shares of Common Stock. The number of
F-18
<PAGE> 68
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of the Company's Common Stock to be received by Sun Life upon the
"cashless" exercise of its warrants was determined based upon the average
closing price of the Common Stock on the American Stock Exchange for the ten day
trading period ended on February 15, 1994, which is $7.163 per share.
Dividend Restrictions
The Company is restricted from paying dividends on its Common Stock or from
acquiring any of its capital stock by certain debt covenants contained in
agreements to which the Company is a party.
9. EMPLOYEE BENEFIT PLANS
Stock Option Plan
Pursuant to the Company's Stock Option Plan (the "Plan"), an aggregate of
2,830,519 shares were approved by shareholders for issuance to employees and
consultants of the Company. The option price and the periods over which an
option is exercisable are specified by the Compensation Committee of the Board
of Directors.
Options expire five years from the date of grant and principally vest over
three to four years. Payment for shares purchased upon the exercise of an option
shall be in cash or stock of the Company. If paid in cash, a partial payment may
be made with the remainder in installments evidenced by promissory notes at the
discretion of the Compensation Committee.
Changes in options outstanding and options available for grant, expressed
in number of shares, are as follows:
<TABLE>
<CAPTION>
1991 1992 1993
---------- ---------- ----------
<S> <C> <C> <C>
Options outstanding, beginning of period......... 1,231,623 945,965 603,765
Expired.......................................... (28,433) (164,200) (214,165)
Cancelled........................................ (257,225) (178,000) (24,350)
---------- ---------- ----------
Options outstanding, end of period............... 945,965 603,765 365,250
---------- ---------- ----------
---------- ---------- ----------
Options exercisable, end of period............... 571,833 502,675 365,250
---------- ---------- ----------
---------- ---------- ----------
Available for grant of options, end of period.... 1,012,118 1,345,318 1,583,833
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The option prices range from $2.75 per share to $9.625 per share, with
amounts as follows: $2.75 -- 200,000 shares, $5.00 -- 144,550 shares,
$7.00 -- 6,200 shares, $8.00 -- 7,000 shares and $9.625 -- 7,500 shares.
Prior to 1992, three directors were granted non-qualified options outside
of the Plan to purchase a total of 50,000 shares. Of these options 45,000 shares
expire in 1994 and 5,000 shares expire in 1995. The option price ranges from
$5.00 per share to $7.25 per share. The table above does not include these
option grants.
On September 23, 1992, six directors were granted options to purchase
20,000 shares each, at market price, which at that time was $1.75 per share.
These option grants were approved at the 1993 annual meeting of shareholders and
expire in 1997. The table above does not include these option grants.
Hanover Direct, Inc. Savings Plan
The 401(K) Savings Plan (the "Plan") allows eligible employees to
contribute a percentage of their base compensation to the Plan. The Company
makes matching contributions of one-third of the employees' pre-tax
contributions. Participants may invest contributions in various investment
funds, in addition to a guaranteed investment fund or in the Company's Common
Stock.
F-19
<PAGE> 69
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's contributions charged to expense for 1991, 1992 and 1993 were
$241,000, $265,000 and $431,000, respectively.
Supplemental Retirement Plan
The Supplemental Retirement Plan (the "Plan") allows eligible employees to
make contributions to a trust where, prior to October 1993, they were invested
for each participant in life insurance having a cash surrender value and
carrying a term benefit payable to the beneficiary selected by the participant.
The Company makes matching contributions. In October 1993, the Company amended
and restated the Plan. Participant contributions are invested by the trust for
each participant in a tax free money market fund. Company contributions in 1991,
1992 and 1993 amounted to $130,000, $179,000 and $130,000, respectively.
The Plan permits eligible employees to contribute up to 4% of their salary.
The Company matches all participant contributions, up to the 4% threshold. The
Plan is not tax-qualified under the applicable provisions of the Internal
Revenue Code of 1986, as amended.
Incentive Compensation Plan
Bonus arrangements with certain executives and key employees generally
provide for additional compensation based upon the attainment of certain profit
levels, as well as other performance measures. These bonuses approximated $1.6
million and $.4 million in 1992 and 1993, respectively. There were no bonuses
paid in 1991. Under the bonus plan, 25% of the bonus is paid in restricted stock
that participants vest in over a three year period. In fiscal 1993, 89,220
shares were issued in connection with the Incentive Compensation Plan.
Executive Equity Incentive Plan
On December 17, 1992, the Board of Directors adopted the 1993 Executive
Equity Incentive Plan (the "Incentive Plan"). Such plan was approved by
Shareholders at the 1993 Annual Meeting. Pursuant to the Incentive Plan, options
to purchase shares of the Company's Common Stock will be granted from time to
time by the Compensation Committee of the Board of Directors to selected
executives of the Company or its affiliates. For each such option granted, the
selected executive will receive the right to purchase on a specified date (the
"Tandem Investment Date") a number of shares of the Company's Common Stock
("Tandem Shares") equal to one-half the maximum number of shares of the
Company's Common Stock covered by such option. An aggregate of 2,400,000 shares
of the Company's Common Stock have been reserved for issuance under the
Incentive Plan. Company financing is available under the Incentive Plan to pay
for the purchase price of the Tandem Shares.
The purchase price per share of the Company's Common Stock upon exercise of
a stock option was $2.50 ("Option Price") for all options granted before the
ratification of the Incentive Plan by the Shareholders, and the fair market
value of a share of the Company's Common Stock on the date of grant of such
option for all other options. Options granted under the Incentive Plan become
exercisable three years after the date of grant and expire six years from the
date of grant. The purchase price shall be paid in full at the time of purchase
in cash, or shares of the Company's Common Stock valued at their fair market
value or in combination thereof. The difference between the Option Price and the
fair market value of the Common Stock on the Tandem Investment Date aggregated
$601,000 and is being amortized over the three year period that the options
become exercisable. The amortization for fiscal 1993 was $170,000.
In 1993, 663,830 shares were purchased at prices ranging from $3.125 to
$4.50 for a total consideration of $2,133,156. The employees paid $710,000 and
the Company accepted notes in the amount of $1,423,000 which are due in 1999.
The notes bear interest at 3.96% to 5.54%, and 1,327,660 options were granted to
such employees at prices ranging from $2.50 to $4.50.
F-20
<PAGE> 70
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted Stock Award Plan
On December 17, 1992, the Board of Directors adopted the 1993 Restricted
Stock Award Plan (the "Restricted Stock Plan"). Each full-time or permanent
part-time employee of the Company or its affiliates selected by the Compensation
Committee who holds a key position that the Compensation Committee shall have
designated for eligibility in the Restricted Stock Plan, has attained the age of
18, has performed at least 12 months of continuous service with the Company or
an affiliate of the Company, and is not covered by a collective bargaining
agreement may participate in the Restricted Stock Plan. Pursuant to the
Restricted Stock Plan, the Compensation Committee from time to time may award
shares of the Company's Common Stock ("Award Shares") to such participants. The
Award Shares received by such participants are not transferable (other than by
will or the laws of descent and distribution) until the vesting date or when
such participant attains the age of 65, dies, or becomes permanently disabled,
and are subject to forfeiture in the event the participant ceases to be an
employee prior to that date. An aggregate of 500,000 shares of the Company's
Common Stock have been reserved for issuance under the Restricted Stock Plan.
During 1993, 185,800 shares were awarded to participants aggregating $650,000.
Such amount is being amortized over a three year vesting period. Amortization in
1993 was $188,000.
All Employee Equity Investment Plan
On December 17, 1992, the Board of Directors adopted the 1993 All Employee
Equity Investment Plan (the "Investment Plan"), subject to the approval of
Shareholders at the 1993 Annual Meeting. Each full-time or permanent part-time
employee of the Company or its affiliates who has attained the age of 18, has
met certain standards of continuous service with the Company or an affiliate of
the Company and is not covered by a collective bargaining agreement may
participate in the Investment Plan.
An eligible employee shall be granted a right to purchase a specific number
of shares of the Company's Common Stock by the Compensation Committee, based on
the eligible employee's salary level. The purchase price of the Company's Common
Stock in the Investment Plan shall be the average market value of a share of the
Company's Common Stock during the 20 days prior to the first day of the
subscription period, less a 40% discount. The Shares received by such
participants are not transferable (other than by will or the laws of descent and
distribution) until the vesting date or when such participant attains the age of
65, dies, or becomes permanently disabled, and are subject to forfeiture in the
event the participant ceases to be an employee prior to that date. An aggregate
of 2,000,000 shares of the Company's Common Stock have been reserved for
issuance under the Investment Plan. During fiscal 1993, 211,883 shares were
purchased by employees at an average discounted price of $2.32. The difference
between the market price and discounted price aggregated $422,000 and is being
amortized over a three year vesting period. Amortization in 1993 was $46,000.
Employee Stock Ownership Plan
The Employee Stock Ownership Plan (the "ESOP") was terminated December 28,
1991. Because the value of the unallocated shares was not sufficient upon
termination to fully satisfy the ESOP's indebtedness to the Company, a charge of
$4.7 million was recognized in 1991 and is reflected in Other income (expense).
Shares allocated to participants at December 28, 1991 were approximately
288,000. These shares became vested upon termination of the ESOP. In November
1992, after receiving approval of the termination from the Internal Revenue
Service, the Company transferred 646,053 nonvested shares into its Treasury. The
vested shares were distributed in 1993.
10. INCOME TAXES
Effective December 29, 1991, the Company adopted Statement of Financial
Accounting Standards No. 109 -- Accounting for Income Taxes (SFAS 109). In
accordance with this statement, for the year ended December 26, 1992, the
Company recognized a deferred tax asset of $10 million, reflecting the
cumulative
F-21
<PAGE> 71
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
effect of the accounting change for the benefit expected to be realized from the
utilization of net operating loss carryforwards ("NOLs") and deductible
temporary differences. For the year ended January 1, 1994, the Company
recognized an additional deferred tax asset of $.6 million, reflecting the
effect of the increase in the Federal corporate income tax rate (from 34% to
35%) on the benefit expected to be realized from the utilization of NOLs
carryforwards and deductible temporary differences.
At January 1, 1994, the Company had tax NOLs totalling $147 million, which
expire as follows: In the year 2000 -- $1 million, 2001 -- $21 million,
2003 -- $15 million, 2004 -- $14 million, 2005 -- $21 million, 2006 -- $47
million, 2007 -- $28 million.
The Company also has $.9 million of charitable contribution carryforwards
that expire in 1994 through 1997 and $1.7 million of general business tax credit
carryforwards that expire in 1998 through 2003.
Under Section 382 of the Internal Revenue Code of 1986, certain
transactions the Company entered into during 1991 resulted in an ownership
change with respect to the Company and, thus, in the imposition of an annual
limitation ("the Section 382 limitation") of approximately $4 million on the
amount of taxable income of the Company which may be offset by the Company's
pre-change NOL, charitable contribution and business tax credit carryforwards.
The Company's available NOLs for tax purposes consists of $97 million of
pre-change NOL (subject to the Section 382 limitation) and $50 million of
post-change NOL (not subject to the Section 382 limitation). The Company's
charitable contribution carryforwards and business tax credit carryforwards are
pre-change items subject to the Section 382 limitation.
The unused portion of the $4 million annual Section 382 limitation for any
year may be carried forward to succeeding years to increase the annual
limitation for those succeeding years. In addition, the Company's entire $97
million of pre-change NOL may be used to offset future taxable income realized
within five years of the date of change of ownership from built-in gains
(generally, taxable income from the sale of appreciated assets held by the
Company at the date of change in ownership) without reference to the Section 382
limitation.
A reconciliation of the Company's net income for financial statement
purposes to taxable income (loss) for the years ended December 26, 1992 and
January 1, 1994 is as follows (in thousands):
<TABLE>
<CAPTION>
1992 1993
-------- --------
<S> <C> <C>
Net income..................................................... $ 20,249 $ 17,337
Income tax provision (benefit)................................. 219 (130)
-------- --------
Income before income taxes..................................... 20,468 17,207
-------- --------
Differences between income before taxes for financial statement
purposes and taxable income:
Cumulative effect of accounting change for income taxes...... (10,000) --
State income taxes........................................... (219) (501)
Utilization of carryovers.................................... -- (2,543)
Permanent differences........................................ 3,687 28
Net change in temporary differences.......................... (41,678) (14,191)
-------- --------
(48,210) (17,207)
-------- --------
Taxable income (loss).......................................... $(27,742) $ --
-------- --------
-------- --------
</TABLE>
Changes during 1992 and 1993 in temporary differences principally relate to
restaurant closing expenses and losses on asset disposals accrued in 1990 and
1991, which are deductible for income tax purposes in the year in which the
assets are actually disposed and expenses are paid.
F-22
<PAGE> 72
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax asset at January 1, 1994 are as
follows (in millions):
<TABLE>
<CAPTION>
NON-
CURRENT CURRENT TOTAL
------- ------- ------
<S> <C> <C> <C>
Federal tax NOL, charitable contribution and business tax
credit carryforwards....................................... $ -- $ 55.2 $ 55.2
Allowance for doubtful accounts.............................. .8 -- .8
Accrued liabilities.......................................... 3.6 -- 3.6
Tax basis in net assets of discontinued operations in excess
of financial statement amount.............................. .3 -- .3
Other........................................................ .4 -- .4
------- ------- ------
Deferred Tax Asset........................................... 5.1 55.2 60.3
Valuation allowance........................................ (2.1) (47.6) (49.7)
------- ------- ------
Deferred Tax Asset, net...................................... $ 3.0 $ 7.6 $ 10.6
------- ------- ------
------- ------- ------
</TABLE>
The Company has established a valuation allowance for a portion of the
deferred tax asset, due to the Section 382 limitation and limiting the
utilization of the remaining deferred tax asset.
SFAS 109 requires that the future tax benefit of such NOLs be recorded as
an asset to the extent that management assesses the utilization of such NOLs to
be "more likely than not". In 1992 management determined, based upon the
conversion of interest-bearing debentures to equity, the issuance of additional
Common Stock, the disposal of unprofitable discontinued restaurant operations,
the Company's history of prior operating earnings in the direct marketing
business and its expectations for the future, that the operating income of the
Company will, more likely than not, be sufficient to utilize $30 million of
deductible temporary differences and NOLs prior to their expiration. In making
such determination, the Company adjusted 1992 income by eliminating interest
expense related to retired debt and assumed that such adjusted 1992 income level
could be obtained in each of the next three years.
Realization of the future tax benefits is dependent on the Company's
ability to generate taxable income within the carryforward period and the
periods in which net temporary differences reverse. Future levels of operating
income and taxable income are dependent upon general economic conditions,
competitive pressures on sales and margins, postal and other delivery rates, and
other factors beyond the Company's control. Accordingly, no assurance can be
given that sufficient taxable income will be generated for utilization of the
NOLs and reversals of temporary differences. At January 1, 1994, the Company has
maintained the $30 million amount of expected future operating income that will
"more likely than not" utilize the deductible temporary differences and NOLs
prior to their expiration. Management believes that although the 1993 operating
results might justify a higher amount, in view of its history of operating
losses, the $30 million represents a reasonable conservative estimate of the
future utilization of the NOLs and the Company will continue to evaluate the
likelihood of future profit and the necessity of future adjustments to the
deferred tax asset valuation allowance.
The Company's tax returns for years subsequent to 1984 have not been
examined by the Internal Revenue Service ("IRS"). Availability of the NOLs might
be challenged by the IRS upon examination of such returns which could affect the
availability of NOLs incurred prior or subsequent to the change in ownership or
both. The Company believes, however, that IRS challenges that would limit the
utilization of NOLs will not have a material adverse effect on the Company's
financial position.
The Federal income tax provision was $5.9 million in 1993 which was offset
by the utilization of certain NOLs. In addition, a $.6 million deferred tax
benefit was recorded in 1993 as a result of the increase in the Federal
corporate income tax rates from 34% to 35%. The Company's Federal income tax
provision consists of
F-23
<PAGE> 73
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
zero in 1991 and 1992. The Company's provision for state income taxes consists
of $.2 million in 1991, $.2 million in 1992 and $.5 million in 1993.
Total tax expense for each of the three fiscal years presented differ from
the amount computed by applying the statutory tax rate of 35% (34% in 1992 and
1991) due to the following:
<TABLE>
<CAPTION>
1991 1992 1993
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
LOSS INCOME INCOME
---------- ---------- ----------
<S> <C> <C> <C>
Tax (benefit) at statutory rate........................ (34.0)% 34.0% 35.0%
Cumulative effect of accounting change for income
taxes................................................ -- (16.6) --
State and local taxes.................................. 0.3 1.1 1.9
Effect of federal rate change on deferred tax asset.... -- -- (3.7)
Stock issuance expenses................................ -- 5.5 --
Net reversal of temporary differences.................. -- (69.2) (28.9)
Loss for which no tax benefit could be recognized...... 30.8 -- --
Utilization of contribution and NOL carryover.......... -- -- (5.4)
Tax NOL for which no benefit could be recognized....... -- 46.1 --
Other.................................................. 3.2 0.2 0.3
---------- ---------- ----------
0.3% 1.1% (0.8)%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
11. LEASES
Certain leases to which the Company is a party provide for payment of real
estate taxes and other expenses. Most leases are operating leases and include
various renewal options with specified minimum rentals. Rental expense for
operating leases related to continuing operations were as follows (in
thousands):
<TABLE>
<CAPTION>
1991 1992 1993
------ ------ ------
<S> <C> <C> <C>
Minimum rentals............................................. $6,807 $8,910 $9,458
------ ------ ------
------ ------ ------
</TABLE>
Future minimum lease payments under noncancellable operating and capital
leases relating to continuing operations, that have initial or remaining terms
in excess of one year, together with the present value of the net minimum lease
payments as of January 1, 1994, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING LEASES LEASES
---------------------------------------------------------------- --------- -------
<S> <C> <C>
1994............................................................ $ 7,257 $ 873
1995............................................................ 4,527 732
1996............................................................ 3,425 694
1997............................................................ 2,703 454
1998............................................................ 2,627 --
Thereafter...................................................... 17,706 --
--------- -------
Total minimum lease payments.................................... $38,245 2,753
---------
---------
Less amount representing interest (a)........................... 182
-------
Present value of minimum lease payments (b)..................... $ 2,571
-------
-------
</TABLE>
- ---------------
(a) Amount necessary to reduce net minimum lease payments to present value
calculated at the Company's incremental borrowing rate at the inception of
the leases.
(b) Reflected in the balance sheet as current and noncurrent capital lease
obligations of $50,000 and $105,000 in 1992 and $748,000 and $1,823,000 in
1993, respectively.
12. DISCONTINUED RESTAURANT OPERATIONS
In 1992, the Company sold substantially all of the properties remaining
from its discontinued restaurant operations. The Company realized net proceeds
from such sales of approximately $17.3 million of which approximately $14.9
million was used to reduce outstanding indebtedness. In addition, in exchange
for notes, cash and stock valued at $3.9 million, the Company was relieved of
$20.4 million in future rent obligations.
F-24
<PAGE> 74
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues applicable to discontinued operations were $10 million in 1991.
Interest expense allocated to discontinued operations was $1.6 million and $1.9
million for the years 1991 and 1992, respectively. There was no interest expense
allocated to discontinued operations for the year ended January 1, 1994.
At December 26, 1992 and January 1, 1994, reserves for discontinued
restaurant operations approximated $3.5 million and $2.6 million, respectively.
Charges against these reserves were $7.7 million and $0.9 million for the years
ended December 26, 1992 and January 1, 1994, respectively.
The future minimum lease payments under noncancellable leases as of January
1, 1994, are as follows: 1994 -- $1.7 million; 1995 -- $1.7 million;
1996 -- $1.5 million; 1997 -- $1.5 million; 1998 -- $1.4 million and thereafter
$14.8 million. The above amounts exclude annual sublease income of $1.8 million
from subleases which have the same expiration as the underlying leases.
13. RESTRUCTURING CHARGES AND TRANSACTION COSTS
In 1991, in connection with the restructuring activities, the Company
recorded charges of approximately $5.8 million. These charges were primarily
related to severance costs ($.6 million), the costs associated with the
restructuring of certain catalogs, including inventory costs ($2.6 million), and
other restructuring costs ($2.6 million). The operating results of 1991 also
include charges of approximately $4.8 million which were directly related to the
stock purchase agreement transaction. These charges include approximately $1.7
million of transaction fees which have been classified as Other income (expense)
and increased compensation costs directly related to the change in control
provisions included in certain executive employment contracts. In addition, the
Company incurred a charge of $3.1 million in connection with the settlement of
the employment contract of the former Chairman and CEO of the Company.
14. MANAGEMENT COMPENSATION AGREEMENTS
In connection with consummating the transactions in the stock purchase
agreement and as a condition thereto, the Company entered into an employment
agreement (the "Employment Agreement") with Jack E. Rosenfeld, the President and
Chief Executive Officer of the Company. The Employment Agreement provides for
(1) a five-year term commencing on October 25, 1991, at a base salary of
$500,000 per year; (2) a payment to a trust on behalf of Mr. Rosenfeld of
916,667 shares of Common Stock in lieu of a cash payment of $1,564,000 to which
he would have been entitled in connection with a change in control, 250,000 of
such shares to vest in equal annual installments over three years with the
vested shares distributable to Mr. Rosenfeld at the end of the employment term
or the earlier termination of his employment; (3) the grant of an option to Mr.
Rosenfeld, which has expired, to purchase shares of Common Stock in the event
the Company achieved certain earnings in the fourth quarter of 1991; and (4) the
grant of registration rights under the Securities Act of 1933, as amended, for
shares of Common Stock owned by Mr. Rosenfeld. On October 25, 1991, NAR entered
into an agreement with Mr. Rosenfeld pursuant to which he may purchase from NAR
prior to October 25, 1996, 1,213,605 shares of Common Stock at a price per share
of $2.00 (subject to adjustment) plus 10% per year through the exercise period.
This agreement was amended on September 23, 1992 to provide that NAR would grant
to Mr. Rosenfeld in March 1993 the right to purchase an additional 1,213,605
shares of Common Stock ("Rights Shares") at a price per share of $1.50 (subject
to adjustment) plus 10% per year from September 1992 through the exercise
period.
In connection with the stock purchase agreement, the Company entered into
employment agreements with each of Messrs. Michael P. Sherman, Wayne P. Garten
and Edward J. O'Brien, executive officers of the Company. These agreements were
substantially the same as such officers' existing employment agreements, except
that they provided for cash payments to Messrs. Sherman, Garten and O'Brien of
$281,714, $221,621 and $90,000, respectively, and contribution to a trust on
behalf of such officers of 156,979 shares, 147,812 shares and 60,000 shares of
Common Stock of the Company, respectively, in connection with the change in
control effected by the NAR transaction and in lieu of their right to receive a
cash change in control payment.
F-25
<PAGE> 75
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to the terms of the trust, such Common Stock was distributed to each
such officer during fiscal 1993. Messrs. Sherman, Garten and O'Brien were
granted certain registration rights under the Securities Act of 1933, as
amended, with respect to the shares of Common Stock granted to each of them.
15. RELATED PARTY TRANSACTIONS
Approximately $85,000 was paid for the rental of property pursuant to an
operating lease to a partnership in which the wife of the Chief Executive
Officer and President of the Company, Jack E. Rosenfeld, is a partner. Jack E.
Rosenfeld is also a director of the Company.
On September 23, 1992, a transaction was approved by the Company's
shareholders pursuant to which NAR acquired 62% of the Company's Common Stock.
See Note 2 for a description of the transaction. At January 1, 1994, NAR owned
57% of the Company's outstanding Common Stock.
Since January 1993, pursuant to a consulting arrangement, QCC renders
management consulting, business advisory and investment banking services to the
Company for an annual fee of $750,000.
16. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various employment contracts with key
executives extending through 1995. The aggregate payments due under such
contracts is $2.0 million.
In connection with certain disposal transactions, the Company remains
contingently liable with respect to lease obligations for 10 restaurant
properties, should the buyers fail to perform under the agreements. The future
minimum lease payments as of January 1, 1994, are as follows (in thousands):
1994 -- $459; 1995 -- $445; 1996 -- $366; 1997 -- $278; 1998 -- $192 and
thereafter $737.
In January 1994, the Company purchased for $1.1 million a 50% interest in
Blue Ridge Associates (the "Partnership"), a partnership which owns the Tweeds
Roanoke, Virginia fulfillment center. In connection with the Partnership, a
subsidiary of the Company is contingently liable with respect to the obligations
of the Partnership. The Partnership has a mortgage on the Roanoke fulfillment
center in the amount of $6.6 million.
In May 1992 the United States Supreme Court reaffirmed an earlier decision
which allowed direct marketing companies to make sales into states where they do
not have a physical presence without collecting sales taxes with respect to
those sales. The Court, however, noted that Congress has the power to change
this law. Forty-six states plus the District of Columbia have sales or use taxes
or authorize local governmental units to impose sales or use taxes. The Company
sells merchandise in all fifty states plus the District of Columbia. Various
states are increasing their efforts by various means, including lobbying
Congress, to impose on direct marketers the burden of collecting sales and use
taxes on the sale of products shipped to state residents. The imposition of a
sales and use tax collection obligation on the Company in states to which it
ships products would result in additional administrative expense to the Company
and higher costs to its customers for the same merchandise currently being
purchased by them. This may have a negative effect on customer response rates
and revenue levels, thereby negatively affecting the Company's sales and
profitability. Under the law as it presently exists, the Company believes that
it collects sales tax in all jurisdictions that it is required to do so.
The Company is involved in other various routine lawsuits of a nature which
are deemed customary and incidental to its business. In the opinion of
management, the ultimate disposition of such actions will not have a material
adverse effect on the Company's financial position or results of operations.
17. SUBSEQUENT EVENT
On February 18, 1994, the Company filed a registration statement on Form
S-3 with the Securities and Exchange Commission registering 10 million shares of
its Common Stock, including 4,154,604 shares on
F-26
<PAGE> 76
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
behalf of two selling shareholders. The net proceeds from the offering with
respect to the Company's shares will be used for general corporate purposes,
including the expansion of the Company's business. The registration statement
has not yet become effective.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1992 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------ -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................................ $128,787 $142,861 $144,769 $170,145
Gross profit.................................... 42,698 51,337 48,924 61,887
Income from operations.......................... 2,133 3,123 2,291 6,855
Income (loss) from continuing operations........ (1,823) (899) (1,246) 5,016
Extraordinary items............................. -- 1,209 6,501 1,491
Cumulative effect of accounting change for
income taxes.................................. 10,000 -- -- --
-------- -------- -------- --------
Net income...................................... 8,177 310 5,255 6,507
Preferred stock dividends....................... (700) (700) (800) (997)
-------- -------- -------- --------
Net income (loss) applicable to Common
Shareholders.................................. $ 7,477 $ (390) $ 4,455 $ 5,510
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share:
Income (loss) from continuing operations...... $ (.09) $ (.05) $ (.07) $ .06
Extraordinary items........................... -- .04 .22 .02
Cumulative effect of accounting change for
income taxes............................... .35 -- -- --
-------- -------- -------- --------
Net income (loss)............................... $ .26 $ (.01) $ .15 $ .08
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1993 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------ -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................................ $121,565 $144,319 $147,890 $228,737
Gross profit.................................... 43,585 52,578 51,233 86,728
Income from operations.......................... 2,937 3,963 3,056 9,120
Net income...................................... 2,477 4,356 2,492 8,012
Preferred stock dividends....................... (1,000) (1,005) (1,006) (1,082)
-------- -------- -------- --------
Net income applicable to Common Shareholders.... $ 1,477 $ 3,351 $ 1,486 $ 6,930
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share............................ $ .02 $ .05 $ .02 $ .09
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
F-27
<PAGE> 77
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 3
Incorporation of Certain Documents by
Reference........................... 3
Prospectus Summary.................... 4
Investment Considerations............. 7
The Company........................... 10
Use of Proceeds....................... 13
Price Range of Common Stock........... 13
Dividend Policy....................... 13
Capitalization........................ 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Consolidated Financial Condition
and Results of Operations........... 16
Business.............................. 23
Management............................ 34
Principal and Selling Shareholders.... 37
Relationship with NAR................. 39
Description of Capital Stock.......... 39
Shares Eligible for Future Sale....... 41
Certain United States Tax Consequences
to Non-U.S. Holders of Common
Stock............................... 42
Underwriting.......................... 45
Legal Matters......................... 46
Experts............................... 46
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
10,000,000 SHARES
[LOGO]
COMMON STOCK
-----------------------------
PROSPECTUS
-----------------------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
, 1994
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 78
APPENDIX TO ELECTRONIC FORMAT DOCUMENT
(INSIDE FRONT COVER 1)
(PHOTOGRAPH 1) -- is a cover of a Gump's catalog with an oriental table and vase
(PHOTOGRAPH 2) -- is a cover of a Hanover House catalog with a staircase basket
(PHOTOGRAPH 3) -- is a cover of a Tweeds catalog with a woman on a pier
(PHOTOGRAPH 4) -- is a cover of a Domestications catalog with a bed
(INSIDE FRONT COVER 2)
(PHOTOGRAPH 1) -- is a cover of an International Male catalog
(PHOTOGRAPH 2) -- is a cover of The Company Store catalog
(PHOTOGRAPH 3) -- is a cover of an Undergear catalog
(PHOTOGRAPH 4) -- is a cover of a Tapestry catalog
(PHOTOGRAPH 5) -- is a cover of The Safety Zone catalog
(PHOTOGRAPH 6) -- is a cover of a Colonial Garden Kitchens catalog
(PHOTOGRAPH 7) -- is a cover of a Simply Tops catalog
(PHOTOGRAPH 8) -- is a cover of a Silhouettes catalog
(PHOTOGRAPH 9) -- is a cover of an Essence catalog
(PHOTOGRAPH 10) -- is a cover of a Mature Wisdom catalog
(INSIDE BACK COVER)
(PHOTOGRAPH 1) -- is a cover of a Kitchen & Home catalog
(PHOTOGRAPH 2) -- are covers of the Finishing Touches and Museum Collections
catalog
(PHOTOGRAPH 3) -- are covers of two Sears catalogs -- Beautiful Style and Great
Kitchens
(PHOTOGRAPH 4) -- is a cover of the Sears catalog, Show Place
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
the issuance and sale of the Common Stock offered hereby, other than
underwriting discounts and commissions. The amount of such expenses are as
follows:
<TABLE>
<CAPTION>
SELLING
COMPANY SHAREHOLDER
----------- -----------
<S> <C> <C>
SEC registration fee.................................... $ 18,043.35 9,715.65
NASD filing fee......................................... 5,557.50 2,992.50
AMEX listing fee........................................ 11,375.00* 6,125.00*
Printing and engraving expenses......................... 146,250.00* 78,750.00*
Legal fees and expenses................................. 146,250.00* 78,750.00*
Accounting fees and expenses............................ 130,000.00* 70,000.00*
Blue Sky fees and expenses (including counsel fees)..... 13,000.00* 7,000.00*
Transfer agent and registrar fees and expenses.......... 10,075.00* 5,425.00*
Miscellaneous expenses.................................. 39,449.15* 21,241.85*
----------- -----------
Total......................................... $520,000.00* $280,000.00*
----------- -----------
----------- -----------
</TABLE>
- ---------------
* Estimated
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C>
1 Purchase Agreement.*
5 Opinion of Whitman Breed Abbott & Morgan as to the legality of the securities
being registered.**
23.1 Consents of Arthur Andersen & Co.
23.2 Consent of KPMG Peat Marwick.
23.3 Consent of Deloitte & Touche.
23.4 Consent of Ernst & Young.
23.5 Consent of Whitman Breed Abbott & Morgan (included in the opinion set forth as
Exhibit 5 to this Registration Statement).**
24 Powers of Attorney of certain directors of the Company (included on Page II-6 of
the Registration Statement on Form S-3 (Registration No. 33-52353) filed on
February 18, 1994).**
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
II-1
<PAGE> 80
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
HANOVER DIRECT, INC. CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT
MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS
AMENDMENT NO. 3 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF WEEHAWKEN, STATE OF NEW
JERSEY, ON THE 24TH DAY OF MARCH, 1994.
HANOVER DIRECT, INC.
By: /s/ JACK E. ROSENFELD
Jack E. Rosenfeld,
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 3 TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS, IN THE CAPACITIES INDICATED ON MARCH 24, 1994.
<TABLE>
<CAPTION>
NAME TITLE
- --------------------------------------------- ----------------------------------------------
<S> <C>
/s/ ALAN G. QUASHA* Chairman of the Board and Director
Alan G. Quasha
/s/ JACK E. ROSENFELD* Director, President and Chief Executive
Jack E. Rosenfeld Officer
(principal executive officer)
/s/ WAYNE P. GARTEN* Executive Vice President and Chief Financial
Wayne P. Garten Officer
(principal financial officer)
/s/ DAVID E. ULLMAN* Vice President-Controller
David E. Ullman (principal accounting officer)
/s/ RALPH DESTINO* Director
Ralph Destino
/s/ J. DAVID HAKMAN* Director
J. David Hakman
/s/ S. LEE KLING* Director
S. Lee Kling
Director
Theodore H. Kruttschnitt
/s/ JEFFREY LAIKIND* Director
Jeffrey Laikind
/s/ ELIZABETH VALK LONG* Director
Elizabeth Valk Long
</TABLE>
II-2
<PAGE> 81
<TABLE>
<CAPTION>
NAME TITLE
- --------------------------------------------- ----------------------------------------------
<S> <C>
/s/ EDMUND R. MANWELL* Director
Edmund R. Manwell
/s/ GERALDINE STUTZ* Director
Geraldine Stutz
/s/ ROBERT F. WRIGHT* Director
Robert F. Wright
</TABLE>
- ---------------
* Michael P. Sherman, pursuant to a Power of Attorney executed by each of
the directors and officers noted above and filed with the Securities and
Exchange Commission, by signing his name hereto, does hereby sign and execute
this Amendment No. 3 to Registration Statement on Form S-3 on behalf of each of
the persons noted above, in the capacities indicated.
/s/ MICHAEL P. SHERMAN
Michael P. Sherman
II-3
<PAGE> 82
SCHEDULE II
HANOVER DIRECT, INC.
AMOUNTS RECEIVABLE FROM RELATED PARTIES, UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
YEAR ENDED JANUARY 1, 1994
<TABLE>
<CAPTION>
COLUMN D COLUMN E
----------------------- ---------------------
COLUMN B
---------- DEDUCTIONS BALANCE AT END
COLUMN A BALANCE AT COLUMN C ----------------------- OF PERIOD
- ------------------------------------ BEGINNING -------- AMOUNTS AMOUNTS ---------------------
NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED WRITTEN OFF CURRENT NON CURRENT
- ------------------------------------ ---------- -------- --------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Spence Halper, E.V.P.(a)
Year Ended January 1, 1994........ $ -- $100,000 $ -- $-- $-- $ 100,000
Wayne P. Garten, E.V.P.(b)
Year Ended January 1, 1994........ $ -- $235,802 $ 135,802 $-- $-- $ 100,000
Edward J. O'Brien Sr.V.P.(c)
Year Ended January 1, 1994........ $ -- $113,837 $ 63,837 $-- $-- $ 50,000
Charles Pellenberg, E.V.P.(a)
Year Ended January 1, 1994........ $ -- $125,000 $ -- $-- $-- $ 125,000
Jack Rosenfeld, C.E.O.(a)
Year Ended January 1, 1994........ $ -- $187,500 $ -- $-- $-- $ 187,500
Michael P. Sherman, E.V.P.(d)
Year Ended January 1, 1994........ $ -- $229,802 $ 129,802 $-- $-- $ 100,000
</TABLE>
- ---------------
(a) Notes receivable issued in connection with Executive Equity Incentive Plan.
The Notes bear interest at 5.54% and are due March 1999.
(b) Notes receivable represents $100,000 for the Executive Equity Incentive Plan
bearing interest at 5.54% due March 1999. The $135,802 represents a personal
loan with interest at 8% and such loan was repaid in fiscal 1993.
(c) Notes receivable represents $50,000 for the Executive Equity Incentive Plan
bearing interest at 5.54% due March 1999. The remaining $63,837 represents a
personal loan with interest at 8% and such loan was repaid in fiscal 1993.
(d) Notes receivable represents $100,000 for the Executive Equity Incentive Plan
bearing interest at 5.54% due March 1999. The remaining $129,802 represents
a personal loan with interest at 8% and such loan was repaid in fiscal 1993.
S-1
<PAGE> 83
SCHEDULE VIII
HANOVER DIRECT, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JANUARY 1, 1994, DECEMBER 26, 1992 AND DECEMBER 28, 1991
<TABLE>
<CAPTION>
COLUMN C
-------------------------------
ADDITIONS
COLUMN B ------------------------------- COLUMN E
------------- CHARGED TO COLUMN D -----------
COLUMN A BALANCE AT OTHER ------------- BALANCE AT
- ------------------------- BEGINNING CHARGED TO COSTS ACCOUNTS DEDUCTIONS - END OF
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------- ------------- ---------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
1993:
Allowance for doubtful
accounts receivable.... $ 6,386,000 $3,676,000 (5) $134,000 (1)$5,952,000 $ 4,244,000
Reserves for discontinued
operations............. 3,464,000 (2) 906,000 2,558,000
Deferred tax asset
valuation allowance.... 53,000,000 (6)2,600,000 (4) 5,900,000 49,700,000
1992:
Allowance for doubtful
accounts receivable.... 7,040,000 6,024,000 (1) 6,678,000 6,386,000
Reserves for discontinued
operations............. 11,185,000 (2) 7,721,000 3,464,000
Deferred tax asset
valuation allowance.... (3)53,000,000 53,000,000
1991:
Allowance for doubtful
accounts receivable.... 4,994,000 6,756,000 (1) 4,710,000 7,040,000
Reserves for discontinued
operations............. 17,270,000 5,229,000 (2)11,314,000 11,185,000
</TABLE>
- ---------------
(1) Accounts written-off.
(2) Utilization of reserves.
(3) The Company adopted SFAS 109 effective December 29, 1991.
(4) Utilization of valuation allowance.
(5) Represents acquired allowance for doubtful accounts receivable.
(6) Represents increase in available net operating losses and effect of increase
in corporate income tax rates from 34% to 35%.
S-2
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ -----------------------------------------------------------------------------
<S> <C>
1 Purchase Agreement
5 Opinion of Whitman Breed Abbott & Morgan as to the legality of the securities
being registered*
23.1 Consents of Arthur Andersen & Co.*
23.2 Consent of KPMG Peat Marwick.*
23.3 Consent of Deloitte & Touche.*
23.4 Consent of Ernst & Young.*
23.5 Consent of Whitman Breed Abbott & Morgan (included in the opinion set forth
as Exhibit 5 to this Registration Statement).*
24 Powers of Attorney of certain directors of the Company (included on Page II-6
of the Registration Statement on Form S-3 filed on February 18, 1994).
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
DRAFT - 03/23/94
================================================================================
HANOVER DIRECT, INC.
(a Delaware corporation)
10,000,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: , 1994
================================================================================
<PAGE> 2
HANOVER DIRECT, INC.
(a Delaware corporation)
10,000,000 Shares of Common Stock
PURCHASE AGREEMENT
____________________, 1994
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
ALEX. BROWN & SONS INCORPORATED
As Representatives of the Several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281-1201
Ladies and Gentlemen:
Hanover Direct, Inc., a Delaware corporation (the "Company"), Sun
Life Insurance Company of America, a Maryland insurance corporation ("Sun
Life") and Theodore H. Kruttschnitt, an individual ("Kruttschnitt") (Sun Life
and Kruttschnitt collectively the "Selling Stockholders" and individually, a
"Selling Stockholder"), confirm their respective agreements with Merrill Lynch
& Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Alex. Brown & Sons
Incorporated and each of the other Underwriters named in Schedule A hereto
(collectively, the "Underwriters," which term shall also include any
underwriter substituted as hereinafter provided in Section 11), for whom
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Alex. Brown & Sons Incorporated are acting as representatives (in such
capacity, the "Representatives"), with respect to (i) the sale by the Company
of an aggregate of 5,845,396 shares of Common Stock, par value $.66 2/3 per
share, of the Company ("Common Stock"), the sale by the Selling Stockholders of
an aggregate of 4,156,604 shares of Common Stock, and the purchase by the
Underwriters, acting severally and not
<PAGE> 3
jointly, of the respective numbers of such shares totaling 10,000,000 shares of
Common Stock, set forth in said Schedule A and (ii) (a) the grant by the
Company to the Underwriters, acting severally and not jointly, of the option
described in Section 2(e) hereof to purchase all or any part of 975,000
additional shares of Common Stock to cover over-allotments and (b) the grant by
Kruttschnitt to the Underwriters, acting severally and not jointly, of the
option described in Section 2(e) hereof to purchase all or any part of 525,000
additional shares of Common Stock to cover over-allotments. The 10,000,000
shares of Common Stock (the "Initial Shares") and all or any part of the
1,500,000 shares of Common Stock subject to the options described in Section
2(e) hereof (the "Option Shares") to be purchased by the Underwriters are
collectively hereinafter called the "Offered Shares."
You have advised us that you and the other Underwriters, acting
severally and not jointly, desire to purchase the Initial Shares and, if the
Underwriters so elect, the Option Shares, and that you have been authorized by
the other Underwriters to execute this Agreement and the Price Determination
Agreement referred to below on their behalf.
The initial public offering price per share for the Offered
Shares and the purchase price per share for the Offered Shares to be paid by
the several Underwriters shall be agreed upon by the Company, the Selling
Stockholders and the Representatives, acting on behalf of the several
Underwriters, and such agreement shall be set forth in a separate written
instrument substantially in the form of Exhibit A hereto (the "Price
Determination Agreement"). The Price Determination Agreement may take the form
of an exchange of any standard form of written telecommunication between the
Company, the Selling Stockholders and the Representatives and shall specify
such applicable information as is indicated in Exhibit A hereto. The offering
of the Offered Shares will be governed by this Agreement, as supplemented by
the Price Determination Agreement. From and after the date of the execution
and delivery of the Price Determination Agreement, this Agreement shall be
deemed to incorporate, and all references herein to "this Agreement" or
"herein" shall be deemed to include, the Price Determination Agreement.
The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-3
(File No. 33-52353) covering the registration of the Offered Shares under the
Securities Act of 1933, as amended (the "1933 Act"), including the related
preliminary Prospectus, and either (A) has prepared and proposes to file, prior
to the effective date of such registration statement, an amendment to such
registration statement, including a final Prospectus, or (B) if the Company has
elected to rely upon Rule 430A ("Rule 430A") of the rules and regulations of
the Commission under the 1933 Act (the "1933 Act Regulations"), will prepare
and file a Prospectus, in accordance with the provisions of Rule 430A and Rule
424(b) ("Rule 424(b)") of the 1933 Act Regulations, promptly after execution
and
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<PAGE> 4
delivery of the Price Determination Agreement. The information, if any,
included in such Prospectus that was omitted from any prospectus included in
such registration statement at the time it becomes effective but that is
deemed, pursuant to Rule 430A(b), to be part of such registration statement at
the time it becomes effective is referred to herein as the "Rule 430A
Information." Each Form of Prospectus used before the time such registration
statement becomes effective, and any Form of Prospectus that omits the Rule
430A Information that is used after such effectiveness and prior to the
execution and delivery of the Price Determination Agreement, is herein called a
"preliminary prospectus." Any reference to any preliminary prospectus shall be
deemed to refer to and include the documents incorporated by reference therein
pursuant to Item 12 of Form S-3 under the 1933 Act as of the date of such
preliminary prospectus. Such registration statement, including the exhibits
thereto and the documents incorporated by reference therein pursuant to Item 12
of Form S-3 under the 1933 Act, as amended at the time it becomes effective and
including, if applicable, the Rule 430A Information, is herein called the
"Registration Statement," and the Form of Prospectus, including the documents
incorporated by reference therein pursuant to Item 12 of Form S-3 under the
1933 Act, included in the Registration Statement at the time it becomes
effective is herein called the "Prospectus," except that, if the final
Prospectus first furnished to the Underwriters after the execution of the Price
Determination Agreement for use in connection with the offering of the Offered
Shares differs from the Prospectus included in the Registration Statement at
the time it becomes effective (whether or not such Prospectus is required to be
filed pursuant to Rule 424(b)), the term "Prospectus" shall refer to the final
Prospectus first furnished to the Underwriters for such use.
The Company and the Selling Stockholders understand that the
Underwriters propose to make a public offering of the Offered Shares as soon as
you deem advisable after the Registration Statement becomes effective and the
Price Determination Agreement has been executed and delivered.
Section 1. Representations and Warranties. (a) The Company
represents and warrants to and agrees with each of the Underwriters that:
(i) The Company meets the requirements for use of Form S-3
under the 1933 Act, and when the Registration Statement and any further
amendments thereto shall become effective, (A) the Registration
Statement and any such amendments will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations; (B)
neither the Registration Statement nor any such amendment will contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading. Neither the Prospectus nor any amendment or
supplement to it will, as of its issue date, at the Closing Time
referred to below, and, if any Option Shares are purchased, on the Date
of Delivery referred to below, include an
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<PAGE> 5
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
Notwithstanding the foregoing, this representation and warranty does not
apply to statements or omissions from the Registration Statement or the
Prospectus or any amendments or supplements thereto made in reliance
upon and in conformity with information furnished or confirmed in
writing to the Company by or on behalf of any Underwriter through you
expressly for use in the Registration Statement or the Prospectus or any
amendments or supplements thereto.
(ii) The documents incorporated by reference in the Prospectus
pursuant to Item 12 of Form S-3 under the 1933 Act, at the time they
were filed with the Commission, conformed in all material respects with
the requirements of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), and the rules and regulations of the Commission thereunder
(the "1934 Act Regulations"), and, when read together with the
information in the Prospectus, at the time the Registration Statement
shall become effective, and if the Company has elected to rely upon Rule
430A, on the date of the Price Determination Agreement, and on the
effective or issue date of each amendment or supplement to the
Registration Statement or the Prospectus, and at the Closing Time
referred to below, and if any option shares are purchased on the Date of
Delivery referred to below, will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(iii) Arthur Andersen & Co., Ernst & Young, KPMG Peat Marwick
and Deloitte & Touche, who are each reporting upon the audited
consolidated financial statements and schedules included or incorporated
by reference in the Registration Statement, are independent public
accountants as required by the 1933 Act and the 1933 Act Regulations.
(iv) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under this
Agreement and the Price Determination Agreement, and this Agreement has
been, and the Price Determination Agreement, on the date thereof, will
be duly authorized, executed and delivered by the Company.
(v) The consolidated financial statements included or
incorporated by reference in the Registration Statement present fairly
the financial position of the Company and its Subsidiaries (as
hereinafter defined) as of the dates indicated and the consolidated
statements of operations, stockholders' equity and cash flows of the
Company and its Subsidiaries for the periods specified. Such financial
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<PAGE> 6
statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the
periods involved, except for changes in methods of accounting, if any,
incorporated therein. The financial statement schedules, if any,
included or incorporated by reference in the Registration Statement
present fairly the information required to be stated therein. The pro
forma financial statements and other pro forma financial information
included in or incorporated by reference in the Prospectus present
fairly the information shown therein, have been prepared in all material
respects in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements, have been properly compiled
on the pro forma bases described therein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are reasonable
and the adjustments used therein are appropriate to give effect to the
transactions or circumstances referred to therein.
(vi) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware
with corporate power under such laws to own, lease and operate its
properties and conduct its business as described in the Prospectus; and
the Company is duly qualified to transact business as a foreign
corporation and is in good standing in each other jurisdiction in which
it owns or leases property of a nature, or transacts business of a type,
that would make such qualification necessary, except to the extent that
the failure to so qualify or be in good standing would not have a
material adverse effect on the condition (financial and otherwise),
earnings or business affairs of the Company and its Subsidiaries (as
defined below), considered as one enterprise.
(vii) The Company's only material subsidiaries are listed on
Schedule B hereto (collectively, the "Subsidiaries"). Each Subsidiary
is a corporation duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its incorporation with
corporate power under such laws to own, lease and operate its properties
and conduct its business as described in the Prospectus; and each
Subsidiary is duly qualified to transact business as a foreign
corporation and is in good standing in each other jurisdiction in which
it owns or leases property of a nature, or transacts business of a type,
that would make such qualification necessary, except to the extent that
the failure to so qualify or be in good standing would not have a
material adverse effect on the condition (financial or otherwise),
earnings or business affairs of the Company and its Subsidiaries,
considered as one enterprise. All of the outstanding shares of capital
stock of each Subsidiary have been duly authorized and validly issued
and are fully paid and non-assessable, and are owned by the Company,
directly or through one or more Subsidiaries, free and clear of any
pledge, lien, perfected security interest, claim or encumbrance of any
kind or, to the knowledge of the Company, any unperfected security
interest; none of the outstanding shares of capital stock of the
Subsidiaries
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<PAGE> 7
was issued in violation of the preemptive or similar rights of any
stockholder of such corporation arising by operation of law, under the
charter or by-laws of any Subsidiary or under any agreement to which the
Company or any Subsidiary is a party.
(viii) The Company has a duly authorized and outstanding
capitalization as set forth in the Prospectus in the column entitled
"Actual" under the caption "Capitalization," and the Offered Shares
conform in all material respects to the description thereof contained in
the Prospectus.
(ix) The Offered Shares to be sold by the Company pursuant to
this Agreement have been duly authorized and, when issued and delivered
by the Company upon receipt of the payment therefor in accordance with
this Agreement, will be validly issued, fully paid and non-assessable;
no holder thereof will be subject to personal liability by reason of
being such holder; such Offered Shares are not subject to the preemptive
or other similar rights of any stockholder of the Company arising by
operation of law, under the charter and by-laws of the Company or under
any agreement to which the Company or any of its Subsidiaries is a
party.
(x) Except as disclosed in the Prospectus, there are no
outstanding options, warrants or other rights calling for issuance of,
and no commitments, plans or arrangements to issue, any shares of
capital stock of the Company or any of its Subsidiaries or any security
convertible into or exchangeable for capital stock of the Company or any
of its Subsidiaries.
(xi) All of the outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid
and non-assessable; no holder thereof is subject to personal liability
by reason of being such holder; and none of the outstanding shares of
Common Stock of the Company was issued in violation of the preemptive or
other similar rights of any stockholder of the Company arising by
operation of law, under the charter or by-laws of the Company or under
any agreement to which the Company or any of its Subsidiaries is a
party.
(xii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein or contemplated thereby, there has not been (A)
any material adverse change in the condition (financial or otherwise),
earnings or business affairs of the Company and its Subsidiaries,
considered as one enterprise, whether or not arising in the ordinary
course of business, (B) any transaction entered into by the Company or
any Subsidiary, other than in the ordinary course of business, that is
material to the Company and its Subsidiaries, considered as one
enterprise, or (C) any dividend or
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<PAGE> 8
distribution of any kind declared, paid or made by the Company, on its
capital stock.
(xiii) Neither the Company nor any Subsidiary is in violation of
its charter or by-laws or in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other
agreement or instrument to which it is a party or by which it is bound
or to which any of its properties is subject, except as disclosed in the
Prospectus and except for such defaults that would not have a material
adverse effect on the condition (financial or otherwise), earnings or
business affairs of the Company and its Subsidiaries, considered as one
enterprise. The execution and delivery of this Agreement by the
Company, the issuance, sale and delivery of the Offered Shares, the
consummation by the Company of the transactions contemplated in this
Agreement and in the Registration Statement and compliance by the
Company with the terms of this Agreement have been duly authorized by
all necessary corporate action on the part of the Company and do not and
will not result in any violation of the charter or by-laws of the
Company or any Subsidiary, and do not and will not conflict with, or
result in a breach of any of the terms or provisions of, or constitute a
default under, or result in the creation or imposition of any lien or
encumbrance upon any property or assets of the Company or any Subsidiary
under (A) any contract, indenture, mortgage, loan agreement, note, lease
or other agreement or instrument to which the Company or any Subsidiary
is a party or by which the Company or any Subsidiary is bound or to
which any of their respective properties are subject, or (B) any
existing applicable law (except that no representation is made with
respect to any state securities or "blue-sky" laws), rule, regulation,
judgment, order or decree of any government, governmental
instrumentality or court having jurisdiction over the Company or any
Subsidiary or any of their respective properties, except as disclosed in
the Prospectus.
(xiv) No authorization, approval, consent or license of any
government, governmental instrumentality or court (other than under the
1933 Act and the 1933 Act Regulations and the securities or blue sky
laws of the various states) is necessary in connection with the due
authorization, execution, delivery and performance by the Company of
this Agreement and the Price Determination Agreement and the valid
authorization, issuance, sale and delivery of the Offered Shares or for
the consummation by the Company of the transactions contemplated in the
Prospectus.
(xv) Except as disclosed in the Prospectus, there is no
action, suit or proceeding before or by any government, governmental
instrumentality or court, domestic or foreign, now pending or, to the
knowledge of the Company,
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<PAGE> 9
threatened against or affecting the Company or any Subsidiary that is
required to be disclosed in the Prospectus or that, if determined
adversely to the Company or any of the Subsidiaries, might result in a
material adverse change in the condition (financial or otherwise),
earnings or business affairs of the Company and its Subsidiaries,
considered as one enterprise, which might materially and adversely
affect the properties or assets of the Company and its Subsidiaries,
considered as one enterprise, or which might materially and adversely
affect the consummation of the transactions contemplated in this
Agreement and in the Registration Statement; the aggregate of all
pending legal or governmental proceedings to which the Company or any
Subsidiary is a party or which affect any of the Company's or any
Subsidiary's properties that are not described or referred to in the
Prospectus would not, if determined against the Company and after giving
effect to the Company's insurance coverage, have a material adverse
effect on the condition (financial or otherwise), earnings or business
affairs of the Company and its Subsidiaries, considered as one
enterprise.
(xvi) There are no contracts or documents of a character
required to be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement or to any
document incorporated by reference therein that are not described and
filed as required.
(xvii) The Company and each of its Subsidiaries have good and
marketable title to all properties and assets described in the
Prospectus as owned by it, free and clear of all liens, encumbrances or
restrictions, except such as (A) are described in the Prospectus or (B)
do not materially impair or interfere with the current use made of such
properties or (C) are neither material in amount nor materially
significant, in each case in relation to the business of the Company and
its Subsidiaries, considered as one enterprise; all of the leases and
subleases material to the businesses of the Company and its
Subsidiaries, considered as one enterprise, and under which the Company
or any Subsidiary holds properties described in the Prospectus, are in
full force and effect and neither the Company nor any Subsidiary has
received any notice of any claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any Subsidiary under any
of the leases or subleases mentioned above or affecting or questioning
the rights of the Company or any Subsidiary, to the continued possession
of the leased or subleased premises under any such lease or sublease,
which claims, in the aggregate would have a material adverse effect on
the condition (financial or otherwise), earnings or business affairs of
the Company and its Subsidiaries, considered as one enterprise.
(xviii) The Company and each of its Subsidiaries own or possess
all foreign and domestic governmental licenses, permits, certificates,
consents, orders,
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<PAGE> 10
approvals and other authorizations (collectively, "Governmental
Licenses") necessary to own or lease, as the case may be, and to operate
its properties and to carry on its business as presently conducted,
except where the failure to possess such Governmental Licenses might be
expected to have a material adverse effect on the condition (financial
or otherwise), earnings or business affairs of the Company and its
Subsidiaries, considered as one enterprise, and neither the Company nor
any Subsidiary has received any notice of proceedings relating to
revocation or modification of any such Governmental Licenses that,
singly or in the aggregate, would have a material adverse effect on the
condition (financial or otherwise), earnings or business affairs of the
Company and its Subsidiaries, considered as one enterprise.
(xix) The Company and each of its Subsidiaries own or possess,
or can acquire on reasonable terms, adequate foreign and domestic
patents, patent rights, licenses, trademarks, service marks, trade
names, inventions, copyrights and know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) collectively, "intellectual
property" necessary to carry on their business as presently conducted,
and neither the Company nor any of its Subsidiaries has received any
notice of infringement of or conflict with asserted rights of others
with respect to any intellectual property or of any facts which would
render any intellectual property invalid or inadequate to protect the
interest of the Company or any Subsidiaries therein and which
infringement or conflict, that singly or in the aggregate, could have a
material adverse effect on the condition (financial or otherwise),
earnings or business affairs of the Company and its Subsidiaries,
considered as one enterprise.
(xx) No labor dispute exists with the Company's employees or
with employees of its Subsidiaries or, to the knowledge of the Company,
is imminent that might be expected to materially and adversely affect
the Company and its Subsidiaries, considered as one enterprise; and
neither the Company nor any of its Subsidiaries is aware of any existing
or imminent labor disturbance by the employees of its principal
suppliers, manufacturers or contractors which might be expected to
result in any material adverse change in the condition (financial or
otherwise), earnings or business affairs of the Company and its
Subsidiaries, considered as one enterprise.
(xxi) The Company has not taken since the initial filing of the
Registration Statement and will not take prior to the completion of the
distribution of the Offered Shares, directly or indirectly, any action
designed to cause or result in stabilization or manipulation of the
price of the Common Stock; and the Company has not distributed and will
not distribute any prospectus (as such term is defined in the 1933 Act
and the 1933 Act Regulations) in connection with the offering and
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<PAGE> 11
sale of the Offered Shares other than any preliminary prospectus filed
with the Commission or the Prospectus or other material permitted by the
1933 Act or the 1933 Act Regulations.
(xxii) Except as disclosed in the Prospectus, all United States
federal income tax returns of the Company and its Subsidiaries required
by law to be filed have been filed and all taxes shown by such returns
or otherwise assessed, which are due and payable, have been paid, except
tax assessments, if any, as are being contested in good faith and as to
which adequate reserves have been provided. Except as disclosed in the
Prospectus, all other franchise and income tax returns of the Company
and its Subsidiaries required to be filed pursuant to applicable
foreign, state or local law have been filed, except insofar as the
failure to file such returns would not have a material adverse effect on
the condition (financial or otherwise), earnings or business affairs of
the Company and its Subsidiaries, considered as one enterprise, and all
taxes shown on such returns or otherwise assessed which are due and
payable have been paid, except for such taxes, if any, as are being
contested in good faith and as to which adequate reserves have been
provided. To the best of the Company's knowledge, the charges, accruals
and reserves on the books of the Company and its Subsidiaries in respect
of any income and corporate franchise tax liability for any years not
finally determined are adequate to meet any assessments or
re-assessments for additional income or corporate franchise tax for any
years not finally determined, except as disclosed in the Prospectus and
except to the extent of any inadequacy that would not have a material
adverse effect on the condition (financial or otherwise), earnings or
business affairs of the Company and its Subsidiaries, considered as one
enterprise. The Company is not a United States real property holding
corporation as defined under Section 897(c)(2) of the Code as of the
date hereof, nor has it been a United States real property holding
corporation during the five year period ending on the date hereof.
(xxiii) The Company has obtained the written agreements of each
of Westmark Holdings Limited, Quadrant Capital Corp., Alan G. Quasha,
Jack E. Rosenfeld, Michael P. Sherman, Wayne P. Garten, Edward J.
O'Brien, Geraldine Stutz, Robert F. Wright, Ralph Destino, Elizabeth
Valk Long, Jeffrey Laikind, S. Lee Kling, David E. Ullman, Edward R.
Manwell and J. David Hakman in the forms previously furnished to you
that, for a period of 180 days from the date hereof, such parties will
not, without the prior written consent of Merrill Lynch, Pierce, Fenner
& Smith Incorporated on behalf of the Underwriters, directly or
indirectly, sell, offer to sell, grant any option for the sale of, or
otherwise dispose of any shares of Common Stock or securities or rights
convertible into or exercisable or exchangeable for Common Stock.
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<PAGE> 12
(xxiv) Except as set forth in the Prospectus or in the
agreements listed in Schedule D to this Agreement, there are no holders
of securities (debt or equity) of the Company, or holders of rights
(including, without limitation, preemptive rights), warrants or options
to obtain securities of the Company or its Subsidiaries, who have the
right to request the Company to register securities held by them under
the 1933 Act.
(xxv) The Company and the Subsidiaries (as hereinafter defined)
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance
with management's general and specific authorizations; (ii) transactions
are recorded as necessary to permit preparations of financial statements
in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorizations;
and (iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(b) Mr. Kruttschnitt represents and warrants to, and agrees
with, each of the Underwriters as follows:
(i) When the Registration Statements shall become
effective, and at all times subsequent thereto up to the Closing Time,
and, if any Option Shares are purchased, up to the Date of Delivery, (A)
such parts of the Registration Statement and any amendments and
supplements thereto as specifically refer to Kruttschnitt and are based
upon and in conformity with information furnished or confirmed in
writing to the Company by Kruttschnitt expressly for use in the
Registration Statement will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading and
(B) such parts of the Prospectus as specifically refer to Kruttschnitt
and are based upon and in conformity with information furnished or
confirmed in writing to the Company by Kruttschnitt expressly for use in
the Prospectus will not include an untrue statement of a material fact
or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
(ii) Kruttschnitt has full right, power and authority
to enter into this Agreement and the Price Determination Agreement, and
to sell, transfer and deliver the Shares pursuant to this Agreement; and
this Agreement has been duly authorized, executed and delivered by
Kruttschnitt.
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<PAGE> 13
(iii) Except as set forth in the Prospectus, there is
no action, suit, investigation, or proceeding before or by any
government, governmental instrumentality or court, domestic or foreign,
now pending or, to the knowledge of Kruttschnitt threatened to which
Kruttschnitt is or would be a party or of which the property of
Kruttschnitt is or may be subject, that (i) seeks to restrain, enjoin,
prevent the consummation of or otherwise challenge the sale of Offered
Shares by Kruttschnitt or any of the other transactions contemplated
hereby or (ii) questions the legality or validity of any such
transactions or seeks to recover damages or obtain other relief in
connection with any such transactions.
(iv) No authorization, approval, consent or license of
any government, governmental instrumentality or court (other than under
the 1933 Act and the 1933 Act Regulations and the securities or blue sky
laws of the various states) is required for the execution and delivery
by Kruttschnitt of this Agreement and the Price Determination Agreement
and the valid sale and delivery of the Offered Shares to be sold by
Kruttschnitt hereunder and thereunder.
(v) The execution and delivery of this Agreement and
the Price Determination Agreement by Kruttschnitt, the sale of the
Offered Shares by Kruttschnitt hereunder and thereunder, the compliance
by Kruttschnitt with all the provisions of this Agreement and the Price
Determination Agreement and the consummation by Kruttschnitt of the
transactions herein and therein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other material agreement or instrument to which
Kruttschnitt is a party or by which Kruttschnitt is bound or to which
the properties or assets of Kruttschnitt are subject, nor will such
action result in any violation of the provisions of any statute or any
order, rule or regulation of any court or governmental agency or body
having jurisdiction over Kruttschnitt or the property of Kruttschnitt.
(vi) Kruttschnitt has, and will at the Closing Time
have, good and valid title to the Offered Shares to be sold by
Kruttschnitt pursuant to this Agreement, free and clear of any pledge,
lien, security interest, charge, claim, equity or encumbrance of any
kind (other than (A) the pledge of the Offered Shares to be sold by
Kruttschnitt to Bear Stearns & Co. and Merrill Lynch to secure margin
loans and (B) under the 1933 Act and the 1933 Act Regulations and the
securities or blue sky laws of the various states); and, upon delivery
of such Offered Shares and payment of the purchase price therefor as
contemplated in this Agreement, each of the Underwriters will receive
good and valid title to the Offered Shares purchased by it from
Kruttschnitt, free and clear of any pledge, lien, security interest,
charge, claim, equity or encumbrance of any kind (other
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<PAGE> 14
than under the 1933 Act and the 1933 Act Regulations and the securities
or blue sky laws of the various states).
(vii) Certificates for all of the Offered Shares to be
sold by Kruttschnitt pursuant to this Agreement, in suitable form for
transfer by delivery or accompanied by duly executed instruments of
transfer or assignment in blank with signatures guaranteed, will be
delivered to the Underwriters at the Closing Time, and if any Option
Shares are purchased, at the Date of Delivery.
(viii) Kruttschnitt has not taken and will not take,
directly or indirectly, any action designed to cause or result in
stabilization or manipulation of the price of the Common Stock; and
Kruttschnitt has not distributed and will not distribute any prospectus
(as such term is defined in the 1933 Act and the 1933 Act Regulations)
in connection with the offering and sale of the Offered Shares other
than any preliminary prospectus filed with the Commission or the
Prospectus or other material permitted by the 1933 Act or the 1933 Act
Regulations.
(ix) Neither Kruttschnitt nor any of his affiliates
directly, or indirectly through one or more intermediaries, controls, or
is controlled by, or is under common control with, or has any other
association with (within the meaning of Article I, Section 1(m) of the
By-laws of the National Association of Securities Dealers, Inc.), any
member firm of the National Association of Securities Dealers, Inc.
(c) Sun Life represents and warrants to, and agrees with,
each of the Underwriters as follows:
(i) When the Registration Statements shall become
effective, and at all times subsequent thereto up to the Closing Time,
(A) such parts of the Registration Statement and any amendments and
supplements thereto as specifically refer to Sun Life and are based upon
and in conformity with information furnished or confirmed in writing to
the Company by Sun Life expressly for use in the Registration Statement
will not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading and (B) such parts of the Prospectus
as specifically refer to Sun Life and are based upon and in conformity
with information furnished or confirmed in writing to the Company by Sun
Life expressly for use in the Prospectus will not include an untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
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<PAGE> 15
(ii) Sun Life has full right, power and authority to
enter into this Agreement, the Price Determination Agreement and the
Custody Agreement (as defined below), and to sell, transfer and deliver
the Offered Shares being sold by it pursuant to this Agreement; and this
Agreement has been duly authorized, executed and delivered by Sun Life.
(iii) Except as set forth in the Prospectus, there is
no action, suit, investigation, or proceeding before or by any
government, governmental instrumentality or court, domestic or foreign,
now pending or, to the knowledge of Sun Life threatened to which Sun
Life is or would be a party or of which the property of Sun Life is or
may be subject, that (i) seeks to restrain, enjoin, prevent the
consummation of or otherwise challenge the sale of Offered Shares by Sun
Life or any of the other transactions contemplated hereby or (ii)
questions the legality or validity of any such transactions or seeks to
recover damages or obtain other relief in connection with any such
transactions.
(iv) Sun Life has duly executed and delivered, in the
form heretofore furnished to you, an irrevocable power of attorney and
custody agreement (the "Custody Agreement") with the Company as
custodian (the "Custodian") and Jack E. Rosenfeld and Michael P.
Sherman as attorneys-in-fact (the "Attorneys-in-Fact"); each of the
Attorneys-in-Fact is authorized to execute and deliver this Agreement
(including the Price Determination Agreement) on behalf of Sun Life, to
determine the purchase price to be paid by the Underwriters to Sun Life,
as provided in Section 2 hereof and otherwise to act on behalf of Sun
Life in connection with this Agreement, and the Attorneys-in-Fact and
the Custodian are each authorized to deliver the Shares to be sold by
Sun Life pursuant to this Agreement and to accept payment therefor.
(v) The representations and warranties of Sun Life in
the Custody Agreement are, and on the Closing Date will be, true and
correct.
(vi) No authorization, approval, consent or license of
any government, governmental instrumentality or court (other than under
the 1933 Act and the 1933 Act Regulations and the securities or blue sky
laws of the various states) is required for the execution and delivery
by Sun Life of the Custody Agreement, the execution and delivery by or
on behalf of Sun Life of this Agreement and the Price Determination
Agreement and the valid sale and delivery of the Offered Shares to be
sold by Sun Life hereunder.
(vii) The execution and delivery of this Agreement and
the Price Determination Agreement by Sun Life, the sale of the Offered
Shares by Sun Life hereunder, the compliance by Sun Life with all the
provisions of this Agreement and the Price Determination Agreement and
the consummation by Sun Life of the
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<PAGE> 16
transactions herein and therein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, Sun Life's charter documents, as amended to
the date hereof, or any indenture, mortgage, deed of trust, loan
agreement or other material agreement or instrument to which Sun Life is
a party or by which Sun Life is bound or to which the properties or
assets of Sun Life are subject, nor will such action result in any
violation of the provisions of any statute or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over Sun Life or the property of Sun Life.
(viii) Sun Life has, and will at the Closing Time have
good and valid title to the Offered Shares to be sold by Sun Life
pursuant to this Agreement, free and clear of any pledge, lien, security
interest, charge, claim, equity or encumbrance of any kind (other than
under the 1933 Act and 1933 Act Regulations and the securities or blue
sky laws of the various states); and, upon delivery of such Offered
Shares and payment of the purchase price therefor as contemplated in
this Agreement, each of the Underwriters will receive good and valid
title to the Offered Shares purchased by it from Sun Life, free and
clear of any pledge, lien, security interest, charge, claim, equity or
encumbrance of any kind.
(ix) Certificates for all of the Offered Shares to be
sold by Sun Life pursuant to this Agreement, in suitable form for
transfer by delivery or accompanied by duly executed instruments of
transfer or assignment in blank with signatures guaranteed, have been
placed in custody with the Custodian with irrevocable conditional
instructions to deliver such Offered Shares to the Underwriters pursuant
to this Agreement.
(x) Sun Life has not taken and will not take,
directly or indirectly, any action designed to cause or result in
stabilization or manipulation of the price of the Common Stock; and Sun
Life has not distributed and will not distribute any prospectus (as such
term is defined in the 1933 Act and the 1933 Act Regulations) in
connection with the offering and sale of the Offered Shares other than
any preliminary prospectus filed with the Commission or the Prospectus
or other material permitted by the 1933 Act or the 1933 Act Regulations.
(xi) Neither Sun Life nor any of its affiliates
directly, or indirectly through one or more intermediaries, controls, or
is controlled by, or is under common control with, or has any other
association with (within the meaning of Article I, Section 1(m) of the
By-laws of the National Association of Securities Dealers, Inc.), any
member firm of the National Association of Securities Dealers, Inc.
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<PAGE> 17
(d) Any certificate signed by any officer of the Company, any
officer of Sun Life or Kruttschnitt and delivered to you or to Fried, Frank,
Harris, Shriver & Jacobson as counsel for the Underwriters pursuant to this
Agreement or at the Closing contemplated hereby shall be deemed a
representation and warranty by the Company, Sun Life or Kruttschnitt, as the
case may be, to each Underwriter as to the matters covered thereby.
Section 2. Sale and Delivery to the Underwriters; Closing. (a)
On the basis of the representations and warranties herein contained, and
subject to the terms and conditions herein set forth, the Company agrees to
sell to each Underwriter, severally and not jointly, and each Underwriter
agrees, severally and not jointly, to purchase from the Company, at the
purchase price per share set forth in the Price Determination Agreement, that
proportion of the number of Initial Shares being sold by the Company which the
number of Initial Shares set forth in Schedule A opposite the name of such
Underwriter (plus such additional number of Initial Shares that such
Underwriter may become obligated to purchase pursuant to Section 11 hereof)
bears to the total number of Initial Shares, subject, in each case, to such
adjustments as the Underwriters in their discretion shall make to eliminate any
sales or purchases of fractional shares.
(b) On the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, each of
the Selling Stockholders, severally and not jointly, agrees to sell to each
Underwriter and each Underwriter agrees, severally and not jointly, to purchase
from each Selling Stockholder, at the purchase price per share set forth in the
Price Determination Agreement, that proportion of the number of Initial Shares
being sold by such Selling Stockholder set forth on Schedule C opposite the
name of such Selling Stockholder which the number of Initial Shares set forth
in Schedule A opposite the name of such Underwriter (plus such additional
number of Initial Shares that such Underwriter may become obligated to purchase
pursuant to Section 11 hereof) bears to the total number of Initial Shares,
subject, in each case, to such adjustments as the Underwriters in their
discretion shall make to eliminate any sales or purchases of fractional shares.
(c) If the Company has elected to rely upon Rule 430A, the
initial public offering price per share for the Initial Shares and the purchase
price per share for the Initial Shares to be paid by the several Underwriters
shall be agreed upon and set forth in the Price Determination Agreement, dated
the date hereof, and an amendment to the Registration Statement containing such
per share price information will be filed before the Registration Statement
becomes effective.
(d) If the Company has elected to rely upon Rule 430A, the
initial public offering price per share for the Initial Shares and the purchase
price per share for the Initial Shares to be paid by the several Underwriters
shall be agreed upon and set forth in
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<PAGE> 18
the Price Determination Agreement. In the event that the Price Determination
Agreement has not been executed by the close of business on the fourth business
day following the date on which the Registration Statement becomes effective,
this Agreement shall terminate forthwith, without liability of any party to any
other party except that Sections 7 and 8 shall remain in effect.
(e) In addition, on the basis of the representations and
warranties herein contained, and subject to the terms and conditions herein set
forth, (i) the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional 975,000 shares of Common Stock
and (ii) Kruttschnitt hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional 525,000 Shares of Common Stock
at the same purchase price per share as shall be applicable to the Initial
Shares. The option hereby granted will expire 30 days after the date upon
which the Registration Statement becomes effective or, if the Company has
elected to rely upon Rule 430A, the date of the Price Determination Agreement,
and may be exercised in whole or from time to time in part only for the purpose
of covering over-allotments that may be made in connection with the offering
and distribution of the Initial Shares upon notice by you to the Company
setting forth the number of Option Shares as to which the several Underwriters
are exercising the option, and the time and date of payment and delivery
thereof. Such time and date of delivery (the "Date of Delivery") shall be
determined by you but shall not be later than five full business days after the
exercise of such option, nor in any event prior to the Closing Time. If the
option is exercised as to all or any portion of the Option Shares, the Option
Shares as to which the option is exercised shall be purchased by the
Underwriters, severally and not jointly, in the respective proportions that
bear the same relationship to the number of Option Shares to be purchased at
the Date of Delivery as the number of Initial Shares set forth opposite the
name of each Underwriter in Schedule A hereto bears to the total number of
Initial Shares (such proportions are hereinafter referred to as each
Underwriter's "underwriting obligation proportions").
(f) Payment of the purchase price for, and delivery of
certificates for, the Initial Shares shall be made at the offices of Fried,
Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York
10004, or at such other place as shall be agreed upon by the Company, the
Selling Stockholders and you, at 10:00 A.M. either (i) on the fifth full
business day after the effective date of the Registration Statement, or (ii) if
the Company has elected to rely upon Rule 430A, the fifth full business day
after execution of the Price Determination Agreement (unless, in either case,
postponed pursuant to Section 11 or 12), or at such other time not more than
ten full business days thereafter as you, the Company and the Selling
Stockholders shall determine (such date and time of payment and delivery being
herein called the "Closing Time"). In addition, in the event that any or all
of the Option Shares are purchased by the Underwriters, payment of the purchase
price for, and delivery of certificates for, such Option Shares shall be
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<PAGE> 19
made at the offices of Fried, Frank, Harris, Shriver & Jacobson set forth
above, or at such other place as the Company and you shall determine, on the
Date of Delivery as specified in the notice from you to the Company. Payment
shall be made to the Company and the Selling Stockholders by certified or
official bank check or checks in New York Clearing House funds payable to the
order of the Company or the Selling Stockholders, as the case may be, against
delivery to you for the respective accounts of the several Underwriters of
certificates for the Offered Shares to be purchased by them.
(g) Certificates for the Initial Shares and Option Shares to
be purchased by the Underwriters shall be in such denominations and registered
in such names as you may request in writing at least two full business days
before the Closing Time or the Date of Delivery, as the case may be. The
certificates for the Initial Shares and Option Shares will be made available in
New York City for examination and packaging by you not later than 10:00 A.M. on
the business day prior to the Closing Time or the Date of Delivery, as the case
may be.
(h) It is understood that each Underwriter has authorized
you, for its account, to accept delivery of, receipt for, and make payment of
the purchase price for, the Offered Shares that it has agreed to purchase.
You, individually and not as Representative, may (but shall not be obligated
to) make payment of the purchase price for the Initial Shares, or Option
Shares, to be purchased by any Underwriter whose check or checks shall not have
been received by the Closing Time or the Date of Delivery, as the case may be.
(i) The Company has complied, and will comply, with all of
the provisions of Florida H.B. 1771, as codified in sec. 517.075 Florida
Statutes, 1987, as amended, and all regulations promulgated thereunder relating
to issuers or their affiliates doing business with the government of Cuba or
with any person or affiliate located in Cuba.
Section 3. Certain Covenants of the Company. The Company
covenants with each Underwriter as follows:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective and, if the Company elects to rely
upon Rule 430A and subject to Section 3(b), will comply in all material
respects with the requirements of Rule 430A and will notify you promptly, (i)
when the Registration Statement, or any post-effective amendment to the
Registration Statement, shall have become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission to
amend the Registration Statement or amend or supplement any Prospectus or for
additional information and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of any
order preventing or
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<PAGE> 20
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Offered Shares for offering or sale in any jurisdiction,
or of the institution or threatening of any proceedings for any of such
purposes. The Company will make every reasonable effort to prevent the
issuance of any such stop order or of any order preventing or suspending such
use and, if any such order is issued, to obtain the lifting thereof at the
earliest possible moment.
(b) The Company will not at any time file or make any
amendment to the Registration Statement, any amendment or supplement, and
documents incorporated by reference therein or (i) if the Company has not
elected to rely upon Rule 430A, to the Prospectus or (ii) if the Company has
elected to rely upon Rule 430A, to either the prospectus included in the
Registration Statement at the time it becomes effective or to the Prospectus,
of which you shall not have previously been advised and furnished a copy or to
which you or Fried, Frank, Harris, Shriver & Jacobson as counsel for the
Underwriters shall have promptly and reasonably objected in writing.
(c) The Company has furnished or will furnish to you and your
counsel, without charge, signed copies of the Registration Statement and of all
amendments thereto, whether filed before or after the Registration Statement
becomes effective, copies of all exhibits and documents filed therewith, copies
of all documents incorporated by reference therein and signed copies of all
consents and certificates of experts, and has furnished or will furnish to you,
for each other Underwriter, one conformed copy of the Registration Statement as
originally filed and each amendment thereto.
(d) The Company will deliver to each Underwriter, without
charge, from time to time until the effective date of the Registration
Statement (or, if the Company has elected to rely upon Rule 430A, until the
time the Price Determination Agreement is executed and delivered), as many
copies of each preliminary prospectus as such Underwriter may reasonably
request, and the Company hereby consents to the use of such copies for purposes
permitted by the 1933 Act. The Company will deliver to each Underwriter,
without charge, as soon as the Registration Statement shall have become
effective (or, if the Company has elected to rely upon Rule 430A, as soon as
practicable after the Price Determination Agreement has been executed and
delivered) and thereafter from time to time as requested during the period when
the Prospectus is required to be delivered under the 1933 Act, such number of
copies of the Prospectus (as supplemented or amended) as such Underwriter may
reasonably request.
(e) The Company will comply to the best of its ability with
the 1933 Act and the 1933 Act Regulations, and the 1934 Act, and the 1934 Act
Regulations so as to permit the completion of the distribution of the Offered
Shares as contemplated in this Agreement and in the Prospectus. If at any time
when a prospectus is required by the 1933 Act to be delivered in connection
with sales of the Offered Shares any event shall
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<PAGE> 21
occur or condition exist as a result of which it is necessary, in the opinion
of counsel for the Underwriters, to amend the Registration Statement or amend
or supplement any Prospectus in order that the Prospectus will not include an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the opinion of such counsel, at any such time to amend
the Registration Statement or amend or supplement any Prospectus in order to
comply with the requirements of the 1933 Act, the 1933 Act Regulations, the
1934 Act or the 1934 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 3(b), such amendment or supplement
as may be necessary to correct such untrue statement or omission or to make the
Registration Statement or the Prospectus comply with such requirements.
(f) The Company will use its best efforts, in cooperation
with the Underwriters, to qualify the Offered Shares for offering and sale
under the applicable securities laws of such states and other jurisdictions as
you may designate and to maintain such qualifications in effect for a period of
not less than one year from the effective date of the Registration Statement;
provided, however, that neither the Company nor any Subsidiary shall be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which
it is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. The
Company will file such statements and reports as may be required by the laws of
each jurisdiction in which the Offered Shares have been qualified as above
provided.
(g) The Company will make generally available to its security
holders as soon as practicable, but not later than 60 days after the close of
the period covered thereby, an earnings statement of the Company (in form
complying with the provisions of Rule 158 of the 1933 Act Regulations),
covering a period of 12 months beginning after the effective date of the
Registration Statement but not later than the first day of the Company's fiscal
quarter next following such effective date.
(h) The Company will use the net proceeds received by it from
the sale of the Offered Shares in the manner specified in the Prospectus under
the caption "Use of Proceeds."
(i) For a period of 180 days from the date hereof, the
Company will not, without the prior written consent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated on behalf of the Underwriters, directly or
indirectly, sell, offer to sell, grant any option for the sale of, or otherwise
dispose of, any Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock, other than Common Stock or securities convertible
into or exchangeable or exercisable for Common Stock (i) issued 90 days after
the date hereof as consideration for the acquisition by the Company of stock
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<PAGE> 22
or assets of another entity and (ii) issued to the eligible participants in the
Company's stock plans pursuant to the terms thereof.
(j) If the Company has elected to rely upon Rule 430A, it
will take such steps as it deems necessary to ascertain promptly whether the
forms of Prospectus transmitted for filing under Rule 424(b) were received for
filing by the Commission and, in the event that it was not, it will promptly
file such Prospectus.
(k) For a period of five years after the Closing Time, the
Company will furnish to you and to each Underwriter that so requests copies of
all annual reports, quarterly reports and current reports filed with the
Commission on Forms 10-K, 10-Q and 8-K, or such other similar forms as may be
designated by the Commission, and such other documents, reports and information
relating to the Company's business or finances as shall be furnished by the
Company to its stockholders generally.
(l) The Company, during the period when the Prospectus is
required to be delivered under the 1933 Act or the 1934 Act, will file all
documents required to be filed with the Commission pursuant to Sections 13, 14
or 15 of the 1934 Act within the time periods required by the 1934 Act and the
1934 Act Regulations.
Section 4. Payment of Expenses. The Company will pay all
expenses incident to the performance of its obligations under this Agreement,
including (a) the printing and filing of the Registration Statement (including
financial statements and exhibits), as originally filed and as amended, the
preliminary Prospectus and the Prospectus and any amendments or supplements
thereto, and the cost of furnishing copies thereof to the Underwriters, (b) the
printing and distribution of this Agreement (including the Price Determination
Agreement), the certificates for the Offered Shares and the Blue Sky Survey,
(c) the delivery of the certificates for the Shares to the Underwriters,
including any capital duties, stamp duties and stock or other transfer taxes
payable upon the sale of the Shares to the Underwriters, (d) the fees and
disbursements of the Company's counsel and accountants, and (e) the
qualification of the Offered Shares under the applicable securities laws in
accordance with Section 3(f) and any filing for review of the offering with the
National Association of Securities Dealers, Inc., including filing fees and
reasonable fees and disbursements of Fried, Frank, Harris, Shriver & Jacobson
as counsel for the Underwriters in connection therewith and in connection with
the Blue Sky Survey. Without limiting the obligations of the Selling
Stockholders, each of the Selling Stockholders will pay the fees and
disbursements of its counsel.
If this Agreement is terminated by you in accordance with the
provisions of Section 5, 10(a)(i) or 12, the Company shall reimburse the
Underwriters through you for all their out-of-pocket expenses approved in
writing by you, including the reasonable fees and disbursements of Fried,
Frank, Harris, Shriver & Jacobson as counsel for the Underwriters.
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Section 5. Conditions of Underwriters' Obligations. In addition
to the execution and delivery of the Price Determination Agreement, the
obligations of the several Underwriters to purchase and pay for the Shares that
they have respectively agreed to purchase hereunder (including any Option
Shares as to which the option granted in Section 2 has been exercised and the
Date of Delivery determined by you is the same as the Closing Time) are subject
to the accuracy of the representations and warranties of the Company and the
Selling Stockholders contained herein (including those contained in the Price
Determination Agreement) or in certificates of the Company's and the Selling
Stockholders' officers delivered pursuant to the provisions hereof, to the
performance by the Company and the Selling Stockholders of its obligations
hereunder, and to the following further conditions:
(a) The Registration Statement shall have become effective
not later than 5:30 P.M. on the date of this Agreement or, with your consent,
at a later time and date not later, however, than 5:30 P.M. on the first
business day following the date hereof, or at such later time or on such later
date as you may agree to in writing with the approval of a majority in interest
of the several Underwriters; and at the Closing Time no stop order suspending
the effectiveness of the Registration Statement shall have been issued under
the 1933 Act and no proceedings for that purpose shall have been instituted or
shall be pending or, to your knowledge or the knowledge of the Company or any
of its Subsidiaries, shall have been threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of Fried, Frank, Harris,
Shriver & Jacobson as counsel for the Underwriters. If the Company has elected
to rely upon Rule 430A, a Prospectus containing the Rule 430A Information shall
have been filed with the Commission in accordance with Rule 424(b) (or a
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A).
(b) At the Closing Time, you shall have received signed
opinions of Whitman Breed Abbott & Morgan, counsel for the Company, dated as of
the Closing Time, together with reproduced copies of such opinions for each of
the other Underwriters, in form and substance reasonably satisfactory to Fried,
Frank, Harris, Shriver & Jacobson as counsel for the Underwriters, to the
effect that:
(i) Each of the Company and its Subsidiaries is
incorporated, validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, and each has
corporate power and authority to conduct its business as described in
the Prospectus.
(ii) The Offered Shares to be sold by the Company have
been duly authorized by the Company and, when issued and delivered to
and paid for
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<PAGE> 24
by the Underwriters pursuant to this Agreement, will be validly issued,
fully paid and non-assessable. Such Offered Shares are not subject to
preemptive rights of any stockholder of the Company arising by operation
of law, under the charter or by-laws of the Company or any of its
Subsidiaries or under any agreement of which such counsel has actual
knowledge to which the Company or any of its Subsidiaries is a party.
(iii) All of the outstanding shares of capital stock of
the Company, including the Offered Shares to be sold by the Selling
Stockholders, have been duly authorized and validly issued and are fully
paid and non-assessable and none of the outstanding shares of capital
stock of the Company was issued in violation of the preemptive or other
similar rights of any stockholder of the Company arising by operation of
law, under the charter or by-laws of the Company or its Subsidiaries or
under any agreement known to such counsel to which the Company or any of
its Subsidiaries is a party. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the heading "Capitalization."
(iv) The outstanding stock options and warrants
relating to the Company's Common Stock and any rights calling for the
issuance of shares of the Company's Common Stock have been duly
authorized.
(v) The statements made in the Prospectus under
"Description of Capital Stock," insofar as they are descriptions of
laws, regulations and rules, of contracts, agreements and other legal
documents, or refer to statements of law or legal conclusions have been
reviewed by such counsel and are accurate in all material respects and
are summaries thereof, and the form of certificate used to evidence the
Common Stock is in due and proper form and complies with all applicable
statutory requirements.
(vi) This Agreement and the Price Determination
Agreement have been duly authorized, executed and delivered by the
Company.
(vii) No authorization, approval, consent or license of
any government, governmental instrumentality or court (other than under
the 1933 Act and the 1933 Act Regulations, which have been obtained, or
as may be required under the securities or blue sky laws of the various
states as to which such counsel need express no opinion) is required in
connection with the due authorization, execution, and delivery of this
Agreement by the Company, for the valid issuance, sale and delivery of
the Offered Shares or for the consummation by the Company of the
transactions contemplated in this Agreement and the Prospectus under the
23
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caption "Use of Proceeds," except for obtaining permits and licenses in
the ordinary course.
(viii) The execution and delivery of this Agreement and
the Price Determination Agreement by the Company, the issuance and
delivery of the Offered Shares sold by the Company to the Underwriters,
the consummation by the Company of the transactions contemplated in this
Agreement and compliance by the Company with the terms of this Agreement
have been duly authorized by all necessary corporate action on the part
of the Company and do not and will not result in any violation of the
charter or by-laws of the Company or any of its Subsidiaries, and do not
and will not conflict with, or constitute a breach of any of the terms
and provisions of, or constitute a default under, or result in the
creation or imposition of any lien or encumbrance upon any property or
assets of the Company or its Subsidiaries under (A) any agreement filed
as an Exhibit to the Registration Statement or any document incorporated
by reference therein, (B) any existing federal, New York or Delaware
law, rule or regulation (other than the securities or blue sky laws of
the various states as to which such counsel need express no opinion)
applicable to the Company or its Subsidiaries, or (C) to the actual
knowledge of such counsel, any judgment, order or decree of any
government, governmental instrumentality or court, having jurisdiction
over the Company or its Subsidiaries or any of their respective
properties. Such counsel need express no opinion, however, as to
whether the execution, delivery and performance by the Company of any of
the agreements identified in the preceding sentence will constitute a
violation of, or default under, any financial covenant or financial
ratios contained in such agreements.
(ix) Such counsel has been informed by the Commission
that the Registration Statement is effective under the 1933 Act; any
required filing of the Prospectus or any supplement thereto pursuant to
Rule 424(b) has been made in the manner and within the time period
required by Rule 424(b); and, to the knowledge of such counsel, no stop
order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted or
are pending or have been threatened by the Commission under the 1933
Act.
(x) The Registration Statement (including the Rule
430A Information, if applicable), the Prospectus and each amendment or
supplement to the Registration Statement and the Prospectus, as of their
respective effective or issue dates (in each case, except for the
financial statements and supporting schedules included therein or
omitted therefrom, as to which such counsel need express no opinion),
complied as to form in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations.
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(xi) All descriptions in the Prospectus described
under the captions "The Company -- Recent Strategic Acquisitions and
Ventures," "Business -- Growth Strategy," "Business -- Credit
Management," "Business -- Government Regulation," "Business --
Properties," "Management -- General," "Principal and Selling
Stockholders -- Relationship with Sun Life," and "Relationship with NAR"
insofar as they are descriptions of laws, regulations and rules,
contracts, agreements and other legal documents or refer to statements
of law or legal conclusions have been reviewed by such counsel and are
accurate in all material respects; to the best of such counsel's
knowledge, there are no franchises, contracts, indentures, mortgages,
loan agreements, notes, leases or other instruments or agreements
required to be described or referred to in the Registration Statement or
the Prospectus or in the documents incorporated by reference therein or
to be filed as exhibits thereto other than those described or referred
to therein or filed as exhibits thereto or incorporated by reference
therein (and other than financial statements and other financial data,
as to which counsel need express no opinion); and the descriptions
thereof or references thereto are accurate in all material respects.
(xii) The documents incorporated by reference in the
Registration Statement and the Prospectus (other than the financial
statements and other financial data therein, as to which counsel need
express no opinion), when they were filed with the Commission, or, if
applicable, at the date of filing any amendments thereto, complied as to
form in all material respects with the requirements of the 1934 Act and
the 1934 Act Regulations.
(xiii) To the actual knowledge of such counsel, there
are no legal or governmental actions, suits or proceedings pending or
threatened against the Company or any of its Subsidiaries that are
required to be described in the Prospectus that are not described as
required.
(xiv) The statements made in the Prospectus under the
caption "Certain United States Federal Tax Consequences to Non-Holders
of Common Stock," to the extent they are statements of United States
federal laws, have been reviewed by such counsel and fairly present the
information disclosed therein in all material respects.
In addition, such opinion shall state that such counsel has
participated in the preparation of the Registration Statement and Prospectus
and in conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company and your
representatives and your counsel at which the contents of the Registration
Statement, the Prospectus and related matters were discussed and, although such
counsel need not pass upon or assume any responsibility for the
25
<PAGE> 27
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except as set forth in clauses (v),
(xi) and (xiv), on the basis of and subject to the foregoing, no facts have
come to the attention of such counsel to lead such counsel to believe (A) that
the Registration Statement (including the documents incorporated by reference
therein and the Rule 430A Information, if applicable) or any amendment thereto
(except for the financial statements, supporting schedules and other financial
data included therein or omitted therefrom, as to which such counsel need
express no opinion), as of the date the Registration Statement or any such
amendment became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or (B) that the Prospectus
(including the documents incorporated by reference therein) or any amendment or
supplement thereto (except for the financial statements, supporting schedules
and other financial data included therein or omitted therefrom, as to which
such counsel need express no opinion), as of the date of the Prospectus and at
the Closing Time, contained or contains an untrue statement of a material fact
or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Such opinion shall be to such further effect with respect to
legal matters relating to this Agreement and the sale of the Offered Shares
pursuant to this Agreement as counsel to the Underwriters may reasonably
request. Such counsel may limit its opinion to the laws of the United States,
the State of New York and the General Corporation Law of the State of Delaware.
Such counsel may also state that, insofar as such opinions involve factual
matters, they have relied, to the extent they deem proper, upon certificates of
officers of the Company and the Subsidiaries and certificates of public
officials.
(c) At the Closing Time, you shall have received a signed
opinion of Michael P. Sherman, Executive Vice President- General Counsel for
the Company, dated as of the Closing Time, together with reproduced copies of
such opinion for each of the other Underwriters, in form and substance
reasonably satisfactory to Fried, Frank, Harris, Shriver & Jacobson as counsel
for the Underwriters, to the effect that:
(i) To the best knowledge of such counsel except as
described or referred to in the Prospectus, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to
which the Company or any of the Subsidiaries is a party, or to which the
property of the Company or any of the Subsidiaries is subject, before or
brought by any court or governmental agency or body, which, if
determined adversely to the Company or any of the Subsidiaries, would
individually or in the aggregate result in any material adverse change
in condition (financial or otherwise), earnings, business affairs or
business prospects, of the Company and the Subsidiaries considered as
one enterprise or would
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adversely affect the consummation of the transactions contemplated by
the Registration Statement; and all pending legal or governmental
proceedings to which the Company or any of the Subsidiaries is a party
or that affect any of their respective properties that are not described
in the Prospectus, including ordinary routine litigation incidental to
the business, would, considered in the aggregate not result in a
material adverse change in the condition (financial or otherwise),
earnings or business affairs of the Company and the Subsidiaries
considered as one enterprise. Such counsel does not know of any pending
or threatened legal or government actions, suits or proceedings required
to be described in the Prospectus that are not described as required,
nor any material contracts or documents of a character required to be
described or referred to in the Registration Statement, the Prospectus
or the documents incorporated by reference therein or to be filed as
exhibits to the Registration Statement or the documents incorporated by
reference therein that are not described, referred to, incorporated by
reference or filed as required.
(ii) Each of the Company and its Subsidiaries is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which it owns or leases property.
(iii) To the best of such counsel's knowledge, no
default exists on the part of the Company or any of its Subsidiaries in
the performance or observance of any material obligation, agreement,
covenant or condition contained in any contract, indenture, loan
agreement, note, lease or other agreement or instrument that is
described or referred to in the Registration Statement, Prospectus or
the documents incorporated by reference therein or filed as an exhibit
to the Registration Statement that is material to the Company.
(iv) To the best of such counsel's knowledge, neither
the Company nor its Subsidiaries are in violation of its charter
documents.
(v) Except as disclosed in or specifically
contemplated by the Prospectus, to the best of such counsel's knowledge,
there are no outstanding options, warrants or other rights calling for
the issuance of, and no commitments, obligations, plans or arrangements
to issue, any shares of capital stock of the Company or any security
convertible into or exchangeable for capital stock of the Company.
(vi) The outstanding stock options and warrants
relating to the Company's Common Stock and any rights calling for the
issuance of shares of the Company's Common Stock have been validly
issued.
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<PAGE> 29
In addition, such opinion shall state that such counsel has
participated in the preparation of the Registration Statement and Prospectus
and in conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company and your
representatives and your counsel at which the contents of the Registration
Statement, the Prospectus and related matters were discussed and, although such
counsel need not pass upon or assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus on the basis of and subject to the foregoing, no
facts have come to the attention of such counsel to lead such counsel to
believe (A) that the Registration Statement (including the documents
incorporated by reference therein, and the Rule 430A Information, if
applicable) or any amendment thereto (except for the financial statements,
supporting schedules and other financial data included therein or omitted
therefrom, as to which such counsel need express no opinion), as of the date
the Registration Statement or any such amendment became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or (B) that the Prospectus (including the documents incorporated by
reference therein) or any amendment or supplement thereto (except for the
financial statements, supporting schedules and other financial data included
therein or omitted therefrom, as to which such counsel need express no
opinion), as of the date of the Prospectus and at the Closing Time, contained
or contains an untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
Such opinion shall be to such further effect with respect to
legal matters relating to this Agreement and the sale of the Offered Shares
pursuant to this Agreement as counsel to the Underwriters may reasonably
request. Such counsel may also state that, insofar as such opinions involve
factual matters, he has relied, to the extent he deems proper, upon
certificates of officers of the Company and the Subsidiaries and certificates
of public officials.
(d) At the Closing Time, you shall have received signed
opinions of Hosie, Wes, McLaughlin & Sacks, counsel for Kruttschnitt, dated as
of the Closing Time, together with reproduced copies of such opinions for each
of the other Underwriters, in form and substance reasonably satisfactory to
Fried, Frank, Harris, Shriver & Jacobson as counsel for the Underwriters to the
effect that:
(i) This Agreement, the Price Determination Agreement
and the Purchase Agreement have been duly executed and delivered by or
on behalf of Kruttschnitt.
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<PAGE> 30
(ii) No authorization, approval, consent or license of
any government, governmental instrumentality or court (other than under
the 1933 Act and the 1933 Act Regulations, which have been obtained, or
as may be required under the securities or blue sky laws of the various
states as to which counsel need express no opinion) is required in
connection with the due authorization, execution and delivery of this
Agreement and the Price Determination Agreement by Kruttschnitt, for the
valid sale and delivery of the Offered Shares or for the consummation by
Kruttschnitt of the transactions contemplated in this Agreement or the
Price Determination Agreement.
(iii) The execution and delivery of this Agreement and
the Price Determination Agreement by Kruttschnitt, the sale of the
Offered Shares by Kruttschnitt hereunder and thereunder, the compliance
by Kruttschnitt with all the provisions of this Agreement and the Price
Determination Agreement and the consummation by Kruttschnitt of the
transactions herein and therein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other material agreement or instrument to which
Kruttschnitt is a party or by which Kruttschnitt is bound or to which
the properties or assets of Kruttschnitt are subject, nor will such
action result in any violation of the provisions of any statute or any
order, rule or regulation of any court or governmental agency or body
having jurisdiction over Kruttschnitt or the property of Kruttschnitt.
(iv) Kruttschnitt is the sole record owner and has
good and valid title to the Offered Shares to be sold by Kruttschnitt
hereunder and full power, right and authority to sell the Offered Shares
as herein contemplated; the Underwriters shall receive good and valid
title to the Offered Shares purchased by them free and clear of any
mortgage, pledge, lien, security interest, encumbrance, claim or equity
created by or arising through Kruttschnitt.
Such opinion shall be to such further effect with respect to
legal matters relating to this Agreement and the sale of the Offered Shares
pursuant to this Agreement as counsel to the Underwriters may reasonably
request. Such counsel may also state that, insofar as such opinions involve
factual matters, he has relied, to the extent he deemed proper, upon
certificates of public officials.
(e) At the Closing Time, you shall have received signed
opinions of Lorin M. Fife, Senior Vice President and General Counsel for Sun
Life, dated as of the Closing Time, together with reproduced copies of such
opinions for each of the other Underwriters, in form and substance reasonably
satisfactory to Fried, Frank, Harris, Shriver & Jacobson as counsel for the
Underwriters to the effect that:
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<PAGE> 31
(i) This Agreement and the Price Determination
Agreement, have been duly authorized, executed and delivered by or on
behalf of Sun Life.
(ii) No authorization, approval, consent or license of
any government, governmental instrumentality or court (other than under
the 1933 Act and the 1933 Act Regulations or as may be required under
the securities or blue sky laws of the various states as to which
counsel need express no opinion) is required in connection with the due
authorization, execution and delivery of this Agreement and the Price
Determination Agreement by Sun Life, for the valid sale and delivery of
the Offered Shares or for the consummation by Sun Life of the
transactions contemplated in this Agreement or the Price Determination
Agreement.
(iii) The Custody Agreement (including the Power of
Attorney contained therein) has been duly authorized, executed and
delivered by Sun Life and constitutes the valid and binding obligation
of Sun Life, in accordance with its terms.
(iv) Each Attorney-in-Fact has been duly authorized by
Sun Life to deliver the Offered Shares on behalf of Sun Life in
accordance with the terms of this Agreement and the Price Determination
Agreement.
(v) The execution and delivery of this Agreement and
the Price Determination Agreement by Sun Life, the sale of the Offered
Shares by Sun Life hereunder and thereunder, the compliance by Sun Life
with all the provisions of this Agreement and the Price Determination
Agreement and the consummation by Sun Life of the transactions herein
and therein contemplated will not result in a violation of the charter
or bylaws of Sun Life and, to the best of such counsel's knowledge after
due inquiry, will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other material
agreement or instrument to which Sun Life is a party or by which Sun
Life is bound or to which the properties or assets of Sun Life are
subject, nor will such action result in any violation of the provisions
of any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over Sun Life or the
property of Sun Life.
(vi) Sun Life is the sole record owner and has full
power, right and authority to sell the Offered Shares as herein
contemplated; and, assuming the Underwriters purchase the Offered Shares
from Sun Life in good faith and without notice of any adverse
30
<PAGE> 32
claim, the Underwriters shall receive good and valid title to the
Offered Shares purchased by them from Sun Life free and clear of any
adverse claim, including without limitation, any mortgage, pledge, lien,
security interest, encumbrance, claim or equity created by or arising
through Sun Life.
Such opinion shall be to such further effect with respect to
legal matters relating to this Agreement and the sale of the Offered Shares
pursuant to this Agreement as counsel to the Underwriters may reasonably
request. Such counsel may also state that, insofar as such opinions involve
factual matters, he has relied, to the extent he deemed proper, upon
certificates of public officials.
(f) At the Closing Time, you shall have received the
favorable opinion of Fried, Frank, Harris, Shriver & Jacobson as counsel for
the Underwriters, dated as of the Closing Time, together with reproduced copies
of such opinion for each of the other Underwriters, to the effect that the
opinions delivered pursuant to Sections 5(b), 5(c), 5(d) and 5(e) appear on
their faces to be appropriately responsive to the requirements of this
Agreement except, specifying the same, to the extent waived by you, and with
respect to the incorporation and legal existence of the Company, the Offered
Shares, this Agreement, the Registration Statement, the Prospectus and such
other related matters as you may require. In giving such opinion such counsel
may rely, as to all matters governed by the laws of jurisdictions other than
the law of the State of New York and the federal law of the United States, upon
the opinions of counsel satisfactory to you. Such counsel may also state that,
insofar as such opinion involves factual matters, they have relied, to the
extent they deem proper, upon certificates of officers of the Company and the
Subsidiaries and certificates of public officials.
(g) At the Closing Time, (i) the Registration Statement and
the Prospectus (including the documents incorporated therein by reference), as
they may then be amended or supplemented, shall conform in all material
respects to the requirements of the 1933 Act, the 1933 Act Regulations, the
1934 Act and the 1934 Act Regulations, the Company shall have complied in all
material respects with Rule 430A (if it shall have elected to rely thereon),
the Registration Statement (including the documents incorporated therein by
reference), as it may then be amended or supplemented, shall not contain an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements in the Registration
Statement not misleading, and the Prospectus (including the documents
incorporated therein by reference), as they may then be amended or
supplemented, shall not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements in the Prospectus, in light of the circumstances under which they
were made, not misleading, (ii) there shall not have been, since the respective
dates as of which information is given in the Prospectus, any material adverse
change, or any development involving a prospective material adverse change, in
the condition (financial or otherwise), earnings or business affairs of the
Company and its Subsidiaries, considered as one enterprise, whether or not
arising in the ordinary course of business,
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<PAGE> 33
(iii) no action, suit or proceeding at law or in equity shall be pending or, to
the knowledge of the Company, threatened against the Company or any Subsidiary
that would be required to be set forth in the Prospectus other than as set
forth therein and no proceedings shall be pending or, to the knowledge of the
Company, threatened against the Company or any Subsidiary before or by any
federal, state or other commission, board or administrative agency that could
reasonably be expected to materially and adversely affect the condition
(financial or otherwise), earnings or business affairs of the Company and its
Subsidiaries, considered as one enterprise, other than as set forth in the
Prospectus, (iv) the Company shall have complied in all material respects with
all agreements and satisfied in all material respects all conditions on their
parts to be performed or satisfied at or prior to the Closing Time and (v) the
other representations and warranties of the Company set forth in Section 1(a)
shall be accurate as though expressly made at and as of the Closing Time. At
the Closing Time, you shall have received a certificate of the President or
Executive Vice President and the chief financial or chief accounting officer of
the Company, dated as of the Closing Time, to such effect. As used in Section
5(g)(ii) and (iii), the term "Prospectus" means the Prospectus in the form
first used to confirm sales of the Offered Shares.
(h) At the Closing Time, (i) the representations and
warranties of each Selling Stockholder set forth in Section 1(b) and Section
1(c), respectively, and in any certificates by or on behalf of the Selling
Stockholders delivered pursuant to the provisions hereof shall be accurate as
though expressly made at and as of the Closing Time, (ii) each Selling
Stockholder shall have performed its obligations under this Agreement in all
material respects and (iii) you shall have received a certificate of each
Selling Stockholder, dated as of the Closing Time, to the effect set forth in
subsections (i) and (ii) of this Section 5(h).
(i) At the time that this Agreement is executed by the
Company, you shall have received from Arthur Andersen & Co. a letter, dated
such date, in form and substance satisfactory to you, together with signed or
reproduced copies of such letter for each of the other Underwriters, confirming
that they are independent public accountants with respect to the Company within
the meaning of the 1933 Act and the applicable published 1933 Act Regulations,
and stating in effect that:
(i) in their opinion, the audited financial
statements and the related financial statement schedules included or
incorporated by reference in the Registration Statement and the
Prospectus comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations;
(ii) on the basis of procedures (but not an
examination in accordance with generally accepted auditing standards)
consisting of a reading of
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<PAGE> 34
the minutes of all meetings of the stockholders and directors of the
Company and the Subsidiaries and each committee of the board of
directors of each of the Company and the Subsidiaries since January 1,
1994, inquiries of certain officials of the Company and the Subsidiaries
responsible for financial and accounting matters and such other
inquiries and procedures as may be specified in such letter, nothing
came to their attention that caused them to believe that:
(A) at ________, 1994 and at a specified date
not more than five days prior to the date of this Agreement, there was
(i) any change in the consolidated stockholders' equity or capital stock
or any decrease in consolidated net current assets, working capital or
total assets or (ii) increase in long-term debt of the Company and its
Subsidiaries as compared with the amounts shown in the latest balance
sheet included or incorporated by reference in the Registration
Statement, except in each case for changes, decreases or increases that
the Registration Statement discloses have occurred or may occur; or
(B) for the period January 1, 1994 to a
specified date not more than five days prior to the date of this
Agreement, there was any decrease in consolidated net revenues,
operating income, or in the total or per-share amounts of consolidated
income before income taxes or of consolidated net income or in other
items specified by the Representatives, in each case as compared with
the comparable period in the preceding year, except in each case for any
decreases that the Registration Statement discloses that occurred or may
occur;
(iii) they are unable to and do not express any opinion
on the Pro Forma Consolidated Financial Statements of the Company or on
the pro forma adjustments applied to the historical amounts included or
incorporated by reference in the Registration Statement and the
Prospectus in such statements (the "Pro Forma Information"), however,
for purposes of such letter they have:
(A) read the Pro Forma Information;
(B) made inquiries of certain officials of the
Company who have responsibility for financial and accounting matters
about the basis for their determination of the pro forma adjustments and
whether the Pro Forma Information above complies in form in all material
respects with the applicable accounting requirements of Rule 11-02 of
Regulation S-X;
(C) compared the historical amounts in the Pro Forma
Information with the Company's audited financial statements or
accounting records; and
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(D) proved the arithmetic accuracy of the application
of the pro forma adjustments to the historical amounts in the Pro Forma
Information; and
on the basis of such procedures, and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that caused them
to believe that the Pro Forma Information included in the Registration
Statement does not comply as to form in all material respects with the
applicable requirements of Rule 11-02 of Regulation S-X and that the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of such statements; and
(iv) in addition to the procedures referred to in clauses (ii)
and (iii) above, they have performed other specified procedures, not
constituting an audit, with respect to certain amounts, percentages, numerical
data and financial information appearing in the Registration Statement and the
documents incorporated therein by reference, which have previously been
specified by you and which shall be specified in such letter, and have compared
certain of such items with, and have found such items to be in agreement with,
the accounting and financial records of the Company and its Subsidiaries.
(j) At the Closing Time, you shall have received from Arthur
Andersen & Co. a letter, in form and substance satisfactory to you and dated as
of the Closing Time, to the effect that they reaffirm the statements made in
the letter furnished pursuant to Section 5(i), except that the specified date
referred to shall be a date not more than five days prior to the Closing Time.
In the event the Company relies on Rule 430A and the final Prospectus furnished
to the Underwriters in connection with the offering of the Offered Shares
differs from the Prospectus included in the Registration Statement at the time
of effectiveness, such letter shall update the procedures referred to in
clauses 5(h)(ii), (iii) and (iv) above.
(k) At the time that this Agreement is executed by the
Company, you shall have received from Ernst & Young a letter, dated such date,
in form and substance satisfactory to you, together with signed or reproduced
copies of such letter for each of the other Underwriters, confirming that they
are independent public accountants with respect to Gump's, Inc. within the
meaning of the 1933 Act and the applicable published 1933 Act Regulations, and
stating in effect that:
(i) in their opinion, the audited financial
statements incorporated by reference in the Registration Statement and
the Prospectus comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations; and
(ii) they have read the 1993 minutes of meetings of
the stockholders, the board of directors, and each committee of the
board of directors
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<PAGE> 36
of Gump's, Inc. through September 26, 1993, inquired of certain
officials of Gump's, Inc. responsible for financial and accounting
matters and performed certain procedures as may be specified in such
letter.
(l) At the time that this Agreement is executed by the
Company, you shall have received from Arthur Andersen & Co. a letter, dated
such date, in form and substance satisfactory to you, together with signed or
reproduced copies of such letter for each of the other Underwriters, confirming
that they are independent public accountants with respect to Company Store
Holdings, Inc. and its subsidiaries (the "Company Store") within the meaning
of the 1933 Act and the applicable published 1933 Act Regulations, and stating
in effect that:
(i) in their opinion, the audited financial statements
incorporated by reference in the Registration Statement and the
Prospectuses comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations; and
(ii) they have read the 1993 minutes of meetings of the
stockholders, the board of directors, and each committee of the board of
directors of the Company Store through _____________, 1993, inquired of
certain officials of the Company Store responsible for financial and
accounting matters and performed certain procedures as may be specified
in such letter.
(m) At the time that this Agreement is executed by the
Company, you shall have received from KPMG Peat Marwick a letter, dated such
date, in form and substance satisfactory to you, together with signed or
reproduced copies of such letter for each of the other Underwriters, confirming
that they are independent public accountants with respect to the Tweeds, Inc.
within the meaning of the 1933 Act and the applicable published 1933 Act
Regulations, and stating in effect that:
(i) in their opinion, the audited financial
statements incorporated by reference in the Registration Statement and
the Prospectuses comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations; and
(ii) they have read the 1993 minutes of meetings of
the stockholders, the board of directors, and each committee of the
board of directors of Tweeds, Inc. through March 4, 1993, inquired of
certain officials of Tweeds, Inc. responsible for financial and
accounting matters and performed certain procedures as may be specified
in such letter.
(n) At the Closing Time, you shall have received a letter
from each of Ernst & Young, Arthur Andersen & Co. and KPMG Peat Marwick, in
form and substance
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<PAGE> 37
satisfactory to you and dated as of the Closing Time, to the effect that they
reaffirm the statements made to you in their letters furnished pursuant to
Sections 5(k), 5(l) and 5(m), respectively, except that the specified date
referred to shall be a date not more than five days prior to the Closing Time.
(o) At the Closing Time, counsel for the Underwriters shall
have been furnished with all such documents, certificates and opinions as they
may reasonably request for the purpose of enabling them to pass upon the
issuance and sale of the Offered Shares as contemplated in this Agreement and
the matters referred to in Section 5(f) and in order to evidence the accuracy
and completeness of any of the representations, warranties or statements of the
Company and the Selling Stockholders, the performance of any of the covenants
of the Company and the Selling Stockholders , or the fulfillment of any of the
conditions herein contained; and all proceedings taken by the Company and the
Selling Stockholders at or prior to the Closing Time in connection with the
authorization, issuance and sale of the Offered Shares as contemplated in this
Agreement shall be reasonably satisfactory in form and substance to you and to
Fried, Frank, Harris, Shriver & Jacobson as counsel for the Underwriters.
(p) Each Selling Stockholder shall have delivered to you on
or prior to the Closing Time a properly completed and executed United States
Treasury Department Form W/9 (or other applicable form or statement specified
by Treasury Department regulations).
If any of the conditions specified in this Section 5 shall not
have been fulfilled when and as required by this Agreement to be fulfilled,
this Agreement may be terminated by you upon notice to the Company and the
Selling Stockholders at any time at or prior to the Closing Time, and such
termination shall be without liability of any party to any other party except
as provided in Section 4 herein. Notwithstanding any such termination, the
provisions of Sections 7 and 8 herein shall remain in effect.
Section 6. Conditions to Purchase of Option Shares. In the
event that the Underwriters exercise their option granted in Section 2 to
purchase all or any of the Option Shares and the Date of Delivery determined by
you pursuant to Section 2 is later than the Closing Time, the obligations of
the several Underwriters to purchase and pay for the Option Shares that they
shall have respectively agreed to purchase pursuant to this Agreement are
subject to the accuracy of the representations and warranties of the Company
herein contained, to the performance of the Company of its obligations
hereunder and to the following further conditions:
(a) The Registration Statement shall remain effective at the
Date of Delivery, and at the Date of Delivery no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
1933 Act and no proceedings for that purpose shall have been instituted or
shall be pending or, to your knowledge or the
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<PAGE> 38
knowledge of the Company, shall have been threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of Fried, Frank, Harris,
Shriver & Jacobson as counsel for the Underwriters.
(b) At the Date of Delivery, the provisions of Section 5(g)
shall have been complied with at and as of the Date of Delivery and, at the
Date of Delivery, you shall have received a certificate of the President or
Executive Vice President and the chief financial or chief accounting officer of
the Company with respect to the provisions of Section 5(g), dated as of the
Date of Delivery, to such effect.
(c) At the Date of Delivery, you shall have received the
favorable opinions of Whitman Breed Abbott & Morgan, Michael P. Sherman and
Hosie, Wes, McLaughlin & Sacks together with reproduced copies of such opinions
for each of the other Underwriters in form and substance satisfactory to Fried,
Frank, Harris, Shriver & Jacobson as counsel for the Underwriters, dated as of
the Date of Delivery, relating to the Option Shares and otherwise to the same
effect as the opinions required by Sections 5(b), (c) and (d).
(d) At the Date of Delivery, you shall have received the
favorable opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel for the
Underwriters, dated as of the Date of Delivery, relating to the Option Shares
and otherwise to the same effect as the opinion required by Section 5(f).
(e) At the Date of Delivery, you shall have received a letter
from Arthur Andersen & Co., in form and substance satisfactory to you and dated
as of the Date of Delivery, to the effect that they reaffirm the statements
made in the letter furnished pursuant to Section 5(j), except that the
specified date referred to shall be a date not more than five days prior to the
Date of Delivery.
(f) At the Date of Delivery, you shall have received letters
from each of Ernst and Young, Arthur Andersen & Co. and KPMG Peat Marwick, in
form and substance satisfactory to you and dated as of the Date of Delivery, to
the effect that they reaffirm the statements made in their letters furnished
pursuant to Section 5(n) except that the specified date referred to shall be a
date not more than five business days prior to the Date of Delivery.
(g) At the Date of Delivery, Fried, Frank, Harris, Shriver &
Jacobson as counsel for the Underwriters shall have been furnished with all
such documents, certificates and opinions as they may reasonably request for
the purpose of enabling them to pass upon the issuance and sale of the Option
Shares as contemplated in this Agreement and the matters referred to in Section
6(f) and in order to evidence the accuracy and completeness of any of the
representations, warranties or statements of the
37
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Company, the performance of any of the covenants of the Company, or the
fulfillment of any of the conditions herein contained; and all proceedings
taken by the Company, at or prior to the Date of Delivery in connection with
the authorization, issuance and sale of the Option Shares as contemplated in
this Agreement shall be reasonably satisfactory in form and substance to you
and to Fried, Frank, Harris, Shriver & Jacobson as counsel for the
Underwriters.
Section 7. Indemnification. (a) The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim,
damage and expense whatsoever, promptly after submission for payment,
arising out of an untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), including the Rule 430A Information, if applicable, and all
the documents incorporated by reference therein, or the omission or
alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading or
arising out of an untrue statement or alleged untrue statement of a
material fact included in any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto), including all the documents
incorporated by reference therein, or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(ii) against any and all loss, liability, claim,
damage and expense whatsoever, promptly after submission for payment, to
the extent of the aggregate amount paid in settlement of any litigation,
investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, and
(iii) against any and all expense whatsoever, promptly
after submission for payment (including, subject to the last sentence of
Section 7(d), fees and disbursements of counsel chosen by you to
represent the Underwriters), reasonably incurred in investigating,
preparing or defending against any litigation, or investigation or
proceeding by any governmental agency or body, commenced or threatened,
or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under subparagraph (i) or (ii)
above;
provided, however, that (i) this indemnity does not apply to any loss,
liability, claim, damage or expense to the extent arising out of an untrue
statement or omission or alleged
38
<PAGE> 40
untrue statement or omission made in reliance upon and in conformity with
information furnished or confirmed in writing to the Company by or on behalf of
any Underwriter through you expressly for use in the Registration Statement (or
in any amendment thereto), including the Rule 430A Information, if applicable,
or any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) and (ii) such indemnity with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter (or any person controlling
such Underwriter) from whom the person asserting such loss, claim, damage or
liability purchased the Offered Shares which are the subject thereof if such
person did not receive a copy of the Prospectus (or the Prospectus as amended
or supplemented) at or prior to the confirmation of the sale of such Offered
Shares to such person in any case where such delivery is required by the 1933
Act and the untrue statement or omission or alleged untrue statement or
omission of a material fact contained in such preliminary prospectus was
corrected in the Prospectus (as amended or supplemented).
(b) Each Selling Stockholder severally (in the proportion
that the number of Offered Shares being sold by such Selling Stockholder bears
to the total number of Offered Shares) agrees to indemnify and hold harmless
the Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the 1933 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in Section 7(a),
promptly after submission for payment, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information, if applicable, or any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) in reliance upon and in conformity with
information furnished or confirmed in writing to the Company by or on behalf of
such Selling Stockholder expressly for use in the Registration Statement (or
any amendment thereto), including the Rule 430A Information, if applicable, or
such preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(c) Each Underwriter severally agrees to indemnify and hold
harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person who controls the Company within the
meaning of Section 15 of the 1933 Act and each Selling Stockholder against any
and all loss, liability, claim, damage and expense described in the indemnity
contained in Section 7(a), promptly after submission for payment, but only with
respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with information furnished or confirmed in
writing to the Company by or on behalf of such Underwriter through you
expressly for use in the Registration Statement (or any
39
<PAGE> 41
amendment thereto), including the Rule 430A Information, if applicable, or such
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(d) Each indemnified party shall give prompt notice to each
indemnifying party of any action commenced against it in respect of which
indemnity may be sought hereunder, but failure to so notify an indemnifying
party shall not relieve it from any liability which it may have otherwise than
on account of this indemnity agreement. An indemnifying party may participate
at its own expense in the defense of such action. In no event shall the
indemnifying party or parties be liable for the fees and expenses of more than
one counsel in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances.
(e) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding. No indemnifying party shall be liable for any settlement
of any action or claim for monetary damages which an indemnified party may
effect without the consent of the indemnifying party, which consent shall not
be unreasonably withheld.
(f) No Selling Stockholder shall be responsible for the
payment of an amount pursuant to this Section which exceeds the gross proceeds
received by such Selling Stockholder from the sale of the Offered Shares by
such Selling Stockholder hereunder.
Section 8. Contribution. In order to provide for just and
equitable contribution in circumstances under which the indemnity provided for
in Section 7 is for any reason held to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Company, the
Selling Stockholders and the Underwriters shall contribute to the aggregate
losses, liabilities, claims, damages and expenses of the nature contemplated by
such indemnity incurred by the Company, the Selling Stockholders and one or
more of the Underwriters, as incurred, in such proportions that (a) the
Underwriters are responsible for that portion represented by the percentage
that the underwriting discount appearing on the cover page of the Prospectus in
respect of the Offered Shares bears to the initial public offering price
appearing thereon and (b) the Company and the Selling Stockholders are
responsible for the balance on the same basis as each of them would have been
obligated to provide indemnification pursuant to Section 7 hereof; provided,
however, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled
40
<PAGE> 42
to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the 1933 Act shall
have the same rights to contribution as such Underwriter, and each director of
the Company, each officer of the Company who signed the Registration Statement,
and each person who controls the Company within the meaning of Section 15 of
the 1933 Act shall have the same rights to contribution as the Company.
Notwithstanding the provisions of this Section 8, no Selling Stockholder shall
be required to contribute any amount under this Section 8 in excess of the
amount by which the gross proceeds received by such Selling Stockholder in
connection herewith exceed the aggregate amount such Selling Stockholder has
otherwise paid pursuant hereto and Section 7(b).
Section 9. Representations, Warranties and Agreements to Survive
Delivery. The representations, warranties, indemnities, agreements and other
statements of the Company or its officers and the Selling Stockholders set
forth in or made pursuant to this Agreement will remain operative and in full
force and effect regardless of any investigation made by or on behalf of the
Company, the Selling Stockholders or any Underwriter or controlling person and
will survive delivery of and payment for the Offered Shares.
Section 10. Termination of Agreement. (a) You may terminate
this Agreement, by notice to the Company and the Selling Stockholders, at any
time at or prior to the Closing Time (i) if there has been, since the
respective dates as of which information is given in the Prospectus, any
material adverse change, or any development involving a prospective material
adverse change in the condition (financial or otherwise), earnings, or business
affairs of the Company or its Subsidiaries, considered as one enterprise,
whether or not arising in the ordinary course of business, or (ii) if there has
occurred any material adverse change in the financial markets in the United
States or internationally or any outbreak of hostilities or escalation of
existing hostilities or other calamity or crisis the effect of which is such as
to make it, in your reasonable judgment, impracticable to market the Offered
Shares or enforce contracts for the sale of the Offered Shares, or (iii) if
trading in any securities of the Company has been suspended by the Commission,
or if trading generally on either the American Stock Exchange or the New York
Stock Exchange or in the over-the-counter market has been suspended, or minimum
or maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by either of such exchanges or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either federal or New York authorities, or (v) if there has occurred any change
or development involving a prospective change in national or international
political, financial or economic controls, which in your opinion is likely to
have a material adverse effect on the market
41
<PAGE> 43
for the Offered Shares. As used in this Section 10(a), the term "Prospectus"
means the Prospectus in the form first used to confirm sales of the Offered
Shares.
(b) If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party,
except to the extent provided in Section 4. Notwithstanding any such
termination, the provisions of Sections 7 and 8 shall remain in effect.
(c) This Agreement may also terminate pursuant to the
provisions of Section 2(c), with the effect stated in such Section.
Section 11. Default by One or More of the Underwriters. If one
or more of the Underwriters shall fail at the Closing Time to purchase the
Initial Shares that it or they are obligated to purchase pursuant to this
Agreement (the "Defaulted Shares"), you shall have the right, within 24 hours
thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than
all, of the Defaulted Shares in such amounts as may be agreed upon and upon the
terms set forth in this Agreement; if, however, you have not completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Shares does not exceed 10% of
the total number of Initial Shares, the non- defaulting Underwriters shall be
obligated to purchase the full amount thereof in the proportions that their
respective Initial Shares underwriting obligation proportions bear to the
underwriting obligation proportions of all non-defaulting Underwriters, or
(b) if the number of Defaulted Shares exceeds 10% of the
total number of Initial Shares, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriters.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of its default.
In the event of any such default that does not result in a
termination of this Agreement, either you, the Company or the Selling
Stockholders shall have the right to postpone the Closing Time for a period not
exceeding seven days in order to effect any required changes in the
Registration Statement or Prospectus or in any other documents or arrangements.
As used herein, the term " Underwriter" includes any person substituted for an
Underwriter under this Section 11.
Section 12. Default. (a) If the Company shall fail at the
Closing Time to sell and deliver the number of Offered Shares that it is
obligated to sell, then this Agreement shall terminate without any liability on
the part of any non-defaulting party
42
<PAGE> 44
except to the extent provided in Section 4 and except that the provisions of
Sections 7 and 8 shall remain in effect. No action taken pursuant to this
Section shall relieve the Company from liability, if any, in respect of such
default.
(b) If one or more of the Selling Stockholders shall fail at
the Closing Time to sell and deliver the number of Offered Shares that it is
obligated to sell, then the Representatives may, at their option, by notice to
the Company and the non- defaulting Selling Stockholders, either (a) terminate
this Agreement without any liability on the part of any non-defaulting party
except to the extent provided in Section 4 and except that the provisions of
Sections 7 and 8 shall remain in effect or (b) elect to purchase the Offered
Shares which the non-defaulting Selling Stockholders, if any, have agreed to
sell hereunder. No action taken pursuant to this Section shall relieve any
Selling Stockholder from liability, if any, in respect of such default.
Section 13. Notices. All notices and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
if delivered, mailed or transmitted by any standard form of telecommunication
(notices transmitted by telecopier to be promptly confirmed in writing).
Notices to you or the Underwriters shall be directed to you c/o Merrill Lynch,
Pierce, Fenner & Smith Incorporated at Merrill Lynch World Headquarters, North
Tower, World Financial Center, New York, New York 10281, attention of Jerry H.
Marcus; notices to the Company shall be directed to the Company at 1500 Harbor
Boulevard, Weehawken, NJ 07087 (telecopier no.: 201-392-5005), attention of
Michael P. Sherman; notices to Sun Life shall be directed to Sun Life at 1 Sun
America Center, Century City, California 90067 (telecopier no.: 310-772-6150),
attention of Mike Thomas; and notices to Kruttschnitt shall be directed to
Kruttschnitt at 1350 Bayshore Blvd., Suite 850, Burlingame, California 94010
(telecopier no.: 415-348-0273) and to Robert McLaughlin at Hosie Wes,
McLaughlin & Sacks, One Sansome Street, San Francisco, California 94104
(telecopier no. 415-781-2525).
Section 14. Parties. This Agreement is made solely for the
benefit of the several Underwriters, the Selling Stockholders, the Company and,
to the extent expressed, any person controlling the Company or any of the
Underwriters, and the directors of the Company, its officers who have signed
the Registration Statement, and their respective executors, administrators,
successors and assigns and, subject to the provisions of Section 11, no other
person shall acquire or have any right under or by virtue of this Agreement.
The term "successors and assigns" shall not include any purchaser, as such
purchaser, from any of the several Underwriters of the Shares. All of the
obligations of the Underwriters hereunder are several and not joint.
Section 15. Governing Law and Time. This Agreement shall be
governed by the laws of the State of New York. Specified times of the day
refer to New York City time.
43
<PAGE> 45
Section 16. Counterparts. This Agreement may be executed in one
or more counterparts and, when a counterpart has been executed by each party,
all such counterparts taken together shall constitute one and the same
agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument will become a binding agreement between the Company,
each of the Selling Stockholders and the several Underwriters in accordance
with its terms.
Very truly yours,
HANOVER DIRECT, INC.
By
----------------------------------------
Name:
Title:
THEODORE H. KRUTTSCHNITT
By
----------------------------------------
SUN LIFE INSURANCE COMPANY OF AMERICA
By
----------------------------------------
as Attorney-in-Fact, acting on behalf
of Sun Life Insurance Company of
America
Confirmed and accepted as of
the date first above written:
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
ALEX. BROWN & SONS INCORPORATED
By: MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By
-----------------------------------
Name:
Title:
For themselves and as Representatives of
other Underwriters named in Schedule A.
44
<PAGE> 46
Exhibit A
HANOVER DIRECT, INC.
(a Delaware corporation)
10,000,000 Shares
of Common Stock
PRICE DETERMINATION AGREEMENT
____________________, 1994
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
ALEX. BROWN & SONS INCORPORATED
As Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281-1201
Dear Sirs:
Reference is made to the Purchase Agreement dated ______________,
1994 (the "Purchase Agreement") between Hanover Direct, Inc., a Delaware
corporation (the "Company"), the Selling Stockholders named in Schedule C
thereto or hereto and the several Underwriters named in Schedule A thereto or
hereto (the "Underwriters"), for whom Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Alex. Brown & Sons Incorporated are
acting as representatives (the "Representatives"). The Purchase Agreement
provides for the purchase by the Underwriters from the Company and the Selling
Stockholders, subject to the terms and conditions set forth therein, of an
aggregate of 10,000,000 shares (the "Initial Shares") of the Company's common
stock, par value $.66 2/3 per share. This Agreement is the Price Determination
Agreement referred to in the Purchase Agreement.
Pursuant to Section 2 of the Purchase Agreement, the undersigned
agrees with the Representatives as follows:
<PAGE> 47
1. The initial public offering price per share for the
Initial Shares shall be $_____.
2. The purchase price per share for the Initial Shares to be
paid by the several Underwriters shall be $_____, representing an amount
equal to the initial public offering price set forth above, less $_____
per share.
The Company confirms to each of the Underwriters that the
representations and warranties of the Company set forth in Section 1(a) of the
Purchase Agreement are accurate as though expressly made at and as of the date
hereof.
Each of the Selling Stockholders severally confirms to each of
the Underwriters that the representations and warranties of such Selling
Stockholder set forth in Sections 1(b) with respect to Mr. Kruttschnitt and
1(c) with respect to Sun Life Insurance Company of America of the Purchase
Agreement are accurate as though expressly made at and as of the date hereof.
As contemplated by Section 2 of the Purchase Agreement, attached
as Schedule A is a completed list of the several Underwriters, which shall be a
part of this Agreement and the Purchase Agreement.
This Agreement shall be governed by the laws of the State of New York.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company, Theodore H. Kruttschnitt and
the Attorney-in-Fact for Sun Life Insurance Company of America, a counterpart
hereof, whereupon this instrument along with all counterparts and together with
the Purchase Agreement shall be
2
<PAGE> 48
a binding agreement between the Underwriters, the Company and the Selling
Stockholders in accordance with its terms and the terms of the Purchase
Agreement.
Very truly yours,
HANOVER DIRECT, INC.
By
-------------------------------------
Name:
Title:
THEODORE H. KRUTTSCHNITT
By
-------------------------------------
SUN LIFE INSURANCE COMPANY
OF AMERICA
By
-------------------------------------
as Attorney-in-Fact, acting on behalf
of Sun Life Insurance
Company of America
Confirmed and accepted as of
the date first above written:
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
ALEX. BROWN & SONS INCORPORATED
By: MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By
-----------------------------------
Name:
Title:
For themselves and as Representatives of
other Underwriters named in Schedule A.
3
<PAGE> 49
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial Shares
to be
Underwriters Purchased
------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Alex. Brown & Sons Incorporated
TOTAL ==================
</TABLE>
<PAGE> 50
SCHEDULE B
Subsidiaries
<PAGE> 51
SCHEDULE C
<TABLE>
<CAPTION>
Number of Number of
Selling Stockholder Initial Shares Option Shares
------------------- to be Sold to be Sold
---------------- --------------------------
<S> <C> <C>
Sun Life Insurance Company of America 654,604 0
Theodore H. Kruttschnitt 3,500,000 525,000
</TABLE>
