<PAGE>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 30, 1996
--------------
Commission file number 1-12082
HANOVER DIRECT, INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-0853260
- ----------------------------------- -------------------------------------------
(State of incorporation) (IRS Employer Identification No.)
1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087
- ---------------------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
(201) 863-7300
----------------------
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Common stock, par value $.66 2/3 per share: 93,590,646 shares outstanding as of
May 10, 1996.
<PAGE>
<PAGE>
HANOVER DIRECT, INC.
FORM 10-Q
MARCH 30, 1996
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 30, 1995 and March 30, 1996.................... 3
Condensed Consolidated Statements of Income (Loss) - thirteen weeks ended
April 1, 1995 and March 30, 1996.............................................................. 5
Condensed Consolidated Statements of Cash Flows - thirteen weeks ended April 1, 1995
and March 30, 1996............................................................................ 6
Notes to Condensed Consolidated Financial Statements for the thirteen weeks
ended April 1, 1995 and March 30, 1996........................................................ 8
Item 2. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations....................................................................... 15
Part II - Other Information
Item 5. Other Information.......................................................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................................... 20
Signatures.......................................................................................... 21
</TABLE>
2
<PAGE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 30, 1995 AND MARCH 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 30, March 30,
1995 1996
------------ ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,682 $ 2,750
Accounts receivable, net 30,176 31,245
Inventories 79,281 87,479
Prepaid catalog costs 37,118 40,683
Deferred tax asset, net 3,300 3,300
Other current assets 6,170 4,107
-------- --------
Total Current Assets 158,727 169,564
-------- --------
Property and equipment, at cost
Land 4,811 4,816
Buildings and building improvements 19,353 19,369
Leasehold improvements 14,001 14,075
Furniture, fixtures and equipment 39,508 40,041
Construction in progress 5,479 5,741
-------- --------
83,152 84,042
Accumulated depreciation and amortization (25,525) (27,528)
-------- --------
Net Property and Equipment 57,627 56,514
-------- --------
Goodwill, net 36,586 36,173
Deferred tax asset, net 11,700 11,700
Other assets, net 14,369 14,446
-------- --------
Total Assets $279,009 $288,397
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
<PAGE>
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 30, 1995 AND MARCH 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 30, MARCH 30,
1995 1996
------------ ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital lease obligations $ 3,546 $ 3,554
Accounts payable 93,291 91,705
Accrued liabilities 25,969 24,928
Customer prepayments and credits 7,147 8,022
--------- ---------
Total Current Liabilities 129,953 128,209
--------- ---------
Noncurrent Liabilities:
Long-term debt 57,283 79,180
Capital lease obligations 1,973 1,498
Other 2,590 1,649
--------- ---------
Total Noncurrent Liabilities 61,846 82,327
--------- ---------
Total Liabilities 191,799 210,536
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
6% Series A Preferred Stock, convertible, $.01 par value, authorized
5,000,000 shares; issued 78,300 shares in 1995 and 1996. 795 806
Series B Preferred Stock, convertible, $.01 par value, authorized and
issued 634,900 shares in 1995 and 1996. 5,558 5,606
Common Stock, $.66 2/3 par value, authorized 150,000,000
shares; issued 93,706,508 shares in 1995 and 93,757,045 shares in 1996. 62,461 62,504
Capital in excess of par value 255,390 255,397
Accumulated deficit (231,332) (240,868)
-------- --------
92,872 83,445
Less:
Treasury stock, at cost (1,157,061 shares in 1995 and 1996) (3,345) (3,345)
Notes receivable from sale of Common Stock (2,023) (1,962)
Deferred compensation (294) (277)
--------- ---------
Total Shareholders' Equity 87,210 77,861
--------- ---------
Total Liabilities and Shareholders' Equity $279,009 $288,397
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
<PAGE>
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
13 WEEKS ENDED
------------------
APRIL 1, MARCH 30,
1995 1996
----------- -----------
<S> <C> <C>
REVENUES $ 176,592 $ 165,527
----------- -----------
Operating costs and expenses:
Cost of sales and operating expenses 112,714 108,438
Provision for catalog and facility closings 316 1,100
Selling expenses 50,503 45,391
General and administrative expenses 15,755 15,333
Depreciation and amortization 1,451 2,998
----------- -----------
180,739 173,260
----------- -----------
INCOME (LOSS) FROM OPERATIONS (4,147) (7,733)
----------- -----------
Interest expense (751) (1,663)
Interest income 85 169
----------- -----------
(666) (1,494)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (4,813) (9,227)
Income tax provision (90) (250)
----------- -----------
NET INCOME (LOSS) (4,903) (9,477)
Preferred Stock dividends and accretion (45) (59)
----------- -----------
Net income (loss) applicable to common shareholders $ (4,948) $ (9,536)
=========== ===========
Primary and fully diluted net income (loss) per share $ (0.05) $ (0.10)
=========== ===========
Weighted average shares outstanding for
primary and fully diluted earnings per share 92,790,015 93,493,937
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
<PAGE>
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED
-------------------
APRIL 1, MARCH 30,
1995 1996
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (4,903) $ (9,477)
Adjustments to reconcile net (loss) to net cash (used)
by operating activities:
Depreciation and amortization including deferred fees 1,775 3,406
Other -- (34)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 4,920 (1,543)
Inventories (94) (8,198)
Prepaid catalog costs 31 (3,565)
Other assets (687) 299
Accounts payable (10,001) (1,586)
Accrued liabilities (1,016) (1,041)
Customer prepayments and credits 141 875
-------- --------
NET CASH (USED) BY OPERATING ACTIVITIES (9,834) (20,864)
-------- --------
Cash flows from investing activities:
Acquisitions of property (7,161) (980)
Proceeds from sale of businesses -- 1,164
Proceeds from sale of securities -- 474
Payments for businesses acquired, net of cash acquired (11,555) --
Notes receivable and investments with affiliated companies (1,688) --
Other, net (2,155) 37
-------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $(22,559) $ 695
-------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
<PAGE>
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED
-----------------
APRIL 1, MARCH 30,
1995 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under credit facility $ 10,000 $ 22,092
Payments of long-term debt and capital lease obligations (207) (662)
Proceeds from issuance of Common Stock 80 104
Payment of debt issuance costs -- (356)
Other, net (318) (941)
-------- --------
Net cash provided by financing activities 9,555 20,237
-------- --------
Net increase (decrease) in cash and cash equivalents (22,838) 68
Cash and cash equivalents at the beginning of the year 24,053 2,682
-------- --------
Cash and cash equivalents at the end of the period $ 1,215 $ 2,750
======== ========
Supplemental cash flow disclosures:
Interest paid $ 1,038 $ 1,474
======== ========
Income taxes paid $ 566 $ 362
======== ========
Supplemental disclosure of non cash investing and financing activities:
Issuance of Common Stock for notes receivable $ 208 $ 81
======== ========
Acquisition of businesses:
Fair value of assets acquired $ 24,943 $ --
Fair value of liabilities assumed (7,888) --
Preferred stock issued (5,500) --
-------- --------
Net cash paid $ 11,555 $ --
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
<PAGE>
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRTEEN WEEKS
ENDED APRIL 1, 1995 AND MARCH 30, 1996 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with the instructions for Form 10-Q
and, therefore, do not include all information and footnotes necessary for a
fair presentation of financial condition, results of operations and cash flows
in conformity with generally accepted accounting principles. Reference should be
made to the annual financial statements, including the footnotes thereto,
included in the Hanover Direct, Inc. (the "Company") Annual Report on Form 10-K
for the fiscal year ended December 30, 1995. In the opinion of management, the
accompanying unaudited interim condensed consolidated financial statements
contain all material adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial condition, the results of operations
and cash flows of the Company and its consolidated subsidiaries for the interim
periods. Operating results for interim periods are not necessarily indicative of
the results that may be expected for the entire year. Certain prior year amounts
have been reclassified to conform with the current year presentation.
2. RETAINED EARNINGS RESTRICTIONS
The Company is restricted from paying dividends at any time on its
Common Stock or from acquiring its capital stock by certain debt covenants
contained in agreements to which the Company is a party.
3. EARNINGS PER SHARE
Net income per share - Net income per share was computed using the
weighted average number of shares outstanding. Due to the net loss for the
thirteen weeks ended April 1, 1995 and March 30, 1996, warrants, stock options
and convertible preferred stock are excluded from the calculations of both
primary and fully diluted earnings per share.
Supplemental earnings per share - The following represents the pro forma
results of operations for the thirteen weeks ended April 1, 1995 as if the
Leichtung, The Safety Zone and Austad's acquisitions, which were made in the
first half of 1995, had occurred at the beginning of the fiscal year (in
thousands, except per share data). The pro forma results include the impact of
accounting for the acquisitions, including amortization of goodwill and customer
lists, amortization of the discount related to the Series B Preferred Stock
issued to acquire Safety Zone and interest on the cash used to acquire Leichtung
and Austad's.
<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS ENDED
APRIL 1, 1995
-------------
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Revenues $176,592 $186,693
Net income (loss) $ (4,903) $ (4,990)
Net income (loss) per share $ (.05) $ (.05)
</TABLE>
8
<PAGE>
<PAGE>
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.
4. SALE OF ASSETS
Businesses
Austad's. In May 1995, the Company acquired 67.5% of the outstanding
shares of Austad's Holdings, Inc. ("Austad's"), which owned The Austad Company
("TAC"), the publisher of the Austad's catalog featuring golf equipment, apparel
and gifts, for a purchase price of $1.8 million in cash. On February 16, 1996,
David Austad and certain family members surrendered to Austad's their Austad's
shares, amounting to 32.5% of the outstanding shares, and paid approximately
$1.1 million in exchange for all the outstanding shares of AGS, Inc. ("AGS"), a
South Dakota corporation newly formed by TAC to hold the existing retail assets
and liabilities of TAC. The transaction assumed a value for Austad's and TAC
based on the Company's purchase price in the May 1995 acquisition, as adjusted
by adding the net income of Austad's and TAC from May 25, 1995 through February
16, 1996. There was no gain or loss recognized on this transaction.
As a result of the reorganization, Austad's became a wholly owned
subsidiary of the Company. In connection with the reorganization, TAC was
released from all future obligations under three of four store leases. The
Company expects that a similar release will be obtained in the near future
regarding the fourth lease. AGS will operate the four existing retail stores
acquired from TAC as Austad's stores under license from Austad's. The license
grants Mr. Austad exclusive retail rights to the Austad's name in 37 states and
Canada. Austad's retains all direct marketing rights and all other rights. Mr.
Austad will continue to work together with TAC on joint buying and other
cooperative efforts. The customer service and fulfillment operations of Austad's
were transferred to other Company facilities during the first quarter of 1996.
The Company is negotiating the sale of the Austad's South Dakota warehouse and
distribution facility at its approximate book value. To the extent that the
proceeds from both the sale of such facility and certain computer equipment
produces any gain or loss, Mr. Austad will share therein to the extent of his
previous 32.5% interest in Austad's.
TAC had a revolving credit facility that was secured by substantially
all of TAC's assets that was to expire on February 26, 1996. Such facility was
paid off at the February 16th closing with the proceeds from the sale of the
retail operations and from the Company's revolving credit facility.
Leichtung Workshops. In January 1995, the Company acquired substantially
all of the assets of Leichtung, Inc., a direct marketer of wood-working and home
improvement tools and related products sold under the Improvements and Leichtung
Workshops names, for a purchase price of approximately $12.8 million in cash and
the assumption of certain liabilities. In connection with this acquisition, the
Company sold the assets of the Leichtung Workshops catalog in April 1996 for $.9
million in cash and short-term notes and relocated all telemarketing and
fulfillment operations to the Company's Hanover, PA facility in the first
quarter of 1996. The former distribution facility in Ohio which is being held
for sale is carried at its estimated net realizable value of $.8 million, at
March 30, 1996. There was no gain or loss recognized on the sale of the assets
of the Leichtung Workshops catalog.
Debt Securities
During 1994, the Company invested approximately $2.7 million in
convertible debt securities of Regal Communications, Inc. ("Regal"). In
September 1994, Regal filed for protection under Chapter 11 of the United States
Code. As a result, during 1994, the Company established a valuation allowance
against the securities
9
<PAGE>
<PAGE>
reflecting their estimated fair value of $1.7 million. During 1995, certain
assets of Regal were liquidated at or above the estimates established in 1994
and the Company continues to expect to recover the $1.7 million carrying value
of its investment that is included in other assets. To date in 1996, the Company
received approximately $.7 million from asset distributions made by Regal.
5. RIGHTS OFFERING
In March 1996, the Company announced that the Board of Directors had
voted to conduct a rights offering (the "Rights Offering") for $40 million of
the Company's Common Stock. On April 23, 1996, the Company filed a Registration
Statement on Form S-3 with the Securities and Exchange Commission registering
40,996,590 shares of the Company's Common Stock for the Rights Offering. The
securities will be offered and sold only pursuant to the prospectus contained
therein. The rights will be exercisable at a price to be determined at the time
of commencement of the Rights Offering equal to 75% of the then-current market
price, but not less than $1.00 nor more than $1.50 per share. NAR Group Limited
("NAR"), the Company's majority shareholder, will receive rights entitling it to
purchase approximately 50% of the shares to be offered in the Rights Offering
and has agreed to exercise such rights. In addition, NAR has agreed to standby
and purchase all shares not subscribed by common shareholders and will receive a
fee as a result.
The proceeds of the Rights Offering will be used by the Company to repay
the 9.25% Senior Subordinated Notes ("9.25 % Notes") due on August 1, 1998 held
by an affiliate of NAR, and for other general corporate purposes, including
repaying outstanding indebtedness under its revolving credit facility. At such
time the Company will record an extraordinary expense related to the early
extinguishment of this debt, representing the write-off of the unamortized debt
issuance costs of approximately $1.2 million.
In May 1996, the Company and NAR agreed in principle to increase the
Rights Offering to $50 million. Such action, which is subject to approval by the
Company's Board of Directors, is intended to provide the Company with greater
financial flexibility. As was the case previously, NAR has agreed to standby and
purchase any shares not subscribed for by common shareholders.
6. CHANGES IN MANAGEMENT AND EMPLOYMENT AGREEMENTS
On March 7, 1996, Rakesh K. Kaul was named President and Chief Executive
Officer and elected to the Board of Directors of the Company. Effective that
date, Mr. Kaul entered into an Executive Employment Agreement (the "Employment
Agreement") which provides for an "at will" term commencing on March 7, 1996 at
a base salary of $525,000 per year. The Employment Agreement also provides for
Mr. Kaul's participation in the Short-Term Incentive Plan for Rakesh K. Kaul.
That plan, which is subject to Shareholder approval, provides for an annual
bonus of between 0% and 125% of Mr. Kaul's base salary, depending on the
attainment of various performance objectives as determined in accordance with
the objective formula or standard to be adopted by the Compensation Committee as
part of the performance goals for each such year. The Employment Agreement also
provides for Mr. Kaul's participation in the Long-Term Incentive Plan for Rakesh
K. Kaul. That plan, which is subject to Shareholder approval, provides for the
purchase by Mr. Kaul of 1,000,000 shares of Common Stock at their fair market
value; an option expiring March 7, 2006 for the purchase of 2,000,000 shares of
Common Stock; an option expiring March 7, 2006 to purchase 2,000,000 shares of
Common Stock exercisable only upon satisfaction of the condition that the
closing price of the Common Stock has attained an average of $7.00 per share
during a 91-day period ending on or before March 7, 2002; an option expiring
March 7, 2006 to purchase 1,000,000 shares of Common Stock at their fair market
value, subject to the attainment of certain objective performance goals to be
set by the Compensation Committee; and four options expiring March 7, 2002, and
the first three anniversaries thereof, respectively, for the purchase of 250,000
shares of Common Stock each, to be granted by NAR, the Company's largest
shareholder. The Employment Agreement also provides for the grant of
registration rights under
10
<PAGE>
<PAGE>
the Securities Act of 1993, as amended (the "Securities Act") , for shares of
Common Stock owned by Mr. Kaul. Pursuant to the Employment Agreement, the
Company will make Mr. Kaul whole, on an after-tax basis, for various relocation
and temporary living expenses related to his employment with the Company. In the
event that Mr. Kaul's employment is actually or constructively terminated by the
Company, other than for cause, he will be entitled for a 12-month period
commencing on the date of his termination to (i) a continuation of his base
salary, (ii) continued participation in the Company's medical, dental, life
insurance and retirement plans offered to senior executives of the Company, and
(iii) a bonus, payable in 12 equal installments, equal to 100% of his base
salary (at the rate in effect immediately prior to such termination). In
addition, Mr. Kaul will be entitled to receive (i) to the extent not previously
paid, the short-term bonus payable to Mr. Kaul for the year preceding the year
of termination and (ii) for the year in which Mr. Kaul's employment is
terminated, an additional bonus equal to his annual base salary for such year,
pro-rated to reflect the portion of such year during which Mr. Kaul is employed.
Mr. Kaul's employment will be deemed to be constructively terminated by the
Company in the event of a change in control (as defined in the Employment
Agreement), the Company's bankruptcy, a material diminution of his
responsibilities, or a relocation of the Company's headquarters outside the New
York metropolitan area without his prior written consent. In the event that Mr.
Kaul's employment terminates other than as a result of a termination by the
Company, Mr. Kaul will not be entitled to any payment or bonus, other than any
short-term bonus he is entitled to receive from the year prior to termination.
Jack E. Rosenfeld resigned as President and Chief Executive Officer and
as a Director of the Company effective December 30, 1995. In connection with
such resignation, the Company and Mr. Rosenfeld have agreed in principal to
enter into a Termination of Employment Agreement, to be dated as of December 30,
1995 (the 'Termination Agreement"), providing for the termination of (i) the
Employment Agreement, dated as of October 25, 1991, between the Company and Mr.
Rosenfeld, and (ii) all benefits, salary and prerequisites provided for therein
except for (a) benefits, salary and prerequisites earned and accrued up to
December 30, 1995, (b) salary of $500,000 through December 31, 1996, and (c)
benefits including (i) continued disability and term life insurance in amounts
not less than the amounts in force on the date of the Termination Agreement for
a three-year period and (ii) the right to continue to participate in the
Company's medical plans to the extent he is eligible for up to three years from
the date of the Termination Agreement. The Termination Agreement will call for
Mr. Rosenfeld to serve as a Director Emeritus of the Company and will allow Mr.
Rosenfeld to attend meetings of the Board of Directors and participate in Board
discussions for a one-year period but Mr. Rosenfeld will have no right to vote
on any matters that come before the Board of Directors. The Termination
Agreement will preclude Mr. Rosenfeld for a one-year period from competing with
the Company under certain circumstances.
In April 1996, the Executive Vice President, Secretary and General
Counsel resigned. Also, in April 1996, the Executive Vice President and Chief
Financial Officer indicated his intention to resign his position in order to
pursue other interests. He has agreed to stay with the Company until his
replacement can be found. In connection therewith, the Company entered into a
settlement of his employment agreement.
7. LONG-TERM DEBT
In November 1995, the Company entered into a three-year $75 million
secured revolving credit facility (the "Credit Facility") with Congress
Financial Corporation. The Company is required to maintain minimum net worth and
working capital levels. In addition, the Credit Facility places limitations on
the Company's ability to incur additional indebtedness. The Credit Facility was
amended in February 1996 to permit the reorganization of Austad and was further
amended in April 1996 to permit borrowing of an additional $4 million over the
borrowing base formula until the closing of the Rights Offering, subject to the
$75 million limit of the Credit Facility. In addition, the minimum working
capital and net worth requirements contained in the Credit Facility and in the
Indenture relating to the 9.25% Notes were reduced by $5 million for the same
period.
11
<PAGE>
<PAGE>
At March 30, 1996, the Company had $24.1 million of borrowings
outstanding under the revolving line of credit and $9.8 million outstanding
under the revolving term notes. The rates of interest related to the revolving
line of credit and term notes were 9.75% and 10.0%, respectively, at March 30,
1996.
The face amount of unexpired documentary letters of credit at March 30,
1996, was $4.1 million. In addition, the Company had issued $28.9 million of
standby letters of credit at March 30, 1996.
8. INCOME TAXES
At March 30, 1996, the Company had a net deferred tax asset of $15
million, including a deferred tax asset valuation allowance of approximately $52
million, which was recorded in prior years primarily relating to the realization
of certain net operating loss carryforwards ("NOLs"). At March 30, 1996, the
Company had $172 million of NOLs. Realization of the future tax benefits
associated with the NOLs 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 all of the NOLs and
reversals of temporary differences.
In assessing the realizability of the $15 million net deferred tax
asset, the Company has considered numerous factors, including its future
operating plans and its recent history of operating results (including pre-tax
income in 1994 as well as the losses incurred in 1995 and the quarter ended
March 30, 1996). Management believes that the $15 million net deferred tax asset
represents a reasonable, conservative estimate of the future utilization of the
NOLs and the Company will continue to routinely evaluate the likelihood of
future profits and the necessity of future adjustments to the deferred tax asset
valuation allowance.
9. ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation", which is
effective in 1996. The statement encourages entities to adopt the fair
value-based method of accounting for employee stock options, as opposed to the
method which measures compensation cost for those plans using the intrinsic
value- based accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company has decided to adopt the recognition
provisions of SFAS No. 123 for the first quarter of 1996. However, as there were
no employee stock options granted during the interim period, there is no income
statement or balance sheet impact related to the adoption of SFAS No. 123 at
this time.
12
<PAGE>
<PAGE>
A summary of the status of the Company's two stock option plans as of
December 30, 1995 and March 30, 1996 and changes during the periods ending on
those dates is presented below.
Executive Equity Incentive Plan
<TABLE>
<CAPTION>
December 30, 1995 March 30, 1996
----------------- --------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Options outstanding beginning of period 1,073,836 $2.98 1,021,170 $2.66
Options granted 286,666 $2.53 -- --
Options cancelled (339,332) $3.59 (266,000) $2.53
---------- ---------
Options outstanding end of period 1,021,170 $2.66 755,170 $2.70
========== =========
Options exercisable end of period -- -- 478,498 $2.50
=========
Options exercised end of period -- -- -- --
Weighted average fair value of options
granted during the year -- $1.19 -- --
Stock Option Plan
December 30, 1995 March 30, 1996
----------------- --------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Options outstanding beginning of period 496,050 $3.60 90,000 $2.42
Options granted 70,000 $2.11 -- --
Options cancelled (142,000) $3.50 -- --
Options expired (334,050) $3.65 (20,000) $3.50
--------- -------
Options outstanding end of period 90,000 $2.42 70,000 $2.11
========= =======
--
Options exercisable end of period 20,000 $3.50 --
=========
Options exercised end of period -- -- -- --
Weighted average fair value of options
granted during the year -- $.90 -- --
</TABLE>
13
<PAGE>
<PAGE>
The following table summarizes information with regard to stock options
outstanding at March 30, 1996.
Executive Equity Incentive Plan
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
REMAINING
EXERCISE PRICE OPTIONS OUTSTANDING CONTRACTUAL LIFE
-------------- ------------------- ----------------
<S> <C> <C>
$1.75 30,000 5.75 Years
$2.50 510,504 3.25 Years
$2.63 50,000 5.25 Years
$2.75 66,666 5.00 Years
$3.00 20,000 3.00 Years
$3.89 20,000 3.25 Years
$4.50 58,000 3.05 Years
</TABLE>
There are 478,498 options exercisable at the end of the first quarter at a
weighted average exercise price of $3.25.
Stock Option Plan
<TABLE>
<CAPTION>
Weighted-Average
Remaining
Exercise Price Options Outstanding Contractual Life
-------------- ------------------- ----------------
<S> <C> <C>
$1.75 20,000 4.5 Years
$2.25 50,000 4.5 Years
</TABLE>
There are no options exercisable at the end of the first quarter under this
plan.
14
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, the
percentage relationship to revenues of certain items in the Company's condensed
consolidated statements of income.
<TABLE>
<CAPTION>
13 Weeks Ended
April 1, March 30,
1995 1996
---- ----
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of sales and operating expenses 63.9 65.5
Provision for catalog and facility closings .2 .7
Selling expenses 28.6 27.4
General and administrative expenses 8.9 9.3
Depreciation and amortization .8 1.8
Income (loss) from operations (2.4) (4.7)
Interest expense, net (.4) (.9)
Net income (loss) (2.8%) (5.7%)
</TABLE>
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MARCH 30, 1996 COMPARED WITH THIRTEEN WEEKS ENDED
APRIL 1, 1995
Net Income (Loss). The Company reported a net loss of $(9.5) million or
$(.10) per share for the quarter ended March 30, 1996 compared to a net loss of
$(4.9) million or $(.05) per share in the same period last year.
The higher loss was primarily a result of: (i) paper costs which were
21% higher than in the first quarter of 1995; (ii) higher telemarketing and
fulfillment costs due to weather related issues and continued operating problems
in the new Roanoke fulfillment center; and (iii) $1.8 million of additional
inventory obsolescence provisions.
Revenues. Revenues decreased 6% in the quarter ended March 30, 1996 to
$166 million from $177 million for the same period last year, due to a $14
million decline in revenues of the Company's discontinued catalogs. Continuing
catalog revenues increased 2% to $154 million in the current quarter from $151
million for the same period last year, on a 7% reduction in catalog circulation.
Overall, the Company circulated 99 million catalogs in 1996, a reduction of 12%
from the prior year.
Non-apparel continuing catalog revenues increased 3% to $125.2 million,
due to an increase in revenues from the Company's venture with Sears, and from
The Company Store, Improvements and Austad's, which offset reductions in the
other non-apparel catalogs, principally Domestications and Colonial Garden
Kitchens. Domestications revenues were down 20%, as improved response rates
partially offset a decline in the average order and a 25% reduction in catalog
circulation. The decline in Colonial Garden Kitchens' revenues was due to lower
circulation and higher backorder levels due to merchandise delivery problems
caused by the Company's credit situation, which more than offset improved
response rates and a higher average order. Revenues from discontinued catalogs
decreased 44% to $10.2 million. The Company discontinued the Mature Wisdom,
Tapestry and Hanover
15
<PAGE>
<PAGE>
House catalogs in 1995.
Apparel continuing catalog revenues declined 3% from $29.5 million for
the first quarter of 1995 to $28.8 million in the current period as increased
backorder levels in Silhouettes, also attributable to the Company's credit
situation, more than offset sales improvements in Tweeds and International Male.
Revenues from discontinued apparel catalogs declined by $6.0 million from 1995
to $1.3 million in 1996. The Company discontinued the Essence By Mail, One 212,
and Simply Tops catalogs in 1995.
Operating Costs and Expenses. Cost of sales and operating expenses
increased to 65.5% of revenues compared to 63.9% for the same period in 1995.
The increase is primarily attributable to lower overall product margins due to
higher inventory obsolescence provisions and the impact of mark downs for the
discontinued catalogs. In addition, fulfillment and telemarketing costs
increased significantly due to the severe winter weather conditions during much
of the first quarter which caused the periodic shut down of the call centers in
Wisconsin, Pennsylvania and Virginia, as well as slowed shipments of both
inbound and outbound freight. In addition, the Company continued to experience
significant operating problems in connection with the new Roanoke fulfillment
center, which will continue to impact the Company's operating results for the
balance of the year.
The Provision for catalog and facility closings increased from $.3
million in 1995 to $1.1 million in 1996. In the current quarter, higher
provisions for the disposal of the remaining inventory for the discontinued
Simply Tops and One 212 catalogs were recorded as the Company experienced
significantly lower recovery rates on liquidation of such inventory than had
been anticipated. The prior year amount reflected expenses incurred for
relocation and severance costs related to several facility closings which did
not occur in the current period.
Selling expenses decreased to 27.4% of revenues in the first quarter of
1996 from 28.6% for the same quarter last year. This decrease was attributable
to a 12% decline in circulation and higher response rates, which helped offset a
21%, or $2.3 million increase in paper prices.
General and administrative expenses were 9.3% of revenues in the first
quarter of 1996, compared to 8.9% in 1995, due to costs associated with the
hiring of the Company's new Chief Executive Officer, and $.6 million
attributable to the settlement of an executive's employment agreement.
Depreciation and amortization increased to 1.8% of revenues in the first
quarter of 1996 from .8% of revenues for the same period in 1995. The total
expense increased $1.5 million or 107% from 1995 to 1996 as a result of
depreciation charges related to the Gump's retail store, the Roanoke
distribution facility and the Austad acquisition, all of which had no impact in
the 1995 quarter.
Income (Loss) from Operations. The Company recorded a loss from
operations of $(7.7) million in the first quarter of 1996, or (4.7)% of
revenues, compared to a loss from operation of $(4.1) million for the same
period in 1995, or (2.4)% of revenues.
The Non-Apparel group's results of operations decreased $3.4 million,
from a loss of $(.9) million in the first quarter of 1995 to a loss of $(4.3)
million in the same period in 1996 due primarily to the sales and cost increases
mentioned above. The increase in the loss was primarily due to the results of
operations at Domestications which were adversely affected by the higher
telemarketing and fulfillment costs related to its problems with its new Roanoke
distribution center. In addition, its product margin continued to be negatively
impacted by product mix changes, promotional activities and an increase in its
obsolescence provision due to a decision not to continue to offer certain
products in future catalogs. These factors more than offset improved catalog
productivity. The discontinued catalogs lost ($.7) million in 1996 compared to
($1.4) million in the prior year.
16
<PAGE>
<PAGE>
The Apparel group's results of operations improved $.4 million from a
loss of $(2.3) million in the first quarter of 1995 to a loss of $(1.9) million
for the same period in 1996. The Men's Apparel catalogs generated income of $.4
million in the first quarter of 1995 compared to break even results for the same
period in 1996. The Women's Apparel continuing catalogs generated a loss of
$(.4) million in the first quarter of 1995 compared to a loss of $(.7) million
for the same period in 1996. The Women's Apparel discontinued catalogs generated
a loss of $(2.2) million in the first quarter of 1995 compared to a loss of
$(1.2) million for the same period in 1996.
Interest Expense, Net. Interest expense, net increased to $1.5 million
in the first quarter of 1996 from $.7 million in the first quarter of 1995 due
to the Company's higher cost of credit under its new Credit Facility and
increased borrowings related to the Company's increased working capital
requirements.
Income Taxes. In assessing the realizability of the $52 million net
deferred tax asset, the Company has considered numerous factors, including its
future operating plans and its recent history of operating results (including
pre-tax income in 1994 as well as the losses incurred in 1995). The Company
believes that the $15 million net deferred tax asset represents a reasonable,
conservative estimate of the future utilization of the tax 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.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. At March 30, 1996, the Company had $2.8 million in cash
and cash equivalents, compared to $2.7 million at December 30, 1995. Working
capital and the current ratio were $41.4 million and 1.32 to 1 at March 30, 1996
versus $28.8 million and 1.22 to 1 at December 30, 1995. The $20.9 million of
cash used in operations in the first quarter of 1996, which was provided from
additional borrowings under the Credit Facility, was primarily utilized to fund
the operating losses incurred in 1996 and a working capital increase. This
working capital increase is in part a seasonal increase in inventory and in part
a reaction to the tightening of vendor credit terms that the Company began to
experience in 1995. In addition, the Company expanded its deferred billing
program that is offered to customers of certain catalogs which caused an
increase in its accounts receivable.
As a result of the operating losses incurred in 1995 and 1996, the
Company's financial condition has deteriorated, which has caused a tightening of
vendor credit during this period and resulted in an increase in long-term debt.
Nevertheless, backorder levels have increased only marginally although certain
catalogs have been affected more than others, and the Company has managed to
receive merchandise shipments in most cases in sufficient quantities to satisfy
customer demand. However, back order levels have negatively affected initial
fulfillment which has resulted in an increase in split shipments and higher
customer inquiry calls which contributed to the higher fulfillment expense
experienced in 1996. In addition the Company has had to utilize more working
capital than had previously been anticipated, due to a tightening in trade
terms. Also in March 1996, the Company concluded that its recent operating
results would have a further negative impact on the Company's ability to conduct
business on normal trade terms. Therefore, the Company decided that it was
necessary to obtain an equity infusion which would: (i) restore the Company's
equity base that had deteriorated due to the operating losses since the
beginning of 1995, (ii) reduce long-term debt, and (iii) provide the Company
with additional liquidity. As a result, the Company announced in March that it
would conduct a $40 million rights offering after the first quarter to be
underwritten by NAR, the Company's largest shareholder. The Company will utilize
$14 million of the net proceeds to repay its 9.25% Senior Subordinated Notes due
1998 owned by an affiliate of NAR. At such time, the Company will record an
extraordinary expense related to the early extinguishment of debt, representing
the write-off of the unamortized debt issuance costs of approximately $1.2
million. The balance of the proceeds will be used for general corporate
purposes, including the repayment of outstanding revolver indebtedness under the
Credit Facility.
17
<PAGE>
<PAGE>
The announcement of this Rights Offering has generally eased
vendor/creditor concerns about the Company's viability as indicated by the
significant increase in inventory receipts in the first quarter of 1996.
However, the Company believes that because of the continued operating losses and
the problems being encountered in its Roanoke distribution center it should
increase the amount of the Rights Offering to $50 million to provide it with
additional financial flexibility in dealing with its vendors. Accordingly in
May, the Company agreed with NAR, subject to approval by the Company's Board of
Directors, to such an increase. The Company believes that, upon the conclusion
of the Rights Offering, it will return to normal trade terms with suppliers and
will be able to obtain sufficient merchandise on a timely basis to satisfy
customer demand as well as have adequate capital to support its operations.
The Company experiences seasonality in its working capital requirements
and fluctuations in the Credit Facility will occur usually within the first and
fourth quarters of the year.
Infrastructure Investments. The Company continued its management
information systems up-grade in 1996. The new system was operational in ten
catalogs at the end of 1995 and the Company expects to complete the roll-out of
the system to the remaining catalogs in 1996, although this could be affected by
the problems in the Roanoke facility. The Company will incur higher MIS costs in
1996 due to the completion of the new system. As of March 30, 1996, the Company
had incurred costs of approximately $16.2 million as part of this plan,
including $.3 million in the first quarter of 1996. Such costs included hardware
and software costs aggregating $10.3 million and internal costs of $5.9 million
related to production of this new system that have been capitalized. The Company
currently anticipates making additional expenditures of approximately $3 million
in its Roanoke facility in 1996 to alleviate certain problems it is currently
experiencing. Overall, the Company's level of capital spending has been reduced
in 1996 and will focus on these projects.
Effect of Inflation and Cost Increases. The Company normally experiences
increased costs of sales and operating expenses as result of the general rate of
inflation in the economy. Operating margins are generally maintained through
internal cost reductions and operating efficiencies and then through selective
price increases where market conditions permit. The Company's inventory is
mail-order merchandise which undergoes sufficiently high turnover so that the
cost of goods sold approximates replacement cost. Because sales are not
dependent upon a particular supplier or product brand, the Company can adjust
product mix to mitigate the effects of inflation on its overall merchandise
base.
Paper and Postage. The Company mails its catalogs and ships most of its
merchandise through the United States Postal Service ("USPS"). In 1996, the USPS
announced a reclassification of postal rates that will become effective on July
1, 1996. It is anticipated that this will favorably impact the Company's postage
expenses by approximately 2% - 3% on an annualized basis. Paper costs
represented approximately 8% and 7% of revenues in 1995 and the first quarter of
1996 respectively. Since January of 1996, paper prices have begun to decline
from their record levels in 1995. While this is a favorable development for the
Company, there can be no assurance that this decline will continue nor that
prices will not increase later in the year.
18
<PAGE>
<PAGE>
Cautionary Statements
The following statements constitute forward looking statements which
involve risks and uncertainties:
"...the Company believes that, upon the conclusion of the Rights
Offering, the Company will return to normal trade terms with all
suppliers and will be able to obtain sufficient merchandise on a
timely basis to satisfy customer demand, as well as have adequate
capital to support its operations"
"In 1996, the USPS announced a reclassification of postal rates
that will become effective on July 1, 1996. It is anticipated
that this will favorably impact the Company's postage expenses by
approximately 2%-3% on an annualized basis."
The following are important factors, among others, that could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf, of the Company:
a general deterioration in the economic conditions in the United
States leading to increased competitive activity including a
business failure of a substantial size company in the retail
industry; and a reduction in consumer spending generally or
specifically with reference to the types of merchandise that the
Company offers in its catalogs;
an increase in the failure rate of consumer indebtedness
generally; and an increase in credit sales by the Company
accompanied by an increase in its bad debt experience with
respect to consumer debt;
a delay in the implementation of the actions to be taken by the
Company to increase the efficiency of operations; rapid increases
and decreases in the volume of merchandise that passes through
the Company's warehouse facilities;
the failure of the Rights Offering to be consummated on a timely
basis;
the failure of the Company to achieve quarterly profitable
operating results by the end of fiscal 1996;
the failure of the Company to solve the operating problems at the
new Roanoke fulfillment center;
and a delay or reversal in the implementation of postal rate
decreases or an increase in paper costs.
19
<PAGE>
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
In November 1995, the Company entered into the Credit Facility with
Congress. The Credit Facility was amended in February 1996 to permit the
reorganization of Austad. In addition, the Credit Facility was amended in April
1996 to permit the borrowing of an additional $4 million over the borrowing base
formula until the closing of the Rights Offering, subject to the $75 million
limit of the Credit Facility. In addition, the minimum working capital and net
worth requirements contained in the Credit Facility and in the Indenture
relating to the 9.25% Notes were reduced by $5 million until the closing of the
Rights Offering.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
10 (a) First Amendment to Loan and Security Agreement, dated
as of February 22, 1996, among Congress Financial
Corporation and certain subsidiaries of the Company.
(b) Second Amendment to Loan and Security Agreement, dated as
of April 16, 1996, among Congress Financial Corporation
and certain subsidiaries of the Company.
(c) Third Supplemental Indenture dated as of April 16, 1996,
to the Indenture, dated as of August 17, 1993, as
supplemented, among the Company and First Trust National
Association, as Trustee.
27 Financial Data Schedule (EDGAR filing only).
Reports on Form 8-K - There were no reports on Form 8-K filed during the first
quarter ended March 30, 1996. However, on April 17, 1996, the Company filed an
Amendment No. 1 to its current report on form 8-K dated May 25, 1995 attaching,
pursuant to Item 7(a) (i) of such form, financial statement for the Austad
Company reported on by Arthur Andersen LLP, together with a consent of such
firm.
20
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER DIRECT, INC.
--------------------
Registrant
By: /s/Wayne P. Garten
------------------------
Wayne P. Garten
Executive Vice President and
Chief Financial Officer
(on behalf of the Registrant
and as principal financial
officer)
May 14, 1996
21
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT NUMBER NO.
-------------- ----
<C> <S> <C>
10(a) First Amendment to Loan and Security Agreement, dated as
of February 22, 1996, among Congress Financial Corporation
and certain subsidiaries of the Company.
(b) Second Amendment to Loan and Security Agreement, dated as
of April 16, 1996, among Congress Financial Corporation
and certain subsidiaries of the Company.
(c) Third Supplemental Indenture dated as of April 16, 1996,
to the Indenture, dated as of August 17, 1993, as
supplemented, among the Company and First Trust National
Association, as Trustee.
27 Financial Data Schedule (EDGAR filing only)
</TABLE>
E-1
<PAGE>
<PAGE>
Exhibit 10(a)
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT, dated as of February 22,
1996, by and among CONGRESS FINANCIAL CORPORATION, a California corporation
("Lender"), HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania corporation
("HDPI"), BRAWN OF CALIFORNIA, INC., a California corporation ("Brawn"), GUMP'S
BY MAIL, INC., a Delaware Corporation ("GBM"), GUMP'S CORP., a California
corporation ("Gump's"), THE COMPANY STORE, INC., a Wisconsin corporation
("TCSI"), TWEEDS, INC., a Delaware corporation ("Tweeds"), LWI HOLDINGS, INC., a
Delaware Corporation ("LWI"), AEGIS CATALOG CORPORATION, a Delaware corporation
("Aegis"), HANOVER DIRECT VIRGINIA INC., a Delaware corporation ("HDV"), and
HANOVER REALTY, INC., a Virginia corporation ("Hanover Realty"; and together
with HDPI, Brawn, GBM, Gump's, TCSI, Tweeds, LWI, Aegis and HDV, each
individually referred to herein as an "Existing Borrower" and collectively,
"Existing Borrowers") and HANOVER DIRECT, INC., a Delaware corporation
("Hanover"), AEGIS RETAIL CORPORATION, a Delaware corporation, AEGIS SAFETY
HOLDINGS, INC., a Delaware corporation ("Aegis Holding"), AEGIS VENTURES, INC.,
a Delaware corporation, AMERICAN DOWN & TEXTILE COMPANY, a Wisconsin
corporation, BRAWN WHOLESALE CORP., a California corporation, THE COMPANY
FACTORY, INC., a Wisconsin corporation, THE COMPANY OFFICE, INC., a Wisconsin
corporation, COMPANY STORE HOLDINGS, INC., a Delaware corporation ("CSHI"), D.M.
ADVERTISING, INC., a New Jersey corporation, GUMP'S CATALOG, INC., a Delaware
corporation, GUMP'S HOLDINGS, INC., a Delaware corporation, HANOVER CASUALS,
INC., a Delaware corporation, HANOVER CATALOG HOLDINGS, INC., a Delaware
corporation ("Hanover Catalog"), HANOVER DIRECT NEW JERSEY, INC., a Delaware
corporation, HANOVER FINANCE CORPORATION, a Delaware corporation ("Hanover
Finance"), HANOVER HOLDINGS, INC., a Delaware corporation, HANOVER LIST
MANAGEMENT INC., a New Jersey corporation, HANOVER VENTURES, INC., a Delaware
corporation, LEICHTUNG OF MICHIGAN, INC., a Michigan corporation, LWI RETAIL,
INC., an Ohio corporation, SCANDIA DOWN CORPORATION, a Delaware corporation
("Scandia"), SKANDIA DOWNSALES, INC., a Wisconsin corporation, TW ACQUISITIONS
INC., a Delaware corporation, TWEEDS OF VERMONT, INC., a Delaware corporation,
and YORK FULFILLMENT COMPANY, INC., a Pennsylvania corporation (each
individually an "Existing Guarantor" and collectively, "Existing Guarantors"),
THE AUSTAD COMPANY, a South Dakota corporation ("Austad"; as hereinafter further
defined) and AUSTAD HOLDINGS, INC., a Delaware corporation ("Austad Holdings";
as hereinafter further defined). Each Existing Borrower, together with Austad,
shall hereinafter be referred to individually as a "Borrower" and collectively
as "Borrowers", and each Existing Guarantor, together with Austad Holdings,
shall hereinafter be referred to individually as a "Guarantor" and collectively
as "Guarantors."
<PAGE>
<PAGE>
W I T N E S S E T H:
WHEREAS, Existing Borrowers, Existing Guarantors and Lender
entered into the Loan and Security Agreement, dated November 14, 1995 (the "Loan
Agreement"), pursuant to which Lender has made loans and advances to Existing
Borrowers; and
WHEREAS, Existing Borrowers, Existing Guarantors and Lender
contemplated, pursuant to Section 2.11 of the Loan Agreement, that Austad may
become a Revolving Loan Borrower under the Loan Agreement and that Austad
Holdings may become a Guarantor under the Loan Agreement; and
WHEREAS, Hanover, Austad, Austad Holdings, David B. Austad,
individually and as custodian for certain members of his immediate family, and
Denise Austad (the "David Austad Group", as hereinafter further defined) have
agreed, among other things, to a plan of corporate separation and restructure of
the mail order and retail businesses of Austad; and
WHEREAS, to provide working capital financing for the mail order
business retained by Austad following such corporate separation and
reorganization, Austad has requested that it become a Revolving Loan Borrower
under the Loan Agreement and Austad Holdings has requested that it become a
Guarantor under the Loan Agreement; and
WHEREAS, Existing Borrowers and Existing Guarantors have also
requested that Austad become a Revolving Loan Borrower pursuant to the terms and
conditions of the Loan Agreement, as amended hereby, and that Austad Holdings
become a Guarantor pursuant to the terms and conditions of the Loan Agreement,
as amended hereby; and
WHEREAS, the parties to the Loan Agreement desire to enter into a
this Amendment to the Loan Agreement to amend and modify certain provisions
thereof in order to: (a) include Austad as a Revolving Loan Borrower and Austad
Holdings as a Guarantor thereunder, subject to the provisions set forth herein,
(b) provide that Lender shall have a security interest in and lien upon all of
the assets and properties of each of Austad and Austad Holdings to secure their
Obligations to Lender, and (c) make certain other amendments to the Loan
Agreement;
NOW, THEREFORE, in consideration of the premises and covenants
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
-2-
<PAGE>
<PAGE>
1. Definitions.
(a) Additional Definitions. As used herein or
in any of the other Financing Agreements, the following terms shall have the
respective meanings given to them below, and the Loan Agreement shall be deemed
and is hereby amended to include, in addition and not in limitation, each of the
following definitions:
(i) "AGS" shall mean AGS, Inc., a South
Dakota corporation, and its successors and assigns.
(ii) "Austad Catalog Division" shall mean
all of the assets and properties of Austad related to or used in connection with
the sale of golf equipment, golf supplies, golf apparel and related goods and
services through its "Austad's" mail order catalog.
(iii) "Austad Eligible Inventory" shall
mean all Inventory of Austad in the merchandise categories of golf equipment,
golf supplies, golf apparel and related finished goods offered for sale by
Austad in its "Austad's" catalog, or such other catalogs created or acquired by
Austad covering substantially similar merchandise which Austad has requested
Lender to include in this Inventory category.
(iv) "Austad Escrow Agreement" shall mean
the Escrow Agreement, dated February 16, 1996, by and among The First National
Bank in Sioux Falls, Austad and David Austad in his individual capacity and on
behalf of the other members of the David Austad Group, as the same now exists or
may hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
(v) "Austad Holdings" shall mean Austad
Holdings, a Delaware corporation, and its successors and assigns.
(vi) "Austad Reorganization Agreements"
shall mean, collectively, the Agreement and Plan of Corporate Separation and
Reorganization, dated as of February 16, 1996, by and among Hanover, Austad
Holdings, Austad and the David Austad Group, the Escrow Agreement and all other
agreements, documents and instruments now or at any time hereafter executed
and/or delivered by any Person in connection therewith or related thereto, as
the same now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
(vii) "Austad Retail Division" shall mean
all assets and properties of Austad related to or used in connection with the
retail sale of golf equipment, golf supplies, apparel and related goods and
services through one retail store located in Sioux Falls, South Dakota, two
retail stores located in Blaine and Edina, Minnesota and one retail store
located in
-3-
<PAGE>
<PAGE>
Oak Brook, Illinois, but only to the extent such assets and properties are
transferred to AGS pursuant to the Austad Reorganization Agreements, and, in the
case of Inventory of Austad, limited to only such Inventory that is located on
the premises of the foregoing retail stores and such Inventory that is located
on the premises of the Sioux Falls, South Dakota fulfillment center of Austad
that was specifically purchased for the retail division of Austad.
(viii) "Austad Subordinated Notes" shall
mean, collectively, (A) the Promissory Note, dated May 25, 1995, by Austad
payable to Hanover Finance in the original principal amount of $400,000, the
payment of which is guaranteed by Austad Holdings, and (B) the Subordinated
Promissory Note, dated May 25, 1995, by Austad payable to Hanover Finance in the
original principal amount of $2,200,000, as the same now exist or may hereafter
be amended, modified, supplemented, extended, renewed, restated or replaced.
(ix) "David Austad" shall mean David B.
Austad, and his heirs, executors, administrators, successors and assigns.
(x) "David Austad Group" shall mean,
individually and collectively, (A) David B. Austad, individually and as
custodian for certain members of his immediate family under the South Dakota
Uniform Transfer to Minors Act, (B) Denise Austad, individually and (C) each of
their respective heirs, executors, administrators, successors and assigns.
(xi) "FNBO" shall mean First National
Bank of Omaha, a national banking association, successor in interest to First
Bank of South Dakota, N.A., and its successors and assigns.
(xii) "HDV" shall mean Hanover Direct
Virginia Inc., a Delaware corporation, and its successors and assigns.
(b) Amendments of Certain Definitions.
(i) Section 1.117 of the Loan Agreement
is hereby amended to include Austad within the definition of "Revolving Loan
Borrowers" as set forth therein.
(ii) Section 1.100 of the Loan Agreement
is hereby amended such that neither Austad nor Austad Holdings shall be
considered Non-Guarantor Subsidiaries.
(iii) Austad and Austad Holdings shall
each be deemed included in the definition of "Guarantors" set forth in Section
1.51 of the Loan Agreement, and the parties hereto agree
-4-
<PAGE>
<PAGE>
that Austad and Austad Holdings are each hereby included as a Guarantor under
the Loan Agreement.
(iv) Section 1.34 of the Loan Agreement
is hereby amended to include Austad Eligible Inventory within the definition of
"Eligible Inventory" as set forth therein.
(v) Section 1.13 of the Loan Agreement
is hereby deleted in its entirety and replaced with the following:
"1.13 "Austad" shall mean The Austad Company, a South
Dakota corporation, and its successors and assigns."
(c) Interpretation. For purposes of this
Amendment, unless otherwise defined herein, all capitalized terms used herein
which are defined in the Loan Agreement shall have the meaning given to such
terms in the Loan Agreement.
2. Assumption of Obligations; Amendments to
Guarantees and Financing Agreements.
(a) Austad hereby expressly (i) assumes and
agrees to be directly liable to Lender, jointly and severally with the other
Borrowers, for all Obligations under, contained in, or arising out of the Loan
Agreement and the other Financing Agreements applicable to all Borrowers and as
applied to Austad as a Borrower and Guarantor, (ii) agrees to perform, comply
with and be bound by all terms, conditions and covenants of the Loan Agreement
and the other Financing Agreements applicable to all Borrowers and as applied to
Austad as a Borrower and Guarantor, with the same force and effect as if Austad
had originally executed and been an original Borrower and Guarantor party
signatory to the Loan Agreement and the other Financing Agreements, and (iii)
agrees that Lender shall have all rights, remedies and interests, including
security interests in and to the Collateral granted pursuant to Section 3(a)
hereof, the Loan Agreement and the other Financing Agreements, with respect to
Austad and its properties and assets with the same force and effect as Lender
has with respect to the other Borrowers and their assets and properties as if
Austad had originally executed and had been an original Borrower and Guarantor
party signatory to the Loan Agreement and the other Financing Agreements.
(b) Austad Holdings hereby expressly (i) assumes
and agrees to be directly liable for all Obligations under, contained in, or
arising out of the Loan Agreement, the General Security Agreement, dated
November 14, 1995, by the Existing Guarantors, other than Hanover and Borrowers,
in favor of Lender (the "Subsidiary General Security Agreement") and the other
Financing Agreements applicable to all Guarantors and as applied to Austad
Holdings as a Guarantor, (ii) agrees to perform, comply with and be bound by all
terms, conditions and covenants of the
-5-
<PAGE>
<PAGE>
Loan Agreement, the Subsidiary General Security Agreement and the other
Financing Agreements applicable to all Guarantors and as applied to Austad
Holdings as a Guarantor with the same force and effect as if Austad Holdings had
originally executed and been an original Guarantor or Debtor, as the case may
be, party signatory to the Loan Agreement, the Subsidiary General Security
Agreement and the other Financing Agreements, and (iii) agrees that Lender shall
have all rights, remedies and interests, including security interests in the
Collateral granted pursuant to Section 3(b) hereof, the Loan Agreement, the
Subsidiary General Security Agreement, and the other Financing Agreements, with
respect to Austad Holdings and its properties and assets with the same force and
effect as if Austad Holdings had originally executed and had been an original
Guarantor or Debtor, as the case may be, party signatory to the Loan Agreement,
the Subsidiary General Security Agreement and the other Financing Agreements.
(c) Each of the Existing Borrowers, in their
capacities as Guarantors, hereby agrees that each of their respective Guarantee
and Waivers, dated November 14, 1995 (collectively, the "Borrower Guarantees")
is hereby amended to include Austad as an additional Guarantor party signatory
thereto. Austad hereby expressly (i) assumes and agrees to be directly liable to
Lender, jointly and severally with the other Borrowers signatories thereto and
the Guarantors, for all Obligations (as defined in the Borrower Guarantees),
(ii) agrees to perform, comply with and be bound by all terms, conditions and
covenants of the Borrower Guarantees with the same force and effect as if Austad
had originally executed and been an original party signatory to each of the
Borrower Guarantees, and (iii) agrees that Lender shall have all rights,
remedies and interests with respect to Austad and its property under the
Borrower Guarantees with the same force and effect as if Austad had originally
executed and been an original party signatory to each of the Borrower
Guarantees.
(d) Each of the Existing Guarantors which is a party to
the Guarantee and Waiver, dated November 14, 1995, executed by the Existing
Guarantors, other than Hanover and the Existing Borrowers, in favor of Lender
(the "Subsidiary Guarantee"), hereby agrees that such Guarantee is hereby
amended to include Austad Holdings as an additional Guarantor party signatory
thereto. Austad Holdings hereby expressly (i) assumes and agrees to be directly
liable to Lender, jointly and severally with the other Guarantors signatories
thereto and the Borrowers, for all Obligations (as defined in the Subsidiary
Guarantee), (ii) agrees to perform, comply with and be bound by all terms,
conditions and covenants of the Subsidiary Guarantee with the same force and
effect as if Austad Holdings had originally executed and been an original party
signatory to the Subsidiary Guarantee, and (iii) agrees that Lender shall have
all rights, remedies and interests with respect to Austad Holdings and its
property with the same force and effect as if Austad Holdings had
-6-
<PAGE>
<PAGE>
originally executed and been an original party signatory to the Subsidiary
Guarantee.
(e) Each Guarantor, including without
limitation, Austad, in its capacity as Guarantor, and Austad Holdings, hereby
expressly and specifically ratifies, restates and confirms the terms and
conditions of its respective Guarantees in favor of Lender and its liability for
all of the Obligations (as defined in its Guarantees), and other obligations,
liabilities, agreements and covenants thereunder.
(f) Each Borrower, including, without
limitation, Austad, and each Guarantor, including, without limitation, Austad
Holdings, hereby agrees that all references to Borrower or Borrowers contained
in any of the Financing Agreements are hereby amended to include Austad as an
additional Borrower. Each Borrower, including, without limitation, Austad, and
each Guarantor, including, without limitation, Austad Holdings, hereby agrees
that all references to Guarantor or Guarantors or Debtor or Debtors contained in
any of the Financing Agreements are hereby amended to include Austad Holdings as
an additional Guarantor or Debtor, as the case may be.
3. Collateral.
(a) Austad Collateral. Without limiting the
provisions of Section 2(a) hereof, the Loan agreement and the other Financing
Agreements, as collateral security for the prompt performance, payment and
performance when due of all of the Obligations of Austad to Lender, Austad
hereby grants to Lender, a continuing security interest in, and liens upon, and
rights of setoff against, and Austad hereby pledges and assigns to Lender, all
now owned and hereafter acquired and arising assets and properties of Austad,
all of which shall be included in the definition of Collateral as set forth in
the Loan Agreement (which definition is hereby amended accordingly), including,
without limitation, the following:
(i) all of the following, whether now
owned or hereafter acquired or arising: (A) all Accounts, including, without
limitation, all MasterCard/VISA Receivables and all other Third Party Credit
Card Receivables, and all monies, credit balances and other amounts due from or
through or held by Third Party Credit Card Issuers, or other parties to the
Third Party Credit Card Agreements, all monies paid by or through the Private
Credit Card Purchaser, all rentals or license fees receivable in respect of
sale, lease, or license of Customer Lists, all monies, securities and other
property and the proceeds thereof, now or hereafter held or received by, or in
transit to, Lender from or for Austad, whether for safekeeping, pledge, custody,
transmission, collection or otherwise, and all of Austad's deposits (general or
special), balances, sums and credits with Lender at any time existing; (B) all
right, title
-7-
<PAGE>
<PAGE>
and interest, and all rights, remedies, security and liens, in, to and in
respect of the Accounts and other Collateral, including, without limitation,
rights of stoppage in transit, replevin, repossession and reclamation and other
rights and remedies of an unpaid vendor, lienor or secured party, guarantees or
other contracts of suretyship with respect to the Accounts, deposits or other
security for the obligations of any Account Debtor, all credit and other
insurance; (C) all right, title and interest in, to and in respect of all goods
relating to, or which by sale have resulted in, Accounts, including, without
limitation, all goods described in invoices, documents, contracts or instruments
with respect to, or otherwise representing or evidencing, any Account or other
Collateral, including, without limitation, all returned, reclaimed or
repossessed goods; (D) all deposit accounts; and (E) all other general
intangibles of every kind and description, including, without limitation, (1)
tradenames and trademarks, and the goodwill of the business symbolized thereby,
(2) patents, (3) copyrights, (4) licenses, (5) Federal, State and local tax and
duty refund claims of all kinds, (6) catalogs and promotional materials, (7) all
Customer Lists, and (8) all right, title and interest of Austad in and to Mail
Order Joint Ventures, and other joint ventures, partnerships and other Persons;
(ii) Inventory;
(iii) Equipment;
(iv) Real Property, other than the real
property located at 4500 East 10th Street, Sioux Falls, South
Dakota;
(v) all present and future books,
records, ledger cards, computer software (including all manuals, upgrades,
modifications, enhancements and additions thereto), computer tapes, disks, other
electronic data storage media, documentation of file and record formats and
source code, documents, other property and general intangibles evidencing or
relating to any of the above, any other Collateral or any Account Debtor,
together with the file cabinets or containers in which the foregoing are stored;
and
(vi) all present and future products and
proceeds of the foregoing, in any form whatsoever, including, without
limitation, any insurance proceeds and any claims against third persons for loss
or damage to or destruction of any or all of the foregoing.
Notwithstanding the foregoing, the Collateral does not include any leasehold
interests of Austad.
(b) Austad Holdings Collateral. Without
limiting the provisions of Section 2(b) hereof, the Loan Agreement, the
-8-
<PAGE>
<PAGE>
Subsidiary General Security Agreement and the other Financing Agreements, as
collateral security for the prompt payment and performance when due of all of
the Obligations of Austad Holdings, Austad Holdings hereby grants to Lender, a
continuing security interest in, and liens upon, and rights of setoff against,
and Austad Holdings hereby pledges and assigns to Lender, all now owned and
hereafter acquired and arising assets and properties of Austad Holdings, all of
which shall be included in the definition of Collateral as set forth in the
Subsidiary General Security Agreement (which definition is hereby amended
accordingly), including, without limitation, the following:
(i) all present and future: (A)
accounts, credit card receivables (including credit card charge records and
other evidences of credit card transactions), contract rights, general
intangibles, chattel paper, documents and instruments (collectively,
"Accounts"), including, without limitation, all obligations for the payment of
money arising out of the sale, lease or other disposition of goods or other
property or rendition of services, all monies, all credit balances, reserve
balances and other monies due from or held by factors or credit card issuers or
servicing agents or financial intermediaries; (B) all monies, securities and
other property and the proceeds thereof, now or hereafter held or received by,
or in transit to, Lender or any participant from or for Austad Holdings, whether
for safekeeping, pledge, custody, transmission, collection or otherwise, and all
of Austad Holding's deposits (general or special), balances, sums and credits
with Lender or any participant at any time existing; (C) all of Austad Holding's
right, title and interest, and all of Austad Holding's rights, remedies,
security and liens, in, to and in respect of the Accounts and other collateral,
including, without limitation, rights of stoppage in transit, replevin,
repossession and reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, guaranties or other contracts of suretyship with
respect to the Accounts, deposits or other security for the obligation of any
account debtor, credit and other insurance; (D) all of Austad Holding's right,
title and interest in, to and in respect of all goods relating to, or which by
sale have resulted in Accounts, including, without limitation, all goods
described in invoices, documents, contracts or instruments with respect to, or
otherwise representing or evidencing, any Account or other collateral,
including, without limitation, all returned, reclaimed or repossessed goods; (E)
all deposit accounts; and (F) all other general intangibles of every kind and
description, including, without limitation, (1) trade names and trademarks, and
the goodwill of the business symbolized thereby, (2) patents, (3) copyrights,
(4) licenses, (5) claims and other choses in action, (6) Federal, State, local
and foreign tax refund claims of all kinds, (7) catalogs and promotional
materials, customer and mailing lists, and (8) all right, title and interest in
and to joint ventures and partnerships;
-9-
<PAGE>
<PAGE>
(ii) all Inventory;
(iii) all Equipment;
(iv) all Real Property;
(v) all present and future books,
records, ledger cards, computer programs and other property and general
intangibles evidencing or relating to any of the above, any other collateral or
any account debtor, together with the file cabinets or containers in which the
foregoing are stored; and
(vi) all present and future products and
proceeds of the foregoing, in any form, including, without limitation, any
insurance proceeds and any claims against third persons for loss or damage to or
destruction of any or all of the foregoing.
Notwithstanding the foregoing, the Collateral does not include any leasehold
interests of Austad Holdings.
(c) Additional Collateral. Without limiting the
foregoing, or the other grants of Collateral pursuant to the Loan Agreement or
any of the other Financing Agreements, in order to induce Lender to extend
loans, advances and other financial accommodations to Borrowers under the Loan
Agreement, and as additional collateral for the payment and performance when due
of all Obligations of Austad, Austad Holdings and Hanover Finance, as the case
may be, (i) each of Austad and Austad Holdings by its execution below, hereby
pledges and assigns to Lender and grants to Lender a security interest in, all
of its now existing and hereafter arising (A) rights, remedies, claims for
monies, indemnification claims and claims for damages or other relief pursuant
to or in respect of the Austad Escrow Agreement and the other Austad
Reorganization Agreements, (B) rights, remedies, claims for monies,
indemnification claims and claims for damages or other relief under or in
respect of the documents and instruments referred to in the Austad Escrow
Agreement and the other Austad Reorganization Agreements, and (C) all proceeds,
collections, recoveries and rights with respect to the foregoing and (ii)
Hanover Finance by its signature below hereby pledges and assigns to Lender all
of its right, title and interest in and to, and agrees to indorse to Lender,
each of the Austad Subordinated Notes. Nothing set forth herein, and no act
taken by Lender pursuant to the pledges, assignments and grants of security
interests set forth herein shall constitute an assumption by Lender of any
obligation or liability of Austad or Austad Holdings pursuant to or in
connection with the Escrow Agreement and the other Austad Reorganization
Agreements or otherwise, or of Hanover Finance pursuant to or in connection with
the Austad Subordinated Notes or otherwise.
-10-
<PAGE>
<PAGE>
4. Austad Inventory Advance Rate. Section 2.1(b) of
the Loan Agreement is hereby deleted in its entirety and
replaced with the following:
"(b) Revolving Inventory Loans. Subject to, and upon the
terms and conditions contained herein and in the other Financing
Agreements, Lender shall, from time to time, make Revolving
Inventory Loans (i) to each Revolving Loan Borrower, other than
Gump's and Austad's, at such Revolving Loan Borrower's request,
of up to the lesser of (A) sixty percent (60%) of the Value of
the Eligible Inventory of such Revolving Loan Borrower or (B) the
Net OLV Percentage of the Value of such Eligible Inventory, and
(ii) to Gump's, at its request, of up to the lesser of (A) sixty
percent (60%) of the Value of Eligible Inventory of Gump's or (B)
the Net GOB Percentage of the Value of Eligible Inventory of
Gump's, and (iii) to Austad, at its request, of up to the lesser
of (A) forty percent (40%) of the Value of Eligible Inventory of
Austad or (B) the Net OLV Percentage of the Value of such
Eligible Inventory, or, in each of clauses (b)(i), (b)(ii) or
(b)(iii), such greater or lesser percentages thereof as Lender
shall, in its sole discretion, determine from time to time (the
"Inventory Loan Formulas"). Without limiting the foregoing, the
sixty percent (60%) lending formula component referred to in
clauses (b)(i)(A) and (b)(ii)(A) and the forty percent (40%)
lending formula component referred to in clause (b)(iii)(A) may
be adjusted downward by Lender based upon any adverse change,
individually or in the aggregate, in the turnover of Eligible
Inventory or deterioration in mix, nature or quality of Eligible
Inventory in the respective categories of Eligible Inventory, and
any such downward adjustment made for such reason(s) (or on the
basis of the lending formula component set forth in clauses
(b)(i)(B), (b)(ii)(B) or (b)(iii)(B) above) shall not be
considered solely discretionary for purposes of the provision
contained in the definition of Interest Rate and Section 2.7(c)
hereof."
5. Inventory Sublimits. Section 2.2(j) of the Loan
Agreement is hereby redesignated Section 2.2(k) and a new
Section 2.2(j) of the Loan Agreement is added as follows:
"(j) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Loans and Letter of Credit Accommodations made available to
Austad shall not exceed Three Million Dollars ($3,000,000) at any
one time outstanding."
-11-
<PAGE>
<PAGE>
6. Letter of Credit Accommodations. Without limiting the rights
of Lender to establish a greater percentage in connection with Letter of Credit
Accommodations established for the purchase of goods pursuant to Sections 2.3(b)
and 2.3(d) of the Loan Agreement, Austad and the Existing Borrowers agree for
purposes of clarity that the reference to forty percent (40%) set forth in
Sections 2.3(b)(i)(A)(1) and 2.3(d)(i)(A) of the Loan Agreement shall apply only
to Existing Borrowers and that it is hereby agreed that such percentage as
applied to Austad shall be sixty percent (60%) in such Sections.
7. Guarantees. Section 4.2 of the Loan Agreement is
hereby deleted in its entirety and replaced with the following,
effective November 14, 1995:
"4.2 Guarantees
Concurrently herewith, in order to induce Lender to enter
into this Agreement and the other Financing Agreements to be
entered into on the date hereof, each Borrower shall execute and
deliver to Lender the Guarantee by Borrowers, and Borrowers shall
cause Guarantors to execute and deliver to Lender the Guarantees
by the Guarantors, each in form and substance satisfactory to
Lender, as provided therein (as all of such Guarantees, now exist
or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced, individually a "Guarantee" and
collectively the "Guarantees"). In its capacity as a party
signatory to such Guarantees, each Borrower shall be considered a
Guarantor hereunder."
8. Additional Amendments.
(a) Section 2.11(c), (d) and (e) of the Loan
Agreement are hereby redesignated Sections 2.11(a), (b) and (c), respectively.
(b) The name of the signatory party identified
on signature page 123 to the Loan Agreement as Skandia Down Sales,
Inc. is hereby corrected to be Skandia Downsales, Inc.
9. Exhibits.
(a) Exhibits A, B-1, B-4, C, D, F, G, H-1 and
H-3, to the Loan Agreement are hereby amended to include, in addition and not in
limitation, the information set forth on the First Supplements to each of such
Exhibits attached hereto.
(b) Exhibit A to the Subsidiary General Security
Agreement is hereby amended to include, in addition and not in limitation, the
information set forth on the First Supplement to Exhibit A attached hereto.
-12-
<PAGE>
<PAGE>
10. Representations and Warranties. Borrowers represent, warrant
and covenant with and to Lender as follows, which representations, warranties
and covenants are continuing and shall survive the execution and delivery
hereof, the truth and accuracy of, or compliance with each, together with the
representations, warranties and covenants in the other Financing Agreements,
being a continuing condition of the making of any Revolving Loans or Letter of
Credit Accommodations by Lender to Borrowers:
(a) As of the date hereof, Austad does not have
a Deferred Billing Option Program.
(b) This Amendment and each other agreement or
instrument to be executed and delivered by each of Austad, Austad Holdings, the
other Borrowers and/or the other Guarantors hereunder have been duly authorized,
executed and delivered by all necessary action on the part of each of Austad,
Austad Holdings, the other Borrowers and the other Guarantors which is a party
hereto and thereto and, if necessary, their respective stockholders, and is in
full force and effect as of the date hereof, as the case may be, and the
agreements and obligations of each of Austad, Austad Holdings, the other
Borrowers and/or the other Guarantors, as the case may be, contained herein and
therein constitute legal, valid and binding obligations of each of Austad,
Austad Holdings, the other Borrowers and/or the other Guarantors, as the case
may be, enforceable against them in accordance with their terms.
(c) Neither the execution and delivery of the
Austad Reorganization Agreements, nor the consummation of the transactions
contemplated by the Austad Reorganization Agreements, nor compliance with the
provisions of the Austad Reorganization Agreements, shall result in the creation
or imposition of any lien, claim, charge or encumbrance upon any assets of the
Austad Catalog Division or any other Collateral, except in favor of Lender
pursuant to this Amendment.
(d) Neither the execution and delivery of the
Austad Reorganization Agreements, nor the consummation of the transactions
therein contemplated, nor compliance with the provisions thereof, (i) has
violated or shall violate any Bulk Sales Act, Bulk Transfer Act or Article 6 of
the UCC, if applicable, or any Federal or State securities laws or any other law
or regulation or any order or decree of any court or governmental
instrumentality in any respect or (ii) does, or shall conflict with or result in
the breach of, or constitute a default in any respect under any mortgage, deed
of trust, security agreement, agreement or instrument to which Austad or Austad
Holdings or any other Borrower or other Guarantor is a party or may be bound, or
(iii) shall violate any provision of the Certificates of Incorporation or
By-Laws of Austad, Austad Holdings, or any other Borrower or other Guarantor.
-13-
<PAGE>
<PAGE>
(e) All of the outstanding shares of capital stock of
each of Austad and Austad Holdings have been duly authorized, validly issued and
are fully paid and non-assessable, free and clear of all claims, liens, pledges
and encumbrances of any kind. Hanover is the beneficial and direct owner of
record of one hundred (100%) percent of the issued and outstanding capital stock
of Austad Holdings. Austad Holdings is the beneficial and direct owner of record
of one hundred (100%) percent of the issued and outstanding capital stock of
Austad. After giving effect to the consummation of the Austad Reorganization
Agreements, there is no debt outstanding that is convertible into capital stock
of Austad or Austad Holdings, and there are no outstanding rights, options or
warrants to acquire any capital stock or debt convertible into capital stock of
Austad or Austad Holdings.
(f) No action of, or filing with, or consent of
any governmental or public body or authority, other than the filing of UCC
financing statements, and no approval or consent of any other party, is required
to authorize, or is otherwise required in connection with, the execution,
delivery and performance of this Amendment.
(g) All of the representations and warranties
set forth in the Loan Agreement and the other Financing Agreements, each as
amended hereby, are true and correct in all material respects on and as of the
date hereof as if made on the date hereof, except as affected by transactions
expressly contemplated or permitted by this Amendment and except to the extent
any such representation or warranty is made as of a specified date, in which
case such representation or warranty shall have been true and correct as of such
date.
(h) As of the date hereof, and after giving
effect to the provisions of this Amendment, no Event of Default, and no
condition or event which, with the giving of notice or lapse of time, or both,
would constitute an Event of Default, exists or has occurred and is continuing.
(i) Austad Holdings is a Delaware corporation,
duly organized and validly existing in good standing under the laws of the State
of Delaware. Austad is a South Dakota corporation, duly organized and validly
existing in good standing under the laws of the State of South Dakota. Each of
Austad and Austad Holdings (i) is duly licensed or qualified to do business as a
foreign corporation and is in good standing in each of the jurisdictions set
forth in the First Supplement to Exhibit A to the Loan Agreement annexed hereto,
which are the only jurisdictions wherein the character of the properties owned
or licensed or the nature of the business of Austad and/or Austad Holdings,
makes such licensing or qualification to do business necessary; and (ii) has all
requisite power and authority to own,
-14-
<PAGE>
<PAGE>
lease and operate its properties and to carry on its business as it is now being
conducted and will be conducted in the future.
(j) The assets and properties of Austad and
Austad Holdings are owned by them, free and clear of all security interests,
liens and encumbrances of any kind, nature or description, as of the date
hereof, except those security interests granted pursuant hereto in favor of
Lender and except for Liens (if any) permitted under Section 6.4 of the Loan
Agreement or the other Financing Agreements.
11. Conditions Precedent. Concurrently with the execution hereof
(except to the extent otherwise indicated below), and as a further condition to
the effectiveness of this Amendment and the agreement of Lender to the
modifications and amendments set forth in this Amendment:
(a) Lender shall have received, in form and
substance satisfactory to Lender, evidence that (i) the Austad Reorganization
Agreements have been duly executed and delivered by and to the appropriate
parties thereto and (ii) the transactions contemplated under the terms of the
Austad Reorganization Agreements have been consummated prior to, or
contemporaneously with, the execution of this Amendment, including, without
limitation, the receipt by FNBO of the amount, to be paid by or on behalf of the
David Austad Group and/or AGS, representing a portion of the outstanding
obligations owed by Austad to FNBO under the financing arrangements between FNBO
and Austad, referred to as the "Balance Due Amount" in the Austad Reorganization
Agreements;
(b) Lender shall have received, in form and
substance satisfactory to Lender, all releases, terminations and such other
documents as Lender may request to evidence and effectuate the termination by
FNBO of its financing arrangements with Austad and Austad Holdings, and the
termination and release by FNBO of any interest in and to any assets and
properties of Austad and Austad Holdings, duly authorized, executed and
delivered by FNBO, including, but not limited to (i) UCC-3 Termination
Statements for all UCC-1 Financing Statements previously filed by FNBO for its
predecessors, as secured party, and Austad or Austad Holdings, as debtor, and
(ii) satisfactions and discharges of any mortgages, deeds of trust or deeds to
secure debt by Austad or Austad Holdings in favor of FNBO, in form acceptable
for recording in the appropriate governmental office;
(c) Lender shall have received, in form and
substance satisfactory to Lender, all consents, waivers, acknowledgments and
other agreements from third persons which Lender may deem necessary or desirable
in order to permit, protect and perfect its security interests in and liens upon
the Collateral or to effectuate the provisions of this Amendment and
-15-
<PAGE>
<PAGE>
the other Financing Agreements, including, without limitation, a Mortgagee
Waiver by Valley Bank as mortgagee of Austad's Sioux Falls, South Dakota
distribution center real property;
(d) Each of Austad, Austad Holdings, Borrowers
and Guarantors shall have delivered to Lender, in form and substance
satisfactory to Lender, each of the following agreements duly authorized,
executed and delivered:
(i) First Amendment to Trademark
Collateral Assignment and Security Agreement, dated November 14, 1995, by and
among Hanover, Hanover Catalog, Scandia, Aegis Holdings, CSHI and Lender,
providing for the addition of Austad Holdings as a Debtor thereunder and the
grant by Austad Holdings of a security interest in any trademarks, and any such
documents, instruments or filings with respect thereto with the U.S. Patent and
Trademark Office to protect such Collateral;
(ii) five (5) Special Powers of Attorney
(Trademark) by Austad Holdings in favor of Lender;
(iii) amendments to the Third Party Credit
Card Acknowledgments setting forth such acknowledging parties' agreement to
transfer to the Blocked Accounts all monies due and other funds payable to or
for the account of Austad and/or Austad Holdings under any applicable Third
Party Credit Card
Agreements;
(iv) evidence that all existing Customer
Lists, including the Customer Lists of Austad and/or Austad Holdings, have been
delivered by HDI to the Customer List Escrow Agent and are being held by the
Customer List Escrow Agent pursuant to the Customer List Escrow Agreement;
(v) Amended and Restated Intercompany
Subordination Agreement between Hanover and Lender;
(vi) Amended and Restated Agency
Agreement by and among Hanover, Austad and certain Borrowers;
(vii) Guarantee and Waiver by Borrowers,
other than Austad, in favor of Lender with respect to the
Obligations of Austad to Lender;
(viii) Guarantee and Waiver by Guarantors,
other than Borrowers, Hanover and Austad, in favor of Lender
with respect to the Obligations of Austad to Lender;
(ix) Guarantee and Waiver by Hanover in
favor of Lender with respect to the Obligations of Austad to
Lender;
(x) Amended and Restated Blocked Account
Agreement by and among The First National Bank of Maryland,
-16-
<PAGE>
<PAGE>
Borrowers, certain Guarantors and Lender providing for the establishment of a
Blocked Account for Austad; and
(xi) the delivery by Hanover Finance to
Lender of each of the Austad Subordinated Notes with an Allonge Indorsement
affixed to each such note providing for the payment of any amounts due under
each Austad Subordinated Note to the order of Lender;
(e) Austad and Austad Holdings and all other
Borrowers and Guarantors shall have duly executed and delivered to Lender such
UCC financing statements and other documents and instruments which Lender in its
sole discretion has determined are necessary to perfect the security interests
of Lender in all assets now or hereafter owned by Austad and Austad Holdings;
(f) Lender shall have received a current
Appraisal with respect to the Inventory of Austad, prepared at Revolving Loan
Borrowers' expense by the Appraiser in form, scope and methodology acceptable to
Lender and addressed to Lender, or upon which Lender is expressly permitted to
rely, that is satisfactory to Lender and will enable Lender to calculate the Net
Orderly Liquidation Value of such Inventory and the Net OLV Percentage with
respect thereto;
(g) Each of Austad and Austad Holdings shall
have delivered to Lender (i) a copy of its Certificate of Incorporation, and all
amendments thereto, certified by the Secretary of State of its jurisdiction of
incorporation as of the most recent practicable date certifying that each of the
foregoing documents remains in full force and effect and has not been modified
or amended, except as described therein, (ii) a copy of its By-Laws, certified
by the secretary of each of Austad and Austad Holdings, and (iii) a certificate
from the secretary of each of Austad and Austad Holdings dated the date hereof
certifying that each of the foregoing documents remains in full force and effect
and has not been modified or amended, except as described therein;
(h) Each of Austad and Austad Holdings shall
have delivered to Lender evidence, as of the most recent practicable date, that
it is duly qualified and in good standing in each jurisdiction set forth on the
First Supplement to Exhibit A to the Loan Agreement annexed hereto;
(i) Lender shall have received Secretary's
Certificates of Directors' Resolutions with Shareholders' Consent evidencing the
adoption and subsistence of corporate resolutions approving the execution,
delivery and performance by Austad, Austad Holdings and the other Borrowers and
other Guarantors of this Amendment and the agreements, documents and instruments
to be delivered pursuant to this Amendment, together with such opinions of
counsel to Austad, Austad Holdings, the other
-17-
<PAGE>
<PAGE>
Borrowers and other Guarantors with respect thereto, addressed to Lender as
Lender shall reasonably require, all in form and substance and satisfactory to
Lender;
(j) Each of Borrowers and Guarantors shall
deliver, or cause to be delivered, to Lender a true and correct copy of any
consent, waiver or approval to or of this Amendment, which any Borrower or
Guarantor is required to obtain from any other Person, and such consent,
approval or waiver shall be in a form reasonably acceptable to Lender; and
(k) Hanover shall have delivered to Lender, in
form and substance satisfactory to Lender, consolidating pro forma opening
balance sheets as of February 16, 1996 for Austad and Austad Holdings reflecting
the separation of the Austad Catalog Division and the Austad Retail Division.
12. Effect of this Amendment. This Amendment and the instruments
and agreements delivered pursuant hereto constitute the entire agreement of the
parties with respect to the subject matter hereof and thereof, and supersede all
prior oral or written communications, memoranda, proposals, negotiations,
discussions, term sheets and commitments with respect to the subject matter
hereof and thereof. Except as expressly amended pursuant hereto, and except for
the acknowledgements expressly set forth herein, no other changes or
modifications to the Financing Agreements or waivers of or consents under any
provisions thereof are intended or implied, and in all other respects the
Financing Agreements are hereby specifically ratified, restated and confirmed by
all parties hereto as of the effective date hereof. To the extent that any
provision of the Loan Agreement or any of the other Financing Agreements are
inconsistent with the provisions of this Amendment, such other provision shall
be deemed to be amended so that it is made consistent with the provisions of
this Amendment.
13. Further Assurances.
(a) Borrower shall execute and deliver such
additional documents and take such additional action as may be reasonably
requested by Lender to effectuate the provisions and purposes of this Amendment.
(b) Without limiting the provisions of Section
13(a) hereof, Austad shall, or Borrowers and Hanover shall cause Austad to, (i)
obtain and deliver to Lender, within thirty (30) days from the date hereof, (A)
evidence that Austad has qualified to do business as a foreign corporation in
each of the State of Pennsylvania and the State of California and (B) the Final
Closing Balance Sheet (as defined in the Austad Reorganization Agreements) and
(ii) cause FNBO to remit to an account designated by Lender the balance of any
collections or other amounts received by FNBO in respect of the financing
arrangements between
-18-
<PAGE>
<PAGE>
FNBO and Austad being terminated pursuant to Section 11(b) hereof, after FNBO
first applies any such amounts to any checks made by Austad that are presented
to FNBO for payment.
14. Governing Law. The rights and obligations hereunder of each
of the parties hereto shall be governed by and interpreted and determined in
accordance with the internal laws of the State of New York (without giving
effect to principles of conflicts of laws).
15. Binding Effect. This Amendment shall be binding upon and
inure to the benefit of each of the parties hereto and their respective
successors and assigns.
16. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed on the day and year first written.
CONGRESS FINANCIAL CORPORATION
By:_________________________
Title:______________________
HANOVER DIRECT PENNSYLVANIA, INC.
By:_________________________
Title:______________________
BRAWN OF CALIFORNIA, INC.
By:_________________________
Title:______________________
GUMP'S BY MAIL, INC.
By:_________________________
Title:______________________
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
-19-
<PAGE>
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
GUMP'S CORP.
By:_________________________
Title:______________________
THE COMPANY STORE, INC.
By:_________________________
Title:______________________
TWEEDS, INC.
By:_________________________
Title:______________________
LWI HOLDINGS, INC.
By:_________________________
Title:______________________
AEGIS CATALOG CORPORATION
By:_________________________
Title:______________________
HANOVER DIRECT VIRGINIA INC.
By:_________________________
Title:______________________
HANOVER REALTY, INC.
By:_________________________
Title:______________________
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
-20-
<PAGE>
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
THE AUSTAD COMPANY
By:_________________________
Title:______________________
By their signatures below, the undersigned
Guarantors acknowledge and agree to
be bound by the applicable provisions of this
Amendment:
HANOVER DIRECT, INC.,
a Delaware corporation
By:____________________________
Title:_________________________
AEGIS RETAIL CORPORATION
By:____________________________
Title:_________________________
AEGIS SAFETY HOLDINGS, INC.
By:____________________________
Title:_________________________
AEGIS VENTURES, INC.
By:____________________________
Title:_________________________
AMERICAN DOWN & TEXTILE COMPANY
By:____________________________
Title:_________________________
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
-21-
<PAGE>
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
BRAWN WHOLESALE CORP.
By:____________________________
Title:_________________________
THE COMPANY FACTORY, INC.
By:____________________________
Title:_________________________
THE COMPANY OFFICE, INC.
By:____________________________
Title:_________________________
COMPANY STORE HOLDINGS, INC.
By:____________________________
Title:_________________________
D.M. ADVERTISING, INC.
By:____________________________
Title:_________________________
GUMP'S CATALOG, INC.
By:____________________________
Title:_________________________
GUMP'S HOLDINGS, INC.
By:____________________________
Title:_________________________
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
-22-
<PAGE>
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
HANOVER CASUALS, INC.
By:____________________________
Title:_________________________
HANOVER CATALOG HOLDINGS, INC.
By:____________________________
Title:_________________________
HANOVER DIRECT NEW JERSEY, INC.
By:____________________________
Title:_________________________
HANOVER FINANCE CORPORATION
By:____________________________
Title:_________________________
HANOVER HOLDINGS, INC.
By:____________________________
Title:_________________________
HANOVER LIST MANAGEMENT, INC.
By:____________________________
Title:_________________________
HANOVER VENTURES, INC.
By:____________________________
Title:_________________________
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
-23-
<PAGE>
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
LEICHTUNG OF MICHIGAN, INC.
By:____________________________
Title:_________________________
LWI RETAIL, INC.
By:____________________________
Title:_________________________
SCANDIA DOWN CORPORATION
By:____________________________
Title:_________________________
SKANDIA DOWNSALES, INC.
By:____________________________
Title:_________________________
TW ACQUISITIONS, INC.
By:____________________________
Title:_________________________
TWEEDS OF VERMONT, INC.
By:____________________________
Title:_________________________
YORK FULFILLMENT COMPANY, INC.
By:____________________________
Title:_________________________
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
-24-
<PAGE>
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
AUSTAD HOLDINGS, INC.
By:____________________________
Title:_________________________
-25-
<PAGE>
<PAGE>
Exhibit 10(b)
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT, dated as of
April 16, 1996, by and among CONGRESS FINANCIAL CORPORATION, a California
corporation ("Lender"), HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania
corporation ("HDPI"), BRAWN OF CALIFORNIA, INC., a California corporation
("Brawn"), GUMP'S BY MAIL, INC., a Delaware Corporation ("GBM"), GUMP'S CORP., a
California corporation ("Gump's"), THE COMPANY STORE, INC., a Wisconsin
corporation ("TCSI"), TWEEDS, INC., a Delaware corporation ("Tweeds"), LWI
HOLDINGS, INC., a Delaware Corporation ("LWI"), AEGIS CATALOG CORPORATION, a
Delaware corporation ("Aegis"), HANOVER DIRECT VIRGINIA INC., a Delaware
corporation ("HDV"), HANOVER REALTY, INC., a Virginia corporation ("Hanover
Realty"), and THE AUSTAD COMPANY, a South Dakota corporation ("Austad"; and
together with HDPI, Brawn, GBM, Gump's, TCSI, Tweeds, LWI, Aegis, HDV and
Hanover Realty, each individually referred to herein as a "Borrower" and
collectively, "Borrowers") and HANOVER DIRECT, INC., a Delaware corporation
("Hanover"), AEGIS RETAIL CORPORATION, a Delaware corporation, AEGIS SAFETY
HOLDINGS, INC., a Delaware corporation ("Aegis Holding"), AEGIS VENTURES, INC.,
a Delaware corporation, AMERICAN DOWN & TEXTILE COMPANY, a Wisconsin
corporation, BRAWN WHOLESALE CORP., a California corporation, THE COMPANY
FACTORY, INC., a Wisconsin corporation, THE COMPANY OFFICE, INC., a Wisconsin
corporation, COMPANY STORE HOLDINGS, INC., a Delaware corporation, D.M.
ADVERTISING, INC., a New Jersey corporation, GUMP'S CATALOG, INC., a Delaware
corporation, GUMP'S HOLDINGS, INC., a Delaware corporation, HANOVER CASUALS,
INC., a Delaware corporation, HANOVER CATALOG HOLDINGS, INC., a Delaware
corporation, HANOVER FINANCE CORPORATION, a Delaware corporation, HANOVER LIST
MANAGEMENT INC., a New Jersey corporation, HANOVER VENTURES, INC., a Delaware
corporation, LEICHTUNG OF MICHIGAN, INC., a Michigan corporation, LWI RETAIL,
INC., an Ohio corporation, SCANDIA DOWN CORPORATION, a Delaware corporation,
TWEEDS OF VERMONT, INC., a Delaware corporation, YORK FULFILLMENT COMPANY, INC.,
a Pennsylvania corporation, and AUSTAD HOLDINGS, INC., a Delaware corporation
(each individually a "Guarantor" and collectively, "Guarantors").
W I T N E S S E T H:
WHEREAS, Borrowers, Guarantors and Lender entered into the Loan
and Security Agreement, dated November 14, 1995, as amended by the First
Amendment to Loan and Security Agreement, dated February 22, 1996 (the "Loan
Agreement"), pursuant to which Lender has made loans and advances to Borrowers;
and
WHEREAS, Borrowers and Guarantors have requested that Lender (a)
provide temporary, supplemental revolving loans to HDPI of up to the maximum
amount of Four Million Dollars ($4,000,000) at any one time outstanding, (b)
reduce, on a temporary basis, the required maintenance levels under certain
financial covenants contained in the Loan Agreement, (c) release
<PAGE>
<PAGE>
a portion of certain loan availability reserves previously established, and
establish a permanent availability reserve in the amount of One Million Dollars
($1,000,000), and (d) enter into certain related amendments to the Loan
Agreement and agreements in connection therewith;
WHEREAS, the parties to the Loan Agreement desire to enter into
this Second Amendment to Loan and Security Agreement (this "Amendment") to
evidence and effectuate the foregoing, to the extent set forth herein, and
subject to the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and covenants
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Definitions.
(a) Additional Definitions. As used herein or
in any of the other Financing Agreements, the following terms shall have the
respective meanings given to them below, and the Loan Agreement shall be deemed
and is hereby amended to include, in addition and not in limitation, each of the
following definitions:
(i) "Supplemental Revolving Inventory
Loans" shall have the meaning given in Section 2(a) of this Amendment.
(ii) "Hanover Rights Offering" shall mean
the proposed offering by Hanover of rights to purchase shares of common stock of
Hanover, for an aggregate gross issuance price of approximately $40,000,000, as
described in the press release, dated March 7, 1996, issued by Hanover, a copy
of which is annexed as Exhibit A hereto, and the consummation of the
transactions involving the exercise of such rights and the issuance of Hanover's
common stock in respect of such exercise, including the standby purchase of any
of such common stock by NAR.
(iii) "Permanent Availability Reserve"
shall have the meaning given in Section 3(a) of this Amendment.
(iv) "Temporary Loan Period" shall mean
the period commencing on the date hereof and ending on the earlier of (A) June
15, 1996 and (B) the first date of issuance of common stock of Hanover upon the
exercise of the rights under, and/or in the case of NAR, its standby purchase of
common stock of Hanover pursuant to, the Hanover Rights Offering (regardless of
the actual number of rights exercised or shares issued or the amounts received
by Hanover from such issuance or exercise).
(b) Interpretation. For purposes of this
Amendment, unless otherwise defined herein, all capitalized terms
-2-
<PAGE>
<PAGE>
used herein that are defined in the Loan Agreement, shall have the respective
meanings given to such terms in the Loan Agreement.
2. Supplemental Revolving Inventory Loan
Availability.
(a) Subject to the terms and conditions
contained herein and all of the terms and conditions of the Loan Agreement as
amended hereby, Lender agrees that, after giving effect to the adjustments to
certain availability reserves described in Section 3 hereof, to make available
to HDPI from time to time during the Temporary Loan Period and permit to remain
outstanding during the Temporary Loan Period, additional Revolving Inventory
Loans in the aggregate principal amount of Four Million Dollars ($4,000,000) at
any one time outstanding in excess of the aggregate amount of Revolving
Inventory Loans otherwise determined by Lender to be available to HDPI pursuant
to Section 2.1(b) of the Loan Agreement (the "Supplemental Revolving Inventory
Loans").
(b) The Supplemental Revolving Inventory Loans
(i) shall constitute part of and shall be deemed Revolving Inventory Loans, and
as such shall constitute Obligations of HDPI, for all purposes under the Loan
Agreement and the other Financing Agreements, except that during the Temporary
Loan Period the sublimit on Revolving Inventory Loans to HDPI contained in
Section 2.2(b) shall not be applicable to the Supplemental Revolving Inventory
Loans, (ii) shall be subject to (A) Lender's right to establish reserves against
availability of Revolving Loans and Letter of Credit Accommodations pursuant to
Section 2.6 of the Loan Agreement, and all the other terms and conditions set
forth herein and in the Loan Agreement and the other Financing Agreements,
except as expressly set forth in clause (i) of this Section, (iii) shall be
repaid on or prior to the expiration of the Temporary Loan Period in accordance
with the provisions of this Amendment, the Loan Agreement as amended hereby and
the other Financing Agreements, and (iv) shall be secured by all of the
Collateral.
3. Release of Part of Existing Availability
Reserves; Establishment of Permanent Availability Reserve.
(a) In place of Lender's continued maintenance
of the reserve against Revolving Loan Availability as provided in paragraph 2 of
the letter agreement re: Post-Closing Items, dated November 14, 1995, among
Lender and Borrowers, Lender shall release the remaining unreleased portion of
such reserve, except for $1,000,000 thereof, which shall be maintained at all
times hereafter by Lender as a permanent reserve against the Revolving Loan
availability of HDPI (the "Permanent Availability Reserve"), and the provisions
of such letter agreement providing for release of such previously established
availability reserve shall be of no further force and effect.
-3-
<PAGE>
<PAGE>
(b) The Permanent Availability Reserve shall be
in addition to, and not in limitation of, the rights of Lender to establish
other and further reserves against the availability of Revolving Loans and
Letter of Credit Accommodations under the Loan Agreement and the other Financing
Agreements.
4. Amendment Fee. In addition to all other fees, charges,
interest and expenses payable by Borrowers to Lender under the Loan Agreement
and the other Financing Agreements, HDPI shall pay to Lender a fee for entering
into this Amendment in the amount of Forty Thousand Dollars ($40,000), which
amount is fully earned and payable as of the date hereof and may be charged
directly to HDPI's loan account maintained by Lender in respect of the Revolving
Loans.
5. Consolidated Working Capital. Notwithstanding Section 6.19 of
the Loan Agreement, as of the end of each fiscal month occurring during the
period commencing on the date hereof and ending on the last day of the Temporary
Loan Period, Hanover shall only be required to maintain Consolidated Working
Capital, calculated on a consolidated basis for Hanover and its Subsidiaries, of
not less than Twenty One Million Dollars ($21,000,000). As of the end of each
fiscal month ending after the last day of the Temporary Loan Period, Hanover
shall maintain Consolidated Working Capital as provided in Section 6.19 of the
Loan Agreement.
6. Consolidated Net Worth. Notwithstanding Section 6.20 of the
Loan Agreement, as of the end of each fiscal month occurring during the period
commencing on the date hereof and ending on the last day of the Temporary Loan
Period, Hanover shall only be required to maintain Consolidated Net Worth,
calculated on a consolidated basis for Hanover and its Subsidiaries, of at least
Seventy-Five Million Dollars ($75,000,000). As of the end of each fiscal month
ending after the last day of the Temporary Loan Period, Hanover shall maintain
Consolidated Net Worth as provided in Section 6.20 of the Loan Agreement.
7. Hanover Rights Offering. Upon receipt of proceeds of the
Hanover Rights Offering, net of commissions and expenses relating thereto,
Hanover shall use all such net proceeds, to the extent necessary to satisfy
fully the following requirement, to make a capital contribution or intercompany
advance (i) to HDPI to be used by HDPI to repay to Lender all Supplemental
Revolving Inventory Loans then outstanding, and (ii) to the Borrowers (including
HDPI), to the extent the outstanding Obligations (excluding the aggregate
outstanding principal amount of the Term Loans) exceeds the aggregate amount of
Revolving Loans determined by Lender pursuant to the lending formulas and
subject to the sublimits and reserves provided for or established pursuant to
the Loan Agreement as amended hereby, to be used by the respective Borrowers to
repay to Lender such excess, in each case under clauses (i) and (ii) before
using any such proceeds for any
-4-
<PAGE>
<PAGE>
other purpose, whether contemplated by the March 7, 1996 press release annexed
hereto as Exhibit A, or otherwise.
8. New Collateral Locations. For purposes of clarifying the scope
of Section 5.7(b) of the Loan Agreement, the movement of Inventory or Equipment
or other Collateral of a Borrower or Guarantor to a location which has been
disclosed on Exhibit C to the Loan Agreement as a location of Collateral of that
type of another Borrower or Guarantor, but not that particular Borrower or
Guarantor, shall be considered the opening of a new location, subject to the
prior notice and other requirements provided in or contemplated by Section
5.7(b). Concurrently herewith, Borrowers and Guarantors shall deliver an updated
Exhibit C to the Loan Agreement and shall execute or cause to be executed and/or
delivered such additional UCC financing statements and other agreements provided
in or contemplated by Section 5.7(b) or in connection with the mergers referred
to in Section 9 hereof, in each case as Lender shall require with respect to any
Collateral locations for particular Borrowers or Guarantors that were not
originally shown on Exhibit C to the Loan Agreement as Collateral locations as
to any type(s) of Collateral for those particular Borrowers or Guarantors.
9. Certain Mergers. Anything contained in Section 6.7 of the Loan
Agreement to the contrary notwithstanding, the mergers of certain Guarantors as
described in the footnotes appearing on the updated Exhibit C to the Loan
Agreement delivered pursuant to Section 8 of this Amendment are hereby
acknowledged and approved by Lender, Borrowers and Guarantors as of the
effective dates thereof.
10. Pledge of Note Payable to LWI. Upon execution and delivery of
the promissory note to be executed by Woodworkers Supply, Inc., payable to LWI
Holdings, Inc. in connection with the Asset Purchase Agreement, dated March 29,
1996, by and among LWI Holdings, Inc., Hanover and Woodworkers Supply, Inc., LWI
Holdings, Inc. shall deliver to Lender, as pledgee pursuant to the Loan
Agreement, such note together with an allonge indorsement affixed to such note
providing for the payment of all amounts due thereunder to the order of Lender.
11. Representations and Warranties. Borrowers represent, warrant
and covenant with and to Lender as follows, which representations, warranties
and covenants are continuing and shall survive the execution and delivery
hereof, the truth and accuracy of, or compliance with each, together with the
representations, warranties and covenants in the other Financing Agreements,
being a condition of the effectiveness of this Amendment and a continuing
condition of the making or providing of any Revolving Loans or Letter of Credit
Accommodations by Lender to Borrowers:
(a) This Amendment has been duly authorized,
executed and delivered by all necessary action of each of the Borrowers and
Guarantors which is a party hereto, and is in full
-5-
<PAGE>
<PAGE>
force and effect, and the agreements and obligations of Borrowers and
Guarantors, as the case may be, contained herein constitute legal, valid and
binding obligations of Borrowers and Guarantors, as the case may be, enforceable
against them in accordance with their terms.
(b) All of the representations and warranties
set forth in the Loan Agreement as amended hereby, and the other Financing
Agreements, are true and correct in all material respects, and except to the
extent any such representation or warranty is made as of a specified date, in
which case such representation or warranty shall have been true and correct as
of such date.
(c) After giving effect to the provisions of
this Amendment, no Event of Default or Incipient Default exists or
has occurred and is continuing.
12. Conditions Precedent. Concurrently with the
execution hereof, and as a further condition to the
effectiveness of this Amendment and the agreement of Lender to the
modifications and amendments set forth in this Amendment:
(a) Lender shall have received an original of
this Amendment, in form and substance satisfactory to Lender and
its counsel, duly authorized, executed and delivered by
Borrowers and Guarantors; and
(b) each of Borrowers and Guarantors shall
deliver, or cause to be delivered, to Lender a true and correct copy of any
consent, waiver or approval to or of this Amendment, which any Borrower or
Guarantor is required to obtain from any other Person, and such consent,
approval or waiver shall be in a form reasonably acceptable to Lender.
13. Effect of this Amendment. This Amendment constitutes the
entire agreement of the parties with respect to the subject matter hereof, and
supersedes all prior oral or written communications, memoranda, proposals,
negotiations, discussions, term sheets and commitments with respect to the
subject matter hereof. Except as expressly provided herein, no other changes or
modifications to the Loan Agreement and no changes or modifications to the
Subordination Agreement dated November 14, 1995 between IMR and Lender, or any
of the other Financing Agreements, or waivers of or consents under any
provisions of any of the foregoing, are intended or implied, and in all other
respects the Financing Agreements are hereby specifically ratified, restated and
confirmed by all parties hereto as of the effective date hereof. To the extent
that any provision of the Loan Agreement or any of the other Financing
Agreements conflicts with any provision of this Amendment, the provision of this
Amendment shall control.
-6-
<PAGE>
<PAGE>
14. Further Assurances. Borrowers and Guarantors
shall execute and deliver such additional documents and take
such additional action as may be reasonably requested by Lender to
effectuate the provisions and purposes of this Amendment.
15. Governing Law. The rights and obligations
hereunder of each of the parties hereto shall be governed by and
interpreted and determined in accordance with the internal laws
of the State of New York (without giving effect to principles of
conflicts of laws).
16. Binding Effect. This Amendment shall be binding
upon and inure to the benefit of each of the parties hereto and
their respective successors and assigns.
17. Counterparts. This Amendment may be executed in
any number of counterparts, but all of such counterparts shall
together constitute but one and the same agreement. In making
proof of this Amendment, it shall not be necessary to produce or
account for more than one counterpart thereof signed by each of
the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed on the day and year first written.
CONGRESS FINANCIAL CORPORATION
By:_________________________
Title:______________________
HANOVER DIRECT PENNSYLVANIA, INC.
By:_________________________
Title:______________________
BRAWN OF CALIFORNIA, INC.
By:_________________________
Title:______________________
[SIGNATURES CONTINUE ON NEXT PAGE]
-7-
<PAGE>
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
GUMP'S BY MAIL, INC.
By:_________________________
Title:______________________
GUMP'S CORP.
By:_________________________
Title:______________________
THE COMPANY STORE, INC.
By:_________________________
Title:______________________
TWEEDS, INC.
By:_________________________
Title:______________________
LWI HOLDINGS, INC.
By:_________________________
Title:______________________
AEGIS CATALOG CORPORATION
By:_________________________
Title:______________________
HANOVER DIRECT VIRGINIA INC.
By:_________________________
Title:______________________
[SIGNATURES CONTINUE ON NEXT PAGE]
-8-
<PAGE>
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
HANOVER REALTY, INC.
By:_________________________
Title:______________________
THE AUSTAD COMPANY
By:_________________________
Title:______________________
By their signatures below, the
undersigned Guarantors acknowledge
and agree to be bound by the
applicable provisions of this
Amendment:
HANOVER DIRECT, INC.
By:____________________________
Title:_________________________
AEGIS RETAIL CORPORATION
By:____________________________
Title:_________________________
AEGIS SAFETY HOLDINGS, INC.
By:____________________________
Title:_________________________
[SIGNATURES CONTINUE ON NEXT PAGE]
-9-
<PAGE>
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
AEGIS VENTURES, INC.
By:____________________________
Title:_________________________
AMERICAN DOWN & TEXTILE COMPANY
By:____________________________
Title:_________________________
BRAWN WHOLESALE CORP.
By:____________________________
Title:_________________________
THE COMPANY FACTORY, INC.
By:____________________________
Title:_________________________
THE COMPANY OFFICE, INC.
By:____________________________
Title:_________________________
COMPANY STORE HOLDINGS, INC.
By:____________________________
Title:_________________________
[SIGNATURES CONTINUE ON NEXT PAGE]
-10-
<PAGE>
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
D.M. ADVERTISING, INC.
By:____________________________
Title:_________________________
GUMP'S CATALOG, INC.
By:____________________________
Title:_________________________
GUMP'S HOLDINGS, INC.
By:____________________________
Title:_________________________
HANOVER CASUALS, INC.
By:____________________________
Title:_________________________
HANOVER CATALOG HOLDINGS, INC.
By:____________________________
Title:_________________________
HANOVER FINANCE CORPORATION
By:____________________________
Title:_________________________
[SIGNATURES CONTINUE ON NEXT PAGE]
-11-
<PAGE>
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
HANOVER LIST MANAGEMENT, INC.
By:____________________________
Title:_________________________
HANOVER VENTURES, INC.
By:____________________________
Title:_________________________
LEICHTUNG OF MICHIGAN, INC.
By:____________________________
Title:_________________________
LWI RETAIL, INC.
By:____________________________
Title:_________________________
SCANDIA DOWN CORPORATION
By:____________________________
Title:_________________________
TWEEDS OF VERMONT, INC.
By:____________________________
Title:_________________________
[SIGNATURES CONTINUE ON NEXT PAGE]
-12-
<PAGE>
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
YORK FULFILLMENT COMPANY, INC.
By:____________________________
Title:_________________________
AUSTAD HOLDINGS, INC.
By:____________________________
Title:_________________________
-13-
<PAGE>
<PAGE>
Exhibit 10(c)
THIRD SUPPLEMENTAL INDENTURE
THIRD SUPPLEMENTAL INDENTURE, dated as of April 16, 1996 (the
"Third Supplemental Indenture"), to the Indenture, dated as of August 17, 1993,
as supplemented by a First Supplemental Indenture, dated as of March 25, 1995,
and a Second Supplemental Indenture, dated as of November 14, 1995 (as so
supplemented, the "Indenture"), among THE HANOVER COMPANIES, a Nevada
corporation (the "Company"), THE HORN & HARDART COMPANY, a Nevada corporation
(the "Guarantor"), the subsidiaries of the Company which have executed the
Indenture (the "Guarantor Subsidiaries"), and FIRST TRUST NATIONAL ASSOCIATION,
a national association, as Trustee (the "Trustee").
WHEREAS, the Company, the Guarantor and the Trustee heretofore
entered into the Indenture;
WHEREAS, the Company and the Guarantor were merged with and into
Hanover Direct, Inc., a Delaware corporation ("HDI"), pursuant to the provisions
of the Agreements and Plans of Merger, dated as of April 15, 1993, between each
of the Company and the Guarantor and HDI and, when the mergers became effective,
HDI became responsible for the obligations of, and succeeded to and was
substituted for, the Company and the Guarantor, respectively, pursuant to
Section 5.2 of the Indenture;
WHEREAS, pursuant to the Indenture, $14,000,000 aggregate
principal amount of HDI's 9.25% Senior Subordinated Notes due August 1, 1998
(the "Securities") remain outstanding;
WHEREAS, Sun America Life Insurance Company ("Sun Life") was,
until November 14, 1995, the sole Holder of all the outstanding Securities;
WHEREAS, as of November 14, 1995, Intercontinental Mining &
Resources Incorporated ("IMR") purchased all of the outstanding Securities from
Sun Life;
WHEREAS, Section 9.2 of the Indenture provides that HDI, the
Guarantor Subsidiaries and the Trustee may amend the Indenture with the written
consent of the Holders of at least a majority in principal amount of the then
outstanding Securities; and
WHEREAS, HDI and the Guarantor Subsidiaries desire to amend the
Indenture as set forth herein and IMR has provided its written consent to the
substance of such amendments.
<PAGE>
<PAGE>
NOW THEREFORE, each party agrees as follows:
ARTICLE I
AMENDMENTS
1.1 Maintenance of Consolidated Net Worth. Notwithstanding
Section 4.12 of the Indenture, as of the end of each fiscal month occurring
during the period commencing on the date hereof and ending on the last day of
the Temporary Loan Period, the Company shall only be required to maintain
Consolidated Net Worth, calculated on a consolidated basis for the Company and
its Subsidiaries, of at least Seventy One Million Two Hundred Fifty Thousand
Dollars ($71,250,000). As of the end of the Temporary Loan Period, the Company
shall maintain Consolidated Net Worth as provided in Section 4.12 of the
Indenture.
1.2 Working Capital Adequacy. Notwithstanding Section 4.33 of the
Indenture, as of the end of each fiscal month occurring during the period
commencing on the date hereof and ending on the last day of the Temporary Loan
Period, the Company shall only be required to maintain Working Capital,
calculated on a consolidated basis for the Company and its Subsidiaries, of at
least Nineteen Million Nine Hundred Fifty Thousand Dollars ($19,950,000). As of
the end of the Temporary Loan Period, the Company shall maintain Working Capital
Adequacy as provided in Section 4.33 of the Indenture.
1.3 Definitions. As used herein, the following terms shall have
the respective meanings set forth below, and Section 1.1 of the Indenture shall
be deemed and is hereby amended to include, in addition and not in limitation,
each of the following:
"Hanover Rights Offering" means the proposed offering by the
Company of rights to purchase shares of Common Stock of the Company, for an
aggregate gross issuance price of approximately $40,000,000, as described in the
press release, dated March 7, 1996, issued by the Company, a copy of which is
annexed hereto as Exhibit A, and the consummation of the transactions involving
the exercise of such rights and the issuance of the Company's Common Stock in
respect of such exercise, including the standby purchase by NAR.
"Temporary Loan Period" means the period commencing on the date
hereof and ending on the earlier of (A) June 15, 1996 and (B) the closing of the
issuance and sale of shares of Common Stock pursuant to the Hanover Rights
Offering.
-2-
<PAGE>
<PAGE>
ARTICLE II
MISCELLANEOUS
2.1 Except as expressly supplemented by this Third Supplemental
Indenture, the Indenture is in all respects hereby ratified and confirmed and
shall remain in full force and effect.
2.2 This Third Supplemental Indenture is executed and shall
constitute an indenture supplemental to the Indenture and shall be construed in
connection with and as part of the Indenture. This Third Supplemental Indenture
shall be governed by and construed in accordance with the laws of the State of
New York.
2.3 The recitals contained herein shall be taken as the
statements of HDI and the Guarantor Subsidiaries, and the Trustee assumes no
responsibility for their correctness. The Trustee makes no representations as to
the validity or sufficiency of this Third Supplemental Indenture.
2.4 This Third Supplemental Indenture may be executed in any
number of counterparts each of which shall be an original, but all such
counterparts shall together constitute but one and the same instrument.
2.5 Capitalized terms used herein but not otherwise defined shall
have the meanings ascribed to them in the Indenture.
2.6 This Third Supplemental Indenture, together with the
Indenture, and any other instruments or documents delivered or to be delivered
in connection herewith or therewith represent the entire agreement and
understanding concerning the subject matter hereof among the parties hereto, and
supersede all prior proposals, agreements, understandings, negotiations and
discussions, representations, warranties, commitments, offers and contracts
concerning the subject matter hereof, whether oral or written.
2.7 Upon the execution and delivery of this Third Supplemental
Indenture, no Event of Default (and no event that, after notice or lapse of
time, or both, would become an Event of Default) shall be created or have
occurred and be continuing that is not otherwise waived pursuant to any waiver
executed by the Holders.
-3-
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third
Supplemental Indenture to be duly executed and their respective corporate seals
to be hereunto affixed and attested, all as of the day and year first above
written.
HANOVER DIRECT, INC.
By: /s/ WAYNE GARTEN
------------------------
Title:
[CORPORATE SEAL]
ATTEST:
/s/ MICHAEL P. SHERMAN
- -----------------------------
HANOVER DIRECT PENNSYLVANIA,
INC.
BRAWN OF CALIFORNIA, INC.
HANOVER DIRECT NEW JERSEY,
INC.
GUMP'S BY MAIL, INC.
GUMP'S HOLDINGS, INC.
HANOVER LIST MANAGEMENT INC.
HANOVER SYNDICATION CORP.
YORK FULFILLMENT COMPANY, INC.
COMPANY STORE HOLDINGS, INC.
TWEEDS, INC.
HANOVER CASUALS, INC.
HANOVER DIRECT VIRGINIA INC.
HANOVER HOLDINGS INC.
HANOVER VENTURES, INC.
LWI HOLDINGS, INC.
HANOVER REALTY, INC.
HANOVER CATALOG HOLDINGS, INC.
By: /s/ EDWARD J. O'BRIEN
-----------------------
Title:
[CORPORATE SEAL]
ATTEST:
/s/ MICHAEL P. SHERMAN
- -----------------------------
-4-
<PAGE>
<PAGE>
FIRST TRUST NATIONAL
ASSOCIATION, as Trustee
By: /s/ RICK PROKOFCH
------------------------
Title: TRUST OFFICER
[CORPORATE SEAL]
ATTEST:
- -----------------------------
-5-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE HANOVER DIRECT, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF
INCOME FOR THE THREE MONTHS ENDED MARCH 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY, EXCEPT FOR GROSS ACCOUNTS
RECEIVABLE AND THE ALLOWANCE FOR DOUBTFUL ACCOUNTS, BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> MAR-30-1996
<CASH> 2,750
<SECURITIES> 0
<RECEIVABLES> 34,216
<ALLOWANCES> (2,971)
<INVENTORY> 87,479
<CURRENT-ASSETS> 169,564
<PP&E> 84,042
<DEPRECIATION> (27,528)
<TOTAL-ASSETS> 288,397
<CURRENT-LIABILITIES> 128,209
<BONDS> 79,180
6,412
0
<COMMON> 62,504
<OTHER-SE> 8,945
<TOTAL-LIABILITY-AND-EQUITY> 288,397
<SALES> 165,527
<TOTAL-REVENUES> 165,527
<CGS> 108,438
<TOTAL-COSTS> 173,260
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,663
<INCOME-PRETAX> (9,227)
<INCOME-TAX> 250
<INCOME-CONTINUING> (9,477)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,477)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
