<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 30, 1995
Commission file number 1-12082
HANOVER DIRECT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-0853260
(State of incorporation) (I.R.S. Employer Identification No.)
1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 863-7300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $.66 2/3 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
As of March 21, 1996 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $52 million (based on the closing price of
the Common Stock on the American Stock Exchange on March 21, 1996).
As of March 21, 1996 the registrant had 93,516,651 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definite proxy statement is incorporated into items
10,11,12 and 13 of Part III of this Form 10-K.
<PAGE> 2
P A R T I
ITEM 1. BUSINESS
GENERAL
Hanover Direct, Inc. (the "Company") is a leading direct specialty
retailer that markets via a portfolio of branded specialty catalogs offering
home fashions, general merchandise and apparel. The Company's home fashion
catalogs include Domestications(R), a leading specialty home textile catalog,
and The Company Store(R), an upscale direct marketer of down comforters and
other down and related products for the home. The Company also markets
Gump's(R), a leading upscale catalog of exclusive gifts, which opened its new
retail store in downtown San Francisco in March 1995. The Company also markets
via catalogs in the kitchenware market with Colonial Garden Kitchens(R), a
specialty catalog featuring work saving and lifestyle enhancing items for the
kitchen and home, and Kitchen & Home(R), an upscale kitchen and home product
catalog. The Company's apparel catalogs include Tweeds(R), the European
inspired women's fashion catalog, and International Male(R), offering unique
men's fashions with an international flair.
In 1995, the Company acquired Improvements(R), a leading do-it-yourself
home improvement catalog featuring home aid accessories, the remaining interest
in The Safety Zone(R), a direct marketer of safety, prevention and protection
products, and Austad's(R), a direct marketer of golf equipment, related apparel
and accessories.
The Company, in connection with its venture with Sears, Roebuck and Co.
("Sears"), mails several versions of its catalogs to the more than 20 million
mail order and credit card customers of Sears.
During 1995, the Company mailed approximately 370 million catalogs.
The Company maintains a proprietary customer list currently containing
approximately 18 million names of customers (down from 19 million names in 1994)
who have made purchases from at least one of the Company's catalogs within the
past 36 months. Over 7 million of the names on the list represent customers who
have made purchases from at least one of the Company's catalogs within the last
12 months.
The Company is incorporated in Delaware with its principal executive
office at 1500 Harbor Boulevard, Weehawken, New Jersey 07087. The Company's
telephone number is (201) 863-7300. NAR Group Limited, a British Virgin Islands
corporation (together with its affiliates, "NAR"), owns approximately 53% of the
Company's common stock. NAR, a private investment holding company, is a joint
venture between the family of Alan G. Quasha, a Director and the Chairman of the
Board of the Company, and Compagnie Financiere Richemont A.G., a Swiss public
company engaged in luxury goods, tobacco and other businesses. The Company is a
successor in interest to The Horn & Hardart Company, a restaurant company
founded in 1911, and Hanover House Industries, Inc., founded in 1934.
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THE COMPANY'S CATALOGS
Each of the Company's specialty catalogs targets distinct market
segments offering a focused assortment of merchandise designed to meet the needs
and preferences of its target customers. Through market research and ongoing
testing of new products and concepts, each catalog determines its own
merchandise strategy, including the appropriate price points, mailing plans and
presentation of its products. The Company is continuing its development of
exclusive or private label products for a number of its catalogs, including
Domestications, Tweeds, Austad's and The Company Store, to further enhance the
brand identity of the catalogs.
The Company's specialty catalogs typically range in size from 32 to 100
pages with four to six new editions per year depending on the seasonality and
fashion content of the products offered. Each edition may be mailed several
times each season with variations in format and content. Each catalog employs
the services of an outside creative agency or has its own creative staff which
is responsible for the design, layout, copy, feel and theme of the book.
Generally, the initial sourcing of new merchandise for a catalog begins two to
six months before the catalog is mailed.
The Company's operations are divided into two groups, Non-Apparel and
Apparel. Revenues and the percent of total revenues for 1994 and 1995 for each
group are set forth below; all revenues are net of returns:
<TABLE>
<CAPTION>
1995 1995 1994 1994
Percent of Percent of
Revenues Total Revenues Revenues Total Revenues
------------ -------------- ------------ --------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
NON-
APPAREL $593,978 79% $599,333 78%
APPAREL 155,789 21% 169,551 22%
-------- --- -------- --
TOTAL
COMPANY $749,767 100% $768,884 100%
======== === ======== ===
</TABLE>
As a result of significant losses incurred in 1995 and the future
prospects for these catalogs, the Company discontinued six catalogs which
generated revenues of $66.0 million and $21.8 million in 1995, and $77.7 million
and $40.2 million in 1994 for the Non-Apparel and Apparel groups, respectively.
These catalogs lost $10.1 million and $9.9 million in 1995 and $1.3 million and
$3.4 million in 1994 for the Non-Apparel and Apparel groups, respectively.
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Non-Apparel Catalogs
Domestications is a leading specialty home textile catalog and a
fashion decorating source book for today's value-oriented and style-conscious
consumer. Domestications features sheets, towels, comforters, tablecloths,
draperies and other items for the home, and offers coordinated decorating ideas
for the home at value prices. Domestications is also mailed to Sears customers
under the name Show Place.
The Company Store is an upscale direct marketer of down comforters and
other down and related products for the home. The Company Store also features
designer brand name sheets, towels and other bedding accessories.
Colonial Garden Kitchens features work saving and lifestyle enhancing
items for the kitchen and home. Colonial Garden Kitchens is also mailed to Sears
customers under the name Great Kitchens.
Kitchen & Home features upscale kitchen and home products.
Gump's is the well-known San Francisco retailer and a leading upscale
catalog marketer of exclusive gifts, specialized housewares and other unique
items. In March 1995, the Company completed construction and moved to its new
store located in a landmark building in downtown San Francisco.
Improvements, acquired in January 1995, is a leading do-it-yourself
home improvement catalog featuring home improvement accessories. Improvements is
also mailed to Sears customers under the name Sears Improvements.
The Safety Zone, the remaining interest in which was acquired in
February 1995, is a direct marketer of safety, protection and prevention
products.
Austad's, acquired in May 1995, is a direct marketer of golf equipment
and related apparel and accessories.
Apparel Catalogs
Tweeds is a European inspired women's fashion catalog featuring
relaxed, cosmopolitan fashions uniquely designed by its in-house staff.
Silhouettes is a women's fashion catalog featuring every day, workout,
special occasion and career fashions for larger sized women.
International Male is an authority for unique men's fashion with an
international flair.
Undergear is a leader in activewear, workout wear and fashion underwear
for men.
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In 1995, the Company discontinued six catalogs, One 212(R), Simply
Tops(R), Essence By Mail, Hanover House(R), Mature Wisdom(R) and Tapestry(R).
SEARS
In January 1994, the Company entered into a licensing agreement with
the direct marketing subsidiary of Sears to produce specialty catalogs for the
more than 20 million mail order and credit card customers of Sears. The catalogs
currently being mailed under the program are based on existing Company catalogs
and contain a title page with the Sears name and logo. The specialty catalogs
include: Show Place, based on the Domestications catalog, Great Kitchens, based
on the Colonial Garden Kitchens catalog, and Sears Improvements, based on the
Improvements catalog. From time to time, the Company and Sears will add or
delete catalogs to its offerings. In 1995, Beautiful Style, based on
Silhouettes, and Right Touch, based on Tapestry, were discontinued. The Sears
agreement has an initial three-year term and continues thereafter unless
terminated by either party on various grounds, including the Company's failure
to meet various operational performance standards. Profits and losses from this
licensing agreement are shared between the parties on an equal basis. The
Company also issued to Sears a performance warrant to purchase up to 7 million
shares of the Company's Common Stock in 1999, at an exercise price of $10.57 per
share, subject to certain revenue and profit thresholds. In fiscal 1995, the
Company generated revenues of $81 million and operating income of $3 million
from this venture.
MARKETING AND DATABASE MANAGEMENT
The Company maintains one of the largest proprietary customer lists in
the industry currently containing approximately 18 million names of customers
(down from 19 million names in 1994) who have purchased from one of the
Company's catalogs within the past 36 months. The list contains name, gender,
residence and historical transaction data. This database is selectively enhanced
with demographic, socioeconomic, lifestyle and purchase behavior overlays from
other sources.
The Company utilizes proprietary modeling and sophisticated
segmentation analysis, on a catalog by catalog basis, to devise catalog
marketing and circulation strategies that are intended to maximize customer
contribution by catalog. This analysis is the basis for the Company's
determination of which of the Company's catalogs will be mailed and how
frequently to a particular customer, as well as the promotional incentive
content of the catalog(s) such customer receives.
The primary source of new customers for the Company's catalogs is
lists rented from other mailers and compilers. Prior to mailing to these
non-proprietary lists, the lists are edited using statistical segmentation tools
to enhance their probable performance. Other sources of new customers include
space advertisements and promotional inserts in outbound merchandise packages.
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TELEMARKETING
The Company receives approximately 80% of its orders through its
toll-free telephone service which offers customer access seven days per week, 24
hours per day. The Company has created a telephone network to link its three
primary telemarketing facilities in Hanover, Pennsylvania, Roanoke, Virginia and
LaCrosse, Wisconsin. The Company's telemarketing facilities utilize
state-of-the-art telephone switching equipment which enables the Company to
route calls between telemarketing centers and thus provide prompt customer
service. A satellite telemarketing center is also located in San Diego,
California. The Company handled approximately 18 million telephone order calls
in 1995.
The Company trains its telemarketing service representatives to be
courteous, efficient and knowledgeable about the Company's products.
Telemarketing service representatives generally receive 40 hours of training in
selling products, services, systems and communication skills through simulated
as well as actual phone calls. A substantial portion of the evaluation of
telemarketing service representatives' performance is based on how well the
representative meets customer service standards. While primarily trained with
product knowledge to serve customers of one or more specific catalogs,
telemarketing service representatives also receive cross-training that enables
them to take overflow calls from other catalogs. The Company utilizes customer
surveys as an important measure of customer satisfaction.
DISTRIBUTION
The Company operates four distribution centers in three principal
locations: two in Roanoke, Virginia for home fashions and apparel, one in
Hanover, Pennsylvania for general merchandise including giftware and other
hardgoods, and one in LaCrosse, Wisconsin for home fashions. The Company's
facilities processed approximately 14 million packages in 1995. The Company's
plan to maximize efficiencies in merchandise handling and distribution by
consolidating its warehouse and fulfillment centers. In 1995, the Company
completed construction of its 530,000 square foot facility site in Roanoke which
completed the consolidation of all of Domestications' warehouse and fulfillment
operations from several locations into one facility. The Company also concluded
the consolidation of its apparel catalogs in 1995 into the Company's Roanoke
apparel facility. The consolidation of the fulfillment operations of Gump's from
DeSoto, Texas and Improvements' from Cleveland, Ohio to other Company
facilities, was also completed in 1995. The relocation of Austad's fulfillment
operations from Sioux Falls, South Dakota to other Company facilities will be
completed by early 1996. In 1995, the Company incurred operating inefficiencies
in the new facilities and operating expenses related to maintaining duplicate
facilities.
The Company mails its catalogs through the United States Postal Service
("USPS") utilizing pre-sort, bulk mail and other discounts. Most of the
Company's packages are shipped through the USPS. In January 1995, the USPS
increased postage rates by approximately 14% to
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18%. Overall, catalog mailing and package shipping costs approximated 18% of the
Company's net revenues in 1995. The Company obtains rate discounts from the USPS
by automatically weighing each parcel and sorting and trucking packages to a
number of USPS drop points throughout the country. Some packages are shipped
using a consolidator for less frequently used drop points. The Company utilizes
the United Parcel Service, Federal Express and other delivery services.
PURCHASING
The Company's large sales volume permits it to achieve a variety of
purchasing efficiencies, including the ability to obtain prices and terms that
are more favorable than those available to smaller companies. Major goods and
services used by the Company are purchased or leased from selected suppliers by
its central buying staff. These goods and services include: paper, catalog
printing and printing related services such as order forms and color
separations, communication systems including telephone time and switching
devices, packaging materials, expedited delivery services, computers and
associated network software and hardware.
The Company's telephone telemarketing costs (both inbound and outbound
calls) are typically contracted for a three-year period. The Company generally
enters into annual agreements for paper and printing with a limited number of
suppliers. These agreements permit periodic price increases or decreases based
on prevailing market conditions, changes in supplier costs and continuous
productivity improvements. For 1995, paper costs approximated 8% of the
Company's net revenues.
MANAGEMENT INFORMATION SYSTEMS
The Company is continuing to upgrade its management information systems
by implementing new integrated software and migrating from a centralized
mainframe to mid-range mini-computers. The migration of the Company's business
applications to mid-range mini-computers is an important part of the Company's
overall systems plan which defines the mid and long-term systems and computing
strategy for the Company. The Company is continuing to modify and install, on a
catalog by catalog basis, these new integrated systems for use in managing all
phases of the Company's operations. These systems have been designed to meet the
Company's requirements as a high volume publisher of multiple catalogs.
The new software system is an on-line, real-time system which includes
order processing, fulfillment, inventory management, list management and
reporting. The software, where implemented, provides the Company with a flexible
system that offers data manipulation and in-depth reporting capabilities. The
new management information systems are designed to permit the Company to achieve
substantial improvements in the way its financial, merchandising, inventory,
telemarketing, fulfillment and accounting functions are performed. Until the new
system is installed Company-wide, the Company will not achieve the full benefits
of the new system. Two catalogs were brought on-line in 1994. The Company
brought eight additional
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catalogs on-line in 1995, and expects to bring the remaining catalogs on-line in
1996. As of December 30, 1995, the Company invested approximately $16 million in
such systems. The Company currently estimates that the total cost to install and
implement the new systems will be approximately $19 million.
CREDIT MANAGEMENT
Several of the Company's catalogs, including Domestications,
International Male and Gump's, offer their own credit cards. The Company also
offers, for use with almost all catalogs, the use of the Hanover Shop At Home
credit card. The Company has a five year $75 million credit facility with
General Electric Credit Corporation ("GECC") expiring in the year 2000, which
provides for the sale and servicing of accounts receivable originating from the
Company's revolving credit cards. GECC's servicing responsibilities include
credit processing, collections, billing/payment processing, reporting and credit
card issuance.
INVENTORY MANAGEMENT
The Company's inventory management strategy is designed to maintain
inventory levels that provide optimum in-stock positions while maximizing
inventory turnover rates and minimizing the amount of unsold merchandise at the
end of each season. The Company manages inventory levels by monitoring sales and
fashion trends, making purchasing adjustments as necessary and by promotional
sales. Additionally, the Company sells excess inventory in its special sale
catalogs, its outlet stores and to jobbers. Due in part to the transition to new
management information systems, the Company is currently operating with
different systems which increases the difficulty of optimizing inventory levels.
The Company acquires products for resale in its catalogs from numerous
domestic and foreign vendors. No single source supplied more than 5% of the
Company's products in 1995. The Company's vendors are selected based on their
ability to reliably meet the Company's production and quality requirements, as
well as their financial strength and willingness to meet the Company's needs on
an ongoing basis.
RECENT ACQUISITIONS
Improvements. In January 1995, the Company acquired substantially all
of the assets of Leichtung, Inc., the publisher of Improvements, a leading
do-it-yourself home improvement catalog, for a total cash purchase price of
approximately $12 million and the assumption of certain liabilities. Also
included in the purchase were the assets of Leichtung Workshops, a woodworking
and hobby catalog, which the Company is currently negotiating to sell.
The Safety Zone. In February 1995, the Company acquired the remaining
80% of the outstanding common stock it did not already own of Aegis Safety
Holdings, Inc., a direct marketer of safety, prevention and protection products
through The Safety Zone catalog. The purchase
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price was approximately $6.3 million, stated value, of the Company's Series B
Convertible Additional Preferred Stock.
Austad's. In May 1995, the Company acquired 67.5% of the outstanding
common stock of Austad Holdings, Inc. ("AHI"), a direct marketer of golf
equipment and related apparel and accessories, for a purchase price of $1.8
million in cash. The Company lent $2.2 million to The Austad Company ("TAC"), a
wholly owned subsidiary of AHI, which bears interest at the rate of 10% per
annum, is due by May 2000 and subordinated to certain of AHI's existing bank
indebtedness. The Company also provided a $.4 million loan to TAC which bears
interest at a fluctuating rate and is secured by a second mortgage on TAC's
office and warehouse. In February 1996, David Austad and certain family members
surrendered to AHI their AHI shares, amounting to 32.5% of the outstanding
shares, and paid approximately $1.2 million (subject to certain post-closing
adjustments) 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. As a result of the reorganization, AHI became a wholly
owned subsidiary of the Company. AGS will operate the four existing retail
stores acquired from TAC, located in Illinois, Minnesota and South Dakota, as
Austad's stores under license from AHI. The license grants Mr. Austad exclusive
retail rights to the Austad's name in 37 states and Canada. AHI retains all
direct marketing and other rights.
For further information with respect to "Recent Acquisitions", see Note
2 of Notes to Consolidated Financial Statements.
FINANCING
In November 1995, the Company obtained a new $75 million secured
credit facility from Congress Financial Corporation ("Congress") to replace its
former $80 million credit facility with another lender. The Congress facility
provides for a three-year revolving line of credit of up to $65 million and
two-year term loans aggregating $10 million. The revolving facility carries an
interest rate of 1.25% above prime and the term loan carries an interest rate of
1.5% above prime. The facility is secured by all of the assets of the Company.
For further information with respect to "Financing", see Note 7 of
Notes to Consolidated Financial Statements.
EMPLOYEES
The Company currently employs approximately 2,200 persons on a full
time basis and approximately 1,300 persons on a part time basis. Approximately
150 employees at one of the Company's subsidiaries are represented by a union.
The Company believes its relations with its employees are good.
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SEASONALITY
The Company has experienced substantially increased sales in the fourth
quarter of each year as compared to the first three quarters, due in part to the
Company mailing more catalogs in the second part of the year and decreasing
apparel sales as a percentage of total sales.
COMPETITION
The mail order catalog business is highly competitive. The Company
believes that the principal basis upon which it competes are quality, value,
service, product offerings, catalog design, convenience and efficiency. The
Company's catalogs compete with other mail order catalogs, both specialty and
general, and retail stores, including department stores, specialty stores and
discount stores. Competitors also exist in each of the Company's catalog
specialty areas of women's apparel, home fashions, general merchandise, and
men's apparel. A number of the Company's competitors have substantially greater
financial, distribution and marketing resources than the Company.
TRADEMARKS
Each of the Company's catalogs has its own federally registered
trademark. The Company also owns numerous trademarks, copyrights and service
marks on its logos, products and catalog offerings. The Company has also
protected various trademarks internationally. The Company vigorously protects
such marks and believes there is substantial goodwill associated with them. Show
Place and Great Kitchens are trademarks of Sears.
GOVERNMENT REGULATION
The Company is subject to Federal Trade Commission regulations
governing its advertising and trade practices, Consumer Product Safety
Commission and Food and Drug Administration regulations governing the safety of
the products it sells in its catalogs and other regulations relating to the sale
of merchandise to its customers. The Company is also subject to the Department
of Treasury-Customs regulations with respect to any goods it directly imports.
The imposition of a sales and use tax collection obligation on
out-of-state catalog companies in states to which they ship products was the
subject of a case decided in 1994 by the United States Supreme Court. While the
Court reaffirmed an earlier decision that allowed direct marketers to make sales
into states where they do not have a physical presence without collecting sales
taxes with respect to such sales, the Court further noted that Congress has the
power to change this law. The Company believes that it collects sales tax in all
jurisdictions where it is currently required to do so.
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ITEM 2. PROPERTIES
The Company's corporate headquarters are located in a modern
85,000-square-foot facility in Weehawken, New Jersey. The facility houses
merchandising and marketing personnel, catalog production personnel and
corporate and administrative offices. The Weehawken facility is leased for a
15-year term expiring in 2005. The Company operates four warehouses and
fulfillment facilities in three principal locations: two in Roanoke, Virginia
for home fashions and apparel, one in Hanover, Pennsylvania for general
merchandise, including giftware and other hardgoods, and one in LaCrosse,
Wisconsin for upscale home fashions.
In Roanoke, the Company owns a newly completed 530,000 square-foot home
fashions distribution center. The facility became operational in the second half
of 1995 and handles all of Domestications' fulfillment processing. Also in
Roanoke, the Company leases a 175,000 square- foot apparel distribution and
telemarketing center from a partnership in which it owns a 50% interest.
In Hanover, the Company owns a distribution center of approximately
265,000 square feet and leases a telemarketing and administrative office
facility of 123,000 square feet and a warehouse facility of 433,000 square feet.
Renewal terms on the telemarketing center extend through 2009. The warehouse
lease expires November 30, 1996 with two short term renewal periods.
In LaCrosse, Wisconsin, the Company also owns a 150,000 square-foot
home fashions manufacturing and assembly facility and a 58,000 square-foot
telemarketing and customer service facility, and leases a warehouse and
fulfillment center of 185,000 square feet under a short-term lease.
In addition to these principal facilities, the Company leases
administrative facilities for men's apparel in San Diego, California. The San
Diego facility also serves as a telemarketing and customer service facility.
The Company's principal retail operations consist of the Gump's retail
store, which occupies approximately 30,000 square feet in a building in downtown
San Francisco, California. The Gump's facility, which is leased pursuant to a
15-year lease, also includes approximately 15,000 square feet of administrative
offices for retail and mail order functions. The Company also operates and
leases 7 other retail and outlet stores at various locations.
The Company leases or owns premises in Cleveland, Ohio, Sioux Falls,
South Dakota and Edgewater, New Jersey as part of its discontinued operations or
consolidated facilities plan. The Company is actively seeking to sub-lease or
sell, as applicable, all such properties.
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The following chart provides certain information concerning each of the
Company's principal properties:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION(A) STATUS SQUARE FOOTAGE
<S> <C> <C>
Warehouse and
Fulfillment Centers:
Roanoke, VA Owned 530,000
Roanoke, VA Leased 175,000(b)
Hanover, PA Leased 433,000
Hanover, PA Leased/Owned(c) 265,000
LaCrosse, WI Leased 185,000
Corporate and
Administrative Offices:
Weehawken, NJ Leased 85,000
San Diego, CA Leased 30,000(d)
San Francisco, CA Leased 15,000(e)
Telemarketing and
Customer Service:
Roanoke, VA Leased 175,000(e)
Hanover, PA Leased 123,000
LaCrosse, WI Owned 58,000
San Diego, CA Leased 30,000(d)
Retail Stores:
San Francisco, CA Leased 30,000(d)
San Diego, CA Leased 3,800
West Hollywood, CA Leased 3,600
Tysons Corner, VA Leased 1,700
Manufacturing
and Assembly:
LaCrosse, WI Owned 150,000
</TABLE>
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(a) Does not include the Sioux Falls, South Dakota (closed 1996),
Cleveland, Ohio (closed 1995 ), Beachwood, Ohio (closed in 1996), or
Edgewater, New Jersey (closed in 1995), in conjunction with the
consolidation of the Company's warehouse facilities.
(b) Telemarketing and warehouse/fulfillment functions are all located and
performed at the one facility. Square footage stated represents the
entire facility.
(c) The building is owned by the Company and the property is subject to a
ground lease.
(d) Telemarketing and corporate/administrative functions are all located
and performed at the one facility. Square footage stated represents the
entire facility.
(e) Retail and office space are all located at the one facility. Square
footage stated represents allocations to corporate/administrative and
retail and retail storage space.
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine lawsuits of a nature which
is deemed customary and incidental to its businesses. In the opinion of
management, the ultimate disposition of such actions will not have a material
adverse effect on the Company's financial position or results of operations.
On or about September 2, 1994, a complaint was filed in the United
States District Court for the District of New Jersey by Veronica Zucker, an
individual who allegedly purchased shares of Common Stock of the Company in the
public offering completed on April 7, 1994, against the Company, all of its
directors, certain of its officers, Sun Life Insurance Company of America,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Alex. Brown & Sons,
Incorporated. The complaint, which purports to be filed on behalf of a class of
all persons who purchased the Common Stock of the Company in the public offering
or thereafter through and including August 14, 1994, seeks to recover monetary
damages the class has allegedly suffered as a result of certain alleged false
and materially misleading statements contained in the Company's public offering
prospectus dated March 30, 1994. In lieu of an answer, defendants filed a motion
to dismiss the complaint in its entirety for failure to state a claim upon which
relief can be granted. On May 23, 1995, the United States District Court for the
District of New Jersey dismissed the plaintiff's claim, with prejudice, for
failure to state a claim upon which relief could be granted. On June 22, 1995,
plaintiff filed a notice of appeal of the May 23, 1995 decision to the United
States Court of Appeal for the Third Circuit. The appeal was submitted on the
briefs on March 11, 1996. On March 26, 1996, the Court rendered its decision
affirming the District Court's decision.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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P A R T II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the American Stock Exchange (Symbol:
HNV). The following table sets forth, for the periods shown, the high and low
sale prices of the Common Stock reported on the American Stock Exchange
Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1994
First Quarter $7 7/8 $6
Second Quarter 7 1/8 3 15/16
Third Quarter 4 15/16 3 3/4
Fourth Quarter 4 3/8 3 3/8
1995
First Quarter $3 5/8 $2 1/2
Second Quarter 3 1/16 2 5/16
Third Quarter 2 13/16 1 15/16
Fourth Quarter 2 1/16 1 1/2
</TABLE>
The Company is restricted from paying dividends on its Common Stock or
from acquiring its capital stock by certain debt covenants contained in
agreements to which the Company is a party.
As of March 21, 1996, there were approximately 4,826 holders of record
of Common Stock.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for each of the years
indicated:
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ -------------
INCOME STATEMENT DATA: (in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
REVENUES ..................................... $ 623,650 $ 586,562 $ 642,511 $ 768,884 $ 749,767
Depreciation and amortization ................ 3,887 2,681 3,279 6,157 9,020
Operating (loss) income ...................... (26,078) 14,402 19,076 15,975 (22,619)
Interest expense, net ........................ 18,341 13,135 2,757 2,813 4,531
Income (loss) from continuing
operations .................................. (51,081) 1,048 17,337 14,838 (28,153)
(Loss) from discontinued operations .......... (21,119) -- -- -- --
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary
items and cumulative effect of
accounting change for income taxes .......... (72,200) 1,048 17,337 14,838 (28,153)
Extraordinary items .......................... 6,915 9,201 -- -- (1,837)
Cumulative effect of accounting
change for income taxes ..................... -- 10,000 -- -- --
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) ............................ (65,285) 20,249 17,337 14,838 (29,990)
Preferred stock dividends .................... (466) (3,197) (4,093) (135) (240)
------------ ------------ ------------ ------------ ------------
Net income (loss) applicable to
common shareholders ......................... ($ 65,751) $ 17,052 $ 13,244 $ 14,703 ($ 30,230)
============ ============ ============ ============ ============
Per Share:
Income (loss) from continuing
operations ................................. ($ 3.16) ($ .06) $ .17 $ .16 ($ .30)
(Loss) from discontinued operations ......... (1.30) -- -- -- --
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary
items ....................................... (4.46) (.06) .17 .16 (.30)
Extraordinary items .......................... .43 .24 -- -- (.02)
Cumulative effect of accounting
change for income taxes ..................... -- .26 -- -- --
------------ ------------ ------------ ------------ ------------
Net (loss) income ............................ ($ 4.03) $ .44 $ .17 $ .16 ($ .32)
============ ============ ============ ============ ============
Weighted average number of shares outstanding:
Primary ...................................... 16,287,723 38,467,015 75,625,330 93,285,190 93,029,816
============ ============ ============ ============ ============
Fully diluted ................................ 16,287,723 38,467,015 77,064,131 93,285,190 93,029,816
============ ============ ============ ============ ============
BALANCE SHEET DATA
(END OF PERIOD):
Working capital (deficit) .................... ($ 37,636) $ 31,566 $ 25,180 $ 58,501 $ 28,774
Total assets ................................. 162,800 134,352 188,838 262,246 279,009
Total debt ................................... 127,918 43,362 36,160 37,915 62,802
Preferred stock of subsidiary ................ 35,247 32,842 -- -- --
Shareholders' (deficit) equity ............... (113,632) (19,758) 45,868 109,725 87,210
</TABLE>
There were no cash dividends declared on the Common Stock in any of the periods.
See Notes to Consolidated Financial Statements.
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the percentage
relationship to revenues of certain items in the Company's Consolidated
Statements of Income:
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------
1993 1994 1995
---------- ---------- ---------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of sales and operating expenses.......................... 63.4 62.9 64.5
Provision for catalog and facility closings................... - - 1.4
Selling expenses.............................................. 24.6 25.7 27.4
General and administrative expenses........................... 8.5 8.5 8.5
Depreciation and amortization................................. .5 .8 1.2
Income (loss) from operations................................. 3.0 2.1 (3.0)
Interest expense, net ........................................ .4 .4 .6
Other income (expense)........................................ .1 (.2) -
Net income (loss)............................................. 2.7% 1.9% (4.0%)
</TABLE>
RESULTS OF OPERATIONS
1995 COMPARED WITH 1994
Net Income (loss). The Company reported a net loss before extraordinary
items of $28.2 million or $(.30) per share for the year ended December 30, 1995
compared to net income of $14.8 million or $.16 per share in 1994. Including the
effect of the extraordinary loss of $1.8 million for the early extinguishment of
debt, the Company reported a net loss of $30 million or $(.32) per share for the
year ended December 30, 1995. Per share amounts are expressed after deducting
preferred dividends of $.2 million in 1995 and $.1 million in 1994. The weighted
average number of shares outstanding was 93,029,816 for the year ended December
30, 1995 compared to 93,285,190 in 1994.
The net loss in 1995 was primarily the result of the cumulative impact
of the significant increase in postage and paper prices and weak consumer
demand. As a result of these factors, the Company discontinued six poorly
performing catalogs in 1995 which have incurred substantial losses which the
Company believed could not overcome these obstacles. Including a provision for
the costs associated with discontinuing these catalogs of $8.6 million, these
catalogs lost $20 million in 1995 compared to $4.7 million in the prior year. In
addition, the Company also incurred costs, aggregating $2.7 million, in
connection with the consolidation of facilities into its new Roanoke, VA
fulfillment center. These costs included operating expenses related to
maintaining duplicate facilities, start-up problems, operating down-time and
inefficiencies in the new facility. Due to these cost pressures, the Company
implemented a cost reduction program in 1995 whereby the Company instituted a
salary freeze, reduced its workforce by approximately 10%, closed 5 facilities
and reduced other administrative and overhead expenses. In connection with this
program, the Company incurred non-recurring costs of $1.5 million and one-time
severance and employee separation expenses of $2.0 million.
Revenues. Revenues decreased 2.5% in 1995 to $750 million from $769
million in 1994. Revenues of continuing catalogs increased approximately 2% from
$651 million in 1994 to $662 million in 1995, which was offset by a 26% decline
to $88 million in revenues from discontinued catalogs. The Company circulated
370 million catalogs in 1995, a 2% reduction from the prior year.
18
<PAGE> 19
Non-Apparel continuing catalog revenues increased 1% to $528 million,
due to a 14% increase in revenues from the Company's venture with Sears to $81
million and $68 million of revenues from the 1995 acquisitions of Improvements,
Safety Zone and Austad's which offset revenue reductions in the other
Non-Apparel catalogs, principally Domestications and Colonial Garden Kitchens.
Domestications revenues were down 28% as improved customer response rates
partially offset a decline in the average order and a 31% reduction in
circulation. Revenues from discontinued catalogs decreased $11.7 million from
$77.7 million in 1994 to $66 million in 1995. The Company discontinued the
Mature Wisdom catalog in mid-1995 and the Tapestry and Hanover House catalogs in
the fourth quarter of 1995.
Apparel continuing catalog revenues increased $5 million, or
approximately 4%, from $129 million in 1994 to $134 million in 1995, as all
continuing catalogs, International Male, Undergear, Silhouettes and Tweeds
reported higher sales than the prior year. Revenues from discontinued Apparel
catalogs declined 46% from $40 million in 1994 to $22 million in 1995, including
the effect of discontinuing Essence by Mail, One 212 and Simply Tops.
Operating Costs and Expenses. Cost of sales and operating expenses as a
percentage of revenues increased from 62.9% in 1994 to 64.5% in 1995. This
increase is primarily attributable to lower overall product margins due to
greater promotional expenses as a result of the generally weak consumer demand
and the impact of markdowns for the discontinued catalogs. In addition,
fulfillment costs were higher in 1995 due to the start up of the new facility in
Roanoke and higher outbound freight expenses of approximately $7 million or 15%
as a result of the increase in USPS rates.
During 1995, the Company recorded a Provision for Catalog and Facility
Closings totalling $10.1 million. The provision for the discontinuance of six of
the Company's catalogs of $8.6 million primarily consisted of incremental
inventory mark-downs in excess of normal seasonal mark-downs and severance
expenses. The $1.5 million provision for facility closings consisted primarily
of moving expenses, lease termination fees and severance expenses, substantially
all of which were paid in 1995. No such charges were recorded in 1994.
Selling expenses increased from 25.7% of revenues in 1994 to 27.4% of
revenues for the current year, primarily due to a 43% increase in average paper
costs and a 15% increase in the average cost of mailing a catalog which more
than offset the 2.0% reduction in catalog circulation and higher customer
response rates. As a result of these price increases, the Company incurred
approximately $18.0 million of higher costs to prepare and deliver its catalogs
in 1995.
General and administrative expenses declined $1.1 million or 2% in 1995
although they remained constant as a percentage of revenues at 8.5% in both
years. Excluding the impact of one-time severance expenses of $2.0 million,
these expenses declined as a percentage of sales to 8.3% due to the Company's
cost reduction program instituted in early 1995. This reduction was partially
offset by higher bad debt expenses, reflecting increased losses on major credit
cards and the Company's private label credit card.
Depreciation and amortization increased $2.8 million from $6.2 million
in 1994 to $9.0 million in 1995. The increase was attributable to new
amortization charges associated with the Roanoke, Virginia fulfillment facility,
the management information system, the new Gump's retail store and the goodwill
and mailing lists associated with the 1995 acquisitions.
Income (Loss) from Operations. Income from operations declined from
$16.0 million in 1994 to a loss of $22.6 million in 1995. Losses from
discontinued catalogs increased from $4.7 million in 1994 to $20 million in
1995.
19
<PAGE> 20
Non-Apparel income from operations decreased from $20.5 million in 1994
to a loss of $7.8 million in 1995. The most significant contributor to the
decrease in profitability was Domestications, which in addition to being
significantly impacted by the higher postage and paper costs also incurred
additional costs in connection with the move of its operations into the new
Roanoke facility. These costs included start-up costs, down time due to
equipment problems, temporary labor costs, higher shipping , damages and
replacement costs. Additionally, Domestications' product margin was adversely
impacted by product mix changes, increased promotional activities and higher
obsolescence charges. The loss from discontinued Non-Apparel catalogs increased
from $1.3 million in 1994 to $10.1 million in 1995. Profitability from the Sears
venture increased by $.1 million to $3 million in 1995 and the 1995
acquisitions contributed income of $2.5 million. The Company Store and Gump's
also had higher operating profits in 1995 compared to 1994.
Apparel results of operations declined $7.7 million from a loss of $.5
million in 1994 to a loss of $8.2 million in 1995. This decrease is mainly
attributable to the discontinued Apparel catalogs whose losses increased $6.5
million from $3.4 million in 1994 to $9.9 million in 1995. Mens Apparel
operating income increased 35% to $2.6 million which offset lower earnings at
Tweeds and an operating loss at Silhouettes, where credit problems in the fourth
quarter of 1995 contributed to its loss.
Interest Income(Expense). Interest expense increased approximately $1.5
million from $3.5 million in 1994 to $5.0 million in 1995. This increase was due
to higher average borrowings outstanding under the Company's revolving credit
facility in 1995 as well as an increase in the basis point of approximately 3%
in the Company's borrowing rate which is attributable to the Company's
deteriorating financial performance in 1995. Interest income declined by $.2
million to $.5 million in 1995 because the Company had less cash available for
investment.
Other Income (Expense). Other expenses in 1994 totaled a net $1.8
million while there were no similar expenses in 1995. The loss in 1994 was
comprised of $2.5 million in charges due to losses on certain investments offset
by other income of $.7 million.
Income Taxes. The Company did not record a Federal income tax provision
in 1995 based on the current year net operating loss. The Federal income tax
provision of $5.9 million in 1994 was offset by the utilization of net operating
loss carry forwards. The Company's state tax provision was $1.0 million and $.9
million in 1995 and 1994, respectively.
Shareholders' Equity. The number of shares of Common Stock outstanding
increased by 714,928 in 1995 due to shares issued in connection with the
Company's equity and incentive plans, the exchange of the 6% Series A
Convertible Preferred Stock and other activities. At December 30, 1995 there
were 93,452,768 shares of Common Stock outstanding compared to 92,737,840 shares
of Common Stock outstanding at December 31, 1994.
1994 COMPARED WITH 1993
Net Income. The Company reported net income of $14.8 million or $.16
per share for the year ended December 31, 1994, compared to net income of $17.3
million or $.17 per share for the same period in 1993. Per share amounts are
expressed after deducting preferred dividends of $.1 million in 1994 and $4.1
million in 1993. The weighted average number of shares outstanding increased
approximately 21% to 93,285,190 shares for the year ended December 31, 1994,
compared to 77,064,131 shares for the same period in 1993, primarily due to the
public offering and the conversion of certain preferred stocks.
20
<PAGE> 21
Revenues. Revenues increased $126 million, or 20%, from $643 million in
1993 to $769 million in 1994. This significant increase in revenues was
primarily a result of an increase of $48 million from the Company's venture with
Sears and increased revenues of $88 million from Gump's, The Company Store and
Tweeds which were acquired in the second half of 1993 ("1993 acquisitions").
Revenues from catalogs discontinued in 1993 were $20 million in 1993 and $1
million in 1994.
Revenues were negatively impacted in 1994 by an increase in customer
returns from approximately 13.1% of shipped sales in 1993 to 14.9% of shipped
sales in 1994. The increased returns were generated by new product categories
and the Company implemented measures that reduced the rate of returns in the
second half of 1994.
Non-Apparel continuing catalog revenues increased $122 million, or 26%,
from $477 million in 1993 to $599 million in 1994. The Company's venture with
Sears generated increased Non-Apparel revenues of $46 million from 1993 to 1994,
while revenues generated by Gump's and The Company Store increased $57 million
from 1993 to 1994. The remainder of the Non-Apparel revenue increase was
primarily due to increased revenues related to Domestications, and the new
Kitchen & Home catalog. Revenues from discontinued catalogs were $7 million and
$.2 million in 1993 and 1994, respectively.
Apparel continuing catalog revenues increased $23 million, or
approximately 16%, from $146 million in 1993 to $169 million in 1994. This
increase was primarily due to a $31 million increase in the revenues of Tweeds
which was acquired in the fourth quarter of 1993. Women's Apparel continuing
catalog revenues increased 6% which is mainly attributable to Silhouettes and
One 212, while Men's Apparel revenues decreased 16% as the group discontinued an
under performing catalog in 1993 thus focusing on its profitable segments.
Revenues from discontinued apparel catalogs were $13 million and $.5 million in
1993 and 1994, respectively.
Operating Costs and Expenses. Cost of sales and operating expenses as a
percentage of revenues decreased from 63.4% in 1993 to 62.9% in 1994. The
decrease was primarily attributable to higher overall profit margins and lower
fulfillment costs, as partially offset by higher delivery costs in 1994 based on
sales mix.
Selling expenses increased from 24.6% of revenues for the year ended
January 1, 1994 to 25.7% of revenues for the year ended December 31, 1994 as the
Company increased catalog circulation 17% in an effort to increase the number of
active customers on its mailing lists in anticipation of the 1995 postal rate
increase. The response to this prospecting program was less than anticipated
which resulted in higher selling expense. Overall demand from the new customer
acquisition program was soft principally in the Non-Apparel catalogs,
particularly in Domestications, where prospecting was heaviest. The Company
mailed approximately 377 million catalogs in 1994.
General and administrative expenses remained flat as a percentage of
revenues at 8.5% in both years. General and administrative expenses increased
$10.0 million or 18.1% from 1993 to 1994 due primarily to the 1993 acquisitions.
Depreciation and amortization increased $2.9 million from $3.3 million
in 1993 to $6.2 million in 1994. The increase was attributable to a full year of
charges for goodwill, mailing lists and depreciation associated with the 1993
acquisitions of Gump's, The Company Store and Tweeds.
Income from Operations. Income from operations decreased from $19.1
million in 1993, or 3.0% of revenues, to $16.0 million in 1994, or 2.1% of
revenues. Losses from discontinued catalogs were $3.9 million in 1993 compared
to $.1 million in 1994.
21
<PAGE> 22
Non-Apparel income from operations decreased $5.7 million from $25.9
million in 1993 to $20.2 million in 1994. This decrease was mainly due to the
previously-mentioned lower response rates to the Company's customer acquisition
program. Non-Apparel income from operations was also impacted by a loss of $2.1
million in 1994 compared to break even results in 1993 related to the Gump's
retail operations due to the temporary relocation of its retail store prior to
the move to its new location in March 1995.
Apparel income from operations increased $3.1 million from a $3.6
million loss in 1993 to a $.5 million loss in 1994. The Men's Apparel income
from operations increased $3.3 million from a loss of $1.4 million in 1993 to
income of $1.9 million in 1994 as a result of overhead reductions and increased
response rates. The Women's Apparel income from operations increased $1.0
million excluding losses of $.5 million and $1.6 million in 1993 and 1994,
respectively, from the start-up of a new catalog. Apparel income from operations
for discontinued catalogs was a loss of $4.3 million in 1993 and income of $.2
million in 1994.
The Company's venture with Sears generated $1.4 million of income from
operations in 1993 versus $2.9 million in 1994.
Interest Income (Expense). Interest expense decreased approximately
$1.4 million from $4.9 million in 1993 to $3.5 million in 1994. This decrease
was the result of the Company using the proceeds of the public offering to pay
down its revolving line of credit in April 1994, thus reducing borrowing
requirements throughout the remainder of 1994. In addition, the Company
experienced lower interest rates upon entering into a new credit agreement in
October 1994. The Company's long-term debt increased $2.5 million from 1993 to
1994. Interest income decreased $1.5 million from $2.2 million in 1993 to $.7
million in 1994, due to interest income related to a Federal income tax refund
received in 1993.
Other Income (Expense). Other income decreased $2.7 million from income
of $.9 million in 1993 to a loss of $1.8 million in 1994. The income of $.9
million in 1993 represents a settlement of a claim in bankruptcy. The loss in
1994 was comprised of $2.5 million of charges due to losses on investments and
advances as partially offset by other income of $.7 million.
Income Taxes. The Company recorded a Federal income tax benefit of $4.4
million in 1994 based on its estimate of the amount of net operating loss
carryfowards ("NOLs") that can be utilized in the future. Federal income tax
provisions of $5.9 million and $4.2 million, respectively, were offset by the
utilization of NOLs in 1993 and 1994. The Company's state tax provision was $.5
million and $.9 million in 1993 and 1994, respectively.
Shareholders' Equity. The number of shares of Common Stock outstanding
increased by 9,804,663 in 1994 due to: i) 8,045,296 shares issued in connection
with the Public Offering, ii) 1,309,207 shares issued in connection with a
cashless exchange upon the exercise of certain warrants and iii) 450,160 shares
issued in connection with the Company's equity and incentive plans, the exchange
of the 6% Series A Convertible Preferred Stock (the "6% Preferred Stock") and
other activities. At December 31, 1994, there were 92,737,840 shares of Common
Stock outstanding compared to 82,933,177 shares of Common Stock outstanding at
January 1, 1994.
The dividends of $.1 million in 1994 represent dividend requirements on
the 6% Preferred Stock issued in September 1993 while the dividends of $4.1
million in 1993 represent dividend requirements on the 7.5% Preferred Stock and
the Class B Preferred Stock, both of which were converted into Common Stock in
the fourth quarter of 1993.
22
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
The Company had $24.1 million and $2.7 million in cash and cash
equivalents at December 31, 1994 and December 30, 1995 respectively. Working
capital and the current ratio were $58.5 million and 1.51 to 1 at December 31,
1994 versus $28.8 million and 1.22 to 1 at December 30, 1995.
The primary sources of cash in 1995 were the $20.7 million of proceeds
from the issuance of long-term debt and $8.7 million due to a reduction in
inventories. Cash was used primarily to fund: (i) the Company's 1995 operating
loss, (ii) $13.7 million of capital expenditures, (iii) $13.0 million for the
purchase of businesses, (iv) $8.7 million for the reduction of accounts payable,
and (v) $3.6 million for payments of long-term debt and debt issuance costs.
As a result of the operating losses incurred in 1995, the Company's
financial condition deteriorated which reduced its working capital position and
resulted in an increase in long-term debt. In addition, as a result of these
operating losses, the Company was not in compliance at various times during 1995
with certain financial covenants that had been contained in its $80 million
credit facility that it had entered into in 1994 ("Credit Facility"). The
Company obtained waivers for these covenant violations, but was required to
agree to more restrictive terms with respect to availability (reduced to $55
million), financial covenants and a higher interest rate. The disclosure of
these covenant violations in the Company's 1995 interim financial statements,
coupled with a very difficult year for retailers with numerous Chapter 11
filings occurring, caused a tightening of vendor credit in the fourth quarter of
1995. This resulted in higher backorder levels and increased fulfillment costs
which negatively impacted the Company's operating results in that quarter, even
though credit restrictions eased when the Company closed its new three year $75
million credit facility with Congress Financial Corp. ("Congress Facility") on
November 15, 1995. The Company had determined that it was necessary to replace
the original Credit Facility because the terms of the proposed amendment were
too restrictive. Although the Congress Facility is secured by all of the
Company's assets, it provides the Company with greater liquidity and less
restrictive financial covenants, and was competitive in terms of cost with the
proposed amendment.
At the time the Company closed the Congress Facility, the Company
believed that the facility would provide the Company with adequate capital to
fund its operations. The Company had made this determination based upon the
relaxing of the trade credit restrictions, the accompanying increased flow of
merchandise, and expectations for its fourth quarter operating results it had at
that time. In early 1996, after several additional retail companies filed
Chapter 11, the Company again began to experience tightening of vendor credit.
Despite this, backorder levels have increased only marginally, and the Company
has managed to receive merchandise shipments in most cases on a timely basis and
in sufficient quantities to satisfy its customer demand. However, it has had to
utilize more working capital to accomplish this than had previously been
anticipated, due to a tightening in trade terms. In addition, when the final
results of 1995 became known to the Company, it concluded that such 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 loss in 1995, (ii) reduce
long-term debt, and (iii) provide the Company with additional liquidity. As a
result, the Company announced 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. 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 $1.4 million. The balance of the proceeds will be used for general
corporate purposes, including the repayment of outstanding revolver indebtedness
under the Congress Facility.
23
<PAGE> 24
The announcement of this rights offering has eased vendor/creditor
concerns about the Company's viability, and 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.
The Company experiences seasonality in its working capital requirements
and fluctuations in the revolving credit facility will occur usually within the
first and fourth quarters of the year.
Infrastructure Investments. In early 1995, the Company completed the
construction of a new fulfillment facility on a 53 acre site in Roanoke,
Virginia to support the Domestications catalog. The total cost of the facility
was $18.3 million. The Company began partial shipping and receiving activities
in the first quarter of 1995 and the facility was fully operational in September
1995. The Company experienced operating inefficiencies and start-up problems in
conjunction with bringing this facility into service. The Company's operating
margins were negatively impacted by approximately $2.7 million of costs in 1995.
The Company believes it will continue to experience inefficiencies in early
1996. However, the Company has taken and is taking actions which it believes
will lead to more efficient operations.
The Company also completed the construction and opened its new Gump's
retail store in San Francisco in March 1995. The total cost of the construction
was $7.8 million, of which $1.7 million was spent in 1995.
The Company continued its management information systems up-grade in
1995. The new system, which began operation in two of the Company's catalogs in
1994, was operational in ten catalogs at the end of 1995. The Company expects to
complete the roll-out of the system to the remaining catalogs in 1996. The
Company will incur higher MIS costs in 1996 due to the completion of the
transition to the new system. As of December 30, 1995, the Company had incurred
costs of approximately $15.9 million as part of this plan, including $6.8
million in 1995. Such costs included hardware and software costs aggregating
$10.3 million and internal costs of $5.6 million related to production of this
new system that have been capitalized. The Company began to amortize these costs
over 5 years in 1995. The Company's level of capital spending will be reduced in
1996 and will focus on the completion of the systems project.
Effects of Inflation and Cost Increases. The Company normally
experiences increased costs of sales and operating expenses as a result of the
general rate of inflation 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 mailorder merchandise which undergoes sufficiently high turnover so
that the costs 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"), with catalog
mailing and product shipment expenses representing approximately 18% of revenues
in 1995. In January 1995, the USPS increased postage rates by approximately 14%
to 18%. The Company also experienced record price increases in 1995 for the
paper that is used in the production of its catalogs as the paper industry
announced a series of significant price increases that increased the Company's
average cost for paper by over 43% from 1994. Paper costs represented
approximately 8% of revenues in 1995. These cost increases which totaled $25
million, and the duplicate costs associated with the consolidation of the
distribution facilities and the transition to the new system discussed earlier,
adversely impacted the Company's margins and earnings in 1995. 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 prices may
continue at current levels during 1996.
24
<PAGE> 25
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."
- "...the Company has taken and is taking actions which it believes will
lead to more efficient 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. Paper prices may continue at current levels
during 1996."
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; a business failure of a substantial size company in the retail
industry, a reduction in consumer spending generally or specifically
with reference to the types of merchandise that the Company offers in
its catalogs;
- an increase in the failure rate of consumer indebtedness generally; an
increase in credit sales by the Company accompanied by an increase in
its bad debt experience with respect to consumer debt;
- 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;
- and a delay or reversal in the implementation of postal rate increase
or an increase in paper costs;
25
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Hanover Direct, Inc.:
We have audited the accompanying consolidated balance sheets of Hanover
Direct, Inc. (a Delaware corporation) (successor to The Horn & Hardart Company,
see Note 1 to the Consolidated Financial Statements) and subsidiaries as of
December 30, 1995 and December 31, 1994, and the related consolidated statements
of income, shareholders' (deficit) equity and cash flows for each of the three
fiscal years in the period ended December 30, 1995. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hanover Direct, Inc.
and subsidiaries as of December 30, 1995 and December 31, 1994, and the results
of their operations and their cash flows for each of the three fiscal years in
the period ended December 30, 1995 in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statement schedule is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
February 26, 1996
(except with respect to the
matters discussed in Note 14,
as to which the date is March 7, 1996)
26
<PAGE> 27
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1994 and December 30, 1995
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1994 1995
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................ $ 24,053 $ 2,682
Accounts receivable, net of allowance for doubtful
accounts of $2,730 in 1994 and $2,597 in 1995 .... 25,247 30,176
Inventories ...................................... 83,653 79,281
Prepaid catalog costs ............................ 33,725 37,118
Deferred tax asset, net .......................... 3,200 3,300
Other current assets ............................. 2,658 6,170
--------- ---------
Total Current Assets ..................... 172,536 158,727
--------- ---------
Property and Equipment, at cost
Land ............................................ 1,917 4,811
Buildings and building improvements ............. 7,994 19,353
Leasehold improvements .......................... 6,807 14,001
Furniture, fixtures and equipment ............... 24,103 39,508
Construction in progress ........................ 21,358 5,479
--------- ---------
62,179 83,152
Accumulated depreciation and amortization ....... (19,708) (26,090)
--------- ---------
Property and Equipment, net .............. 42,471 57,062
--------- ---------
Goodwill .......................................... 19,026 36,586
Deferred tax asset, net ........................... 11,800 11,700
Other assets ...................................... 16,413 14,934
--------- ---------
Total Assets ............................. $ 262,246 $ 279,009
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE> 28
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
As of December 31, 1994 and December 30, 1995
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE AMOUNTS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital
lease obligations $ 812 $ 3,546
Accounts payable 89,366 93,291
Accrued liabilities 20,215 25,969
Customer prepayments and credits 3,642 7,147
--------- ---------
Total Current Liabilities 114,035 129,953
--------- ---------
Noncurrent Liabilities:
Long-term debt 35,907 57,283
Capital lease obligations 1,196 1,973
Other 1,383 2,590
--------- ---------
Total Noncurrent Liabilities 38,486 61,846
--------- ---------
Total Liabilities 152,521 191,799
--------- ---------
Shareholders' Equity:
6% Series A Convertible Additional Preferred Stock, $10 stated value,
authorized 5,000,000 shares; issued
156,600 shares in 1994 and 78,300 shares in 1995 1,589 795
Series B Convertible Additional Preferred Stock,
$.01 par value, authorized and issued 634,900 shares in 1995 -- 5,558
Common Stock, $.66 2/3 par value, authorized
150,000,000 shares; issued 92,978,234 shares in
1994 and 93,693,162 shares in 1995 61,985 62,461
Capital in excess of par value 253,210 255,390
Accumulated deficit (201,102) (231,332)
--------- ---------
115,682 92,872
Less:
Treasury stock, at cost (1,157,061 shares in 1994 and 1995) (3,345) (3,345)
Notes receivable from sale of Common Stock (1,912) (2,023)
Deferred compensation (700) (294)
--------- ---------
Total Shareholders' Equity 109,725 87,210
--------- ---------
Total Liabilities and Shareholders' Equity $ 262,246 $ 279,009
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE> 29
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the years ended January 1, 1994, December 31, 1994 and December 30, 1995
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES $ 642,511 $ 768,884 $ 749,767
--------- --------- ---------
Operating costs and expenses:
Cost of sales and operating expenses 407,087 484,059 483,493
Provision for catalog and facility closings -- -- 10,143
Selling expenses 157,811 197,436 205,618
General and administrative expenses 55,258 65,257 64,112
Depreciation and amortization 3,279 6,157 9,020
--------- --------- ---------
623,435 752,909 772,386
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 19,076 15,975 (22,619)
Interest expense (4,925) (3,544) (5,050)
Interest income 2,168 731 519
Other income (expense) 888 (1,833) --
--------- --------- ---------
Income (loss) before income taxes 17,207 11,329 (27,150)
Income tax provision (benefit) (130) (3,509) 1,003
--------- --------- ---------
Income (loss) before extraordinary item 17,337 14,838 (28,153)
Extraordinary item -- -- (1,837)
--------- --------- ---------
NET INCOME (LOSS) 17,337 14,838 (29,990)
Preferred stock dividends (4,093) (135) (240)
--------- --------- ---------
Net income (loss) applicable to Common
Shareholders $ 13,244 $ 14,703 ($ 30,230)
========= ========= =========
Net income (loss) per share:
Income (loss) before extraordinary item $ 0.17 $ 0.16 ($ .30)
Extraordinary item -- -- (.02)
--------- --------- ---------
NET INCOME (LOSS) PER SHARE $ 0.17 $ 0.16 ($ .32)
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE> 30
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended January 1, 1994, December 31, 1994 and December 30, 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................. $ 17,337 $ 14,838 ($29,990)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization including
deferred fees................................... 4,122 6,499 9,419
Provision for catalog and facility closings ..... -- -- 10,143
Extraordinary item - early extinguishment of debt -- -- 1,837
Provision for losses on notes receivable and
marketable securities .......................... -- 2,121 --
Deferred transaction costs ...................... -- (837) --
Deferred taxes .................................. (631) (4,369) --
Other, net ...................................... (33) 43 76
Changes in assets and liabilities, net of effects
of acquired businesses and dispositions of assets:
Accounts receivable, net ........................ 8,907 (6,204) (1,713)
Inventories ..................................... (12,081) (3,424) 8,679
Prepaid catalog costs ........................... (5,305) (8,154) 206
Other current assets ............................ 282 (1,220) (3,131)
Accounts payable ................................ 24,530 10,518 (8,671)
Accrued liabilities ............................. (10,650) 185 (1,583)
Dividend payable ................................ 886 -- --
Customer prepayments and credits ................ 684 (1,389) 3,134
-------- -------- --------
Net cash provided (used) by operating activities ... 28,048 8,607 (11,594)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment ............ (4,239) (23,856) (13,686)
Purchase of businesses ............................ (100) -- (13,008)
Purchase of convertible debt securities ........... -- (2,693) --
Investments in affiliates ......................... -- (3,183)
Advances .......................................... -- (2,300) --
Other, net ........................................ (313) (3,293) (887)
-------- -------- --------
Net cash provided (used) by investing activities .... (4,652) (35,325) (27,581)
-------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE> 31
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended January 1, 1994,
December 31, 1994 and December 30, 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under revolving credit facility . ($20,965) $ (230) --
Proceeds from issuance of debt ............... 20,000 10,000 20,685
Payments of long-term debt and capital lease
obligations ................................. (19,856) (8,015) (1,419)
Cash dividends paid .......................... (890) (1,027) --
Payment of debt issuance costs ............... (1,560) (1,458) (2,202)
Repurchase of Common Stock ................... -- (215) --
Proceeds from issuance of Common Stock ....... 912 49,305 400
Other, net ................................... (1,007) (172) 340
-------- -------- --------
Net cash provided (used) by financing activities (23,366) 48,188 17,804
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents ................................... 30 21,470 (21,371)
Cash and cash equivalents at the beginning of
the year ...................................... 2,553 2,583 24,053
-------- -------- --------
Cash and cash equivalents at end of the year ... $ 2,583 $ 24,053 $ 2,682
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid ................................ $ 4,883 $ 2,923 $ 4,586
Income taxes paid ............................ $ 71 $ 701 $ 1,318
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE> 32
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock Preferred Stock
Class B 8% Cumulative 7.5% Cumulative Series B, Cumulative
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 26, 1992 0 $ 0 0 $ 0 0 $ 0
Net income applicable to common shareholders
Mergers of H & H & THC into Hanover Direct, Inc. 40,000 25,516 569,532 7,158
Exchange of Class B 8 % Preferred and Common Stock (40,000) (25,516)
Conversion of 7.5% Preferred Stock (569,532) (7,158)
Issuance of Preferred Stock
Stock dividends
Amortization of deferred compensation
Issuance of Common Stock
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1994 0 $ 0 0 $ 0 0 $ 0
Net income applicable to common shareholders
Exercise of warrants
Shares issued in Stock Offering
Preferred stock dividends
Conversion of one-third of the 6% Preferred Stock
Conversion of note payable
Issuance of Common Stock for Employee Benefit Plans, net
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 0 $ 0 0 $ 0 0 $ 0
Net income/(loss) applicable to common shareholders
Issuance of Preferred Stock 634,900 5,400
Fair market value of warrant extensions
Preferred stock dividends and accretion 158
Conversion of one-third of the 6% Preferred Stock
Issuance of Common Stock for Employee Benefit Plans
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 30, 1995 0 $ 0 0 $ 0 634,900 $5,558
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Preferred Stock Class B Common Stock Common Stock
Series A, 6.0% $.01 par value $.66 2/3 par value
Shares Amount Shares Amount Shares
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 26, 1992 0 $ 0 12,270,503 $ 123 58,154,584
Net income applicable to common shareholders
Mergers of H & H & THC into Hanover Direct, Inc.
Exchange of Class B 8 % Preferred and Common Stock (12,270,503) (123) 18,937,169
Conversion of 7.5% Preferred Stock 2,278,128
Issuance of Preferred Stock 234,900 2,342
Stock dividends 36
Amortization of deferred compensation
Issuance of Common Stock 3,766,661
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1994 234,900 $ 2,378 0 $ 0 83,136,542
Net income applicable to common shareholders
Exercise of warrants 1,309,207
Shares issued in Stock Offering 8,045,296
Preferred stock dividends (6)
Conversion of one-third of the 6% Preferred Stock (78,300) (783) 189,818
Conversion of note payable 13,945
Issuance of Common Stock for Employee Benefit Plans, net 283,426
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 156,600 $ 1,589 0 $ 0 92,978,234
Net income/(loss) applicable to common shareholders
Issuance of Preferred Stock
Fair market value of warrant extensions
Preferred stock dividends and accretion 83
Conversion of one-third of the 6% Preferred Stock (78,300) (877) 427,785
Issuance of Common Stock for Employee Benefit Plans 287,143
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 30, 1995 78,300 $ 795 0 $ 0 93,693,162
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Capital
Common Stock in Excess
$.66 2/3 par value of Par Accum. Treasury Stock
Amount Value (Deficit) Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 26, 1992 $38,774 $ 178,149 ($229,049) (2,169,713) ($7,170)
Net income applicable to common shareholders 13,244
Mergers of H & H & THC into Hanover Direct, Inc.
Exchange of Class B 8 % Preferred and Common Stock 12,625 13,014
Conversion of 7.5% Preferred Stock 1,519 5,639
Issuance of Preferred Stock
Stock dividends (438) 684,890 2,946
Amortization of deferred compensation
Issuance of Common Stock 2,505 13,470 364,791 1,094
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1994 $55,423 $ 209,834 ($215,805) (1,120,032) ($3,130)
Net income applicable to common shareholders 14,703
Exercise of warrants 873 (873)
Shares issued in Stock Offering 5,364 42,136
Preferred stock dividends
Conversion of one-third of the 6% Preferred Stock 126 657
Conversion of note payable 9 162
Issuance of Common Stock for Employee Benefit Plans, net 190 1,294 (37,029) (215)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $61,985 $ 253,210 ($201,102) (1,157,061) ($3,345)
Net income/(loss) applicable to common shareholders (30,230)
Issuance of Preferred Stock
Fair market value of warrant extensions 1,200
Preferred stock dividends and accretion
Conversion of one-third of the 6% Preferred Stock 285 592
Issuance of Common Stock for Employee Benefit Plans 191 388
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 30, 1995 $62,461 $ 255,390 ($231,332) (1,157,061) ($3,345)
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Notes
Receivable
From Sale
of Common Deferred
Stock Comp. Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 26, 1992 $ 0 ($ 585) ($ 19,758)
13,244
Net income applicable to common shareholders 32,674
Mergers of H & H & THC into Hanover Direct, Inc. 0
Exchange of Class B 8 % Preferred and Common Stock 0
Conversion of 7.5% Preferred Stock 2,342
Issuance of Preferred Stock 2,544
Stock dividends 599 599
Amortization of deferred compensation
Issuance of Common Stock (1,774) (1,072) 14,223
- --------------------------------------------------------------------------------------------------
Balance at January 1, 1994 ($1,774) ($ 1,058) $ 45,868
Net income applicable to common shareholders 14,703
Exercise of warrants 0
Shares issued in Stock Offering 47,500
Preferred stock dividends (6)
Conversion of one-third of the 6% Preferred Stock 0
Conversion of note payable 171
Issuance of Common Stock for Employee Benefit Plans, net (138) 358 1,489
- --------------------------------------------------------------------------------------------------
Balance at December 31, 1994 ($1,912) ($ 700) $ 109,725
Net income/(loss) applicable to common shareholders (30,230)
Issuance of Preferred Stock 5,400
Fair market value of warrant extensions 1,200
Preferred stock dividends and accretion 241
Conversion of one-third of the 6% Preferred Stock (0)
Issuance of Common Stock for Employee Benefit Plans (111) 406 874
Balance at December 30, 1995 ($2,023) ($ 294) $ 87,210
==================================================================================================
</TABLE>
32
See notes to consolidated financial statements
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 1, 1994, DECEMBER 31, 1994 AND DECEMBER 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Hanover Direct, Inc. ("HDI") is a direct specialty
retailer in the United States that publishes a portfolio of branded specialty
catalogs offering home fashions, general merchandise and apparel. HDI also
operates several retail operations in the United States which comprised
approximately 3% of HDI's net revenues for the year ended December 30, 1995.
Merger - Hanover Direct, Inc. ("HDI") was formed in connection with the
September 8, 1993 merger (the "Merger") involving HDI, The Horn & Hardart
Company ("H&H") and The Hanover Companies ("THC"), a wholly-owned subsidiary of
H&H. The Merger consisted of the merger of H&H into HDI, followed by the merger
of THC into HDI. The financial statements of THC had previously been included in
the consolidated financial statements of H&H.
The Merger was consummated by (i) the exchange of shares of H&H Common
Stock for shares of HDI Common Stock, (ii) the exchange of shares of THC 7.5%
Preferred Stock for shares of HDI's 7.5% Preferred Stock, and (iii) the exchange
of shares of THC Class B Preferred Stock for shares of HDI's Class B Preferred
Stock, each such distribution being on a one-for-one-basis.
The Merger was accounted for similarly to a pooling-of-interests and,
accordingly, HDI's Consolidated Financial Statements include the results of H&H
and THC for all applicable periods presented.
Principles of Consolidation - The Consolidated Financial Statements include
the accounts of HDI and all subsidiaries (the "Company"). Intercompany
transactions and balances have been eliminated. Certain prior year amounts have
been reclassified to conform to the current year presentation.
Fiscal Year - The Company operates on a 52/53 - week fiscal year. The years
ended December 31, 1994 and December 30, 1995 were 52 - week years. The year
ended January 1, 1994 was a 53 - week year.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Inventories - Inventories consist principally of merchandise held for
resale and are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
Prepaid Catalog Costs - Costs related to mail order catalogs and
promotional material are amortized over their estimated productive lives, not
exceeding six months.
Depreciation and Amortization - Depreciation and amortization of property
and equipment are provided on the straight-line method over the following lives:
buildings and building improvements, 30-40 years; furniture, fixtures and
equipment, 3-10 years; and leasehold improvements, over the lower of the
estimated useful lives or the terms of the related leases. Expenditures for
maintenance and repairs are charged to operations as incurred; major
improvements are capitalized.
33
<PAGE> 34
Capitalized development costs for the Company's new management information
systems aggregated $6.4 million and $5.5 million at December 30, 1995 and
December 31, 1994, respectively. Such costs are included in other assets and are
being amortized over a five year period commencing July 1995.
Goodwill - Excess of cost over the net assets of acquired businesses is
being amortized on a straight-line basis over periods up to forty years.
Accumulated amortization was $4.5 million and $5.6 million at December 31, 1994
and December 30, 1995, respectively. On an on-going basis, the Company assesses
the carrying value and the economic useful life of the goodwill based on the
acquired business' prior and future operating income and estimated net cash
flows.
Mailing Lists - The costs of acquired mailing lists are amortized over a
five year period. Mailing lists, included in Other assets, amounted to $1.8
million and $3.5 million at December 31, 1994 and December 30, 1995,
respectively, and are carried net of accumulated amortization of $.7 million and
$1.6 million, respectively. On an ongoing basis, the Company assesses the
carrying value and the economic useful life of the mailing lists based on the
acquired business' potential future operating income and estimated net cash
flows.
Accounting for Income Taxes - The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 - Accounting
for Income Taxes ("SFAS 109").
Accounting for the Impairment of Long-Lived Assets: In March, 1995, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." This Statement is effective beginning in 1996 and requires
long-lived assets as well as identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount of the assets may not be recoverable. The Company does not expect a
material impact on their financial position upon implementation of this
Statement in 1996.
Cash and Cash Equivalents - For purposes of the Consolidated Statements of
Cash Flows, the Company considers all highly liquid temporary investments with
an original maturity of less than ninety days as cash equivalents.
Net Income Per Share - Net income per share was computed using the weighted
average number of common shares outstanding. The weighted average number of
shares used in the calculation for both primary and fully diluted net income per
share in 1994 and 1995 was 93,285,190 and 93,029,816 shares, respectively. For
1993 the weighted average number of shares for primary and fully diluted net
income per share was 75,625,330 and 77,064,131 shares, respectively. Common
share equivalents for purposes of net income per share consist of stock options
and warrants.
Supplemental Earnings Per Share - Assuming that the conversion of the 7.5%
Preferred Stock and the exchange of the Class B 8% Preferred Stock and the Class
B Common Stock discussed in Note 8 had been consummated at the beginning of
fiscal year 1993, the weighted average number of shares outstanding for primary
and fully diluted earnings per share for 1993 would have been 84,408,807 and
85,847,608 and earnings per share for 1993 would have been $.21 and $.20,
respectively.
34
<PAGE> 35
Supplemental Disclosure of Noncash Activities
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Dividend on Class B 8% Preferred Stock paid in THC Common
Stock...................................................................... $ 2,508 $ - $ -
========== ============= =========
Exchange of 8% Class B Preferred Stock and 7.5%
Convertible Preferred Stock for HDI Common Stock........................... $ 32,674 $ - $ -
========== ============= =========
Capital lease obligations................................................... $ 2,541 $ - $ 1,155
========== ============= =========
Other equity issuances and exchanges........................................ $ 4,990 $ 1,823 $ 1,456
========== ============= =========
Acquisition of businesses:
Fair value of assets acquired............................................. $ 38,578 $ - $ 45,165
Fair value of liabilities assumed......................................... (26,180) - (26,757)
Preferred stock issued.................................................... - - (5,400)
Common stock issued....................................................... (12,298) - -
---------- ------------- ---------
Net cash paid............................................................. $ 100 $ - $ 13,008
========== ============= =========
</TABLE>
2. ACQUISITIONS AND INVESTMENTS
ACQUISITIONS - The Company made the following acquisitions in 1995:
Leichtung, Inc. 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. This acquisition has been accounted for
using the purchase method of accounting based on the fair market values of the
assets and liabilities acquired and has resulted in the recording of
approximately $7.3 million of goodwill and $1.4 million of customer mailing list
intangible assets. In connection with this acquisition the Company plans to sell
the assets of the Leichtung Workshops catalog and has relocated all
telemarketing and fulfillment operations to the Company's Hanover, PA facility.
The distribution facility in Ohio and the Leichtung Workshops assets, which are
being held for sale are being carried at their estimated net realizable value of
$1.7 million, as of December 30, 1995.
The Safety Zone. In February 1995, the Company acquired the remaining 80%
of the outstanding common stock it did not already own of Aegis Safety Holdings,
Inc. ("Aegis"), publisher of The Safety Zone catalog, through the issuance of
634,900 shares of a newly-created Series B Convertible Additional Preferred
Stock ("Series B Stock") of the Company with a stated value of $10 per share.
Previously, in September 1993, the Company had acquired 20% of the outstanding
common stock of Aegis. Dividends can be payable on the Series B Stock at various
rates and times and are contingent on specific earnings targets. The Series B
Stock is also convertible, subject to antidilution, as discussed in Note 8.
Dividends were not paid in 1995 based on The Safety Zone catalog's 1995
operating results.
This investment has been accounted for using the purchase method of
accounting based on the fair market values of Aegis' assets and liabilities and
the Series B Stock, and has resulted in the recording of approximately $7.1
million of goodwill. The fair value of the Series B Stock, which is based on an
independent appraisal, is $.9 million less than the stated value and the
discount is being amortized over a five-year period. This amortization is
included in preferred stock dividends in the statement of income from the date
of acquisition.
35
<PAGE> 36
Austad's. In May 1995, the Company acquired 67.5% of the outstanding shares
of Austad's Holdings, Inc. ("Austad's"), which owned The Austad Company ("TAC"),
the publisher of the Austad's catalog featuring golf equipment, apparel and
gifts, for a purchase price of $1.8 million in cash. The Company also lent TAC,
on a subordinated basis, $2.2 million which bears interest at the rate of 10%
per annum and is due by May 2000. The Company also provided a $.4 million loan
to TAC which bears interest at a fluctuating rate (8.75% through April 1996) and
is secured by a second mortgage on TAC's office and warehouse. The acquisition
has been accounted for using the purchase method of accounting based on the
estimated fair market values of the assets and liabilities acquired and has
resulted in the recording of approximately $4.5 million of goodwill and
approximately $1.2 million of customer mailing list intangible assets.
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 $1.2 million (subject to certain post-closing
adjustments) 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.
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
will be transferred to other Company facilities in the first quarter of 1996.
The Company plans on selling the Austad's South Dakota warehouse and
distribution facility. 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.
Accounting for Acquisitions - The acquisitions of Improvements, Leichtung
Workshops, The Safety Zone and Austad's have been accounted for using the
purchase method of accounting with goodwill of approximately $18.9 million in
the aggregate initially recorded based upon the fair values of the net assets
acquired and liabilities assumed. In addition, the Company recorded $3.1 million
representing the fair value of acquired mailing lists. The operating results of
the acquired companies are included in Consolidated Net Income (Loss) from their
respective dates of acquisition.
36
<PAGE> 37
The following represents the unaudited pro forma results of operations for
the years ended January 1, 1994, December 31, 1994 and December 30, 1995 as if
these three acquisitions had occurred at the beginning of fiscal year 1993.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
(Unaudited)
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $782,365 $840,295 $763,786
======== ======== ========
Income (loss) before extraordinary item $ 8,954 $ 14,305 $(28,083)
======== ======== ========
Net income (loss) $ 4,861 $ 14,170 $(30,160)
======== ======== ========
Per Share:
Income (loss) before extraordinary
item $ .06 $ .15 $ (.30)
Extraordinary item - - (0.2)
-------- -------- --------
Net income (loss) $ .06 $ .15 $ (.32)
======== ======== ========
</TABLE>
The pro forma information does not purport to be indicative of the results
that actually would have been obtained if the operations were combined during
the periods presented and is not intended to be a projection of future results
or trends. Per share amounts are expressed after deducting preferred stock
dividends of $4.1, $.1 and $.2 , million in 1993, 1994 and 1995, respectively.
OTHER INVESTMENTS - Other Investments include the following:
Blue Ridge Associates - In January 1994, the Company purchased for $1.1
million a 50% interest in Blue Ridge Associates ("Blue Ridge"), a partnership
which owns the apparel distribution center in Roanoke, Virginia. This investment
is accounted for by the equity method of accounting. The Company made annual
rent payments to the partnership totaling $.7 million and $.6 million in 1994
and 1995, respectively, as part of a 15 year lease through 2008. The Company
recorded $.1 million in income for its portion of the partnership income in
1994, and 1995, respectively. The Company's investment in Blue Ridge was $1.1
million and $1.0 million at December 31, 1994 and December 30, 1995,
respectively.
Boston Publishing Company - In February 1994, the Company acquired a 20%
equity interest in Boston Publishing Company ("BPC") and provided secured and
unsecured loans to BPC. In August 1994, BPC filed for protection under Chapter
11 of the United States Code. In 1995, the Company received inventory and the
customer mailing list of BPC in payment of its $1.2 million loan and
subsequently realized $.3 million upon disposition of these assets and wrote off
the remaining assets.
Regal Communications, Inc. - During 1994, the Company invested
approximately $2.7 million in convertible debt securities of Regal
Communications, Inc. ("Regal"). In September 1994, Regal filed for protection
under Chapter 11 of the United States Code. As a result, during 1994, the
Company established a valuation allowance against the securities reflecting
their estimated fair value of $1.7 million. In December 1995, a plan of
reorganization was confirmed by the Bankruptcy Court and the Company expects to
recover the $1.7 million carrying value of its investment. The Company received
its first distribution of $.5 million in February 1996.
37
<PAGE> 38
Tiger Direct. - In February 1995, the Company entered into an agreement to
acquire certain securities of Tiger Direct, Inc. ("Tiger"), a direct marketer of
computer software, peripherals and CD-ROM hardware and software. In February
1995, the Company entered into a loan and security agreement with Tiger pursuant
to which the Company provided a secured working capital line of credit to Tiger,
up to a maximum of $3.0 million, which was loaned under such agreement. In
September 1995, due to the continued deterioration of Tiger's financial
condition, the Company terminated the securities purchase agreement. The Company
sold the loan to a third party and received payment in full for the principal of
the loan and interest to the date of sale.
During the period from February 1995 to September 1995, the Company
provided certain services to Tiger and also incurred certain costs related to
entering into the loan and security agreements aggregating $.5 million. Under
the terms of the agreement, Tiger is required to reimburse the Company for such
costs and services rendered. To date, Tiger has refused to reimburse the Company
for these costs. The Company has instituted an action to recover such costs,
which are carried at their realizable value.
3. PROVISION FOR CATALOG AND FACILITY CLOSINGS
In 1995, the Company made a decision to discontinue six catalogs. The six
discontinued catalogs generated an operating loss of $20 million in 1995 which
included a provision of approximately $8.6 million. This provision was recorded
in 1995 primarily to write-down the inventory associated with these catalogs to
their liquidation value. The $8.6 million is included in the Provision for
Catalog and Facility Closings in the Consolidated Statements of Income (Loss)
and, at December 30, 1995, approximately $4.9 million remained in the inventory
obsolescence reserve. There were no such charges incurred by the Company in 1993
or 1994.
In 1995, the Company incurred costs, aggregating approximately $1.5
million, in connection with the consolidation of its fulfillment facilities.
These cost included moving expenses, lease termination fees and severence
expenses, substantially all of which were paid in 1995. There were no such
charges incurred by the Company in 1993 and 1994.
4. SEARS LICENSING AGREEMENT
In January 1994, the Company entered into a licensing agreement (the "Sears
Agreement") with the direct marketing subsidiary of Sears Roebuck and Co.
("Sears") to produce specialty catalogs for customers of the recently
discontinued Sears catalog. The specialty catalogs include: Show Place, based on
the Domestications catalog, Great Kitchens, based on the Colonial Garden
Kitchens catalog and Sears Improvements, based on the Improvements catalog. The
Sears Agreement has an initial three-year term and continues thereafter unless
terminated by either party. Profits and losses from the venture are shared
between the parties on an equal basis. The Sears specialty catalogs generated
revenues of $81 million and $71 million and earnings before interest and taxes
("EBIT") of $3.0 million and $2.9 million in 1995 and 1994, respectively.
The Company also issued to Sears a performance warrant to purchase 3.5
million shares of Common Stock in 1999 if the licensed business with Sears has
revenues of at least $250 million and EBIT of at least $30 million in 1998.
Alternately, Sears will be entitled to purchase 7 million shares of Common Stock
in 1999 if the licensed business with Sears has revenues of at least $500
million and EBIT of at least $60 million in 1998. The warrant exercise price is
$10.57 per share. If neither of these goals is achieved, the performance warrant
will expire unexercised in 1999. Through 1995, no charges have been required to
be recorded in connection with the warrants. The Company is obligated to meet
various operational performance standards and if the Company is unable to meet
these standards, Sears is entitled to terminate the agreement. The Company also
has the right to terminate the agreement in certain circumstances, including if
Sears fails to comply with any material provision of the Sears Agreement.
38
<PAGE> 39
5. ACCOUNTS RECEIVABLE, NET
The Company currently maintains an agreement with an unrelated third party
which provides for the sale and servicing of accounts receivable originating
from the Company's revolving credit card. The agreement expires in December
2000. The Company remains obligated to repurchase uncollectible accounts
pursuant to the recourse provisions of the agreement and is required to maintain
a specified percentage of all outstanding receivables sold under the program as
a deposit with the third party to secure its obligations under the agreement.
At December 31, 1994 and December 30, 1995, the uncollected balances under
this program were $45.9 million and $38.6 million, respectively, of which $11.5
million and $5.5 million, respectively, represent deposits under the agreement
which are included in Accounts receivable, net. The total reserve balance
maintained for the repurchase of uncollectible accounts was $2.3 million and
$2.4 million at December 31, 1994 and December 30, 1995, respectively, of which
$1.2 million and $1.4 million, respectively, are included in Accrued liabilities
and the remaining balance is included in the allowance for doubtful accounts.
Receivables sold under this agreement are considered financial instruments
with off-balance sheet risk as defined in Statement of Financial Accounting
Standards No. 105. Because the Company's sales are primarily made to individual
customers located throughout the United States, the Company believes there are
no concentrations of credit risks.
6. ACCRUED LIABILITIES
Accrued liabilities consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Reserve for future sales returns.................... $ 6,023 $ 5,535
Compensation........................................ 3,923 5,795
Taxes............................................... 1,330 3,007
Reserve for repurchase of accounts receivable
sold with recourse.................................. 1,180 1,391
Other............................................... 7,759 10,241
------- -------
$20,215 $25,969
======= =======
</TABLE>
39
<PAGE> 40
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Revolving Term Notes..................................... $ - $ 9,931
TAC Revolving Credit Facility............................. - 2,011
Term Financing Facility................................... 10,000 20,000
8.75% Mortgage Note Payable due 2003...................... - 1,718
Industrial Revenue Bonds with variable interest rates
averaging 4.5% in 1994 and 4.1% in 1995 due 2003......... 8,000 8,000
6% Mortgage Notes Payable due 1998........................ 3,300 3,139
9.25% Subordinated Notes due 1998........................ 14,000 14,000
7 1/2% Convertible Subordinated Debentures due 2007....... 751 751
Other..................................................... 40 19
------- -------
36,091 59,569
Less current portion...................................... 184 2,286
------- -------
Noncurrent portion........................................ $35,907 $57,283
======= =======
</TABLE>
Revolving Credit Facility - As a result of the operating losses incurred
during 1995, the Company was not in compliance with certain financial covenants
under its revolving credit facility that it had entered into in 1994. In order
to obtain waivers to this facility for these covenant violations, the Company
agreed to more restrictive terms with respect to availability (reduced from $80
million to $55 million), rate and financial covenants. The Company determined
that the terms of these proposed amendments were too restrictive and agreed to a
waiver through November 15, 1995, when the Company replaced this facility with a
new $75 million secured credit facility with Congress Financial Corporation
("Congress Facility").
The Congress Facility is comprised of a revolving line of credit of up to
$65 million with a three year term and two year term loans aggregating $10
million ("Revolving Term Notes"). The amount that can be borrowed under the
Congress Facility is based on percentages of eligible inventory and accounts
receivable from time to time. The revolving line of credit carries an interest
rate of 1.25% above CoresSates' prime rate and the Revolving Term Notes carry an
interest rate of 1.5% above CoreStates' prime rate. The Congress Facility is
secured by all assets of the Company including customer mailing lists, and the
Company is required to maintain a minimum net worth of $80 million, as well as
working capital of $26 million. In addition, the Congress Facility places
limitations on the incurrence of additional indebtedness.
In October 1994, the Company consummated a five-year $80 million unsecured
revolving credit facility with a syndicate of banks (the "Credit Facility") led
by NationsBank of North Carolina, N.A. The Credit Facility provided for a $40
million revolving credit facility, a $20 million acquisition line and $20
million of 15 year Term Financing for certain capital expenditures ("Term
Financing Facility"). There was a $35 million sub-limit for letters of credit
under the Credit Facility.
The Company borrowed $10 million in each of 1994 and 1995 under the Term
Financing Facility. The rate of interest on the Term Financing Facility is based
on the equivalent rate of A-1 commercial paper existing at the time of each
borrowing. The face rate ranged from 5.85% to 6.30% and 5.73% to 6.02% at
December 31, 1994 and December 30, 1995. The Term Financing Facility requires
annual sinking fund payments of $1.0 million beginning October 1996 though
October 1999 and increasing to $1.6 million for each of the ten years
thereafter.
40
<PAGE> 41
The Credit Facility was terminated and amounts outstanding under the
revolving credit facility were repaid with the closing of the Congress Facility
in November 1995. The Term Financing Facility continues to be outstanding and in
effect under its original terms. All standby letters of credit issued under the
Credit Facility were replaced with letters of credit issued by Congress.
At December 30, 1995, the Company had no outstanding borrowings under the
revolving line of credit and $9.9 million outstanding under the Revolving Term
Notes. The rates of interest related to the revolving line of credit and Term
Notes were 9.50% and 9.75%, respectively, at December 30, 1995.
The face amount of unexpired documentary letters of credit at December 31,
1994 and December 30, 1995, were $7.2 million and $4.2 million, respectively. In
addition, the Company had issued $31.2 million and $28.5 million of standby
letters of credit at December 30, 1995 and December 31, 1994, respectively,
which in 1995 included $8.6 million related to the Industrial Revenue Bonds due
2003 and $20.3 million related to the Term Financing Facility.
The TAC Revolving Credit Facility was paid off with the proceeds from the
Congress Facility on February 16, 1996 and accordingly has been classified as a
long-term obligation.
8.75% Mortgage Note Payable due 2003 - TAC's 8.75% Mortgage Note Payable
is reflected as an obligation of the Company and its subsidiaries as a result
of the corporate reorganization, completed in February 1996. The 8.75% Mortgage
Note Payable is secured by the TAC warehouse and distribution facility in South
Dakota. That facility's operations have been largely transferred to other
Company facilities and the Company plans to sell the South Dakota property.
Monthly principal payments amount to approximately $.1 million per year with a
final payment of $1.4 million due in March 2003.
Industrial Revenue Bonds due 2003 - The Industrial Revenue Bonds are due on
December 1, 2003 and are secured by the related assets purchased from the
proceeds of the bonds and by an irrevocable letter of credit in the amount of
$8.6 million. The obligations are guaranteed by the Company.
6% Mortgage Notes Payable due 1998 - In connection with The Company Store
acquisition, subsidiaries of the Company executed and delivered two secured
notes in the aggregate amount of $3.5 million with interest at 6% per annum with
principal and interest payments payable monthly on a fifteen-year amortization
schedule with the remaining balance due in August 1998. The mortgage notes
payable are non-recourse notes and are not guaranteed by the Company. The
mortgage notes payable are secured by the manufacturing and office facilities of
The Company Store.
9.25% Senior Subordinated Notes due 1998 - At December 30, 1995, the
Company has $14 million of 9.25% Senior Subordinated Notes due 1998 ("9.25%
Notes") outstanding.
In November 1995 Intercontinental Mining & Resources Incorporated ("IMR"),
an affiliate of NAR, purchased the 9.25% Notes from a third party in connection
with the refinancing of the indebtedness under the Congress Facility. The
Company paid NAR a commitment fee of $105,000 upon the signing of a repurchase
and option agreement and a fee of $210,000 (1.5% of the outstanding principal
amount of the 9.25% Notes acquired by IMR) upon the funding, as well as all
expenses incurred by NAR in performing its obligation. The Company also extended
by two years the terms of the warrants to purchase 5,033,735 shares held by NAR
and IMR to August 1, 1998. The Company recorded as debt issuance costs,
approximately $1.2 million, representing the fair value of the warrant
extensions. Such costs are being amortized over the life of the 9.25% Notes. The
Company has also agreed to indemnify NAR against any and all claims or losses
asserted against it or incurred by it relating to the transactions contemplated
by the repurchase and option agreement.
41
<PAGE> 42
In connection with IMR's purchase of the 9.25% Notes, the Company and IMR
agreed to amend the financial covenants contained in the Indenture relating to
the 9.25% Notes and to grant to the Trustee for such 9.25% Notes a second
priority security interest in the Company's customer and mailing lists. The
Company is required to maintain certain financial covenants with which it was in
compliance at December 30, 1995.
General - As a result of the replacement of the Credit Facility and the
purchase by IMR of the 9.25% Notes, the Company wrote off approximately $1.8
million of unamortized debt issuance costs as an extraordinary item due to the
early extinguishment of debt.
At December 30, 1995, the aggregate annual principal and sinking fund
payments required on all long-term debt were as follows (in thousands): 1996 -
$2,286; 1997 - $10,176; 1998 - $19,868; 1999 - $1,076; 2000 - $1,649 and
thereafter - $24,514.
8. CAPITAL STOCK
Public Offering - In April 1994, the Company completed a public offering
(the "Public Offering") of 8,045,296 shares of Common Stock for proceeds of
approximately $47.5 million, net of expenses.
6% Series A Convertible Additional Preferred Stock - In December 1993, in
connection with the Company's acquisition of Tweeds Inc., ("Tweeds"), the
Company entered into an exchange agreement with a major vendor of Tweeds. Under
the exchange agreement, the Company issued 234,900 shares of its 6% Series A
Convertible Additional Preferred Stock ("6% Preferred Stock") for an installment
note, dated March 29, 1993, as amended, in the amount of approximately $2.4
million previously issued by Tweeds. Dividends began accruing on September 30,
1993.
The 6% Preferred Stock is convertible into Common Stock of the Company over
a three year period in equal amounts on September 30, 1994, 1995 and 1996. The
conversion price is an amount equal to the average of the per share closing
prices for the five trading days preceding the conversion dates. The Company
converted the first and second equal portions of the 234,900 issued shares of
the 6% Preferred Stock into 189,818 and 427,785 shares of Common Stock on
September 30, 1994 and September 29, 1995, respectively. The Company elected to
pay cash dividends of $.1 million related to the September 1994 conversion.
Series B Convertible Additional Preferred Stock - In February 1995, the
Company issued 634,900 shares of its Class B Convertible Additional Preferred
Stock ("Series B Stock") to acquire the remaining 80% of the outstanding common
stock of Aegis Safety Holdings, Inc. ("Aegis"), publisher of The Safety Zone
catalog. The Series B Stock has a stated value of $10 per share. Non-cumulative
dividends will accrue and be paid at 5% per annum during each of the first three
years if Aegis attains at least $1 million in earnings before interest and taxes
each year. In years four and five, dividends are cumulative and will accrue and
be paid at 7% per annum and are not contingent on the achievement of any
earnings target. Dividends will not be paid in 1995 based on The Safety Zone
catalog's 1995 operating results.
The Series B Stock is convertible at any time, at $6.66 per share, subject
to antidilution, at the option of the holder and is convertible at the Company's
option if the market value of the Company's Common Stock is greater than $6.66
per share, subject to antidilution, for 20 trading days in any consecutive 30
day trading period or at the holder's option from time to time. If, after five
years, the Series B Stock is not converted, it is mandatorily redeemable, at the
Company's option, in cash or for 952,359 shares of the Company's Common Stock
provided the
42
<PAGE> 43
market value of the stock is at least $6.33 per share, subject to antidilution.
If the market value of the Company's Common Stock does not meet this minimum,
the redemption rate is subject to adjustment which would increase the number of
shares for which the Series B Stock is redeemed.
The fair value of the Series B Stock, which is based on an independent
appraisal, is $.9 million less than the stated value. This discount is being
amortized over a five year period and resulted in a charge of $.2 million to
preferred stock dividends in the statement of income for 1995.
Warrants - The warrants outstanding at December 30, 1995 are as follows:
<TABLE>
<CAPTION>
WARRANTS EXERCISE EXPIRATION
ISSUED PRICE DATE
------ ----- ----
<S> <C> <C>
1,541,301 $2.42 8/01/98
3,157,884 2.91 8/01/98
334,550 2.19 8/01/98
---------
5,033,735
</TABLE>
All of the above issued warrants are held by NAR and its affiliates.
As previously discussed, the Company issued to Sears a performance warrant
to purchase up to 7 million shares of Common Stock in 1999. This performance
warrant is not reflected in the above table.
General - At December 30, 1995, there were 93,452,768 shares of Common
Stock, 78,300 shares of 6% Preferred Stock and 634,900 shares of Series B Stock
outstanding. Additionally, an aggregate of 15,087,471 shares of Common Stock
were reserved for issuance pursuant to (i) the exercise of outstanding options
(265,000), (ii) the exercise of outstanding warrants (12,033,735), (iii) the
Executive Equity Incentive Plan (1,021,170), (iv) the Restricted Stock Award
Plan (275,700), and (v) the All Employee Equity Investment Plan (1,491,866).
In October 1995, the 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 Company's current method, which measures compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has
not as yet decided whether it will adopt SFAS No. 123 for financial statement
purposes, however at a minimum it will be required to disclose in its
footnotes to the financial statements, additional information relating to the
Company's various stock-based employee benefit plans and the Company's pro
forma net income and earnings per share, as if the options granted were
expensed at their estimated fair values at the time of grant. If the Company
decides to adopt SFAS No. 123 for financial statement purposes, an additional
expense will be recorded, however the Company has not as yet calculated the
impact of the adoption.
Dividend Restrictions - The Company is restricted from paying dividends on
its Common Stock or from acquiring its capital stock by certain debt covenants
contained in agreements to which the Company is a party.
9. EMPLOYEE BENEFIT PLANS
Stock Option Plan - Pursuant to the Company's Stock Option Plan (the
"Plan"), an aggregate of 2,830,519 shares were approved for issuance to
employees and consultants of the Company. The option price and the periods over
which an option is exercisable are specified by the Compensation Committee of
the Board of Directors.
Options expire five years from the date of grant and generally vest over
three to four years. Payment for shares purchased upon the exercise of an option
shall be in cash or stock of the Company. If paid in cash, a partial payment may
be made with the remainder in installments evidenced by promissory notes at the
discretion of the Compensation Committee.
43
<PAGE> 44
Changes in options outstanding and options available for grant, expressed
in numbers of shares, are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ----------- ---------
<S> <C> <C> <C>
Options outstanding,
beginning of period 603,765 365,250 496,050
Granted - 162,000 70,000
Exercised - (1,000) -
Expired (214,165) (20,700) (334,050)
Cancelled (24,350) (9,500) (142,000)
--------- --------- ---------
Options outstanding,
end of period 365,250 496,050 90,000
========= ========= =========
Options exercisable,
end of period 365,250 334,050 20,000
========= ========= =========
Available for grant of
options, end of period 1,583,833 1,452,033 1,858,083
========= ========= =========
</TABLE>
The option prices and amounts are: $1.75 - 20,000 shares, $2.25 - 50,000
shares and $3.50 - 20,000 shares.
In June 1994, one director was granted non-qualified options to purchase
55,000 shares at an exercise price of $6.125 per share which expire in 2000. In
September 1992, six directors were granted options to purchase 20,000 shares
each, at the market price, which at the time was $1.75 per share. These option
grants were approved at the 1993 Annual Meeting of Shareholders and the options
expire in 1997. The table above does not include these option grants.
Hanover Direct, Inc. Savings Plan - The 401(k) Savings and Retirement Plan
(the "401(k) Plan") allows eligible employees to contribute a percentage of
their annual compensation to the 401(k) Plan. The Company makes matching
contributions of one-third of the employees' pre-tax contributions. Participants
may invest contributions in various investment funds, in addition to a
guaranteed investment fund or in the Company's Common Stock.
The Company's contributions charged to expense for 1993, 1994 and 1995 were
approximately $431,000, $608,000 and $556,000, respectively.
Supplemental Retirement Plan - The Supplemental Retirement Plan (the
"Retirement Plan") allows eligible employees to make contributions to a trust
where the contributions are invested by the trust for each participant in a tax
free money market fund. The Company makes matching contributions. Company
contributions charged to expense in 1993, 1994 and 1995 amounted to
approximately $130,000, $192,000 and $222,000, respectively.
The Retirement Plan permits eligible employees to contribute up to 4% of
their salary. The Company matches all participant contributions, up to 50% of
their contributions with a cap of 2%. The Retirement Plan is not tax-qualified
under the applicable provisions of the Internal Revenue Code of 1986, as
amended.
Incentive Compensation Plan - Bonus arrangements with certain executives
and key employees generally provide for additional compensation based upon the
attainment of certain profit levels, as well as other performance measures.
These bonuses approximated an aggregate of $.4 million, $1.1 million and $1.5
million in 1993, 1994 and 1995, respectively. Under the bonus plan, 25% of the
bonus is deferred and payable in cash or restricted stock that vests over a
three year period.
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<PAGE> 45
Executive Equity Incentive Plan - In December 1992, the Board of Directors
adopted the 1993 Executive Equity Incentive Plan (the "Incentive Plan"). The
Incentive Plan was approved by shareholders at the 1993 Annual Meeting. Pursuant
to the Incentive Plan, options to purchase shares of the Company's Common Stock
will be granted from time to time by the Compensation Committee of the Board of
Directors to selected executives of the Company or its affiliates. For each such
option granted, the selected executive will receive the right to purchase on a
specified date (the "Tandem Investment Date") a number of shares of the
Company's Common Stock ("Tandem Shares") equal to one-half the maximum number of
shares of the Company's Common Stock covered by such option. An aggregate of
2,400,000 shares of the Company's Common Stock have been reserved for issuance
under the Incentive Plan. Company financing is available under the Incentive
Plan to pay for the purchase price of the Tandem Shares.
Changes in shares, options outstanding and options available for grant,
expressed in numbers of shares, for the Incentive Plan are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Shares outstanding beginning of period 663,830 753,830
Shares purchased 663,830 90,000 143,333
Shares cancelled - - (20,000)
----------- ----------- -----------
Shares outstanding
end of period 663,830 753,830 877,163
----------- ----------- -----------
Options outstanding,
beginning of period - 1,101,000 1,073,836
Options granted 1,327,660 180,000 286,666
Options cancelled (226,660) (207,164) (339,332)
----------- ----------- -----------
Options outstanding,
end of period 1,101,000 1,073,836 1,021,170
----------- ----------- -----------
Total shares and options
outstanding, end of period 1,764,830 1,827,666 1,898,333
=========== =========== ===========
Available for grant of
options and shares, end of period 635,170 572,334 501,667
=========== =========== ===========
</TABLE>
The purchase prices per share of the Company's Common Stock upon exercise
of stock options are as follows: $1.75 - 30,000 shares, $2.25 - 33,333 shares,
$2.50 - 676,505 shares, $2.63 -50,000 shares, $2.75 - 133,332 shares, $3.00 -
20,000 shares, $3.89 - 20,000 shares and $4.50 - 58,000 shares. Options granted
under the Incentive Plan become exercisable three years after the dates of grant
and expire six years from the dates of grant. The purchase price shall be paid
in full at the time of purchase in cash or shares of the Company's Common Stock
valued at their fair market value or in a combination thereof. The difference
between the Option Price and the fair market value of the Common Stock on the
Tandem Investment Dates is being amortized over the three-year period in which
the options become exercisable. The amount of amortization charged to expense
was approximately $170,000, $137,000 and $72,000 for 1993, 1994 and 1995,
respectively, net of forfeitures.
Changes to the notes receivable related to the Incentive Plan are as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Notes receivable balance beginning period - $1,424,000 $1,522,000
Total consideration given by HDI $1,707,000 328,000 229,000
Payments (283,000) (230,000) (100,000)
---------- ---------- ----------
Notes receivable balance end of period $1,424,000 $1,522,000 $1,651,000
========== ========== ==========
</TABLE>
45
<PAGE> 46
The Incentive Plan participants purchased shares at prices ranging from
$1.75 to $4.50 with the Company accepting notes bearing interest at rates
ranging from 5.35% to 7.75%.
Restricted Stock Award Plan - In December 1992, the Board of Directors
adopted the 1993 Restricted Stock Award Plan (the "Restricted Stock Plan"). Each
full-time or permanent part-time employee of the Company or its affiliates
selected by the Compensation Committee who holds a key position that the
Compensation Committee shall have been designated for eligibility in the
Restricted Stock Plan, has attained the age of 18, has performed at least 12
months of continuous service with the Company or an affiliate of the Company and
is not covered by a collective bargaining agreement may participate in the
Restricted Stock Plan. Pursuant to the Restricted Stock Plan, the Compensation
Committee from time to time may award shares of the Company's Common Stock
("Award Shares") to such participants. The Award Shares received by such
participants are not transferable (other than by will or the laws of descent and
distribution) until the vesting date or when such participant attains the age of
65, dies or becomes permanently disabled, and are subject to forfeiture in the
event the participant ceases to be an employee prior to that date. An aggregate
of 500,000 shares of the Company's Common Stock have been reserved for issuance
under the Restricted Stock Plan. During 1993, 224,300 shares were awarded to
participants aggregating $785,000. Such amount is being amortized over a
three-year vesting period. The amount of amortization charged to expense was
approximately $188,000 in 1993, $292,000 in 1994 and $219,000 in 1995, net of
forfeitures.
All Employee Equity Investment Plan - In December 1992, the Board of
Directors adopted the 1993 All Employee Equity Investment Plan (the "Investment
Plan"). Such plan was approved by the shareholders at the 1993 Annual Meeting.
Each full-time or permanent part-time employee of the Company or its affiliates
who has attained the age of 18, has met certain standards of continuous service
with the Company or an affiliate of the Company and is not covered by a
collective bargaining agreement may participate in the Investment Plan.
An eligible employee will be granted a right to purchase a specific number
of shares of the Company's Common Stock by the Compensation Committee, based on
the eligible employee's salary level. The purchase price of the Company's Common
Stock in the Investment Plan shall be the average market value of a share of the
Company's Common Stock during the 20 days prior to the first day of the
subscription period, less a 40% discount. The shares received by such
participants are not transferable (other than by will or the laws of descent and
distribution) until the vesting date or when such participant attains the age of
65, dies or becomes permanently disabled, and are subject to forfeiture in the
event the participant ceases to be an employee prior to that date. The employees
who choose to participate in the Investment Plan vest in their shares equally
over a three-year period beginning with the first anniversary of the day
subsequent to the final day of the subscription period or when they reach the
age of 65, die or become permanently disabled. An aggregate of 2,000,000 shares
of the Company's Common Stock have been reserved for issuance under the
Investment Plan.
46
<PAGE> 47
Changes in shares outstanding and available for grant, expressed in numbers of
shares for the Investment Plan are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------------- ----------------- ---------------
<S> <C> <C> <C>
Shares outstanding, beginning of period 211,883 380,563
Shares purchased 223,508 260,124 216,931
Forfeited 11,625 91,444 89,360
--------------- ----------------- ---------------
Shares outstanding end of period 211,883 380,563 508,134
=============== ================= ===============
Shares available for grant, end of period 1,788,117 1,619,437 1,491,866
=============== ================= ===============
</TABLE>
The difference between the market price and the discounted price aggregated
approximately $.4 million, $.4 million and $.2 million in 1993, 1994 and 1995,
respectively. These amounts have been reduced by approximately $46,000 in 1993,
$226,000 in 1994 and $181,000 in 1995 which have been charged to amortization
expense.
10. INCOME TAXES
At December 30, 1995, the Company had net operating loss carryforwards
("NOLs") totalling $162.5 million, which expire as follows: In the year 2001 -
$17.3 million, 2003 - $14.6 million, 2004 - $14.3 million, 2005 - $20.6 million,
2006 - $46.9 million, 2007 - $27.7 million and 2010 - $21.1 million. The Company
also has $1 million of general business tax credit carryforwards that expire in
2000 through 2009. The Company's available NOLs for tax purposes consists of
$91.4 million of NOLs subject to a $4 million annual limitation under Section
382 of the Internal Revenue Code of 1986 and $71.2 million of NOLs not subject
to a limitation.
The unused portion of the $4 million annual limitation for any year may be
carried forward to succeeding years to increase the annual limitation for those
succeeding years. In addition, the Company's entire $91.4 million of NOLs,
subject to the limitation, may be used to offset future taxable income generated
by July 1996 from built-in gains (generally, taxable income from the sale of
appreciated assets held by the Company at the date of its change in ownership in
July 1991) without reference to the limitation.
SFAS 109 requires that the future tax benefit of such NOLs be recorded as
an asset to the extent that management assesses the utilization of such NOLs to
be "more likely than not". In 1992 management determined that, based upon the
conversion of interest-bearing debentures to equity, the issuance of additional
Common Stock, the disposal of unprofitable discontinued restaurant operations,
the Company's history of prior operating earnings in the direct marketing
business and its expectations for the future, the operating income of the
Company will, more likely than not, be sufficient to utilize $30 million of
deductible temporary differences and NOLs prior to their expiration. In making
such determination, the Company adjusted 1992 income by eliminating interest
expense related to retired debt and assumed that such adjusted 1992 income level
could be obtained in each of the next three years. The Company maintained a
consistent adjusted income level in 1993. In 1994, the Company continued the
practice of estimating the NOLs that it could utilize over the subsequent three
years and estimated that it would be able to utilize up to $43 million of NOLs
over the next three years based on the pre-tax income of the most recent two
years. Despite incurring an additional $21.1 million NOL in 1995, management
believes that the Company will
47
<PAGE> 48
be able to utilize up to $43 million of NOLs over the next three years based
upon the Company's assessment of numerous factors, including its future
operating plans and its pre-tax income in 1993 and 1994 and its 1995 NOL.
For the year ended January 1, 1994, the Company recognized an additional
deferred tax asset of $.6 million, reflecting the effect of the increase in the
Federal corporate income tax rate (from 34% to 35%). For the year ended December
31, 1994, the Company reduced its valuation allowance by $4.4 million,
reflecting the increase in management's assessment of the future utilization of
the Company's NOLs and deductible temporary differences. For the year ended
December 30, 1995, the Company maintained its deferred tax asset of $15 million
(net of a valuation allowance of $48.5 million). Management believes that the
$15 million net deferred tax asset represents a reasonable estimate of the
future utilization of the NOLs and will continue to routinely evaluate the
likelihood of future profits and the necessity of future adjustments to the
deferred tax asset valuation allowance.
Realization of the future tax benefits is dependent on the Company's
ability to generate taxable income within the carryforward period and the
periods in which net temporary differences reverse. Future levels of operating
income and taxable income are dependent upon general economic conditions,
competitive pressures on sales and margins, postal and other delivery rates, and
other factors beyond the Company's control. Accordingly, no assurance can be
given that sufficient taxable income will be generated for utilization of NOLs
and reversals of temporary differences.
The Company's Federal income tax provision was $5.9 million in 1993, $4.2
million in 1994 and zero in 1995. The 1994 provision was offset by utilization
of the NOLs. In addition, the Company recognized the $4.4 million benefit in
1994 discussed above. The Company's provision for state income taxes was $.5
million in 1993, $.9 million in 1994 and $1.0 million in 1995.
The following is reconciliation of the Company's net income for financial
statement purposes to taxable income (loss) for the years ended January 1, 1994,
December 31, 1994 and December 30, 1995 (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- -------
<S> <C> <C> <C>
Net income (loss).................................. $ 17,337 $ 14,838 ($30,230)
Income tax provision (benefit).................... (130) (3,509) 1,003
-------- -------- --------
Income (loss) before income taxes.................. 17,207 11,329 (29,227)
-------- -------- --------
Differences between income before taxes
for financial statement purposes and
taxable income:
State income taxes................................ (501) (860) (1,003)
Utilization of carryovers......................... (2,543) (12,652) -
Differences attributable to subsidiary not
included in Company's tax return................. (313)
Permanent differences............................. 28 717 1,223
Net change in temporary
differences...................................... (14,191) 1,466 8,190
-------- -------- --------
(17,207) (11,329) 8,097
-------- -------- --------
Taxable income (loss).............................. $ - $ - ($21,130)
======== ======== ========
</TABLE>
48
<PAGE> 49
The components of the net deferred tax asset at December 30, 1995 are as
follows (in millions):
<TABLE>
<CAPTION>
Non-
Current current Total
------- ------- -----
<S> <C> <C> <C>
Federal tax NOL and business tax credit
carryforwards.............................................. $ - $ 57.9 $ 57.9
Allowance for doubtful accounts............................. 1.7 - 1.7
Inventories................................................. 1.5 - 1.5
Prepaid catalog costs....................................... (1.8) - (1.8)
Excess of net assets of acquired business................... - (1.4) (1.4)
Accrued liabilities......................................... 2.3 - 2.3
Customer prepayments and credits............................ 1.7 - 1.7
Tax basis in net assets of discontinued operations
in excess of financial statement amount.................... 0.6 - 0.6
Other ................................................... - 1.0 1.0
------ ------ ------
Deferred tax asset.......................................... 6.0 57.5 63.5
Valuation allowance......................................... (2.7) (45.8) (48.5)
------ ------ ------
Deferred tax asset, net .................................... $ 3.3 $ 11.7 $ 15.0
====== ====== ======
</TABLE>
The Company has established a valuation allowance for a portion of the
deferred tax asset, due to the limitation on the utilization of the NOLs and its
estimate of the future utilization of the NOL's.
The Company's tax returns for years subsequent to 1984 have not been
examined by the Internal Revenue Service ("IRS"). Availability of the NOLs might
be challenged by the IRS upon examination of such returns which could affect the
availability of the NOLs. The Company believes, however, that IRS challenges
that would limit the utilization of the NOLs will not have a material adverse
effect on the Company's financial position.
Total tax expense for each of the three fiscal years presented differ from
the amount computed by applying the Federal statutory tax rate due to the
following:
<TABLE>
<CAPTION>
1993 1994 1995
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
INCOME INCOME INCOME
------ ------ ------
<S> <C> <C> <C>
Tax (benefit) at Federal statutory rate........................ 35.0% 35.0% (35.0%)
State and local taxes.......................................... 1.9 4.9 2.2
Effect of Federal rate change on deferred tax asset............. (3.7) - -
Reversal of valuation allowance ............................... - (38.5) -
Net increase in (reversal of) temporary differences............ (28.9) 4.5 9.7
Utilization of contribution and NOL carryover.................. (5.4) (39.1) -
Tax NOLs for which no benefit could be recognized - - 25.3
Other.......................................................... 0.3 2.2 1.2
------ ------- ------
(0.8%) (31.0%) 3.4%
====== ======= ======
</TABLE>
49
<PAGE> 50
11. LEASES
Certain leases to which the Company is a party provide for payment of real
estate taxes and other expenses. Most leases are operating leases and include
various renewal options with specified minimum rentals. Rental expense for
operating leases related to continuing operations were as follows (in
thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Minimum rentals $ 9,458 $ 13,572 $13,070
======== ======== =======
</TABLE>
Future minimum lease payments under noncancellable operating and capital
leases relating to continuing operations that have initial or remaining terms in
excess of one year, together with the present value of the net minimum lease
payments as of December 30, 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING LEASES LEASES
----------- ------ ------
<S> <C> <C>
1996................................................... $ 9,815 $1,659
1997................................................... 7,722 1,396
1998................................................... 6,075 432
1999................................................... 5,296 20
2000................................................... 4,736 -
Thereafter............................................. 35,391 -
------- ------
Total minimum lease payments........................... 69,035 3,507
=======
Less amount representing interest (a).................. 274
------
Present value of minimum lease payments (b)............ $3,233
======
</TABLE>
(a) Amount necessary to reduce net minimum lease payments to present value
calculated at the Company's incremental borrowing rate at the inception of the
leases.
(b) Reflected in the balance sheet as current and noncurrent capital lease
obligations of $628,000 and $1,196,000 at December 31, 1994 and $1,260,000 and
$1,973,000 at December 30, 1995, respectively.
The future minimum lease payments under noncancellable leases that remain
from the discontinued restaurant operations as of December 30, 1995 are as
follows: 1996 - $1.3 million; 1997 - $1.3 million; 1998 - $1.3 million; 1999 -
$1.3 million; 2000 - $1.3 million; and thereafter $11.7 million. The above
amounts exclude annual sublease income of $1.2 million from subleases which have
the same expiration as the underlying leases.
In connection with the Company's investment in Blue Ridge, a subsidiary of
the Company is contingently liable with respect to the lease obligation related
to the apparel distribution center in Roanoke, Virginia.
12. RELATED PARTY TRANSACTIONS
At December 30, 1995, current and former officers and executives of the
Company owed the Company approximately $2.2 million of which approximately $1.7
million relates to receivables under the Executive Equity Incentive Plan. These
amounts due to the Company bear interest at rates ranging from 5.35% to 7.75%
and are due from 1999 to 2001. The remaining $.5 million is due on demand from
two officers of the Company and bears interest at rates ranging from 6.0% to
7.96%.
50
<PAGE> 51
Since January 1993, pursuant to a consulting arrangement, a subsidiary of
NAR renders management consulting, business advisory and investment banking
services to the Company for an annual fee of $750,000. NAR will not collect
such a fee in 1996.
At December 30, 1995, NAR owned approximately 50% of the Company's
outstanding Common Stock and would own 53% upon excercising all of their
outstanding warrants.
13. COMMITMENTS AND CONTINGENCIES
On or about September 2, 1994, a complaint was filed in the United States
District Court for the District of New Jersey by Veronica Zucker, an individual
who allegedly purchased shares of Common Stock of the Company in the public
offering completed on April 7, 1994, against the Company, all of its directors,
certain of its officers, Sun Life Insurance Company of America, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Alex. Brown & Sons, Incorporated. The
complaint, which purports to be filed on behalf of a class of all persons who
purchased the Common Stock of the Company in the public offering or thereafter
through and including August 14, 1994, seeks to recover monetary damages the
class has allegedly suffered as a result of certain alleged false and materially
misleading statements contained in the Company's public offering prospectus
dated March 30, 1994. In lieu of an answer, defendants filed a motion to dismiss
the complaint in its entirety for failure to state a claim upon which relief can
be granted. On May 23, 1995, the United States District Court for the District
of New Jersey dismissed the plaintiff's claim, with prejudice, for failure to
state a claim upon which relief could be granted. On June 22, 1995, plaintiff
filed a notice of appeal of the May 23, 1995 decision to the United States Court
of Appeal for the Third Circuit. The appeal was submitted on the briefs on March
11, 1996. On March 26, 1996, the Court rendered its decision affirming the
District Court's decision.
The Company is involved in other various routine lawsuits of a nature which
are deemed customary and incidental to its business. In the opinion of
management, the ultimate disposition of such actions will not have a material
adverse effect on the Company's financial position or results of operations.
The imposition of a sales and use tax collection obligation on
out-of-state catalog companies in states to which they ship products was the
subject of a case decided in 1994 by the United States Supreme Court. While the
court reaffirmed an earlier decision that allowed direct marketers to make
sales into states where they do not have a physical presence without collecting
sales taxes with respect to such sales, the Court further noted that Congress
has the power to change this law. The Company believes that it collects sales
tax in all jurisdictions where it is currently required to do so.
In connection with certain discontinued restaurant transactions, the
Company remains contingently liable with respect to lease obligations for 9
restaurant properties, should the buyers fail to perform under the agreements.
The future minimum lease payments as of December 30, 1995 are as follows (in
thousands): 1996 - $336; 1997 - $278; 1998 - $192; 1999 - $192; 2000 - $143; and
thereafter $403.
51
<PAGE> 52
14. SUBSEQUENT EVENTS:
In March 1996 the Company announced that the Board of Directors had voted
to conduct a rights offering for $40 million of the Company's Common Stock after
completion of the first quarter. 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, 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 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 extinquishment of this debt, representing the write-off of the unamortized
debt issuance costs of approximately $1.4 million.
In February 1996, the Company announced that Rakesh K. Kaul was named
President and Chief Executive Officer and elected to the Board of Directors
effective March 7, 1996. Mr. Kaul has most recently served as Vice Chairman and
Chief Operating Officer of Fingerhut Companies, Inc.
52
<PAGE> 53
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(in thousands, except per share amounts)
1994
<S> <C> <C> <C> <C>
Revenues $179,226 $185,113 $178,282 $226,263
Gross profit 64,942 70,243 62,407 84,815
Income from operations 4,258 4,145 1,159 6,413
-------- -------- -------- --------
NET INCOME 3,144 2,843 640 8,211
Preferred stock dividends (35) (35) (41) (23)
-------- -------- -------- --------
Net income applicable to
Common Shareholders $ 3,109 $ 2,808 $ 599 $ 8,188
======== ======== ======== ========
Net income per share $ 0.04 $ 0.03 $ 0.01 $ 0.09
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(in thousands, except per share amounts)
1995
<S> <C> <C> <C> <C>
Revenues $176,592 $182,774 $169,175 $221,227
Gross profit 62,905 63,003 54,285 79,565
Loss from operations (4,147) (5,988) (6,042) (6,442)
-------- -------- -------- --------
NET LOSS (4,903) (7,490) (9,586) (8,011)
Preferred stock dividends (45) (59) (66) (70)
-------- -------- -------- --------
Net loss applicable to
Common Shareholders $ (4,948) $ (7,549) $ (9,652) $ (8,081)
======== ======== ======== ========
Net loss per share $ (0.05) $ (0.08) $ (0.10) $ (0.09)
======== ======== ======== ========
</TABLE>
53
<PAGE> 54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
54
<PAGE> 55
P A R T III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors.
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
(b) Identification of Executive Officers.
<TABLE>
<CAPTION>
TITLE AND OTHER OFFICE HELD
NAME AGE INFORMATION(A) SINCE
- ---- --- -------------- -----
<S> <C> <C>
Rakesh K. Kaul 44 President, Chief Executive 1996
Officer and Director since March 7, 1996.
From 1995 until February 1996, Mr. Kaul was
the Vice Chairman and Chief Operating
Officer of Fingerhut Companies, Inc.
From January 1992 until March 1995, Mr. Kaul
was also the Executive Vice President and
Chief Administrative Officer of Fingerhut.
Prior to January 1992, Mr. Kaul was the Senior
Vice President, Strategy and Finance and a
director at Shaklee Corporation.
Michael P. Sherman 43 Executive Vice President, 1990
Corporate Affairs, General
Counsel and Secretary. Mr. Sherman
joined the Company in 1983 and was
elected Vice President-Assistant Secretary.
From 1986 to 1990, Mr. Sherman held the
position of Senior Vice President, General
Counsel and Secretary.
Wayne P. Garten 43 Executive Vice President and 1990
Chief Financial Officer. From
1989 to 1990, Mr. Garten
held the position of Senior
Vice President and Chief Financial
Officer. He joined the Company
</TABLE>
55
<PAGE> 56
<TABLE>
<S> <C> <C>
in 1983, was elected Vice
President in 1984 and was
elected Vice President-Finance
in 1989.
Michael Lutz 53 Executive Vice President Operations 1995
since September 1994. Prior to September
1994, Mr. Lutz held various positions with New
Hampton, Inc./ Avon Direct Response.
Chuck Hudson 50 Executive President, Men's Apparel since 1995
September 1993. Mr. Hudson joined the
Company in 1986 as Vice President, Marketing.
Edward J. O'Brien 52 Senior Vice President and 1991
Treasurer. Mr. O'Brien joined the
Company in 1986 and was elected
Vice President in 1988.
Robert G. Kramer 52 Senior Vice President, MIS since October 1994. 1995
Prior to October 1994, Mr. Kramer held various
positions with New Hampton, Inc./Avon Direct
Response.
</TABLE>
Jack E. Rosenfeld resigned as President and Chief Executive Officer and
as a Director effective December 30, 1995. Alan G. Quasha, the Company's
Chairman of the Board, served as acting President and Chief Executive Officer
from January 1, 1996 until March 7, 1996.
- ---------------
(a) All references to dates and positions held by such executive officers prior
to September 1993 refer to the Company's predecessor, The Horn & Hardart
Company ("H&H"). H&H merged with and into the Company in September 1993,
with the Company surviving.
Pursuant to the Company's By-Laws, its officers are chosen annually by the Board
of Directors and hold office until their respective successors are chosen and
qualified.
56
<PAGE> 57
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
57
<PAGE> 58
P A R T IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C> <C>
1. Report of Independent Public Accountants
Hanover Direct, Inc. and Subsidiaries Financial
Statements 26
Consolidated Balance Sheets as of December 31, 1994
and December 30, 1995 27
Consolidated Statements of Income for the
three years ended December 30, 1995 29
Consolidated Statements of Cash Flows for the three
years ended December 30, 1995 30
Consolidated Statements of Shareholders' (Deficit)
Equity for the three years ended December 30, 1995 32
Notes to Consolidated Financial Statements 33
Supplementary Data:
Selected quarterly financial information (unaudited)
for the two fiscal years ended December 30, 1995 53
2. Index to Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 61
Schedules other than that listed above are omitted because
they are not applicable or the required information is shown
in the financial statements or notes thereto.
</TABLE>
58
<PAGE> 59
<TABLE>
<S> <C> <C> <C>
3. Exhibits
The exhibits required by Item 601 of Regulation S-K filed as
part of, or incorporated by reference in, this report are
listed in the accompanying Exhibit Index.
(b) Reports on Form 8-K
Current Report on Form 8-K dated September 30, 1995 reporting the
Company's third quarter financial results under Item 5 Other Events.
(c) Exhibits required by Item 601 of Regulation S-K.
See Exhibit Index.
(d) Financial Statement Schedules
See (a) 2. above.
</TABLE>
59
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HANOVER DIRECT, INC.
(registrant)
Date: March 29, 1996 By: s/Rakesh K. Kaul
------------------------
Rakesh K. Kaul, Director
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the date indicated below.
<TABLE>
<S> <C>
Principal Financial Officer:
s/Wayne P. Garten
----------------------------------
Wayne P. Garten
Executive Vice President and
Chief Financial Officer
Board of Directors:
s/Ralph Destino s/Edmund R. Manwell
---------------------------------- ----------------------------------
Ralph Destino, Director Edmund R. Manwell, Director
s/J. David Hakman s/Alan G. Quasha
---------------------------------- ----------------------------------
J. David Hakman, Director Alan G. Quasha, Director
s/S. Lee Kling s/Geraldine Stutz
---------------------------------- ----------------------------------
S. Lee Kling, Director Geraldine Stutz, Director
s/Theodore H. Kruttschnitt s/Jeffrey Laikind
---------------------------------- ----------------------------------
Theodore H. Kruttschnitt, Director Jeffrey Laikind, Director
s/Elizabeth Valk Long s/Robert F. Wright
---------------------------------- ----------------------------------
Elizabeth Valk Long, Director Robert F. Wright, Director
Date: March 29, 1996
</TABLE>
60
<PAGE> 61
Schedule II
HANOVER DIRECT
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31,1994 AND JANUARY 1,1994
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------------------
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- -----------------------------------------------------------------------------------------------------------------
1995:
- ----------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS RECEIVABLE, CURRENT $ 3,912,000 4,796,000 (4) 42,000 (1) 4,760,000 $ 3,990,000
RESERVES FOR
DISCONTINUED OPERATIONS 1,668,000 (2) 29,585 1,638,415
DEFERRED TAX ASSET
VALUATION ALLOWANCE 38,600,000 (7) 9,900,000 48,500,000
ALLOWANCE FOR NET UNREALIZED
LOSSES ON CONVERTIBLE
DEBT SECURITIES 1,000,000 1,000,000
1994:
- ----------------------------------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS RECEIVABLE, CURRENT 4,244,000 3,931,000 (1) 4,263,000 3,912,000
RESERVES FOR
DISCONTINUED OPERATIONS 2,558,000 (2) 890,000 1,668,000
DEFERRED TAX ASSET
VALUATION ALLOWANCE 49,700,000 (6) 11,100,000 38,600,000
ALLOWANCE FOR NET UNREALIZED
LOSSES ON CONVERTIBLE
DEBT SECURITIES 1,000,000 1,000,000
1993:
- ----------------------------------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS RECEIVABLE, CURRENT 6,386,000 3,676,000 (4) 134,000 (1) 5,952,000 4,244,000
RESERVES FOR
DISCONTINUED OPERATIONS 3,464,000 (2) 906,000 2,558,000
DEFERRED TAX ASSET
VALUATION ALLOWANCE 53,000,000 (5) 2,600,000 (3) 5,900,000 49,700,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Accounts written -off.
(2) Utilization of reserves.
(3) Utilization of valuation allowance.
(4) Represents acquired allowance for doubtful accounts receivable.
(5) Represents available NOL's and the effect of the increase in corporate tax
rates from 34% to 35%.
(6) Represents decrease due to: utilization of valuation allowance and
recognition of NOL's estimated to be utilized by future operating results.
(7) Represents the increase in the valuation allowance offset by an increase
in the gross deferred tax asset.
61
<PAGE> 62
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER
ITEM 601 OF DESCRIPTION OF DOCUMENT AND INCORPORATION PAGE
REGULATION S-K BY REFERENCE WHERE APPLICABLE NO.
- -------------- ----------------------------- ----
<S> <C> <C> <C>
2.1 Asset Purchase Agreement dated as of December 1, 1994
among the Company, LWI Holdings, Inc., Bankers Trust
Company, Leichtung, Inc. and DRI Industries, Inc.
Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
1994.
2.2 Stock Purchase Agreement dated as of February 16,
1995 among the Company, Hanover Holdings, Inc., Aegis
Safety Holdings, Inc., F.L. Holdings, Inc., Roland A.
E. Franklin, Martin E. Franklin, Jonathan Franklin,
Floyd Hall, Frederick Field, Homer G. Williams, Frank
Martucci, Norm Thompson Outfitters, Inc. and Capital
Consultants, Inc., (as agent)(collectively, the
"Aegis Sellers"). Incorporated by reference to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
2.3 Stock Purchase Agreement dated as of May 19, 1995 by
and among the Company, Austad Holdings, Inc. ("AHI"),
The Austad Company ("TAC"), David B. Austad ("DBA"),
Denise Austad ("DA"), David Austad, as custodian
("DBAC"), Oscar Austad, Dorothy Austad, Randall
Austad, Kristi Austad, Lori Miller, Robin Miller,
Kerri Derenge, Sharon Stahl, Lori Miller, as
custodian, Dorothy Austad, as attorney-in-fact, and
Kara Miller (collectively, the "Austad Individuals").
FILED HEREWITH.
2.4 Agreement and Plan of Corporate Separation and
Reorganization dated as of February 16, 1996 by and
among the Company, AHI, TAC, DBA, DBAC, and DA. FILED
HEREWITH.
</TABLE>
E-1
<PAGE> 63
<TABLE>
<S> <C> <C> <C>
3.1 Certificate of Incorporation. Incorporated by
reference to the Company's Annual Report on Form 10-K
for the year ended January 1, 1994.
3.2 Certificate of Amendment of the Company's Certificate
of Incorporation together with Certificate of
Designation of Series A Convertible Additional
Preferred Stock. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year
ended January 1, 1994.
3.3 By-laws. Incorporated by reference to the Company's
Registration Statement on Form S-4 filed on April 16,
1993, Registration No. 33-6152.
3.4 Certificate of Designation of Series B Convertible
Additional Preferred Stock of the Company.
Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
1994.
4.1 Indenture between the Company and First Trust
National Association, as Trustee ("Trustee"), dated
as of August 17, 1993. Incorporated by reference to
the Company's Annual Report on Form 10-K for the year
ended January 1, 1994.
4.2 First Supplement Indenture dated as of March 28, 1995
between the Company, the Guarantor Subsidiaries and
the Trustee. FILED HEREWITH.
4.3 Second Supplemental Indenture dated as of November
14, 1995 between the Company, the Guarantor
Subsidiaries and the Trustee. FILED HEREWITH.
4.4 Warrant Agreement dated as of October 25, 1991 ('NAR
Warrant") between the Company* and NAR Group Limited
("NAR") for 279,110 shares of Common Stock.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated October 25, 1991.
</TABLE>
E-2
<PAGE> 64
<TABLE>
<S> <C> <C> <C>
4.5 Registration Rights Agreement dated as of July 8,1991
among the Company*, NAR and Intercontinental Mining &
Resources Limited ("IMR"). Incorporated by reference
to the Company's* Current Report on Form 8-K Dated
July 10, 1991.
4.6 Warrant Agreement dated as of January 1, 1994 between
the Company and Sears Shop At Home Services, Inc.
("Sears"). Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994.
4.7 Registration Rights Agreement dated as of February
16, 1995 among the Company and the Aegis Sellers.
Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
1994.
4.8 Warrant Agreement dated as of July 8, 1991 between
the Company and IMR for 1,750,000 shares of Common
Stock. Incorporated by reference to the Company's
Current Report on Form 8-K dated July 10, 1991.
4.9 Warrant Agreement dated as of October 25, 1991
between the Company and NAR for 931,791 shares of
Common Stock. Incorporated by reference to the
Company's Current Report on Form 8-K dated October
25, 1991.
4.10 Second Amendment to Warrant Agreement and Warrant
Certificate for 931,791 shares of Common Stock
between the Company and NAR dated as of November 13,
1995. FILED HEREWITH.
4.11 First Amendment to Warrant Agreement and Warrant
Certificate for 1,750,000 shares of Common Stock
between the Company and IMR dated as of November 13,
1995. FILED HEREWITH.
4.12 First Amendment to Warrant Agreement and Warrant
Certificate for 279,110 shares of Common Stock
between the Company and NAR dated as of November 13,
1995. FILED HEREWITH.
</TABLE>
E-3
<PAGE> 65
<TABLE>
<S> <C> <C> <C>
10.1 Stock Option Plan, as amended. Incorporated by
reference to the Company's* Annual Report on Form
10-K for the fiscal year ended December 28, 1991.
10.2 Account Purchase Agreement dated as of December 21,
1992 among the Company*, Hanover Direct Pennsylvania,
Inc. ("HDPI"), Brawn of California, Inc. ("Brawn")
and General Electric Capital Corporation ("GECC").
Incorporated by reference to the Company's* Annual
Report on Form 10-K for the fiscal year ended
December 26, 1992.
10.3 Amendment No. 1 to the Account Purchase Agreement
dated as of July 12, 1993 among the Company*, HDPI,
Brawn, Gumps By Mail, Gump's, Gump's Holdings and
GECC. Incorporated by reference to the Company's*
Current Report on Form 8-K dated July 12, 1993.
10.4 Amendment No.2 to the Account Purchase Agreement
dated as of June 1, 1995 among the Company, HDPI,
Brawn, Gump's, Gump's By Mail, Gump's Holdings and
GECC. FILED HEREWITH.
10.5 Waiver and Amendment No. 3 to the Account Purchase
Agreement dated as of December 14, 1995 among the
Company, HDPI, Brawn, Gump's, Gump's By Mail,
Gump's Holdings and GECC. FILED HEREWITH.
10.6 Form of Stock Option Agreement between the Company*
and certain Directors of the Company, as amended.
Incorporated by reference to the Company's* Annual
Report on Form 10-K for the fiscal year ended
December 28, 1991.
10.7 Executive Employment Agreement dated as of October
25, 1991 among the Company* and Jack E. Rosenfeld.
Incorporated by reference to the Company's Current
Report on Form 8-K dated October 25, 1991.
</TABLE>
E-4
<PAGE> 66
<TABLE>
<S> <C> <C> <C>
10.8 Stock Option Agreement dated as of January 1, 1992
between the Company* and Jack E. Rosenfeld, as
amended. Incorporated by reference to the Company's*
Annual Report on Form 10-K for the fiscal year ended
December 26, 1992.
10.9 Registration Rights Agreement dated as of October 25,
1991 between the Company* and Jack E. Rosenfeld.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated October 25, 1991.
10.10 Employment Agreement dated as of October 14, 1991
between the Company* and Michael P. Sherman.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated October 25, 1991.
10.11 Amendment No. 1 to the Employment Agreement dated as
of June 18, 1993 between the Company and Michael P.
Sherman. Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended January
1, 1994.
10.12 Registration Rights Agreement dated as of October 14,
1991 between the Company* and Michael P. Sherman.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated October 25, 1991.
10.13 Employment Agreement dated as of October 14, 1991,
between the Company* and Wayne P. Garten.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated October 25, 1991.
10.14 Amendment No. 1 to the Employment Agreement dated as
of June 18, 1993 between the Company and Wayne P.
Garten. Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended January
1, 1994.
</TABLE>
E-5
<PAGE> 67
<TABLE>
<S> <C> <C> <C>
10.15 Registration Rights Agreement dated as of October 14,
1991 between the Company* and Wayne P. Garten.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated October 25, 1991.
10.16 Form of Indemnification Agreement among the Company*
and each of the Company's directors and executive
officers. Incorporated by reference to the Company's*
Current Report on Form 8-K dated October 25, 1991.
10.17 Letter Agreement dated May 5, 1989 among the
Company*, Theodore H. Kruttschnitt, J. David Hakman
and Edmund R. Manwell. Incorporated by reference to
the Company's* Current Report on Form 8-K dated May
10, 1989.
10.18 Hanover Direct, Inc. Savings Plan as amended.
Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended January 1,
1994.
10.19 Restricted Stock Award Plan. Incorporated by
reference to the Company's* Registration Statement on
Form S-8 filed on February 24, 1993, Registration No.
33-58760.
10.20 All Employee Equity Investment Plan. Incorporated by
reference to the Company's* Registration Statement on
Form S-8 filed on February 24, 1993, Registration No.
33-58756.
10.21 Executive Equity Incentive Plan. Incorporated by
reference to the Company's* Registration Statement on
Form S-8 filed on February 24, 1993, Registration No.
33-58758.
10.22 Form of Supplemental Retirement Plan. Incorporated by
reference to the Company's Annual Report on Form 10-K
for the year ended January 1, 1994.
</TABLE>
E-6
<PAGE> 68
<TABLE>
<S> <C> <C> <C>
10.23 License Agreement dated as of January 1, 1994 between
Hanover Ventures, Inc. and Sears. Incorporated by
reference to the Company's Current Report on Form 8-K
dated January 1, 1994.
10.24 Loan and Security Agreement dated as of November 14,
1995 by and among Congress Financial Corporation,
("Congress") Hanover Direct Pennsylvania, Inc., Brawn
of California, Inc., Gump's by Mail, Inc., Gump's
Corp., The Company Store, Inc., Tweeds, Inc., LWI
Holdings, Inc., Aegis Catalog Corporation, Hanover
Direct Virginia, Inc and Hanover Realty Inc. FILED
HEREWITH.
10.25 Subordination Agreement, dated as of November 14,
1995, among Congress, IMR and the Trustee. FILED
HEREWITH.
21.1 Subsidiaries of the Registrant. FILED HEREWITH.
23.1 Consent of Independent Public Accountants. FILED
HEREWITH.
27.1 Financial Data Schedule. FILED HEREWITH.**
</TABLE>
- -------------
* Hanover Direct, Inc., a Delaware corporation, is the successor by
merger to The Horn & Hardart Company and The Hanover Companies.
** EDGAR filing only.
E-7
<PAGE> 1
Exhibit 2.3
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT dated as of May 19, 1995 (this "Agreement"),
by and among The Austad Company, a South Dakota corporation ("Austad"); Hanover
Direct, Inc., a Delaware corporation (the "Buyer"); David Austad, President and
a majority shareholder of Austad, individually and as custodian for other
individuals as set forth on the signatory pages hereof; Denise Austad, also a
shareholder of Austad (together with David Austad, both in his individual and
custodial capacities, the "David Austad Group"); Austad Holdings, Inc., a
Delaware corporation (the "Company") formed by Austad; and certain other
individuals who are either signatories hereto or whose custodian is executing on
their behalf (the "Former Stockholders," and together with the members of the
David Austad Group, the "Individuals").
W I T N E S S E T H:
WHEREAS, Austad engages in the direct marketing of golf equipment,
supplies, apparel and related goods and services through its Austad's catalog,
and operates four retail stores offering the same or similar goods and services
(the "Stores");
WHEREAS, pursuant to that certain stock redemption agreement dated
April 29, 1995 to which the Former Stockholders and Austad are parties (the
"Stock Redemption Agreement") Austad has redeemed all the shares of the capital
stock of Austad owned by the Former Stockholders (such transactions being
hereinafter referred to collectively as the "Redemption"), in exchange for
certain promissory notes of Austad which are currently outstanding (the
"Redemption Notes");
WHEREAS, the members of the David Austad Group are the owners, in the
aggregate, of all the outstanding shares of the capital stock of Austad;
WHEREAS, the Company desires to purchase from the members of the David
Austad Group all the outstanding shares of capital stock of Austad and in
exchange therefor to issue and sell to the members of the David Austad Group, in
the aggregate, 32,500 shares of the Common Stock of the Company, $1.00 par value
(the "Common Stock"), which will represent, in the aggregate, 32.5% of the
issued and outstanding shares of the Common Stock (collectively, the "David
Austad Group Shares"), all upon the terms and subject to the conditions set
forth in that certain stock purchase agreement to be entered into between the
Company and the members of the David Austad Group (the "David Austad Group
Acquisition");
WHEREAS, the Company desires to issue and sell to the Buyer, and the
Buyer desires to acquire from the Company, simultaneously with the David Austad
Group Acquisition, 67,500 shares of the Common Stock, which will represent 67.5%
of the issued and outstanding shares of the Common Stock (collectively, the
"Buyer Shares"), for an aggregate cash purchase price of $1,800,000, all upon
the terms and subject to the conditions set forth in this Agreement (the "Buyer
Acquisition");
<PAGE> 2
WHEREAS, upon the satisfaction of certain financial goals during the
1995 fiscal year of the Company and Austad, the Buyer has agreed to make an
additional capital contribution to the Company in an amount determined as set
forth in Section 1.04 below;
WHEREAS, upon consummation of the David Austad Group Acquisition and
the Buyer Acquisition, the Company, Austad and the Buyer or a wholly owned
subsidiary of the Buyer will enter into loan agreements substantially in the
forms set forth in Exhibits A and B, with such additions and changes as shall be
agreed upon by the parties (collectively, the "Loan Agreements"), pursuant to
which the Buyer will lend Austad the sums of (a) $2,200,000 (the "Subordinated
Term Loan"), and (b) a further $400,000 to be secured by a second mortgage (the
"Second Mortgage") on Austad's office and warehouse facility in Sioux Falls,
South Dakota (the "Second Mortgage Loan," and collectively with the Subordinated
Term Loan, the "Loans"), all pursuant to the terms and conditions thereof;
WHEREAS, upon the consummation of the David Austad Group Acquisition
and the Buyer Acquisition and the provision of the Loans pursuant to the Loan
Agreements, Austad will repay $1,500,000 of its existing indebtedness to First
National Bank of Omaha, N.A. ("FNBO") under the Revolving Loan Agreement dated
March 31, 1993 between Austad and FNBO, as amended (the "Revolving Loan
Agreement"), in consideration of the extension of the Loan Termination Date
under the Revolving Loan Agreement to a date no earlier than May 31, 1997, and
will repay $400,000 of its existing indebtedness to Valley Bank ("Valley") under
the Mortgage dated March 15, 1993 between Austad and Valley (the "Valley
Mortgage"), in consideration of Valley's release of certain personal guarantees
of David Austad and of Randall Austad, a Former Stockholder, outstanding in
favor of Valley and, if required, Valley's consent to the Second Mortgage;
WHEREAS, upon the consummation of the David Austad Group Acquisition
and the Buyer Acquisition and the provision of the Loans pursuant to the Loan
Agreements, Austad will also repay to certain Individuals notes payable in the
aggregate amount of $767.878.32 outstanding at December 31, 1994 plus accrued
interest through the Closing Date, and will pay to the respective members of the
David Austad Group outstanding cash dividends, declared but as yet unpaid, in
the aggregate amount of $600,000;
WHEREAS, upon the consummation of the David Austad Group Acquisition
and the Buyer Acquisition,
(a) the members of the David Austad Group and the Buyer will
become parties to a stockholders' agreement (the "Stockholders'
Agreement"), and David Austad and the Company will become parties to a
license agreement relating to new Stores to be developed by David
Austad (the "License Agreement");
(b) the Company and the Buyer will enter into a cost sharing
and reimbursement agreement (the "Reimbursement Agreement"), respecting
cost allocations, cost reimbursements and related issues; and
2
<PAGE> 3
(c) the Company and each of the Former Stockholders other than
Oscar Austad, Dorothy Austad and Randall Austad will enter into a
warrant agreement respecting those parties' rights to acquire certain
shares of the Company's Common Stock (the "Warrant Agreements");
(d) the Buyer and each of David Austad and Randall Austad will
enter into an indemnification agreement respecting certain potential
liabilities (the "Indemnification Agreements");
such agreements to be substantially in the respective forms set forth in
Exhibits C through G hereto, with such additions and changes as shall be agreed
upon by the respective parties (together with the Loan Agreements, the "Other
Agreements"; the transactions contemplated by the Other Agreements, together
with the David Austad Group Acquisition and the Buyer Acquisition, being
referred to as the "Transactions");
NOW, THEREFORE, in reliance upon the representations, warranties and
agreements made herein and in consideration of the premises and mutual promises
herein contained, the parties agree as follows:
ARTICLE I
TERMS OF THE BUYER ACQUISITION
SECTION 1.01. SALE AND PURCHASE OF THE BUYER SHARES. On
the Closing Date (as defined in Section 1.05), and simultaneously with the David
Austad Group Acquisition, the Company shall issue, sell, transfer and deliver to
the Buyer the Buyer Shares by delivering to the Buyer, against payment therefor
as provided in Section 1.02, certificates for the Buyer Shares together with
funds sufficient for the payment of all transfer taxes, if any.
SECTION 1.02. PURCHASE PRICE. The Buyer Shares shall be sold by
the Company and shall be purchased by the Buyer for an aggregate purchase price
of $1,800,000 (the "Purchase Price"). The Purchase Price shall be paid to the
Company against delivery of the certificates representing the Buyer Shares as
provided in Section 1.01, on the Closing Date, by wire transfer of immediately
available funds to an account designated by the Company at least two business
days before the Closing Date.
SECTION 1.03. CERTAIN EXPENSES. At the Closing (as defined in
Section 1.05), the Company may pay up to 75% of the balance of the fee payable
to Mesirow Financial, Inc. ("Mesirow") pursuant to a certain investment banking
agreement among Austad, the Individuals and Mesirow, but not more than $56,250.
Except as otherwise set forth below, neither Austad nor the Company, however,
shall pay or be liable for or be required to pay any of the following
liabilities, fees or expenses related to the Transactions, all of which shall be
borne and paid for by the Individuals:
(a) fees and expenses, if any, of Mesirow in excess of such
amount, or of any person or entity other than Mesirow retained by the
Company, Austad
3
<PAGE> 4
and/or any Individual for financial services or services as a finder
rendered to any such party in connection with the Transactions;
(b) professional fees of counsel and any accountant or auditor
for the Company, Austad or any of the Individuals for services rendered
to any of such parties, or out-of-pocket disbursements and other
expenses of any of such parties or professionals, any of their counsel
or accountants, incurred in connection with the Transactions, including
the expenses of the Company or Austad in connection with the
preparation of the Balance Sheet; provided, that the Company shall be
responsible for 80% of the professional fees payable to Lynn, Jackson,
Shultz & Lebrun, P.C. and to Coopers & Lybrand, L.L.P. (the "Auditors")
related to the Transactions and the Individuals shall pay the remaining
20% of such fees, such fees being estimated by the parties not to
exceed $85,000 in the aggregate;
(c) documentary stamp taxes or other similar charges, taxes or
expenses incurred by the Company in connection with the transfer of the
Buyer Shares to the Buyer;
(d) any income, capital gains or other taxes incurred by the
Company, Austad, any Individual, or any other person or entity as a
result of the Redemption or the Transactions; and
(e) any taxes of the Company or Austad not reflected in the
Balance Sheet, other than taxes incurred in the ordinary course of
business since the date of the Balance Sheet.
SECTION 1.04. ADDITIONAL CAPITAL CONTRIBUTION. Provided
certain financial targets are met during the 1995 fiscal year of the Company and
Austad, as set forth below, the Buyer agrees to make an additional capital
contribution (the "Additional Capital Contribution"), the amount (if any) to be
determined as follows:
(a) If 1995 EBIT (as defined in Section 1.04(c) below) shall be
at least equal to $1,200,000 but less than $1,500,000, the Additional
Capital Contribution shall be $700,000;
(b) If 1995 EBIT shall be at least equal to $1,500,000 but less
than $1,800,000, the Additional Capital Contribution shall be
$1,400,000; and
(c) If 1995 EBIT shall equal or exceed $1,800,000, the
Additional Capital Contribution shall be $2,200,000.
(d) For purposes of this Agreement, "1995 EBIT" shall mean the
pro forma earnings before interest and income taxes of the Company and
its subsidiaries for the twelve months ending on or about December 31,
1995, all in accordance with generally accepted accounting principles
consistently applied throughout the periods covered ("GAAP"), but
adjusted to exclude (i) any decrease in expenses for such period
(compared with Austad's projected 1995 Business Plan, a copy of which
is attached hereto as Exhibit
4
<PAGE> 5
H (the "Business Plan")) resulting from the activities of the Buyer and
its subsidiaries during such period on behalf of the Company and its
subsidiaries, (ii) any expenses, profits or losses incurred by the
Company or its subsidiaries in connection with the proposed opening in
Fall 1995 of a new Austad's retail store and (iii) subject to the
Buyer's reasonable review and approval, any costs incurred by the
Company or Austad in connection with the Transactions and not payable
by the Individuals pursuant to Section 1.03 above.
(e) The Additional Capital Contribution, if any, shall be paid
on or before April 30, 1996 (the "Payment Date"). At the Buyer's
option, payment shall be either in cash or as an offset against any
amount owed by Austad to the Buyer or any subsidiary of the Buyer and
outstanding on the Payment Date. The parties agree that the making of
the Additional Capital Contribution, if any, by the Buyer shall not
change the relative share ownership of the Buyer and the members of the
David Austad Group.
SECTION 1.05. THE CLOSING. The closing of the Transactions (the
"Closing") shall be held at the offices of Lynn, Jackson, Shultz & Lebrun, P.C.,
141 North Main Avenue, Sioux Falls, South Dakota or at such other place or
places as the parties may agree upon, at 10:00 A.M., local time, on May 19,
1995, or such other time and date as may be mutually approved by the parties in
writing, but not later than May 31, 1995 (the "Closing Date"). At the Closing,
(a) the appropriate parties will execute and deliver the Other
Agreements, and will deliver the instruments and documents required
hereby and thereby;
(b) the Company will purchase from the members of the David
Austad Group all the outstanding shares of capital stock of Austad and
in exchange therefor will issue and sell the David Austad Group Shares
to the respective members of such Group;
(c) the Buyer will purchase the Buyer Shares pursuant to this
Agreement and make or cause a subsidiary to make the Loans pursuant to
the Loan Agreements;
(d) Austad will make a payment of $1,500,000 to FNBO, in
reduction of principal and accrued interest as agreed upon between
Austad and FNBO, in consideration of which payment FNBO will execute
and deliver an agreement extending the Loan Termination Date applicable
under the Revolving Loan Agreement to a date not earlier than May 31,
1997 (the "FNBO Extension");
(e) Austad will make a payment of $400,000 to Valley, in
reduction of principal and accrued interest on the Valley Mortgage as
agreed upon between Austad and Valley, in consideration of which
payment Valley will execute and deliver a release and discharge of each
of the outstanding personal guarantees of David Austad and Randall
Austad in favor of Valley (the "Valley Releases"), and Austad will
execute and deliver the Second Mortgage to Buyer or its subsidiary;
(f) Austad will repay to certain Individuals notes payable
outstanding at December 31, 1994 in the aggregate amount of $767,878.32
plus accrued interest through the Closing Date, as set forth in
Schedule 1.05;
5
<PAGE> 6
(g) Austad will pay to the members of the David Austad Group
outstanding cash dividends in the aggregate amount of $600,000 declared
on April 28, 1995, as set forth in Schedule 1.05; and
(h) Austad will pay to the Former Stockholders the amount of
their Redemption Notes outstanding pursuant to the Redemption
Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE
COMPANY, AUSTAD AND THE INDIVIDUALS
The Company, Austad, the members of the David Austad Group and
the Former Stockholders represent and warrant, jointly and severally (but Denise
Austad and the Former Stockholders only to the best of their knowledge), that:
SECTION 2.01. THE COMPANY AND AUSTAD--ORGANIZATION AND
AUTHORITY. The Company and Austad are corporations duly organized and validly
existing and in good standing under the laws of the States of Delaware and South
Dakota, respectively. Set forth in Schedule 2.01 is a list of jurisdictions in
which each of the Company and Austad is qualified to do business. Except as set
forth in Schedule 2.01, each of the Company and Austad is duly qualified and in
good standing in each jurisdiction in which (i) the nature of the business
conducted by it or the character or location of the properties owned or leased
by it makes such qualification necessary and (ii) failure so to qualify would,
if not remedied, materially impair title to its properties or its rights to
enforce contracts against others or expose it to substantial liability in such
jurisdictions. Each of the Company and Austad has all necessary corporate power
and authority to own all of its properties and assets and to carry on its
businesses as now conducted.
SECTION 2.02. COMPANY AND AUSTAD CAPITALIZATION. The Company
has an authorized capital of 200,000 shares of Common Stock, $1.00 par value, of
which no shares are issued and outstanding, and no shares are held in the
treasury of the Company. Austad has an authorized capital of 500,000 shares of
capital stock, $1.00 par value, of which 14,569 shares are issued and
outstanding, all of which are owned by the members of the David Austad Group,
and 30,248 shares are held in the treasury of Austad, in consequence of the
Redemption, it being Austad's intent that such treasury shares will be cancelled
on or about the Closing Date. Upon issuance and payment therefor in accordance
with this Agreement, each of the Buyer Shares and the David Austad Group Shares
will be duly authorized and validly issued, fully paid and non-assessable and
issued by the Company in compliance with all applicable Federal and state
securities laws, rules and regulations. Except for the warrants to be issued
pursuant to the Warrant Agreements, there are no outstanding options, warrants,
convertible securities or other rights to subscribe for or purchase any
securities of the Company or Austad.
SECTION 2.03. SUBSIDIARIES. There are no corporations with
respect to which the Company beneficially owns, directly or indirectly, in
excess of 50% of the outstanding stock or other equity interests, the holders of
which are entitled to vote for election of a majority of the board of directors
or other governing body (hereinafter such an entity being sometimes referred to
as a "Subsidiary"). On the Closing Date, upon consummation of the David Austad
Group
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Acquisition, Austad will become the Company's sole Subsidiary. Set forth in
Schedule 2.03 is a list (including the capitalization thereof) of each
partnership and joint venture agreement or arrangement (the "Joint Ventures") to
which the Company or Austad is a party. Also set forth in Schedule 2.03 is a
list of the corporations or entities with respect to which the Company
beneficially owns, directly or indirectly, in excess of 5% of the outstanding
stock or other equity interests, the holders of which are entitled to vote for
election of a majority of the board of directors or other governing body.
SECTION 2.04. FINANCIAL STATEMENTS; NO COMPANY ACTIVITIES OR
OPERATIONS.
(a) Austad has furnished the Buyer with copies, certified by
the chief financial officer of Austad, of the audited financial
statements of Austad for each of the two fiscal years ended December
31, 1993 and 1992, including in each case a balance sheet, the related
statements of income and of changes in financial position for the
period then ended, the accompanying notes and the reports thereon of
the Auditors, all such reports being unqualified. Austad has also
furnished the Buyer with copies, certified by the chief financial
officer of Austad, of the unaudited financial statements of Austad for
the fiscal year ended December 31, 1994, including a balance sheet, the
related statements of income and of changes in financial position for
the period then ended. The unaudited balance sheet of Austad as of
December 31, 1994, a copy of which is attached hereto as Exhibit I, is
herein referred to as the "Balance Sheet." All such financial
statements (i) are correct and complete and have been prepared in
accordance with the books and records of Austad, (ii) have been
prepared in accordance with GAAP, (iii) reflect and provide adequate
reserves in respect of all known liabilities of Austad in accordance
with GAAP, including all known contingent liabilities as of their
respective dates and (iv) present fairly the financial condition of
Austad at such dates and the results of its operations for the periods
then ended.
(b) The Company was formed on May 12, 1995 and except as
referred to in, or contemplated by, this Agreement, the Company has not
engaged in any activities or incurred any liabilities.
SECTION 2.05. REAL PROPERTY. (a) Except as identified and
described in Schedule 2.05, Austad does not own, have legal or equitable title
in, or have a leasehold interest in any real property.
(b) Austad has good and marketable title in fee simple to the
land described as owned by Austad in Part A of Schedule 2.05 (the "Owned
Realty") and to all plants, buildings and improvements thereon, free and clear
of any mortgage, lien, claim, charge, exception, imperfection of title,
easement, or encumbrance (collectively "Encumbrances"), except for those
Encumbrances (i) which are described in Part A of Schedule 2.05, (ii) which
relate to imperfections of title or easements with respect to the properties
identified in Part B of Schedule 2.05, or (iii) which, individually or in the
aggregate, are not material in character, amount or extent and do not materially
adversely affect the title to, or the present use of, the property subject
thereto or affected thereby or otherwise materially impair the business
operations of
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Austad. True and complete copies of (i) all mortgages, pledge agreements and
similar documents and agreements relating to the Owned Realty and all loan
agreements and other instruments of indebtedness secured thereby or relating
thereto (collectively, the "Mortgages") and (ii) all deeds, title insurance
policies and surveys relating to Austad's ownership of such Owned Realty, as the
same may exist, have been delivered to the Buyer.
(c) Austad has a valid leasehold interest in the real property
described as leased by Austad in Part C of Schedule 2.05 (the "Leased Realty").
True and complete copies of all leases, agreements and instruments (the
"Leases") respecting the Leased Realty have been delivered to the Buyer.
(d) With respect to the Leases and Mortgages referred to in
Schedule 2.05, no default or event of default on the part of Austad as lessee or
mortgagor or, to the knowledge of the Individuals or any officer of Austad, no
default or event of default on the part of the lessor or mortgagee, under the
provisions of any of said Leases or Mortgages, and no event which with the
giving of notice or passage of time, or both, would constitute such default or
event of default on the part of Austad or, to the knowledge of any Individual or
any officer of Austad, on the part of any such lessor or mortgagee, has occurred
and is continuing unremedied or unwaived.
(e) The buildings and improvements owned or leased by Austad,
and the operation or maintenance thereof as now operated and maintained, do not
(i) contravene any zoning or building law or ordinance or administrative
regulation or (ii) violate any restrictive covenant or any provision of
Federal, state or local law, the effect of which materially interferes with or
prevents the continued use of such properties for the purposes for which they
are now being used, or would materially affect the value thereof. All of the
plants, buildings and structures owned or leased by Austad are in good operating
condition and in a state of reasonable maintenance and repair to the extent
necessary for the efficient operation of the business of Austad.
(f) Except as set forth in Schedule 2.05 there exists no
pending or, to the knowledge of the Individuals or any officer of Austad,
threatened condemnation, eminent domain or similar proceeding with respect to,
or which could affect, any Owned Realty, Leased Realty or buildings or
improvements thereon by the Company or Austad.
SECTION 2.06. PERSONAL PROPERTY; ACCOUNTS RECEIVABLE.
(a) Except as set forth in Schedule 2.06, Austad has good and
marketable title to all personal property reflected in the Balance Sheet and all
personal property acquired by Austad since the date of the Balance Sheet (except
such personal property as has been disposed of in the ordinary course of the
business of Austad), free and clear of any Encumbrance, except for those, if
any, which in the aggregate are not material and which do not materially affect
the continued use of such personal property or the continued operation of the
business of Austad as now conducted.
(b) Except for items disposed of in the ordinary course of
business since the date of the Balance Sheet, all machinery, tools, equipment
and other tangible assets (i) reflected
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<PAGE> 9
in the Balance Sheet (other than inventories), (ii) leased by Austad or (iii)
acquired by Austad since the date of the Balance Sheet, currently are used,
useable by or useful to Austad in the ordinary course of its business and in the
manufacture of its products, and are in good operating condition and in a state
of reasonable maintenance and repair.
(c) The inventories reflected in the Balance Sheet were on
the date thereof in good condition; such inventories, and any inventories
acquired by Austad after the date of the Balance Sheet to the extent not sold or
otherwise disposed of in the ordinary course of business, are in good condition,
are used, useable by or useful to Austad in the ordinary course of its business
and in the manufacture of its products, and, except as set forth in Schedule
2.06, are not in excess of reasonable requirements for the next six months.
Except as set forth in such Schedule, no material item of inventory reflected in
the Balance Sheet was valued in excess of the lower of cost (on a first-in,
first-out basis) or market value. The finished goods produced by Austad conform
to customary trade standards for marketable goods.
(d) Except as indicated in the Balance Sheet or in Schedule
2.06, the accounts receivable reflected on the Balance Sheet, or acquired by
Austad after the date of the Balance Sheet, have been collected or are (or will
be) collectible within 120 days following the Closing Date in amounts not less
than the aggregate amount recorded on the Balance Sheet, in the case of
receivables reflected in the Balance Sheet, or not less than the aggregate
amount recorded on the books of Austad, in the case of receivables acquired
after the date of the Balance Sheet. Any payment on the accounts receivable made
by any obligor thereon shall be applied first to the accounts receivable of such
obligor outstanding for the longest period of time, unless such obligor shall
have directed that the payment be applied to a specific receivable.
SECTION 2.07. PERSONNEL; ETC. (a) Set forth in Schedule 2.07 is
a correct and complete list of:
(i) all contracts or agreements with directors, officers or
employees, or consulting agreements, to which Austad is a party or is
subject, provided that no such contracts or agreements need be listed
in Schedule 2.07 if all such contracts and agreements, in the
aggregate, involve a sum not in excess of $2,000; and provided further,
that oral agreements entered into in the ordinary course of Austad's
business with employees respecting their employment by Austad on an
at-will basis at an annual salary of less than $30,000 need not be
listed;
(ii) all group insurance programs in effect for employees of
Austad;
(iii) the officers of Austad specifying their respective
office;
(iv) the directors of Austad;
(v) the name of each bank with which the Company or Austad
has an account or safe deposit box, the identifying numbers or symbols
thereof and the name of each person authorized to draw thereon or to
have access thereto; and
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(vi) the name of each person, if any, holding tax or other
powers of attorney from the Company or Austad and a summary statement
of the terms thereof.
(b) Austad is not in default under any agreement or
contract listed in Schedule 2.07, and all such agreements and contracts are
legally valid and binding on Austad and are in full force and effect.
(c) A list of (i) all employees and consultants of Austad,
including the title or job classification of each such person, and (ii) the
names, positions and current salary rates of the 25 highest-paid employees of
Austad has been provided to the Buyer.
SECTION 2.08. ERISA.
(a) Set forth in Schedule 2.08 is a correct and complete
list of each employee benefit plan within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended and the rules and
regulations issued thereunder (collectively "ERISA") and other profit-sharing,
deferred compensation, bonus, stock option, stock purchase and employee benefit
plans or arrangements maintained or contributed to by or on behalf of Austad
with respect to employees of Austad at any time on or after September 2, 1974,
or to which Austad contributes or is required to contribute for its employees
(collectively, the "Plans"). Each Plan (a "Tax-Qualified Plan") intended to be
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code") is identified as a Tax-Qualified Plan in such Schedule 2.08 and is
so qualified.
(b) Austad has heretofore delivered to the Buyer true and
correct copies of the following:
(i) each Plan listed in Schedule 2.08 and all amendments
thereto to the date hereof;
(ii) each trust agreement and annuity contract (or any other
funding instruments) pertaining to any Plan, including all amendments
to such documents to the date hereof;
(iii) the most recent determination letter issued by the
Internal Revenue Service (the "IRS") with respect to each of the
Tax-Qualified Plans;
(iv) the three most recent actuarial valuation reports for
each Plan for which an actuarial valuation report is required to be
prepared; and
(v) the two most recent Annual Reports (IRS Forms 5500
series), including Schedules A and B and plan audits, if applicable,
required to be filed with respect to each Plan.
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(c) Each Plan is legally valid and binding and, except for
Plans listed in Schedule 2.08 as having been terminated, shall be maintained in
full force and effect through the Closing Date. The status of each Plan is set
forth in Schedule 2.08, including (i) the amount of Austad's contribution to
such Plan for each of the past three fiscal years and the plan year in which the
Closing Date occurs, (ii) the amount of any liability of Austad for payments or
contributions past due with respect to such Plan as of the last day of its most
recent plan year and as of the end of any subsequent month ending prior to the
Closing Date, and the date any such amounts were paid, (iii) any contribution to
such Plan in a form other than in cash and (iv) whether such Plan has been
terminated. Except as set forth in Schedule 2.08, neither the Company nor Austad
has any obligations or liabilities with respect to any Plan or liabilities
relating to any Plan under any collective bargaining agreement to which it is a
party or by which it is bound.
(d) Each Tax-Qualified Plan and any related trust agreements or
annuity contracts (and any other funding instruments) currently comply, and have
complied in the past, both as to form and operation, including compliance with
all reporting and disclosure requirements, with the provisions of ERISA and the
Code, as well as the provisions of any applicable collective bargaining
agreement. The IRS has issued a favorable determination letter with respect to
the qualification under Sections 401(a) and 501(a) of the Code of each
Tax-Qualified Plan and related trust, if any, and has not taken any action to
revoke such letters. In addition, all necessary governmental approvals for the
Tax-Qualified Plans have been obtained.
(e) With respect to each Tax-Qualified Plan that is subject to
Title I, Subtitle B, Part 3 of ERISA (a "Pension Plan"), Schedule 2.08 sets
forth as of the last day of the plan year (i) the actuarial present value (based
upon the same actuarial assumptions as those heretofore used for funding
purposes) of all vested and nonvested accrued benefits (whether on account of
retirement, termination, death, or disability) under such Pension Plan (computed
on the basis of an ongoing plan and without any assumption that nonvested
accrued benefits have become nonforfeitable), (ii) if such Pension Plan uses a
benefit accrual formula having reference to final earnings, the actuarial
present value of the benefits under such Pension Plan as calculated in (i), but
based upon projected earnings increases of five percent per annum, (iii) the
actuarial present value (based upon the same actuarial assumptions, other than
turnover assumptions, as those heretofore used for funding purposes) of vested
benefits under such Pension Plan (computed on the basis of an ongoing plan),
(iv) the net fair market value of the assets held to fund such Pension Plan and
(v) the funding method used in connection with such Pension Plan.
(f) With respect to all Pension Plans, except as set forth in
Schedule 2.08, (i) Austad has paid all premiums (and interest charges and
penalties for late payment, if applicable) due the Pension Benefit Guaranty
Corporation ("PBGC") with respect to each plan year thereof for which such
premiums are required; (ii) on and after September 2, 1974, there has been no
"reportable event" (as defined in Section 4043(b) of ERISA and the regulations
of the PBGC under that Section) subject to Title IV of ERISA; (iii) no liability
to the PBGC has been incurred by the Company, Austad or any corporation or other
trade or business under common control with the Company or Austad (as determined
under Section 414(b) and (c) of the Code) ("Common Control Entity") on account
of any termination subject to Title IV of ERISA; (iv) on
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and after September 2, 1974, no filing has been made by the Company or Austad or
any Common Control Entity with the PBGC, and no proceeding has been commenced by
the PBGC, to termination any Pension Plan subject to Title IV of ERISA
maintained, or wholly or partially funded, by the Company or Austad or any
Common Control Entity; (v) neither the Company nor Austad nor any Common Control
Entity has (A) ceased operations at a facility so as to become subject to the
provisions of Section 4062(f) of ERISA, (B) withdrawn as a substantial employer
so as to become subject to the provisions of Section 4063 of ERISA, (C) ceased
making contributions on or before the Closing Date so as to become subject to
Section 4064(a) of ERISA to which the Company or Austad or any Common Control
Entity made contributions during the five years prior to the Closing Date, or
(D) made a complete or partial withdrawal from a "Multiemployer Plan" (as
defined in Section 3(37) of ERISA) so as to incur withdrawal liability as
defined in Section 4201 of ERISA (without regard to a subsequent reduction or
waiver of such liability under Sections 4207 or 4208 of ERISA); and (vi) future
compliance with the requirements of ERISA as in effect on the Closing Date or
any collective bargaining agreements to which the Company or Austad is a party
will not result in any increase in the rate of benefit accrual.
(g) In addition, with respect to all Plans, except as set forth
in Schedule 2.08, (i) other than routine claims for benefits, there are no
material actions, suits or claims pending or threatened against any Plan or the
fiduciaries thereof, or against the assets of any Plan and (ii) on and after
January 1, 1975, neither the Company nor Austad nor, to the knowledge of the
Individuals, any plan fiduciary of any Plan has engaged in any prohibited
transaction within the meaning of Title I of ERISA or Section 4975 of the Code
and no imposition of excise tax penalties has occurred with respect thereto.
SECTION 2.09. COMPLIANCE WITH LAW; PERMITS.
(a) Except as set forth in Schedule 2.09, the Company and
Austad have complied with all applicable statutes, regulations, orders and
restrictions of the United States of America, all states, possessions and
municipalities thereof, and all agencies and instrumentalities of the foregoing,
the failure to comply with which could result in any liability, penalty or
disability material to the conduct of the business of the Company or Austad or
the ownership or operation by Austad of its properties.
(b) Except as set forth in Schedule 2.09, the operations,
practices, policies and procedures of the Company, Austad and their employees
have been conducted and will be conducted in compliance with, and have not and
will not give rise to any loss, liability, damage, costs or expenses under, all
applicable Federal, state and local laws, orders, regulations, directives and
restrictions concerning protection of the environment, the disposal of
hazardous, toxic or industrial chemicals, substances or wastes and health and
safety, including the following statutes and all orders, rules, regulations,
directives and restrictions issued thereunder or promulgated in connection
therewith:
(i) the Clean Air Act, as amended;
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(ii) the Federal Water Pollution Control Act, as amended;
(iii) the Resource Conservation and Recovery Act of 1976, as
amended;
(iv) the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended;
(v) the Toxic Substances Control Act, as amended;
(vi) the Surface Mining Control and Reclamation Act of
1977, as amended;
(vii) the Mine Safety and Health Act of 1977, as amended;
(viii) the Occupational Safety and Health Act, as amended
("OSHA"); and
(ix) any applicable state or local environmental statutes,
including, without limitation, those of the states of
Illinois, Minnesota and South Dakota.
(c) Except as set forth in Schedule 2.09, Austad has all
permits, licenses, authorizations and bonds necessary to the conduct of its
business operations as presently conducted (collectively, the "Permits"). All
such Permits are listed in Schedule 2.09 and, except as noted in Schedule 2.09,
are currently valid and in full force and effect, and there are no material
violations or breaches of or exceptions to any such Permits.
(d) Except as set forth in Schedule 2.09, there are, under
applicable Federal, state and local laws, orders, regulations, directives and
restrictions concerning protection of the environment and health and safety, no
outstanding notices of violations or consent orders to which the Company or
Austad, or any of its or their properties, are subject or may become subject.
Austad has set aside adequate capital reserves to fund all pending and
threatened notices of violations, all as reflected on the Balance Sheet.
(e) Austad has furnished the Buyer with (i) copies of all
reports or other documents in Austad's files concerning Austad or its employees
made by Austad during the past five years (A) pursuant to Title VII of the Civil
Rights Act of 1964, as amended, (B) pursuant to OSHA, (C) pursuant to workers'
compensation statutes, and (D) pursuant to the National Labor Relations Act, as
amended, and copies or complete and accurate summaries of all notices, orders or
other documents or correspondence notifying or indicating to Austad that any of
its buildings or improvements or the operation or maintenance thereof as now
maintained and operated contravene any zoning or building law or ordinance or
other administrative regulation or violate any restrictive covenant or any
provision of Federal, state or local law.
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SECTION 2.10. LITIGATION.
(a) Except as set forth in Schedule 2.10 there is no (i)
action, suit, claim, proceeding or investigation pending or, to the knowledge of
the Individuals or any Austad officer, threatened against or affecting the
Company or Austad or its or their assets or properties, at law or in equity, or
before or by any Federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign which
is individually for an amount in excess of $1,000, (ii) arbitration proceedings
relating to the Company or Austad or their respective assets or properties or
(iii) governmental inquiries pending or, to the knowledge of the Individuals or
any Austad officer, threatened relating to or involving the Company, Austad,
their respective assets, the properties or business of Austad, or the
Transactions (including inquiries as to the qualification of the Company or
Austad to hold or receive any Permit).
(b) Except as set forth in Schedule 2.10, neither the Company
nor Austad has received any opinion or memorandum or legal advice or notice from
legal counsel to the effect that it is exposed, from a legal standpoint, to any
liability or disadvantage which may be material to its business. Neither the
Company nor Austad is in default with respect to any order, writ, injunction or
decree known to or served upon the Company or Austad of any court or of any
Federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign. There is no pending
action or suit brought by the Company or Austad against others. Neither the
Individuals nor any Austad officer knows of any violation of the Federal or
state antitrust laws by the Company or Austad; there has not been any claim
received by the Company or Austad of violation of the Federal or state antitrust
laws by the Company or Austad, and, so far as is known to the Individuals or any
Austad officer, no basis for any such claim exists.
SECTION 2.11. INTELLECTUAL PROPERTY. Set forth in Schedule 2.11 is a
list and brief description or identification of (i) all patents, patent rights,
patent applications, trademarks, trademark applications, trade names and
copyrights licensed to, applied for, used by, owned by, or registered in the
name of, the Company or Austad, or in which the Company or Austad has any
rights, and (ii) all manufacturing methods or processes, designs, technical
data, product development data, research data, know-how, secret processes,
market reports, consumer investigations, product surveys, distribution methods
and customer lists and trade secrets, computer and electronic data processing
programs and software processes and other proprietary and intellectual property,
rights and interests that Austad uses and believes are not within the general
knowledge of the industry and in each case a brief description of the nature of
such rights (the assets described in clauses (i) and (ii), collectively,
hereinafter are referred to as "Intellectual Property"). Except as set forth in
Schedule 2.11, Austad is not a licensor in respect of any Intellectual Property.
Austad owns or possesses adequate licenses or other rights to use all
Intellectual Property necessary to permit Austad to conduct its business as now
operated. No claim is pending or, to the knowledge of any Individual or any
officer of Austad, threatened to the effect that the present or past operations
of Austad infringe upon or conflict with the asserted rights of any other person
in respect of any Intellectual Property, and except only as set forth in
Schedule 2.11 no claim is pending or threatened to the effect that any of such
Intellectual
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Property is invalid or unenforceable. No contract, agreement or understanding
with any party exists which would impede or prevent the continued use by Austad
of the entire right, title and interest of Austad in and to the Intellectual
Property.
SECTION 2.12. MATERIAL CONTRACTS. Austad has delivered to the
Buyer true copies of all written contracts, obligations and commitments of the
Company and Austad now in effect to which the Company or Austad is a party or by
which it or its property may be bound, under which the total obligation of the
Company or Austad is in excess of $5,000 (other than purchase orders by Austad
which have been entered into in the ordinary course of business), all of which
are described or otherwise referred to in Schedule 2.12 (the "Material
Contracts"). No default, alleged default or anticipatory breach exists on the
part of the Company or Austad or, to the knowledge of the Individuals or any
Austad officer, on the part of any other party, under any Material Contract, and
there are no material agreements of the parties relating to such Material
Contracts which have not been disclosed to the Buyer. Neither the Company nor
Austad is a party to any written or oral contract which could materially
adversely affect the business of the Company or Austad. Except as set forth in
Schedule 2.12, neither the Company nor Austad is a party to any written or oral:
(a) contract not made in the ordinary course of business, other
than this Agreement and the Other Agreements;
(b) employment or consulting contract which is not terminable
without cost or other liability to the Company, Austad or any successor
thereof, upon notice of 30 days or less, other than those listed in
Schedule 2.07;
(c) contract or collective bargaining agreement with any labor
union other than those listed in Schedule 2.13;
(d) bonus, pension, profit-sharing, retirement, stock purchase,
stock option, incentive compensation, hospitalization, insurance or
similar plan, contract or understanding providing for employee benefits
other than those listed in Schedule 2.08;
(e) lease with respect to any property, real or personal,
whether as lessor or lessee other than those listed in Schedule 2.05 or
2.06;
(f) contract for the purchase of real property, equipment or
fixed assets which involve in the aggregate more than $5,000;
(g) contract for the future purchase of materials, supplies or
inventory (i) which is in excess of the requirements of the business of
Austad now booked or the requirements of Austad for its normal
operating inventories, or (ii) which is not terminable without cost or
liability to the Company or Austad, or any successor thereof, upon
notice of 30 days or less except for those purchase orders described in
Schedule 2.12;
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(h) contract for the sale of goods (i) involving more than
$5,000 or (ii) which is not terminable without cost or liability to the
Company or Austad, or any successor thereof, upon notice of 30 days or
less;
(i) contract for the performance of services for or by the
Company or Austad which is not terminable without cost or liability to
the Company or Austad, or any successor thereof, upon notice of 30 days
or less;
(j) insurance contract other than those listed in Schedule
2.17;
(k) contract continuing for a period of more than three months
from its date, which is not terminable by the Company or Austad without
cost or liability to the Company or Austad, or any successor thereof,
upon notice of 30 days or less;
(l) manufacturers' representative, sales agency, dealer or
advertising contract which is not terminable on notice without cost or
other liability to the Company or Austad;
(m) agreement or indenture for the borrowing or lending of
money;
(n) agreement or indenture for the mortgaging or pledging of,
or otherwise placing a lien or security interest on, any assets of the
Company or Austad;
(o) option, warrant or other contract for the issuance of any
debt or equity security, or the conversion of any obligation,
instrument or security, into debt or equity securities of the Company
or Austad other than those contemplated in connection with the
Transactions;
(p) guaranty of any obligation for borrowed money or otherwise,
excluding endorsements made for collection;
(q) settlement agreement of any administrative or judicial
proceedings within the past five years; or
(r) agreement under which the Company or Austad has advanced or
agreed to advance moneys in excess of $500 to any one individual or
$1,000 in the aggregate.
SECTION 2.13. LABOR AND EMPLOYMENT MATTERS. Except as disclosed
in Schedule 2.13, neither the Company nor Austad is a party to any collective
bargaining agreement with any labor organization. There is not pending, or to
the knowledge of the Company or Austad threatened, any labor dispute, strike or
work stoppage involving the employees of Austad. Except as indicated in Schedule
2.13, none of the key employees of Austad has terminated or
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indicated an intention or plan to terminate his or her employment with Austad or
had such employment terminated.
SECTION 2.14. CONDUCT OF BUSINESS. Except as set forth
in Schedule 2.14, since the date of the Balance Sheet, the Company has not
conducted any business, and Austad has conducted its business in the ordinary
course, has maintained its assets and property in at least such order and
condition as is necessary to continue so to conduct its business, and neither
the Company nor Austad has:
(a) incurred any material obligation or liability (absolute,
accrued, contingent or otherwise), except in connection with the
Transactions or the Redemption or, in the case of Austad, in the
ordinary course of Austad's business;
(b) discharged or satisfied any lien or encumbrance, or paid or
satisfied any obligation or liability (absolute, accrued, contingent or
otherwise) except, in the case of Austad, for (i) liabilities shown or
reflected on the Balance Sheet or (ii) liabilities incurred since the
date of the Balance Sheet in the ordinary course of business;
(c) increased or established any reserve for taxes or other
liability on its books or otherwise provided therefor, except as may
have been required in accordance with GAAP due to the operations or
income of Austad since the date of the Balance Sheet;
(d) mortgaged, pledged or subjected to any lien, charge or
other encumbrance any of the assets, properties or business of the
Company or Austad;
(e) sold, assigned or transferred any asset, property or
business or cancelled any debt or claim or waived any right, except, in
the case of Austad, in the ordinary course of Austad's business, and
except for that Owned Realty located at 208 N. Sycamore Avenue, Sioux
Falls, South Dakota and identified in Part A of Schedule 2.05, such
property being sold by Austad under the terms previously disclosed to
the Buyer;
(f) sold, assigned, transferred or permitted to lapse any
rights with respect to any Intellectual Property or other intangible
asset;
(g) granted any general or uniform increase in the rates of pay
of employees of Austad or any increase in salary payable or to become
payable to any officer employee, consultant or agent of Austad, or
changed or increased the compensation payable to any officer,
employee, consultant or agent of Austad for any period before or
after the date of the Balance Sheet, or by means of any bonus or
pension plan, contract or other commitment increased the compensation
of any officer, employee, consultant or agent of Austad, or, in the
case of the Company,
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engaged any employee, consultant or agent except in connection with the
Transactions;
(h) made or authorized any capital expenditures for additions
to the plant or equipment of Austad in excess of $5,000 in the
aggregate except as may have been involved in connection with ordinary
repair, maintenance and replacement and minor plant equipment
additions;
(i) made any loan or payment to any stockholder, or declared,
set aside or paid to any stockholder any dividend or other distribution
in respect of its capital stock, or redeemed or purchased any of its
capital stock, or agreed to take any such action except as contemplated
by the Transactions;
(j) issued, sold or transferred, or agreed to issue, sell or
transfer, any stock, bond, debenture or other corporate security of the
Company or Austad, whether newly issued or held in treasury, except as
contemplated by the Redemption or the Transactions;
(k) except as contemplated by the Redemption or the
Transactions, entered into any material transaction, in the case of the
Company, or any material transaction other than in the ordinary course
of business of Austad, in the case of Austad;
(l) experienced damage, destruction or loss (whether or not
covered by insurance) materially and adversely affecting its
properties, assets or business, or experienced any other material
adverse change in its financial condition, assets, liabilities or
business;
(m) experienced any material change in the assets, liabilities,
business, condition (financial or otherwise) from that disclosed on the
Balance Sheet; or
(n) taken any action which would have the effect of terminating
any Permit.
SECTION 2.15. TAX MATTERS.
(a) Austad has filed all tax returns required to be filed by it
under the laws of the United States of America, the State of South Dakota and
each state or other jurisdiction in which its business activities (i) require
qualification, as specified in Schedule 2.01, or (ii) could result in the
imposition of liability for the payment of any taxes, as specified in Schedule
2.15. Austad has paid or set up an adequate reserve in respect of all taxes for
the periods covered by such returns, as well as all other taxes, assessments and
governmental charges which have become due or payable, including all taxes which
Austad is obligated to withhold from amounts owing to employees, creditors and
third parties. Such reserves include reserves for all tax liabilities of Austad
in all jurisdictions in which Austad has business activities requiring
qualification as specified in Schedule 2.01. Austad has set up as provisions for
taxes in the
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Balance Sheet amounts sufficient for all accrued and unpaid Federal, foreign,
state, county and local taxes of Austad, whether or not disputed, including any
interest and penalties in connection therewith, for all fiscal periods ending on
or before the date of the Balance Sheet.
(b) Austad's Federal income tax returns have never been
examined by the United States Internal Revenue Service and no such examinations
are in progress, nor has Austad been notified of an impending audit. There have
been no state tax examinations of Austad except as set forth in Schedule 2.15
and no such examinations are in progress, nor has Austad been notified of an
impending audit. Any deficiencies proposed as a result of any examination set
forth in Schedule 2.15 have been paid or finally settled and no issue has been
raised in any such examinations which, by application of similar principles,
reasonably can be expected to result in the assertion of a deficiency for any
other year not so examined. The results of any settlements and any necessary
adjustments in taxes resulting therefrom are either set forth in Schedule 2.15
or set forth in the financial statements referred to in Section 2.04 above.
Neither Austad nor any Individual is aware of any fact which would constitute
grounds for any further tax liability with respect to any years. No agreements
or waivers have been made by or on behalf of Austad for the extension of time
for the assessment of any tax or for any applicable statute of limitations.
(c) Except for taxes for the payment of which an adequate
reserve has been established on the Balance Sheet, there are no tax liens,
whether imposed by any Federal, foreign, state or local taxing authority,
outstanding against any of the assets, properties or business of Austad.
For purposes of this Section 2.15, the term "Austad" shall include the Company.
SECTION 2.16. ABSENCE OF UNDISCLOSED LIABILITIES. The Company
and Austad have no indebtedness or liabilities of any character whatsoever,
whether or not accrued and whether or not fixed or contingent, which exceed
$5,000 individually or $25,000 in the aggregate, except, in the case of Austad,
for (i) liabilities reflected in the Balance Sheet, (ii) liabilities incurred in
the ordinary course of business of Austad subsequent to the date of the Balance
Sheet, none of which has been or is materially adverse to the assets, properties
or business of Austad and, in the case of Austad and the Company, (iii)
liabilities incurred in connection with performance of this Agreement.
SECTION 2.17. INSURANCE. All policies of insurance,
together with the premiums currently paid thereon, covering the plant,
machinery, equipment and inventory used in the business of Austad, or providing
for business interruption, general liability, personal and product liability
coverage, are described in Schedule 2.17. Such policies adequately cover all
risks reasonably and prudently foreseeable in the operation and conduct of the
assets, properties, business, operations, products and services of the Company
and Austad as the same are presently owned or conducted. All such policies will
be outstanding and in full force and effect at the Closing Date, subject to the
provisions of Section 4.04 below. Except as set forth in Schedule 2.17, there
are no claims, actions, suits or proceedings arising out of or based upon any of
such policies of insurance, and, so far as is known to the Individuals or any
Austad officer, no basis
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for any such claim, action, suit or proceeding exists. There are no notices of
any pending or threatened terminations or substantial premium increases with
respect to any of such policies and Austad is in compliance with all conditions
contained therein.
SECTION 2.18. TRANSACTIONS WITH AFFILIATES. Except as set forth
in Schedule 2.18, there are no outstanding notes payable to or accounts
receivable from, or advances by the Company or Austad to, and the Company and
Austad are not otherwise creditors of, any officer, employee, subsidiary or
affiliate of the Company or Austad.
SECTION 2.19. SUPPLIERS. Except as set forth in Schedule 2.19,
Austad is not aware of any loss or threatened loss of any key supplier of
Austad. For purposes of this Section, the term "key supplier" means any supplier
of Austad the loss of which might materially adversely affect its business.
SECTION 2.20. CORPORATE NAME. Set forth in Schedule 2.20 is a
correct and complete list of all locations in which the corporate name "The
Austad Company," or any variation thereof, is currently used by the Company or
Austad or any of their affiliates. Austad or one of its affiliates has the full
legal right to so use such name and variations in each of such jurisdictions.
Neither the Individuals, Austad, nor any affiliate thereof knows, or has reason
to know, of any actual or threatened claim by any third party with respect to
the use of such name or of any actual or proposed use of the name "The Austad
Company," or any variation thereof, by any third party in conflict with the use
thereof by the Company or Austad. The use by the Company and Austad of the name
"The Austad Company" and the variations thereof used by them does not, to the
knowledge of the Individuals, Austad and the Company, infringe upon the rights
of any third party, and neither the Company nor any Individual nor any affiliate
or associate of either has granted any third party any right to use such name or
any variation thereof.
SECTION 2.21. INDIVIDUALS' AUTHORITY. Each Individual has all
necessary power and, as of the Closing Date, will be duly authorized to perform
his or her obligations under this Agreement and the other documents, agreements
and certificates executed and delivered by each in connection with the
Transactions. Those Individuals signing as a custodian for any other Individual
are, as of the date hereof, duly authorized to execute this Agreement on behalf
of such other Individual and have provided to the Buyer documentation
satisfactory in form and substance evidencing such authority.
SECTION 2.22. BINDING OBLIGATION; CONSENTS. The execution and
delivery of this Agreement by the Individuals, the Company and Austad do not,
and the consummation of the Transactions will not, violate any provision of the
certificate of incorporation or by-laws of the Company or Austad or violate any
provision of, or result in a breach of any of the terms or provisions of, or
result in the acceleration of any obligation under, or constitute a default
under, any mortgage, lien, lease, agreement, instrument, order, arbitration
award, judgment or decree, to which any Individual or the Company or Austad is a
party, or to which any Individual or the Company or Austad is, or the assets,
properties or business of any Individual or the Company or Austad are, subject.
Each of this Agreement and the respective Warrant Agreement is a valid and
binding agreement of the Individuals, enforceable against the respective
Individuals in
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accordance with its terms; the Stockholders' Agreement is a valid and binding
agreement of the members of the David Austad Group, enforceable against each
member in accordance with its terms; the License Agreement is a valid and
binding agreement of the Company and David Austad, enforceable against such
parties in accordance with its terms; each of the Loan Agreements is a valid and
binding agreement of Austad, enforceable against it in accordance with its
terms; each of the Indemnification Agreements is a valid and binding agreement
of David Austad and Randall Austad, as applicable, enforceable against each of
them in accordance with its terms; and each of this Agreement and the
Reimbursement Agreement is a valid and binding agreement of the Company and
Austad, enforceable against such parties in accordance with its terms. All
authorizations, approvals and consents necessary for the execution and delivery
(a) by the Individuals, of this Agreement and the respective Warrant Agreements,
(b) by the members of the David Austad Group, of the Stockholders' Agreement,
(c) by the Company and David Austad, of the License Agreement, (d) by David
Austad, of his Indemnification Agreement, (e) by Austad, of the Loan Agreements,
(f) by Randall Austad of his Indemnification Agreement, and (g) by the Company
and Austad, of this Agreement and the Reimbursement Agreement, have been given
or made. Except as set forth in Schedule 2.22 or otherwise referred to herein,
no consent, action, approval or authorization of, or registration, declaration
or filing with, any governmental department, commission, agency or other
instrumentality having jurisdiction over the Individuals or the Company or
Austad is required to be obtained by any of them to authorize their execution,
delivery or performance of this Agreement or the Other Agreements to which they
are party.
SECTION 2.23. THE BUYER SHARES. On the Closing Date, all stock
transfer or other taxes and charges (other than income taxes) which are required
to be paid in connection with the issue, sale and transfer of the Buyer Shares
to the Buyer hereunder will have been fully paid by the Individuals and all laws
imposing such taxes or charges will have been fully complied with in respect of
the Buyer Shares by the Individuals and the Company.
SECTION 2.24. CUSTOMER LISTS. The disks, cartridges and tapes
containing customer lists and data of Austad (the "Customer Lists") contain a
true, correct and complete list of the customers who have actually purchased
merchandise from Austad by year of last purchase and the approximate number of
catalogs mailed, reported on an annual basis for the periods of time that such
information is reported. The Customer Lists are the only customer lists which
exist and such lists are deposited with Acxiom Corporation and with no other
vendors. At least 10 days prior to the Closing, Austad shall authorize this
vendor to make the Customer Lists available to the Buyer and its representatives
as they may reasonably request.
SECTION 2.25. CUSTOMS. All goods imported into the United
States or any other country by Austad (the "Imported Goods") have been properly
valued and classified in accordance with applicable tariff laws, rules and
regulations and all proper duties, tariffs or excise taxes have been paid with
respect to the Imported Goods, no penalties have been assessed, asserted or
claimed with respect to any Imported Goods, and no written inquiries relating
thereto have been received by the Company, Austad or any Individual. All
Imported Goods have been properly marked as to country of origin, content and
material. Austad has filed with the U.S. Customs Service all required buying
agency agreements, as applicable, with respect to Imported
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Goods. Except as set forth in Schedule 2.25, Austad has not delivered to any
agents, suppliers or vendors any tools, equipment, molds, additional products or
other assistance (collectively, the "Assists") which would be considered a
dutiable assist. Schedule 2.25 sets forth a true, complete and correct list of
all Assists.
SECTION 2.26. DISCLOSURE; REPRESENTATIONS AND WARRANTIES. The
Individuals, the Company and Austad have made full, true and complete responses
to all the Buyer's requests for information, documents, contracts and records.
Neither this Agreement nor any statement, certificate, writing or document
furnished to the Buyer in connection with this Agreement by any Individual or by
the Company or Austad contains, as of the dates of such documents, any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained therein not misleading. Except as set forth in this
Agreement or in a Schedule hereto, no fact (other than circumstances or events
which are common knowledge or normal business risks) with respect to the
Company's and Austad's business, operations or condition is known to any
Individual or the Company or Austad which materially and adversely affects the
business, operations or condition of the Company or Austad or any of their
respective assets or properties.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents and warrants that:
SECTION 3.01. ORGANIZATION AND AUTHORITY. The Buyer is a
corporation duly organized and validly existing in good standing under the laws
of the State of Delaware. The Buyer has the corporate power to execute, deliver
and perform this Agreement and the other documents, agreements and certificates
executed and delivered by it in connection herewith and therewith. The Buyer has
taken all action required by law, its certificate of incorporation, its by-laws
or otherwise to authorize the execution and delivery of this Agreement, the Loan
Agreements, the Stockholders' Agreement, the Warrant Agreements, the License
Agreement, the Reimbursement Agreement and the Indemnification Agreements and
the documents, agreements and certificates executed and delivered by the Buyer
in connection herewith and therewith. The execution and delivery of this
Agreement and the Stockholders' Agreement, the Warrant Agreements, the License
Agreement, the Loan Agreements, the Reimbursement Agreement and the
Indemnification Agreements by the Buyer (or, in the case of the Loan Agreements,
by a subsidiary of the Buyer), do not, and the consummation of the transactions
contemplated hereby and thereby will not, violate any provision of the
certificate of incorporation or by-laws of the Buyer, or any provision of any
agreement, instrument, order, judgment or decree to which the Buyer is a party
or by which it is bound.
SECTION 3.02. BINDING OBLIGATION; CONSENTS. The execution and
delivery of this Agreement by the Buyer does not, and the consummation of the
Transactions will not, violate any provision of the certificate of incorporation
or by-laws of the Buyer or violate any provision of, or result in a breach of
any of the terms or provisions of, or result in the acceleration of any
obligation under, or constitute a default under, any mortgage, lien, lease,
agreement, instrument, order, arbitration award, judgment or decree, to which
the Buyer is a party or to which its assets,
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properties or business are subject. Each of this Agreement, the Stockholders'
Agreement, the Reimbursement Agreement, the Indemnification Agreements and the
License Agreement (as to Article IX only) is a valid and binding agreement of
the Buyer, enforceable against the Buyer in accordance with its terms, or, in
the case of the Loan Agreements and the Second Mortgage, a valid and binding
agreement of the Buyer's subsidiary, enforceable against such party in
accordance with its terms. All authorizations, approvals and consents necessary
for the execution and delivery by the Buyer of this Agreement, the
Stockholders' Agreement, the Reimbursement Agreement, the Indemnification
Agreements and the License Agreement (as to Article IX only), or, in the case
of the Loan Agreements and the Second Mortgage, the Buyer's subsidiary, have
been given or made. Except as set forth in Schedule 3.02 or otherwise referred
to herein, no consent, action, approval or authorization of, or registration,
declaration or filing with, any governmental department, commission, agency or
other instrumentality having jurisdiction over the Buyer or any subsidiary is
required to be obtained by any of them to authorize their execution, delivery
or performance of this Agreement or the Other Agreements to which they are
party.
SECTION 3.03. ACQUISITION OF BUYER SHARES. The Buyer is
purchasing the Buyer Shares for its own account for investment only and not
with a present view to, or for sale in connection with, any distribution of the
Buyer Shares.
SECTION 3.04. LITIGATION; CONSENTS.
(a) The Buyer knows of no pending or threatened action,
suit, proceeding or investigation before any court or governmental body, or by
any governmental agency to restrain or prevent the performance of the
Transactions or which might affect the right of the Buyer to own the Buyer
Shares.
(b) Except as otherwise referred to herein, no consent,
action, approval or authorization of, or registration, declaration or filing
with, any governmental department, commission, agency or other instrumentality
having jurisdiction over the Buyer is required to be obtained by the Buyer to
authorize the execution, delivery and performance by the Buyer of this
Agreement or the Other Agreements or their respective terms.
SECTION 3.05. DISCLOSURE; REPRESENTATIONS AND WARRANTIES.
The Buyer has made full, true and complete responses to all requests for
information, documents, contracts and records. Neither this Agreement nor any
statement, certificate, writing or document furnished to the Company, Austad or
any Individual in connection with this Agreement by the Buyer contains, as of
the dates of such documents, any untrue statement of a material fact or omits
to state a material fact necessary to make the statements contained therein not
misleading.
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ARTICLE IV
COVENANTS OF THE COMPANY, AUSTAD AND THE BUYER
SECTION 4.01. MAINTAIN BUYER SHARES. Before the Closing
Date, neither the Company nor Austad nor David Austad will, without the consent
of the Buyer, (a) issue, sell or otherwise transfer any of the Buyer Shares or
(b) incur or permit to exist any lien, charge or encumbrance on any of the
Buyer Shares.
SECTION 4.02. APPROVALS; CONSENTS. The Company and/or
Austad will obtain or cause to be obtained all consents, approvals and
authorizations required by law, statute, rule, regulation, contract or
agreement to be obtained by the Company or Austad in connection with the
consummation of the sale and transfer by the Company to the Buyer of the Buyer
Shares and the transactions contemplated hereby, all such consents, approvals
and authorizations being set forth in the attached Schedule 4.02.
SECTION 4.03. MAINTAIN COMPANY BUSINESS.
(a) From the date hereof to and including the Closing
Date, the Company, Austad and the Individuals will use their best efforts to
preserve the business organization of the Company and Austad intact, to keep
available to the Buyer the services of the incorporator of the Company and the
present officers and employees of Austad, and to preserve for the Buyer the
good will of the suppliers, customers and others having business relations with
Austad.
(b) From the date hereof to and including the Closing
Date, the Company, Austad and the Individuals will use their best efforts to
cause Austad to continue the operation of its business in the ordinary course,
and to cause the Company and/or Austad, as the case may be, to maintain their
respective real property and other assets, properties and rights in at least as
good order and condition as exists on the date hereof, and will not permit the
Company or Austad to:
(i) encumber any of its assets, properties or right or
enter into any transaction or make any contract or commitment relating
to its assets, properties or business, except in the ordinary course
of business;
(ii) enter into any employment contract which is not
terminable without cost or other liability to the Company or Austad,
or any successor thereof, except for normal severance arrangements and
accrued vacation pay, upon notice of 30 days or less;
(iii) without the Buyer's consent, enter into any contract
or agreement (x) which cannot be performed within three months or less
or (y) which involves the expenditure of over $50,000;
(iv) reclassify or change in any manner its outstanding
shares of capital stock or issue or sell any shares of its capital
stock or other securities, or redeem or otherwise acquire, or enter
into any contract or commitment to redeem or
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otherwise acquire, any shares of capital stock of the Company or
Austad other than as set forth in Schedule 2.12 hereof;
(v) make any declaration, payment or distribution of a
dividend or any other payment to any stockholder other than as set
forth in Schedule 2.12 hereof;
(vi) transfer any assets of the Company or Austad to any
stockholder;
(vii) make any payment or distribution to any trustee under
any bonus, pension, profit sharing or retirement plan or incur any
obligation to make any such payment or contribution which is not in
accordance with the Company's or Austad's usual past practice, or make
any payment or contribution or incur any obligation pursuant to or in
respect of any other plan, contract or arrangement providing for any
bonus, incentive compensation, pension, deferred compensation,
retirement payment, profit sharing contribution or any other employee
benefit, which is not in accordance with the Company's or Austad's
usual past practice;
(viii) extend credit in excess of $10,000 to any customer
who was not a customer before the date of this Agreement, or depart
from the normal and customary trade, discount and credit policies of
the Company or Austad;
(ix) guarantee the obligation of any person, firm or
corporation, except by the endorsement of negotiable instruments for
deposit or collection in the ordinary course of business;
(x) take any action of the character described in Section
2.14 (Conduct of Business) which would have been required to be
disclosed pursuant thereto had such action been taken after the date
of the Balance Sheet and before the date of this Agreement;
(xi) purchase or sell any securities for investment;
(xii) amend either its charter or by-laws;
(xiii) make any changes in any of its methods of accounting
or in any of its accounting practices; or
(xiv) change the banking or safety deposit arrangements of
the Company or Austad (except as contemplated by the Transactions).
SECTION 4.04. INSURANCE. At any time before the Closing
Date, Austad will add, if possible, new coverage or increase the coverage on,
or otherwise amend, any of the insurance policies described in Schedule 2.17,
the extent of such added or increased coverage or the nature of such amendment
being a matter solely in the discretion of the Buyer.
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SECTION 4.05. NON-COMPETE.
(a) The Former Stockholders agree that from and after the
Closing Date, they will not use the name "Austad" or any confusingly
similar name or any other Intellectual Property in connection with any
business related to the business of the Company, Austad or any of
their Subsidiaries.
(b) David Austad agrees that he will not use any
Intellectual Property, his name, likeness or voicemail announcements
in connection with any business related to the business of the
Company, Austad or any of their Subsidiaries except as permitted by
the License Agreement.
(c) For a period of one year following the Closing Date,
no Individual shall, directly or indirectly, in association with or as
a stockholder, director, officer, consultant, employee, member or
otherwise of or through any person, firm, corporation, partnership,
association or other entity, engage in or conduct any enterprise or
business anywhere in the world which distributes, designs,
manufactures, markets, sells or otherwise deals in products or
services of the type manufactured or sold by the Company, Austad, any
of their Subsidiaries or Joint Ventures or competitive with the
business of the Company, Austad, any of their Subsidiaries or the
Joint Ventures or their successors as such business is currently being
conducted by the Company, Austad, any of their Subsidiaries or the
Joint Ventures on the date hereof except as may be otherwise provided
for by the Stockholders' Agreement or the License Agreement; provided,
however, that an investment in not more than five percent in the
aggregate of the total capital of any such competitive enterprise
whose stock is listed on a national securities exchange shall not be
deemed a violation of this Section; and provided further, that (i) in
the case of Randall Austad, the applicable period shall be two years
following the Closing Date, and (ii) in the case of the members of the
David Austad Group, the provisions of the Stockholders' Agreement and
the License Agreement (as applicable) and not this Section 4.05(c)
shall apply.
SECTION 4.06. NOTICE OF BREACH. The Company will
immediately give notice to the Buyer of the occurrence of any event or the
failure of any event to occur that results in a breach of any representation or
warranty hereunder by the Company, Austad or any Subsidiary or a failure by the
Company, Austad or any Subsidiary to comply with any covenant, condition or
agreement contained herein.
SECTION 4.07. UNIFORM COMMERCIAL CODE SEARCHES. Austad
shall, at its own expense, conduct, or cause to be conducted, a search in each
state and county in which either the Company or Austad conducts its business or
maintains any assets or properties for financing statements filed in such
states and counties under the applicable provisions of the Uniform Commercial
Code. Not later than 10 days prior to the Closing Date, Austad shall deliver a
list, certified as true and complete by an officer of Austad, of all financing
statements or other liens recorded in such jurisdictions and a description of
the property and assets encumbered thereby. Austad shall, prior to the Closing
Date, (i) remove or cause to be removed all such liens and
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encumbrances except those permitted encumbrances set forth in Schedule
2.06, (ii) file or cause to be filed in such jurisdictions a release
of such lien or encumbrance and (iii) deliver to the Buyer evidence
satisfactory in form and substance to the Buyer of compliance by
Austad with the provisions of this Section.
SECTION 4.08. AUDITED FINANCIAL STATEMENTS. Before the
Closing Date, Austad shall deliver to the Buyer audited financial statements of
Austad for the fiscal year ended December 31, 1994, including a balance sheet,
the related statements of income and of changes in financial position for the
period then ended, the accompanying notes and reports of the Auditors, the only
qualification of which shall relate to the effect of the current status of
Austad's indebtedness to FNBO on Austad's ability to continue as a going
concern.
ARTICLE V
COVENANTS OF THE PARTIES
SECTION 5.01. ACCESS. The Individuals, the Company and
Austad will (a) supply the Buyer with all information necessary or beneficial
for the carrying out of the Transactions and will permit the Buyer and its
accounting, legal and other representatives to complete, to its satisfaction, a
review of the assets (including, without limitation, the Intellectual
Property), liabilities, business, operations and prospects of the Company and
Austad, (b) provide such assistance in connection with the Transactions as is
reasonably requested and (c) will give the Buyer and its representatives and
lenders access at all reasonable times to all things related to the assets,
liabilities, business, operations and prospects of the Company and Austad and,
as the same may relate to the Company and Austad, the Individuals. The Buyer
will provide the Individuals with information reasonably required for their
review of the Other Agreements.
SECTION 5.02. RETURN OF INFORMATION. In the event that the
parties are unable to consummate the Transactions, each party will, if
requested by another party, promptly return all records and information
concerning the Company or Austad, the Individuals, the Buyer and their
subsidiaries and affiliates (as the case may be) in such party's possession.
SECTION 5.03. CONFIDENTIALITY. Each party will treat as
confidential all confidential information concerning the Company, Austad, the
Individuals, the Buyer and their subsidiaries and affiliates disclosed to such
party and which does not become generally available to third parties without
fault of the receiving party, unless disclosure thereof is required by law. In
the event that the parties are unable to consummate the Transactions, no party
shall at any time thereafter disclose to third parties, or use, directly or
indirectly, for its own benefit, any such information, written or oral, about
the business or affairs of the other parties hereto.
SECTION 5.04. REPRESENTATIONS. The parties hereto (a) will
take all action necessary to render accurate as of the Closing Date their
respective representations and warranties contained herein, (b) will refrain
from taking any action which would render any such representation or warranty
inaccurate in any material respect as of such time, and (c) will perform or
cause to be satisfied each covenant or condition to be performed or satisfied
by it or them as contemplated by this Agreement.
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SECTION 5.05. GOVERNMENT REVIEWS. Austad and the Buyer, in
a timely manner, shall (i) make required filings with, prepare applications to
and conduct negotiations with each governmental agency as to which such
filings, applications or negotiations are necessary or appropriate for the
consummation of the transactions contemplated hereby, and (ii) provide such
information as each may be required to make such filings, prepare such
applications and conduct such negotiations. Austad and the Buyer shall
cooperate with each other and use their best efforts to assist the other in
making and pursuing such filings and applications and conducting such
negotiations and promptly shall respond to all requests for additional
information or documentation.
SECTION 5.06. PRESS RELEASES. The timing and content of all
announcements regarding any aspect of the Transactions to the financial
community, government agencies, employees of Austad or the public generally
will be mutually agreed upon by the parties hereto in advance.
SECTION 5.07. BEST EFFORTS. Each of the Individuals, the
Company and the Buyer shall use its best efforts to cause all of the conditions
to the obligations of the others to consummate the Transactions to be met as
soon as practicable after the date of this Agreement.
SECTION 5.08. NOTICE OF BREACH. The Buyer will immediately
give notice to David Austad, acting in such event as representative of all the
Individuals, of the occurrence of any event or the failure of any event to
occur that results in a breach of any representation or warranty hereunder by
the Buyer or a failure by the Buyer to comply with any covenant, condition or
agreement contained herein.
ARTICLE VI
INDEMNIFICATION
SECTION 6.01. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
INDEMNITIES. The parties hereto agree that their respective representations,
warranties and indemnities contained in this Agreement shall survive for a
period of two years from the Closing Date, except that those set forth in
Section 2.15 (Tax Matters) shall survive for the applicable statute of
limitations, and those set forth in Section 2.09(b) (Compliance With Law;
Permits) respecting environmental matters shall survive for an unlimited period
(the applicable period of survival of any representation or warranty being
referred to herein as the "Limitation Period"). No claim shall be made by any
party for breach of any representation or warranty unless (i) pursuant to the
indemnification provisions set forth in this Agreement and (ii) notice thereof
is given prior to the end of the applicable Limitation Period.
SECTION 6.02. INDEMNIFICATION BY THE COMPANY, AUSTAD AND
THE INDIVIDUALS. The Company, Austad and the Individuals shall, jointly and
severally, save, defend and indemnify the Buyer and its officers, directors,
employees, affiliates, stockholders, agents, representatives, attorneys,
consultants, principals and associates (individually, an "Indemnitee"
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and collectively, "Indemnitees") against, and hold each of them harmless from,
any and all Damages (as defined in Section 6.04 below):
(a) arising from any breach of a representation or
warranty of the Company, Austad or the Individuals contained in or
made pursuant to this Agreement or the Other Agreements or in any
certificate, instrument or agreement delivered to any Indemnitee
pursuant to or in connection with this Agreement or the Other
Agreements;
(b) resulting from a default in the performance of any of
the covenants or obligations that the Company, Austad or any
Individual is required to perform under this Agreement or the Other
Agreements; provided, that no Individual shall be responsible for
Damages resulting from a default in the performance of any of the
covenants or obligations that the Company or Austad is required to
perform under either Loan Agreement or under the Second Mortgage, the
License Agreement, the Reimbursement Agreement or the Warrant
Agreements unless such Individual, acting in breach of his or her
obligations to the Company or Austad, as the case may be, whether
pursuant to this Agreement or any of the Other Agreements or
otherwise, caused the Company or Austad, as the case may be, to so
default; or
(c) resulting from any foreign, Federal, state or local
income or franchise tax payable (i) with respect to the period ending
on the Closing Date or (ii) in consequence of the Redemption or the
payment of the Redemption Notes;
provided, however, that neither the Company, Austad nor any Individual shall be
required to pay any Damages unless (i) the aggregate amount of Damages exceeds
$100,000, in which event the indemnity pursuant to this Section 6.02 shall
require payment of all Damages incurred by the Indemnitees in excess of $50,000
(e.g., if total Damages incurred are $150,000, payment of $100,000 shall be
required), and (ii) the claim for such Damages is made by an Indemnitee and
received by the Company, Austad or any Individual in accordance with the
provisions of Sections 6.01 and 6.05, it being understood and agreed that the
Indemnitee may elect, in its sole discretion, to bring such claim against any
or all of the Company, Austad or an Individual. In no event, however, shall
the Damages payable pursuant to this Section 6.02 by a Former Stockholder
exceed, in the aggregate, the sum set forth opposite the name of such Former
Stockholder in Schedule 6.02 attached hereto, nor shall the Damages payable
pursuant to this Section 6.02 by parties who are not Former Stockholders
exceed, in the aggregate, the sum of $4,000,000.
SECTION 6.03. INDEMNIFICATION BY THE BUYER. The Buyer
shall be liable for, save, defend and indemnify the Company, Austad and the
Individuals and their respective officers, directors, employees, affiliates,
stockholders, agents, representatives, attorneys, consultants, principals and
associates (also individually, an "Indemnitee" and collectively, "Indemnitees")
against, and hold each of them harmless from, any and all Damages:
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(a) arising from any breach of a representation
or warranty of the Buyer contained in or made pursuant to this
Agreement or the Other Agreements or in any certificate,
instrument or agreement delivered to an Indemnitee pursuant to
or in connection with this Agreement or the Other Agreements;
or
(b) resulting from a default in the performance
of any of the covenants or obligations that the Buyer is
required to perform under this Agreement or the Other
Agreements;
provided, however, that the Buyer shall not be required to pay any Damages
unless (i) the aggregate amount of such Damages exceeds $100,000, in which
event the indemnity pursuant to this Section 6.03 shall require payment of all
Damages incurred by the Indemnitees in excess of $50,000 (e.g., if total
Damages incurred are $150,000, payment of $100,000 shall be required), and (ii)
the claim for such Damages is made by an Indemnitee and received by the Buyer
in accordance with the provisions of Sections 6.01 and 6.05. In no event,
however, shall the Damages payable pursuant to this Section 6.03 exceed, in the
aggregate, the sum of $4,000,000.
SECTION 6.04. DAMAGES. For the purposes of this Agreement,
"Damages" shall mean any loss, liability, damage, cost or expense, including,
without limitation, reasonable costs of defense and prosecution of litigation
and counsel fees incurred by an Indemnitee.
SECTION 6.05. LEGAL PROCEEDINGS.
(a) If any legal proceeding shall be instituted, or any
claim or demand made, against an indemnified party in respect of which an
indemnifying party may be liable hereunder, the indemnified party shall give
prompt written notice thereof to the indemnifying party. The indemnifying
party, at its expense, may participate in and, with the consent of the
Indemnitee, direct any such legal proceeding and the negotiation and settlement
of any such claim or demand. The Indemnitee shall have the absolute right, in
its sole discretion and without the consent of the indemnifying party, to
settle any such legal proceeding, claim or demand; provided, however, that if
the Indemnitee shall so settle without the consent of the indemnifying party,
the indemnifying party shall be discharged from any liability hereunder with
respect to the proceeding, claim or demand so settled.
(b) If the amount of Damages paid, at any time subsequent
to such payment, shall be reduced by any recovery, settlement or otherwise, the
amount of such reduction, less any expense incurred by the party receiving such
recovery in connection therewith, promptly shall be repaid to the indemnifying
party.
(c) The parties hereto shall consult and use their best
efforts to cooperate in resolving questions regarding Damages. If a party
hereto shall believe that it has a claim under this Article VI, such party
shall give notice of such claim to the other parties, specifying in reasonable
detail the nature of the Damages for which payment is claimed, the Section or
Sections of this Agreement upon which such claim is based and the amount
payable in respect thereof.
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ARTICLE VII
TERMINATION OF AGREEMENT
SECTION 7.01. TERMINATION OF AGREEMENT. This Agreement and
the Transactions may be terminated or abandoned at any time before the Closing
Date:
(a) by mutual consent of the parties;
(b) by the Buyer, if there has been a material
misrepresentation in this Agreement by the Company, Austad or any Individual,
or a material breach by the Company, Austad or any Individual of any warranty
or covenant set forth herein, or a failure of any condition to which the
obligations of the Buyer are subject;
(c) by the Company, if there has been a material
misrepresentation in this Agreement by the Buyer, or a material breach by the
Buyer of any warranty or covenant set forth herein, or a failure of any
condition to which the obligations of the Company are subject; or
(d) by either the Company or the Buyer, if the Closing
Date shall not have occurred on or before May 31, 1995, for any reason other
than the failure of the party seeking to terminate this Agreement to perform
its obligations hereunder.
ARTICLE VIII
CONDITIONS TO THE BUYER'S OBLIGATIONS
The obligations of the Buyer to purchase the Buyer Shares
pursuant to this Agreement, enter into the Other Agreements and perform
thereunder, shall be subject to the satisfaction, at or before the Closing
Date, of the following conditions (any of which may be waived, in whole or in
part, by the Buyer):
SECTION 8.01. REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company, Austad and the Individuals
contained in this Agreement (including the Schedules and Exhibits hereto), or
in any certificate or document delivered to the Buyer in connection herewith,
shall be true in all material respects at the Closing Date as if made again on
and as of the Closing Date. The Company, Austad and the Individuals shall have
duly performed and complied with all agreements and conditions required by this
Agreement to be performed or complied with by them at or before the Closing
Date. The Buyer shall have been furnished with certificates of the Individuals
and of appropriate officers of the Company and Austad certifying in such detail
as the Buyer may reasonably request to the fulfillment of the foregoing
conditions.
SECTION 8.02. CERTAIN DOCUMENTS. Austad shall have
furnished the Buyer with the following documents:
(a) The Certificate or Articles (as the case may be) of
Incorporation of the Company and Austad and all amendments thereto, duly
certified by the proper officials of the jurisdictions in which the Company and
Austad were organized;
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(b) Certificates as to the good standing of the Company
and Austad and payment of all applicable state taxes thereby, executed, in the
case of the Company, by the appropriate official of the State of Delaware and
each jurisdiction listed in Schedule 2.01, and, in the case of Austad, by the
appropriate official of the State of South Dakota and each jurisdiction listed
in Schedule 2.01;
(c) The by-laws of the Company and Austad, duly certified
by the incorporator of the Company and the Secretary or an Assistant Secretary
of Austad as being in full force and effect;
(d) Uniform Commercial Code search reports, on Form
UCC-11 or other appropriate form, from the appropriate official for the States
of Delaware, South Dakota and other jurisdictions in which Austad is qualified
to do business, and from the appropriate official or recording office in each
county or other jurisdictional subdivision of each state in which the Company
or Austad leases any real property or maintains an office or any assets, as to
any liens, claims, charges, exceptions or encumbrances of record on any of the
assets, properties or business of the Company or Austad;
(e) Resignations, effective on the Closing Date, of
certain of the officers and directors of Austad, other than David Austad, as
may be requested by the Buyer;
(f) The complete and correct corporate minute books,
stock transfer records and corporate seals of the Company and Austad;
(g) A certificate of the Secretary or an Assistant
Secretary of Austad certifying (i) that attached thereto is a true and complete
copy of all instruments reflecting actions of the incorporator of the Company,
and of all resolutions of the board of directors of Austad pertaining to the
Transactions, the latter being duly adopted at meetings of such board at which
a quorum of directors was present and acting throughout, and certifying (ii) as
to the incumbency and authority of the incorporator and officers of the Company
and Austad executing this Agreement and the documents executed and delivered by
the Company and Austad in connection herewith;
(h) Evidence satisfactory to the Buyer that the members
of the David Austad Group are the sole stockholders of Austad and that the
Company has no stockholders;
(i) Evidence satisfactory to the Buyer respecting the
declaration of a dividend by Austad to the members of the David Austad Group,
in return of a capital contribution, in the aggregate amount of $600,000;
(j) Third-party and governmental and regulatory approvals
and consents necessary to consummate the Transactions, including, without
limitation, all required approvals and consents of (i) FNBO, Valley and any
other lenders to Austad, (ii) lessors of Leased Realty and (iii) the Lease
Finance Group and/or its assignees, as applicable;
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(k) Evidence satisfactory to the Buyer that (i) the
Revolving Loan Agreement shall have been amended to provide for a Loan
Termination Date not earlier than May 31, 1997, and shall have been amended in
no other manner except for changes, if any, required to reflect the payment of
$1,500,000 to be made to FNBO at the Closing as contemplated by Section 1.05(d)
above, and (ii) the Valley Releases shall have been executed and delivered to
David Austad and Randall Austad, respectively;
(l) A copy of the memorandum of the Auditors respecting
certain tax matters;
(m) A copy of the audited financial statements of Austad
for the fiscal year ended December 31, 1994, including a balance sheet, the
related statements of income and of changes in financial position for the
period then ended, the accompanying notes and reports of the Auditors, the only
qualification of which shall relate to the effect of the current status of
Austad's indebtedness to FNBO on Austad's ability to continue as a going
concern;
(n) Evidence satisfactory to the Buyer that David Austad
has obtained at least $130,000 in loan funds from his family members; and
(o) All documents referred to herein and such other
documents as the Buyer may reasonably request.
SECTION 8.03. OPINION OF COUNSEL. The firm of Lynn, Jackson,
Shultz & Lebrun, P.C. shall have delivered to the Buyer a favorable opinion or
opinions, dated the Closing Date, substantially in the form of Exhibit J.
SECTION 8.04. LEGAL MATTERS SATISFACTORY. All legal
matters, and the form and substance of all documents to be delivered by the
Company, Austad and the Individuals to the Buyer at the Closing, shall have
been approved by and satisfactory to the Buyer.
SECTION 8.05. THE BUYER SHARES. The Company shall have
delivered to the Buyer a certificate or certificates for the Buyer Shares
together with funds sufficient for payment of any applicable stock transfer tax
payable in respect of the transfer of the Buyer Shares to the Buyer.
SECTION 8.06. FORMER STOCKHOLDER RELEASES. Each Former
Stockholder shall have delivered to the Buyer, the Company, Austad and the
members of the David Austad Group a general release of all claims he or she may
have through the Closing Date against the Company, Austad or any member of the
David Austad Group.
SECTION 8.07. NO MATERIAL CHANGE. There shall not have
been any material adverse change in the assets, liabilities, results of
operations, business, or prospects of the Company or Austad at the Closing Date
from that disclosed in the Balance Sheet for the period from the date of the
Balance Sheet to the Closing Date, or in the assets or properties of the
Company and Austad, taken as a whole, from the date of the Balance Sheet to the
Closing Date, and the Buyer shall have been furnished with a certificate to
that effect executed by the President
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or Vice President and the Treasurer or Chief Financial Officer of Austad and
the incorporator of the Company.
SECTION 8.08. NO LITIGATION. No action, suit, proceeding
or investigation shall be pending or, so far as is known to the Buyer, the
Individuals, the Company or Austad's executive officers, be threatened before
any court or governmental body, or by any governmental agency challenging the
transactions contemplated by this Agreement or otherwise seeking damages, or
seeking to restrain or prevent the consummation of the Transactions or to
prohibit or limit the ability of the Buyer to exercise full rights of ownership
of the Buyer Shares.
SECTION 8.09. OTHER AGREEMENTS. The Company, Austad and
the Individuals, in each case as applicable, shall have executed and delivered
the Loan Agreements, the Stockholders' Agreement, the License Agreement, the
Reimbursement Agreement, their respective Warrant Agreements and
Indemnification Agreements.
SECTION 8.10. TITLE INSURANCE. The Buyer shall have
obtained title insurance for the Owned Realty which represents the principal
place of business of Austad in amounts and pursuant to such terms and
conditions as the Buyer shall reasonably require.
SECTION 8.11. COMPANY CONSENTS, ETC. The Company and
Austad shall have received all written consents, authorizations and approvals
for the Transactions (i) required by any applicable law, rule or regulation of
any Federal or state governmental or administrative body, (ii) from the lessors
under the Leases, (iii) from FNBO, such consent to include the FNBO Extension,
(iv) from Valley and from any other lender pursuant to the Mortgages, (v) from
the Lease Finance Group and/or its assignees, as required, and (vi) from any
other third party to a material contract with the Company or Austad as deemed
necessary by the Buyer.
SECTION 8.12. BUYER CONSENTS. The Buyer shall have
received consent to the Transactions from such of its lenders as may be
required.
SECTION 8.13. ENVIRONMENTAL. The Buyer shall have received a
Phase I environmental study with respect to the Owned Realty and the Leased
Realty satisfactory in form and substance to the Buyer.
ARTICLE IX
CONDITIONS TO THE COMPANY'S AND DAVID AUSTAD'S OBLIGATIONS
The obligations of the Company to sell the Buyer Shares to the
Buyer pursuant to this Agreement and of David Austad to execute and deliver
this Agreement and the Other Agreements to which he is a party shall be subject
to the satisfaction, at or before the Closing Date, of the following conditions
(any of which may be waived, in whole or in part, by the Company or David
Austad):
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SECTION 9.01. REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Buyer contained in this Agreement or in
any certificate or document delivered to the Company pursuant hereto shall be
true in all material respects at the Closing Date as if made on and as of the
Closing Date. The Buyer shall have duly performed and complied with all
agreements and conditions required by this Agreement to be performed or
complied with by the Buyer at or before the Closing Date. The Company shall
have been furnished with certificates of appropriate officers of the Buyer,
dated the Closing Date, certifying in such detail as the Company may reasonably
request to the fulfillment of the foregoing conditions.
SECTION 9.02. PAYMENT. The Buyer shall have paid to the
Company by wire transfer on the Closing Date the amount required to be paid to
the Company pursuant to Section 1.02.
SECTION 9.03. OPINION OF COUNSEL. The Buyer shall have
furnished to the Company and David Austad a favorable opinion, dated the
Closing Date, of Michael P. Sherman, Esq., General Counsel of the Buyer,
substantially in the form of Exhibit K.
SECTION 9.04. CERTAIN DOCUMENTS. The Buyer shall have
furnished the Company with the following documents:
(a) The Certificate of Incorporation of the Buyer and all
amendments thereto;
(b) Certificate as to the good standing of the Buyer,
executed by the appropriate official of the State of Delaware.
(c) The By-laws of the Buyer, duly certified by the
Secretary or an Assistant Secretary of the Buyer as being in full force and
effect;
(d) A certificate of the Secretary or an Assistant
Secretary of the Buyer certifying (i) that attached thereto is a true and
complete copy of all resolutions of the executive committee of the board of
directors of the Buyer pertaining to the Transactions, duly adopted at meetings
of such committee at which a quorum of directors was present and acting
throughout and (ii) as to the incumbency and authority of the officers of the
Buyer executing this Agreement and the documents executed and delivered by the
Buyer in connection herewith; and
(e) such other documents as the Company may reasonably
request.
SECTION 9.05. OTHER AGREEMENTS. The Buyer shall have
executed and delivered the Stockholders' Agreement, the License Agreement (in
acknowledgment of its obligations pursuant to Article IX thereof), the
Reimbursement Agreement and the Indemnification Agreements.
SECTION 9.06. LEGAL MATTERS SATISFACTORY. All legal
matters, and the form and substance of all documents to be delivered by the
Buyer to the Company, Austad and the Individuals, shall have been approved by
and satisfactory to the Company, Austad and the Individuals.
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SECTION 9.07. CONSENTS. The Buyer shall have received all
written consents, authorizations and approvals required by any applicable law,
rule or regulation of any Federal or state governmental or administrative body
respecting the sale of the Buyer Shares pursuant to the provisions of this
Agreement.
SECTION 9.08. VALLEY RELEASES. David Austad and Randall
Austad shall have received their respective Valley Releases, each such release
to be satisfactory in form and substance to such party and his counsel.
ARTICLE X
MISCELLANEOUS
SECTION 10.01. BANK AND VENDOR TRANSACTIONS. At the Closing,
the Company and/or Austad shall provide satisfactory evidence of (a) the
payment of $1,500,000 to FNBO and the receipt of the FNBO Extension; (b) the
payment of $400,000 to Valley and the receipt of the Valley Release; (c) the
repayment of certain notes payable to the Former Stockholders as set forth in
Schedule 1.05; (d) the payment to the members of the David Austad Group of cash
dividends in the aggregate amount of $600,000 declared on April 28, 1995 as set
forth in such Schedule; and (e) the payment to the Former Stockholders of the
outstanding Redemption Notes.
SECTION 10.02. OTHER COMMITMENTS OF DAVID AUSTAD.
(a) At the Closing, David Austad shall purchase from
Austad the meeting facility of Austad located at Okoboji Lake, Iowa,
as more fully described in Exhibit L attached hereto, for a cash
purchase price of $75,000, payable one third at the Closing, one third
on or before July 1, 1995 and one third on or before December 31,
1995, in each case by certified check or wire transfer with no
prepayment penalties or interest charges to an account designated by
Austad, in exchange for a quitclaim deed in recordable form to be
delivered to David Austad by Austad upon full payment of all such
amounts.
(b) David Austad will expend at least $800,000 in the
opening and roll out of the two New Stores to be opened pursuant to
the License Agreement.
SECTION 10.03. OTHER COMMITMENTS OF THE BUYER.
(a) The Buyer agrees to cause its subsidiaries to phase
in the receipt of Austad catalog telemarketing activities pursuant to
a schedule to be mutually agreed upon by Austad, David Austad and the
Buyer. The Buyer further agrees that it shall not allocate to the
Company or Austad any telemarketing customer contact costs incurred
from the Closing Date through December 30, 1995 in excess of $3.28 per
customer order, representing a guaranteed savings of at least 10% over
Austad's projected 1995 Business Plan cost of $3.64 per customer order
(based upon such Plan's budgeted talk time and call to order ratio).
For the 1996 fiscal year and beyond, costs shall be allocated in the
same manner as for the Buyer's other catalogs, as set forth in the
Reimbursement Agreement.
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The Buyer will retain and produce for inspection during normal
business hours, on reasonable notice by Austad, data sufficient to
verify the accuracy of the costs incurred and allocations made. The
Buyer agrees that Austad shall not approve the relocation of warehouse
and telemarketing facilities for the Austad business in the absence of
a demonstrated plan for savings of at least 10% over Austad's
now-current fulfillment costs.
(b) The Buyer agrees that the Buyer will, at its expense,
use its best efforts to link the Buyer's MACSII system with Austad's
Richter and inventory forecasting systems on a one-way outbound feed
from a data center operated by the Buyer or one of its subsidiaries.
The Buyer further agrees to use its best efforts to integrate Austad's
operations with the Buyer's MACSII system by March 31, 1996 and to
complete such outbound-feed link within sixty (60) days following such
integration into the MACSII system.
(c) The Buyer acknowledges to David Austad its present
intention to cause the Company and/or Austad to open one new Austad's
retail store in 1995 and four in 1996, provided in each case that (i)
the Company's Austad's retail stores collectively are profitable, (ii)
the Company as a whole is operating on budget and (iii) the new stores
in question are self-funding (including use of availability under the
Revolving Loan Agreement provided that such use does not restrict in
any way other business activities of the Company and/or Austad) so
that no financing need be obtained in order to open any such store.
The parties acknowledge that the statement of intention set forth in
this Section 10.03(c) shall be a nonbinding expression of intent only.
(d) The Buyer agrees with each of David Austad and
Randall Austad that, within the following time periods, the Buyer will
obtain the release and discharge of the respective personal guarantees
made by each: (i) the guarantees in favor of FNBO, on or before May
31, 1997, and (ii) the guarantees in favor of the Lease Finance Group
as set forth in Schedule 2.06, on or before May 31, 1998.
(e) The Buyer agrees with each of David Austad and
Randall Austad to execute and deliver, at the Closing, the
Indemnification Agreements, substantially in the form set forth in
Exhibit G, with such additions and changes as shall be agreed upon by
the Buyer, David Austad and Randall Austad.
SECTION 10.04. REPRESENTATIONS AND WARRANTIES. The
representations and warranties made in this Agreement and in any certificate,
Schedule, Exhibit, release or other instrument or document delivered in
connection therewith shall survive the Closing Date. The covenants of the
parties hereto shall continue in full force and effect in accordance with their
terms.
SECTION 10.05. NO BROKERS. Except as contemplated by Section
1.03 hereof, each party hereto represents and warrants that there are no claims
for brokerage commissions or finder's fees in connection with the transactions
contemplated hereby resulting from any action taken by any party, or the
officers or directors of any corporate party.
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SECTION 10.06. GOVERNING LAW. This Agreement shall be
construed and enforced in accordance with the internal, substantive laws of the
State of New Jersey, without giving effect to the conflict of law rules
thereof.
SECTION 10.07. NOTICES. All notices, consents, requests,
instructions, approvals and other communications provided for herein shall be
deemed validly given, made or served if in writing and delivered personally (as
of such delivery) or sent by certified mail, return receipt requested (as of
two days after deposit in a United States post office), postage prepaid, or by
facsimile transmission (as of such transmission provided it is subsequently
confirmed in writing) or by prepaid overnight courier (as of the time of
delivery):
(a) if to the Buyer, addressed to:
Hanover Direct, Inc.
1500 Harbor Boulevard
Weehawken, New Jersey 07087
Attention: Michael P. Sherman, Esq.
Fax No.: 201-392-5005
(b) if to the Company or Austad, addressed to:
Austad Holdings, Inc.
4500 East 10th Street
Sioux Falls, South Dakota 57196
Attention: David Austad
Fax. No.: 605-336-7221
(c) if to the Individuals, addressed to:
c/o David Austad
812 Bayberry Circle
Sioux Falls, South Dakota 57106
and also to:
c/o Randall Austad
1508 South Gray Goose Circle
Sioux Falls, South Dakota 57103
or such other address as shall be furnished in writing by a party to the
others. It is understood and agreed that the confirmed receipt by either of
David Austad or Randall Austad of a notice sent to them on behalf of the
Individuals shall constitute notice to all of the Individuals.
SECTION 10.08. JURISDICTION; AGENT FOR SERVICE. Legal
proceedings commenced by any party hereto arising out of any of the
Transactions or obligations contemplated by this Agreement shall be brought
exclusively in the Federal courts or, in the absence of Federal jurisdiction,
state courts, in either case in the State of New Jersey. The parties hereto
irrevocably and unconditionally submit to the jurisdiction of such courts and
agree to take any and all future action necessary to submit to the jurisdiction
of such courts. Each of the parties hereto irrevocably waives any objection
which it may now or hereafter have to the laying of venue of
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any suit, action or proceeding brought in any Federal or state court in the
State of New Jersey and further irrevocably waives any claims that any such
suit, action or proceeding brought in any such court has been brought in an
inconvenient forum. The Company hereby irrevocably designates, appoints and
empowers Corporation Trust Company, whose present address is 820 Bear Tavern
Road, West Trenton, New Jersey 08628, as its authorized agent to receive, for
and on behalf of the Company, service of process in the State of New Jersey as
and when such actions and proceedings may be brought, and such service of
process shall be deemed completed upon the date of delivery thereof to such
agent, whether or not such agent gives notice thereof to the Company, or upon
the earliest of any other date permitted by applicable law. Final judgment
against the Company in any such suit shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment, a certified or true copy of which
shall be conclusive evidence of the fact and the amount of any indebtedness or
liability of the Company therein described, or by appropriate proceedings under
any applicable treaty or otherwise.
SECTION 10.09. ASSIGNMENT; AMENDMENTS, WAIVERS.
(a) Neither the Buyer nor the Company shall assign any of
its rights or obligations under this Agreement without the prior written
consent of the other, except that the Buyer may assign its rights hereunder to
one or more direct or indirect wholly-owned subsidiaries of the Buyer provided
that the Buyer shall continue to be obligated to perform all the obligations to
be performed by the Buyer hereunder.
(b) This Agreement shall be binding upon and shall inure
to the benefit of the parties and their respective successors and permitted
assigns, and no other person shall acquire or have any right under or by virtue
of this Agreement.
(c) No provision of this Agreement may be amended,
modified or waived except by written agreement duly executed by each of the
parties.
SECTION 10.10. ENTIRE AGREEMENT. This Agreement represents
the entire agreement between the parties and supersedes and cancels any prior
oral or written agreement, letter of intent or understanding related to the
subject matter hereof, including, without limitation, that certain letter of
intent dated March 15, 1995 among the Buyer, Austad, and David Austad
individually and on behalf of the other Individuals.
SECTION 10.11. BINDING AGREEMENT. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns, and no other person shall acquire
or have any right under or by virtue of this Agreement.
SECTION 10.12. COUNTERPARTS. This Agreement may be executed
in one or more counterparts, and shall become effective when one or more
counterparts have been signed by
--BALANCE OF PAGE LEFT INTENTIONALLY BLANK--
39
<PAGE> 40
each of the parties.
IN WITNESS WHEREOF, this Agreement has been duly executed by
the parties hereto on the day and year first above written.
HANOVER DIRECT, INC.
By: /s/ Michael P. Sherman
----------------------
Name: Michael P. Sherman
Title: EVP
AUSTAD HOLDINGS, INC.
By: /s/ David Austad
----------------------
Name: David Austad
Title: Incorporator
THE AUSTAD COMPANY
By: David Austad
----------------------
Name: David Austad
Title: President/CEO
THE INDIVIDUALS:
(a) THE DAVID AUSTAD GROUP:
/s/ David Austad
-------------------------------------
David Austad, individually
/s/ David Austad
-------------------------------------
David Austad, as custodian for each of
Ryan, Sara and Melissa Austad
/s/ Denise Austad
-------------------------------------
Denise Austad
(b) THE FORMER STOCKHOLDERS:
/s/ Oscar Austad
-------------------------------------
Oscar Austad
--SIGNATURES CONTINUED ON FOLLOWING PAGE--
40
<PAGE> 41
--SIGNATURES CONTINUED FROM PRECEDING PAGE--
/s/ Dorothy Austad
-------------------------------------
Dorothy Austad
/s/ Randall Austad
-------------------------------------
Randall Austad
/s/ Kristi Austad
-------------------------------------
Kristi Austad
/s/ Lori Miller
-------------------------------------
Lori Miller, individually
/s/ Robin Miller
-------------------------------------
Robin Miller
/s/ Kerri Derenge
-------------------------------------
Kerri Derenge
/s/ Sharon Stahl
-------------------------------------
Sharon Stahl
/s/ Lori Miller
-------------------------------------
Lori Miller, as custodian for each of
Kara and Andrew Miller
/s/ Dorothy Austad
-------------------------------------
Oscar Austad by Dorothy Austad, his
attorney in fact
41
<PAGE> 1
Exhibit 2.4
AGREEMENT AND PLAN OF CORPORATE SEPARATION
AND REORGANIZATION
AGREEMENT AND PLAN OF CORPORATE SEPARATION AND REORGANIZATION dated as
of February 16, 1996 by and among AUSTAD HOLDINGS, INC. ("Holdings"), a Delaware
corporation; THE AUSTAD COMPANY ("TAC"), a South Dakota corporation and wholly
owned subsidiary of Holdings; HANOVER DIRECT, INC. ("Hanover"), a Delaware
corporation and the owner of 67.5% of the outstanding shares of capital stock of
Holdings; DAVID B. AUSTAD, a resident of the State of South Dakota, individually
("David Austad") and as custodian for certain members of his immediate family
under the South Dakota Uniform Transfer to Minors Act ("SDUTMA"); and DENISE
AUSTAD, also a resident of the State of South Dakota (collectively with David
Austad, both individually and as custodian as aforesaid, the "David Austad
Group", the members of such Group being collectively the owners of the remaining
32.5% of the outstanding shares of capital stock of Holdings).
W I T N E S S E T H:
WHEREAS, TAC is, and since 1973 has been, actively engaged in the
business of direct marketing of golf equipment, supplies, apparel and related
goods and services through its Austad's catalog in Sioux Falls, South Dakota;
and
WHEREAS, TAC is also actively engaged, through its Retail Division (the
"Division"), in the business of the retail sale of golf equipment, supplies,
apparel and related goods and services, such business having been commenced by
TAC in a single retail store in Sioux Falls in 1974 and expanded by two stores
in Minnesota and a fourth store in Illinois during the period 1989 through 1991;
and
WHEREAS, Hanover and the David Austad Group acquired their respective
interests in Holdings on May 25, 1995, the former in exchange for a cash capital
contribution and certain other consideration, and the latter in exchange for all
the outstanding capital shares of TAC, in a transaction in which no gain or loss
was recognized in whole or in part under the Internal Revenue Code of 1986, as
amended (the "Code"); and
WHEREAS, in consequence of the foregoing transactions,
<PAGE> 2
Holdings is the sole shareholder of TAC; and
WHEREAS, TAC has offered to transfer all assets of the Division,
subject to all liabilities of the Division, such assets and liabilities being
substantially those appearing on the pro forma balance sheet prepared February
13, 1996 and dated February 16, 1996, attached hereto as Exhibit A (the "Balance
Sheet"), as adjusted from such date to the date on which the closing of such
transfer shall take place (the "Closing Date"), to AGS, Inc. ("Newco"), a South
Dakota corporation organized by TAC on January 19, 1996, in exchange for the
original issue of 100,000 shares of common stock, par value $1.00 per share, of
Newco (the "Newco Shares"), which shall constitute all of the outstanding common
stock of Newco, in a transaction qualifying as a tax-free reorganization under
Sections 368(a)(1)(D) and 355 of the Code; and
WHEREAS, TAC has offered to spin off the Newco Shares acquired by it to
Holdings, in a transaction intended to qualify as a tax-free reorganization
under Section 355 of the Code; and
WHEREAS, Holdings has offered to transfer the Newco Shares acquired
from TAC to the members of the David Austad Group, in exchange for (1) the
payment of $1,164,445 by the members of the David Austad Group to First National
Bank of Omaha, a national banking association ("FNBO"), as payment of a
liability of the Division, representing a partial paydown of TAC's existing
indebtedness to FNBO (the "FNBO Payment"), and (2) the surrender by the members
of the David Austad Group of all their respective shares of the Common Stock,
$1.00 par value, of Holdings, representing an aggregate of 32,500 such shares,
in a transaction intended to qualify as a tax-free split-off under Section 355
of the Code, and the members of the David Austad Group desire to accept such
offer subject to the terms and conditions set forth herein.
NOW, THEREFORE, in reliance upon the representations, warranties and
agreements made herein and in consideration of the premises and mutual promises
herein contained, the parties agree as follows:
1. PLAN OF REORGANIZATION.
The parties hereby adopt a Plan of Reorganization intended
2
<PAGE> 3
to effect a tax-free reorganization under Section 355 and various other
Sections of the Code. Pursuant to the terms of this Agreement
hereinafter set forth, the reorganization will consist of:
a. SECTION 351 TRANSFER: The transfer by TAC of the part of its
assets constituting the Division, subject to all liabilities of
the Division, to Newco in exchange solely for all of the
outstanding voting stock of Newco;
b. SECTION 355 AND 368(A)(1)(D) TRANSFERS:
(1) The transfer by TAC to Holdings of all the shares of
Newco's voting stock acquired by TAC as aforesaid; and
(2) The distribution by Holdings to the members of the
David Austad Group of an aggregate of 100,000 Newco
Shares, constituting all the stock of Newco acquired
by Holdings, in exchange for the FNBO Payment and
32,500 shares of Holdings' Common Stock, $1.00 par
value, constituting all of the voting stock of
Holdings owned by such members.
2. TRANSFER OF THE DIVISION TO NEWCO.
The parties acknowledge that Newco's articles of incorporation, bylaws,
and organizational minutes are in a form approved by counsel for TAC
and the David Austad Group, its corporate name having been agreed upon
by David Austad and TAC, and that the initial capitalization of Newco
consists solely of 100,000 shares of Common Stock, par value $1.00 per
share. The initial officers and the initial director of Newco shall be
as follows:
Wayne Garten President
Edward O'Brien Vice President and Treasurer
Michael P. Sherman Vice President, Secretary and Sole
Director
TAC agrees to take, or cause to be taken, the following action at or
prior to the Closing Date:
3
<PAGE> 4
a. TAC shall transfer to Newco, in exchange for the Newco Shares,
all of the assets, properties and business of the Division,
subject to all of the liabilities, debts, obligations and
contracts of the Division (including all assets and the
liabilities appearing on the books and records of the Division
and included in Exhibit A hereto, but subject to certain
adjustments as set forth in Section 4 below). The transfer and
assignment of assets shall be by bulk or individual assignments
substantially in the form set forth in Exhibits 2.a.1 through
2.a.__ attached hereto, in each case with such other
appropriate instruments of title as counsel for the David
Austad Group may reasonably request.
b. TAC shall then transfer the Newco Shares to Holdings pursuant
to a unanimous written consent of the Board of Directors and
Sole Shareholder of TAC.
3. PAYMENT ON ACCOUNT OF CERTAIN INDEBTEDNESS; EXCHANGE OF STOCK.
On the Closing Date, the members of the David Austad Group agree:
a. to pay, or cause Newco to pay, to FNBO, as payment of a
liability of the Division, by wire transfer to an account
designated by FNBO, the sum of $1,164,445, representing a
portion of the outstanding obligations of TAC to FNBO under the
Loan Agreement dated as of May 31, 1995 between TAC and FNBO,
such sum being reflected as the "Revolving Credit Facility"
line item in the Retail column of the Liabilities section of
the Balance Sheet (sometimes hereinafter referred to as the
"Balance Due Amount" as described in Section 4 below).
b. to deposit, or cause Newco to deposit, into the Escrow Account
(as defined in Section 4 below), the sum of $200,000 (along
with any interest or earnings thereafter earned thereon, the
"David Austad Escrow Deposit"), to be held as provided in
Section 4; and
c. to transfer, assign, and surrender to Holdings a total of
32,500 shares of the Common Stock, par value $1.00
4
<PAGE> 5
per share, of Holdings, which shares shall constitute, in the
aggregate, all of the shares of voting stock of Holdings owned
by any of such members at the Closing Date;
and in exchange solely for such payment and such transfer of shares,
Holdings agrees:
d. to transfer to the respective members of the David Austad
Group, on the Closing Date, the number of Newco Shares set
forth opposite the name of each in Exhibit 3.d attached hereto,
representing a total of 100,000 Newco Shares, which shares
shall constitute all of the outstanding capital stock of Newco
at the Closing Date, and
e. to deposit, or cause TAC to deposit, into the Escrow Account
the sum of $200,000 (along with any interest or earnings
thereafter earned thereon, the "TAC Escrow Deposit"), to be
held as provided in Section 4 below.
4. ESCROW ACCOUNT; POST-CLOSING ADJUSTMENTS.
a. CERTAIN DEFINITIONS. The parties agree that the following
capitalized terms shall have the meanings indicated:
(1) Agreed Company Value--At February 16, 1996, 2,733,992,
representing $2,666,667(1) plus net income of Holdings
and subsidiary for the period May 26, 1995 through the
date of the Balance Sheet, the Balance Sheet having
been prepared in accordance with the methodology set
forth in Exhibit B attached hereto.
(2) Balance Due Amount--The "Revolving Credit Facility"
line item in the Balance Sheet, representing the
amount by which Retail Net Asset
- ----------------
(1) In accordance with the parties' agreement, this calculation is based on
Hanover's May 1995 purchase price of $1,800,000 for 67.5% of Holdings'
outstanding shares.
5
<PAGE> 6
Value (ignoring the Revolving Credit Facility line
item) exceeds 32.5% of the Agreed Company Value at the
date of the Balance Sheet, for a calculation at
February 16, 1996 as follows:
<TABLE>
<S> <C>
Total Retail Assets: $2,836,072
less Total Retail Liabilities: -1,947,524
----------
Retail Net Asset Value 888,548
plus Retail Revolving Credit
Facility line item: 1,164,445
----------
2,052,993
less 32.5% of $2,733,992: 888,548
----------
$1,164,445
</TABLE>
(3) Retail Net Asset Value--Total Assets less Total
Liabilities as set forth in the Retail column in the
Balance Sheet.
b. FINAL BALANCE SHEET. As soon as reasonably practicable after
the Closing Date but in no event later than the thirtieth
(30th) day following the Closing Date, Holdings shall prepare,
in consultation with Newco, a pro forma balance sheet of
Holdings and subsidiary on a combined basis as at the Closing
Date (the "Final Balance Sheet"), which shall contain all
categories of assets and liabilities reflected in the Balance
Sheet, and shall separately identify Retail and Catalog line
items in the manner set forth in the Balance Sheet. The Escrow
Agent (as defined below in Section 4.c) shall make a cash
payment (the "Adjustment Payment") in accordance with the
Escrow Agreement referred to in Section 4.c, as follows: if the
Balance Due Amount set forth in the Final Balance Sheet exceeds
that set forth in the Balance Sheet, the Adjustment Payment
shall be made to TAC in an amount equal to such excess; if the
Balance Due Amount set forth in the Final Balance Sheet is less
than that set forth in the Balance Sheet, however, the
Adjustment Payment shall be made to Newco in an amount equal to
such deficit. In the event of a dispute between David Austad
and Holdings as to the Balance Due Amount in the Final Balance
Sheet, the
6
<PAGE> 7
parties shall promptly negotiate in good faith to resolve the
issue or issues which form the basis for such dispute. If the
parties are unable to agree on the resolution of the dispute
within ten (10) days after delivery of the Final Balance Sheet
to David Austad and Holdings, the parties will refer such
dispute to Arthur Andersen LLP for determination of an
appropriate adjustment to the Final Balance Sheet to resolve
the disputed issues. The parties agree that such determination
shall be binding on all parties. David Austad and Holdings each
shall pay one-half of the fees, expenses and costs of such firm
for the services described herein.
c. ESCROW AGENT; ESCROW AGREEMENT. At the Closing, David Austad
shall deliver the David Austad Escrow Deposit, and TAC shall
deliver the TAC Escrow Deposit, in each case to The First
National Bank in Sioux Falls (the "Escrow Agent"), for deposit
into escrow in accordance with this Section 4 and the escrow
agreement among the Escrow Agent, David Austad, acting for
himself and the other members of the David Austad Group, TAC
and the Escrow Agent, such agreement to be in the form attached
as Exhibit 4.c (the "Escrow Agreement"). The Adjustment Payment
shall be made by the Escrow Agent in accordance with the Escrow
Agreement within ten (10) days following the delivery of the
Final Balance Sheet; provided, that in the event of a dispute
between David Austad and TAC regarding the Adjustment Payment,
the Escrow Agent shall retain an amount equal to the disputed
amount, and shall continue to hold such retained amount
pursuant to the Escrow Agreement pending resolution of such
dispute.
d. SALE OF FACILITY; SALE OF COMPUTER EQUIPMENT.
(1) Sale or other disposition to a third party of TAC's
office and distribution facility commonly known as
4500 East 10th Street, Sioux Falls, South Dakota (the
"Facility"), and of the computer hardware and software
leased by TAC from Lease Finance Group, Inc. or its
assignees (the "Computer Equipment"), shall require
the written
7
<PAGE> 8
consent of Newco, which consent shall not be
unreasonably withheld. Should Newco not respond to a
written request for consent within five business days
following delivery thereof, its consent shall be
presumed.
(2) Within twenty (20) days following the sale or other
disposition of the Facility or the Computer Equipment
to a third party, (A) TAC shall pay to Newco a sum in
cash, notes or other consideration (in the same types
and the same proportion as received by TAC from the
third party) equal to 32.5% of any Gain (as defined
below) on such sale, or, as the case may be, (B) Newco
shall pay TAC an amount in cash equal to 32.5% of any
Loss (as defined below) on such sale. The parties
acknowledge that any sale of Computer Equipment to
Newco shall be treated as a sale to a third party for
purposes of this Section 4.d.
(3) For purposes of this Section 4.d, "Gain" shall refer
to the excess of net proceeds of sale or other
disposition over the aggregate indebtedness secured by
the asset in question and remaining unpaid at the date
of sale, and "Loss" shall refer to the excess of such
indebtedness over the net proceeds of sale or
disposition, all determined net of any applicable
income or other taxes. "Net proceeds of sale or other
disposition" shall mean, in the event of a sale, the
selling price less any reasonable brokerage fee, the
South Dakota transfer fee(if any), attorneys fees, and
improvements required by the purchaser (if any), but
not including any reduction for fees or expenses
associated with the shutdown of the Facility or the
Computer Equipment; and to the extent shutdown fees
and expenses have previously been included in the
Balance Sheet, such fees and expenses will not be
deducted in the calculation of Gain or Loss. Federal
and state taxes shall be determined for such purposes
as if Holdings and TAC were filing applicable tax
returns on their own and not with Hanover on a
consolidated basis,
8
<PAGE> 9
and payments shall be subject to adjustment following
any tax or other audits. The amount of income taxes
allocable to the computation of Gain or Loss shall be
the incremental income tax computed based on the
inclusion of the tax gain or loss on sale of the asset
in question in all applicable returns. In calculating
the applicable income tax, TAC shall maximize the use
of any available AMT and regulat net operating loss to
reduce the applicable tax, if any. In calculating Gain
or Loss, TAC shall ignore payments on the indebtedness
other than the regularly scheduled installments on the
indebtedness secured by the property in question, and
likewise shall ignore any increase in any such
indebtedness after the date hereof.
(3) Payment in the case of any adjustment under this
Section 4.d will be made by check or wire transfer as
designated by the party to receive such payment.
5. REPRESENTATIONS AND WARRANTIES OF HOLDINGS AND TAC.
Holdings and TAC, jointly and severally, represent and warrant to the
members of the David Austad Group as follows:
a. On the Closing Date, Newco will be a corporation duly organized
and existing and in good standing under the laws of the State
of South Dakota, and will have all necessary corporate power
and authority to own and conduct the business now being
conducted by the Division.
b. On the Closing Date, the authorized capital of Newco shall
consist of 500,000 shares of Common Stock, par value $1.00 per
share, of which 100,000 shares shall be issued and outstanding.
All of the issued and outstanding shares shall have been duly
authorized, validly issued, fully paid, and nonassessable and
shall be owned beneficially and of record by Holdings, free and
clear of any liens, claims, charges, options or encumbrances.
9
<PAGE> 10
c. On the Closing Date, all of the assets, properties and business
of every kind, character and description, whether tangible or
intangible, whether real, personal or mixed, and wherever
located, of the Division, subject to the debts, liabilities,
contracts and obligations of the Division, shall have been
transferred, assigned, conveyed and delivered to Newco, free
and clear of any liens or encumbrances, including, without
limitation, any liens in favor of FNBO (assuming payment in
full of outstanding obligations due to FNBO from TAC, release
by FNBO of its Form UCC- 3 termination statements and any other
applicable agreements or instruments terminating any security
interests of FNBO ("FNBO Termination Instruments"), and filing
of the FNBO Termination Instruments with governmental
authorities as applicable) or in favor of Congress Financial
Corporation ("Congress"), but subject however to the
adjustments provided for in Section 4 above.
d. At any time and from time to time after the Closing Date, upon
request of Newco or David Austad and without the payment of any
further consideration, Holdings or TAC or both of them shall
duly execute, acknowledge and deliver all such assignments,
conveyances and other instruments of transfer and other
assurances and documents, and will take such other action,
consistent with the terms of this Agreement, as reasonably may
be requested for the purpose of better assigning, transferring
and conveying to Newco or reducing to its possession any and
all of the assets, properties and business of the Division.
e. At the request of Newco or David Austad, and at Newco's
expense, TAC will prosecute or otherwise enforce in its own
name for the benefit of Newco, any and all claims or rights in
the name of TAC which, or the benefits of which, are
transferred to Newco pursuant to this Agreement and which are
required to be prosecuted or otherwise enforced in TAC's name.
f. On the Closing Date, Holdings and TAC will deliver or cause to
be delivered to David Austad the stock record
10
<PAGE> 11
book, minute book, financial records and all other corporate
documents of Newco. Holdings and TAC shall thereafter be
entitled to reasonable access to such records and documents as
are applicable to periods prior to the Closing Date.
g. To the best of the knowledge of Patrick D. Penney and Chuck
Kurth, the Chief Financial Officers, respectively, of TAC and
of Brawn of California, Inc., an affiliate of Holdings, there
are no material assets of TAC or Holdings, and no material
agreements, commitments, liens, encumbrances, obligations or
liabilities (absolute, accrued, contingent or otherwise) of or
affecting TAC or Holdings or any of the property of either,
except as shown or reflected in the Balance Sheet or otherwise
disclosed in writing to David Austad. For purposes hereof, an
asset or liability is material if it involves an amount in
excess of $20,000.
h. The shares of Holdings' Common Stock to be acquired by Holdings
hereunder will be acquired for its own account for investment
only and not with a present view to, or for sale in connection
with, any distribution of such shares.
i. To the best of the knowledge of Chuck Kurth and of Wayne
Garten, Executive Vice President and Chief Financial Officer of
Hanover, in each case without specific inquiry, David Austad
has not breached any representation or warranty made by him and
set forth in the Stock Purchase Agreement referred to in
Section 18 below or in any related agreement of the parties
executed and delivered on or about May 19, 1995 or May 25,
1995; it being understood and agreed by the parties that the
representation and warranty set forth in this Section 5.i is
based in part on, and made in partial reliance on, a
certificate of David Austad dated on or about this date, a copy
of which is attached hereto as Exhibit 5.i.
6. REPRESENTATIONS AND WARRANTIES OF THE DAVID AUSTAD GROUP MEMBERS.
11
<PAGE> 12
The members of the David Austad Group, jointly and severally, represent
and warrant to Holdings and TAC as follows:
a. The respective members of the David Austad Group own
beneficially and of record that number of shares of Holdings
Common Stock set forth opposite the name of each in Exhibit 6.a
attached hereto, and each member has full power and authority
to sell and transfer such shares to Holdings in the manner
provided herein, free and clear of any liens, claims, charges,
options and encumbrances.
b. At any time and from time to time after the Closing Date, upon
request of Holdings or TAC and without the payment of any
further consideration, the members of the David Austad Group or
Newco or any of them shall duly execute, acknowledge and
deliver all such assumption agreements, assignments,
conveyances and other instruments of transfer and other
assurances and documents, and will take such other action,
consistent with the terms of this Agreement, as reasonably may
be requested for the purpose of better assuming the liabilities
of the Division being assumed by Newco, or transferring and
conveying to Newco or reducing to its possession any and all of
the assets, properties and business of the Division.
c. The Newco Shares to be acquired by the members of the David
Austad Group hereunder will be acquired for their own account
for investment only and not with a present view to, or for sale
in connection with, any distribution of such shares.
d. To the best of David Austad's knowledge, there are no material
assets of TAC or Holdings, and no material agreements,
commitments, liens, encumbrances, obligations or liabilities
(absolute, accrued, contingent or otherwise) of or affecting
TAC or Holdings or any of the property of either, except as
shown or reflected in the Balance Sheet or otherwise disclosed
in writing to Hanover's Chief Financial Officer.
12
<PAGE> 13
7. OTHER COVENANTS OF THE PARTIES.
a. Each of David Austad, Newco and Holdings agrees to use his or
its best efforts to obtain, prior to the Closing Date, all
third-party and other consents required by Congress in
connection with its contemplated provision of loans and/or
other financial accommodations to Holdings and TAC, including,
without limitation, the consent of Valley Bank, provider of
mortgage financing respecting the Facility, substantially in
the form set forth in the attached Exhibit 7.a.
b. As promptly as possible and in any event prior to the Closing
Date, TAC and Newco shall arrange for the transfer of
sponsorship of TAC's Go for the Green Plan (the "TAC Plan")
from TAC to Newco. The parties acknowledge that TAC Plan
participants who become eligible and choose to participate in
the Hanover 401(k) Plan following the Closing Date shall
continue to retain all appropriate rights in their
undistributed account balances in accordance with the TAC Plan.
TAC agrees to pay Newco a one-time fee of $2,000 in respect of
administration of the TAC Plan, payable on the Closing Date.
c. On the Closing Date, the appropriate parties shall execute and
deliver:
(1) the Escrow Agreement, executed by the parties and the
Escrow Agent;
(2) an Amended License Agreement among Holdings, TAC,
Hanover (as to Article IX only) and David Austad,
substantially in the form attached as Exhibit 7.c.2,
providing for an exclusive license for retail use in a
37-state territory and Canada of certain Holdings
trademarks and other intellectual property rights of
Holdings and TAC;
(3) a Joint Buying and Mutual Cooperation Agreement among
TAC, Newco and DBA, Inc. ("DBA"), a South Dakota
corporation (DBA being wholly owned by David Austad
and having been formed by him to open
13
<PAGE> 14
and operate a fifth Austad's retail store in Omaha,
Nebraska, pursuant to the foregoing Amended License
Agreement), substantially in the form attached as
Exhibit 7.c.3, providing for coordinated purchasing
and other activities; and
(4) a Consulting Agreement between TAC and David Austad,
substantially in the form attached as Exhibit 7.c.4,
respecting consulting services to be provided by David
Austad to TAC and/or Holdings;
(5) bulk or individual assignments substantially in the
form set forth in Exhibits 2.a.1 through 2.a.__
attached hereto, in each case with such other
appropriate instruments of title as counsel for the
David Austad Group may reasonably request.
The foregoing agreements may be referred to collectively hereinafter as
the "Other Agreements."
8. CONDITIONS TO CLOSING--HOLDINGS AND TAC.
The obligation of Holdings to exchange the Holdings shares owned by the
members of the David Austad Group for the Newco Shares, and the
obligations of Holdings and TAC to make the TAC Escrow Deposit and to
execute and deliver the Other Agreements pursuant to this Agreement,
shall be subject to the satisfaction, at or before the Closing Date, of
the following conditions (any of which may be waived, in whole or in
part, by Holdings):
a. The representations and warranties of the members of the David
Austad Group contained in this Agreement, or in any certificate
or document delivered to Holdings in connection herewith, shall
be true in all material respects at the Closing Date as if made
again on and as of the Closing Date, and such members and Newco
shall have duly performed and complied with all agreements and
conditions required by this Agreement to be performed or
complied with by them at or before the Closing Date. Holdings
shall have been furnished with certificates of such members and
of appropriate
14
<PAGE> 15
officers of Newco certifying in such detail as Holdings may
reasonably request to the fulfillment of the foregoing
conditions.
b. David Austad or Newco shall have paid to FNBO the FNBO Payment
and shall have deposited the David Austad Escrow Deposit with
the Escrow Agent.
c. David Austad shall have furnished Holdings with the following
documents:
(1) Resignations of the following from all positions with
Holdings and TAC, effective on the Closing Date:
David Austad Director, President and
Chief Executive Officer--
Holdings, TAC
Randall Stewart Director--Holdings
Patrick Penney Treasurer--Holdings, TAC
(2) Evidence of the payment by TAC to the respective
Warrant Holders of the sums required by Exhibit 8.c.3,
it being agreed by the parties that 32.5% of each such
sum, or $8,125 in the aggregate, is being paid by TAC
on behalf of the members of the David Austad Group and
shall be reflected in the Final Balance Sheet as an
adjustment thereto.
(3) The executed Warrant Holder Releases, together with
warrants submitted in proper form for cancellation.
d. The members of the David Austad Group and Newco shall have
executed and delivered the Other Agreements to which they are
parties.
e. All necessary authorizations and approvals required for the
execution, delivery and consummation of the transactions
provided for in this Agreement shall have been obtained,
including, without limitation, the consents of Congress and
Valley Bank.
15
<PAGE> 16
f. Holdings shall have received either (1) executed agreements
from landlords for TAC's retail stores approving the assignment
to Newco of each of TAC's lease agreements respecting such
stores, as identified in Exhibit 8.e hereto (collectively, the
"Lease Agreements"), and releasing TAC from all obligations
under the Lease Agreements, or, at Holdings' election exercised
in its sole discretion, (2) agreements approving and effecting
the assignment of each of the Lease Agreements to Newco or
subleases executed by Newco in respect of each Lease Agreement,
in each case satisfactory in form and substance to Holdings and
its counsel.
g. Holdings and TAC shall have received a Certificate of the
Secretary of Newco certifying as to the incumbency and
authority of the officers of Newco executing all documents to
be executed and delivered by Newco in connection herewith.
9. CONDITIONS TO CLOSING--DAVID AUSTAD GROUP AND NEWCO.
The obligation of the members of the David Austad Group to exchange the
Holdings shares owned by them for the Newco Shares, the obligation of
David Austad to deposit funds with the Escrow Agent pursuant to the
Escrow Agreement, and the respective obligations of David Austad and
Newco to enter into the Other Agreements pursuant to this Agreement,
shall be subject to the satisfaction, at or before the Closing Date, of
the following conditions (any of which may be waived, in whole or in
part, by David Austad):
a. The representations and warranties of Holdings and TAC
contained in this Agreement, or in any certificate or document
delivered to the members of the David Austad Group or Newco in
connection herewith, shall be true in all material respects at
the Closing Date as if made again on and as of the Closing
Date.
b. TAC shall have deposited the TAC Escrow Deposit with the Escrow
Agent.
c. Holdings shall have furnished David Austad with the
16
<PAGE> 17
following documents:
(1) The Certificate or Articles of Incorporation of Newco
and all amendments thereto, duly certified by the
proper officials of the jurisdiction of Newco's
organization.
(2) A certificate as to the good standing of Newco and
payment of all applicable state taxes thereby,
executed by the appropriate officials of the States of
South Dakota.
(3) The by-laws of Newco, duly certified by the Secretary
of Newco and the Secretary or an Assistant Secretary
of Newco as being in full force and effect.
(4) A certificate of the Secretary or an Assistant
Secretary of Newco, certifying (a) that attached
thereto is a true and complete copy of all instruments
reflecting actions of the incorporator of Newco, and
of all resolutions of the board of directors of Newco
pertaining to the transactions contemplated by this
Agreement, the latter being duly adopted at meetings
of such board at which a quorum of directors was
present and acting throughout, and certifying (b) as
to the incumbency and authority of the incorporator
and officers of Newco.
(5) A favorable opinion of May, Johnson, Doyle and Becker,
P.C., dated the Closing Date, substantially in the
form of Exhibit 9.c.5, relating to the formation of
Newco, the issuance of its shares of Common Stock and
the transfer of such shares by TAC to Holdings.
(6) Evidence of the payment by TAC to the respective
Warrant Holders of the sums required by Exhibit 8.c.3,
it being agreed by the parties that 67.5% of each such
sum, or $16,875 in the aggregate, is being paid by TAC
for its own account and the balance on behalf of the
members of the David
17
<PAGE> 18
Austad Group as provided in Section 8.c(3) above, such
balance to be reflected in the Final Balance Sheet as
an adjustment thereto.
d. TAC and Holdings shall have executed and delivered the Other
Documents to which they are parties.
e. All necessary authorizations and approvals required for the
execution, delivery and consummation of the transactions
provided for in this Agreement shall have been obtained,
including, without limitation, the consents of Valley Bank,
Congress and First National Bank in Sioux Falls.
10. THE CLOSING.
The closing of the transactions contemplated hereby (the "Closing")
shall be held at the offices of Lynn, Jackson, Shultz & Lebrun, P.C.,
141 North Main Avenue, Sioux Falls, South Dakota or at such other place
or places as the parties may agree upon, at 10:00 A.M., local time, on
February 16, 1996, or such other time and date as may be mutually
approved by the parties in writing, but not later than February 28,
1996.
11. CERTAIN EXPENSES.
Except as otherwise set forth below, neither Hanover, Holdings nor TAC
shall pay or be liable for or be required to pay any of the following
liabilities, fees or expenses related to the transactions contemplated
hereby, all of which shall be borne and paid for by David Austad:
a. professional fees of counsel and any accountant or auditor for
any member of the David Austad Group, or for Newco in respect
of activities conducted following the Closing, or for a Warrant
Holder or other former stockholder of TAC; provided, that at
the Closing TAC shall reimburse David Austad for professional
fees of counsel respecting the obtaining of landlord consents
to assignment and releases of TAC's obligations thereunder,
upon receipt of itemized documentation
18
<PAGE> 19
thereof;
b. fees and expenses, if any, of Mesirow Financial, Inc. or any
other investment banking company or any person or entity
retained for financial services or services as a finder
rendered to a member of the David Austad Group or a Former
Stockholder or a Warrant Holder in connection with the
transactions contemplated hereby; and
c. any income, capital gains or other taxes incurred by one or
more members of the David Austad Group or Newco in connection
with the transactions contemplated hereby; provided, that in
the event the transactions contemplated in this Agreement fail
to qualify for treatment as a tax-free reorganization under the
Code as aforesaid, TAC shall pay to the members of the David
Austad Group an amount equal to 67.5% of any federal income tax
liability incurred by such members as a result of such failure,
it being understood that such members will be responsible for
the balance of such liability.
12. CERTAIN OPERATIONAL AND TAX MATTERS; MAINTENANCE OF RECORDS
a. The parties acknowledge that they have been advised that the
written consent of United Properties Investment Company
("Landlord") to the assignment to Newco of TAC's interest as
tenant under its undated lease for a 10-year lease term
expiring July 31, 1999 with The Northtown Triangle Limited
Partnership, Landlord's predecessor in interest, respecting
TAC's retail store premises at the Northcourt Commons Shopping
Center, Blaine, Minnesota (the "Northcourt Lease"), such
consent to include a release of TAC (such consent and release,
the "Northcourt Consent"), may not be received prior to the
Closing. In view of this possible delay, and in view of Newco's
expectation that such Consent will be received no more than
twenty (20) days following the Closing Date, Newco has
requested that TAC waive the condition to closing set forth in
Section 8.f above to the extent required to permit
19
<PAGE> 20
Newco to operate the retail store business in such premises, as
a Licensee's Store pursuant to the Amended License Agreement,
pending receipt of the expected consent. TAC agrees to permit
such operation, pending receipt of the Northcourt Consent,
under the terms and conditions set forth below:
(1) Newco shall perform all obligations of TAC under the
Northcourt Lease, except that TAC shall continue to
pay rent and other sums due to the landlord from time
to time under the Northcourt Lease, and Newco shall
pay TAC, at the Closing, an amount equal to ten (10)
days' rent to cover the anticipated rent expenses;
(2) Newco and David Austad shall use their best efforts to
obtain the Northcourt Consent as promptly as possible
and in any event not later than the twentieth (20th)
day following the Closing Date;
(3) Should the Northcourt Consent not be received by the
close of business on the tenth (10th) day following
the Closing Date, Newco shall immediately commence to
perform all obligations under the Northcourt Lease,
including, without limitation, the direct payment to
the Landlord of rent and other sums due to the
Landlord from time to time under the Northcourt Lease.
The parties shall then use their best efforts to
obtain the Northcourt Consent, or if the parties are
unsuccessful in obtaining such Consent, some agreement
satisfactory to Landlord whereby Newco is assigned the
Northcourt Lease or Newco shall become a subtenant,
TAC being the Sublandlord, and in any such event Newco
and David Austad, jointly and severally, shall
indemnify and hold harmless TAC, its officers,
directors, shareholders, subsidiaries, affiliates,
agents and representatives as more fully set forth in
the Indemnification Agreement. In the event that no
mutually satisfactory agreement can be negotiated with
Landlord, the parties hereto shall negotiate
20
<PAGE> 21
in good faith to arrange for the transfer to TAC of
the Northcourt retail business assets and liabilities
and to agree upon a settlement among the parties
whereby TAC remains as tenant of the Northcourt Lease
and resumes operation of the Austad's retail store in
such premises.
b. From and after the Closing Date, Newco shall endorse its
insurance policies to be primary to any other policies in
effect, and shall provide TAC with satisfactory evidence of
such endorsement. Notwithstanding the assumption of the
Division's liabilities by Newco pursuant to this Agreement and
the Assignment and Assumption Agreement between TAC and Newco
being delivered at the Closing (the form of such agreement
being included as Exhibit 2.a.1 hereto), TAC agrees to be
responsible for any claim respecting the Division's assets and
business that arises prior to the Closing Date, provided TAC
receives notice of such claim, and provided such claim is
covered by TAC's liability policies under the applicable terms
and conditions of such policies in effect prior to the Closing
Date; and provided further, that TAC's responsibility hereunder
shall be only to the extent of such coverage.
c. From and after the Closing Date, each of the parties shall
cooperate with the other parties in connection with any audits
or other examinations by federal, state, local or other taxing
authorities, shall make reasonably available to the other
parties their respective books, records and other data relating
to the transactions contemplated by this Agreement and the
business and affairs of Holdings, TAC and Newco (which books,
records and other data such parties shall maintain until the
later of (i) six years after the Closing Date (and permanently
for personnel- related records) or (ii) the completion of any
Internal Revenue Service or state tax audits of Holdings and/or
TAC), and shall provide assistance to the other parties and
their counsel and accountants, all as reasonably requested and
during normal business hours. In addition to the foregoing,
each of Holdings and TAC,
21
<PAGE> 22
its counsel and accountants shall have the right to remove and
take possession of any of Holdings' or TAC's books, records and
other data that are transferred to Newco on the Closing Date,
as reasonably may be requested, provided that (i) Newco shall
have the right to make copies thereof at TAC's expense before
such removal and (ii) Holdings or TAC, as the case may be,
promptly will return such books, records and other data upon
the request of Newco. Except as otherwise provided in the
foregoing sentence, each party shall bear its own costs
incurred in connection with the cooperation and maintenance of
records provided for herein.
13. SURVIVAL.
The representations and warranties made in this Agreement and in any
certificate, Schedule, Exhibit, release or other instrument or document
delivered in connection therewith shall survive the Closing Date. The
covenants of the parties hereto shall continue in full force and effect
in accordance with their terms.
14. NO BROKERS.
Each party hereto represents and warrants that there are no claims for
brokerage commissions or finder's fees in connection with the
transactions contemplated hereby resulting from any action taken by any
party, any Warrant Holder, or the officers or directors of any
corporate party.
15. GOVERNING LAW.
This Agreement shall be construed and enforced in accordance with the
internal, substantive laws of the State of New Jersey, without giving
effect to the conflict of law rules thereof.
16. NOTICES.
All notices, consents, requests, instructions, approvals and other
communications provided for herein shall be deemed validly given, made
or served if in writing and delivered
22
<PAGE> 23
personally (as of such delivery) or sent by certified mail, return
receipt requested (as of two days after deposit in a United States post
office), postage prepaid, or by facsimile transmission (as of such
transmission provided it is subsequently confirmed in writing) or by
prepaid overnight courier (as of the time of delivery):
(a) if to Holdings, TAC or Hanover, addressed to:
Hanover Direct, Inc.
1500 Harbor Boulevard
Weehawken, New Jersey 07087
Attention: Michael P. Sherman, Esq.
Fax No.: 201-392-5005
(b) if to a member of the David Austad Group, addressed to
such member c/o David Austad as follows:
c/o David Austad
812 Bayberry Circle
Sioux Falls, South Dakota 57106
or such other address as shall be furnished in writing by a party to the others.
17. JURISDICTION; AGENT FOR SERVICE.
Legal proceedings commenced by any party hereto arising out of any of
the transactions or obligations contemplated by this Agreement shall be
brought exclusively in the Federal courts or, in the absence of Federal
jurisdiction, state courts, in either case in the State of New Jersey.
The parties hereto irrevocably and unconditionally submit to the
jurisdiction of such courts and agree to take any and all future action
necessary to submit to the jurisdiction of such courts. Each of the
parties hereto irrevocably waives any objection which it may now or
hereafter have to the laying of venue of any suit, action or proceeding
brought in any Federal or state court in the State of New Jersey and
further irrevocably waives any claims that any such suit, action or
proceeding brought in any such court has been brought in an
inconvenient forum. Each of TAC and Newco hereby irrevocably
designates, appoints and empowers Corporation Trust Company, whose
present address is 820 Bear Tavern Road, West Trenton, New Jersey
08628, as its
23
<PAGE> 24
authorized agent to receive, for and on behalf of TAC and Newco,
respectively, service of process in the State of New Jersey as and when
such actions and proceedings may be brought, and such service of
process shall be deemed completed upon the date of delivery thereof to
such agent, whether or not such agent gives notice thereof to TAC or
Newco, as the case may be, or upon the earliest of any other date
permitted by applicable law. Final judgment against TAC or Newco in any
such suit shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment, a certified or true copy of
which shall be conclusive evidence of the fact and the amount of any
indebtedness or liability of TAC or Newco therein described, or by
appropriate proceedings under any applicable treaty or otherwise.
18. ENTIRE AGREEMENT; ETC.
This Agreement represents the entire agreement between the parties and
supersedes and cancels any prior oral or written agreement, letter of
intent or understanding related to the subject matter hereof, including
(a) the Stockholders' Agreement dated as of May 25, 1995 to which the
members of the David Austad Group and Hanover are parties, and the
Reimbursement Agreement dated the same date between TAC and Hanover,
but not including (b) the Stock Purchase Agreement dated as of May 19,
1995 (the "Stock Purchase Agreement") to which TAC, Hanover, the
members of the David Austad Group and Holdings are parties, which
latter agreement shall continue in full force and effect.
Notwithstanding the generality of the foregoing, the parties agree in
respect of the Stock Purchase Agreement that the provisions of Sections
1.04 (relating to an Additional Capital Contribution), 10.02(b)
(relating to the expenditure of minimum amounts on two new Austad's
stores by David Austad) and 10.03(a) through (c) (relating to
relocation of certain TAC operations, MIS linkups and proposed new TAC
stores) shall be superseded and of no further force or effect. Also
notwithstanding the generality of the foregoing, the parties
specifically agree that those certain Indemnification Agreements dated
May 25, 1995 between Hanover and each of David Austad and Randall
Austad shall remain in full force and effect. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and
their respec-
24
<PAGE> 25
tive successors and permitted assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. This
Agreement may be executed in one or more
[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
25
<PAGE> 26
counterparts, and shall become effective when one or more counterparts
have been signed by each of the parties.
IN WITNESS WHEREOF, this Agreement has been duly executed by
the parties hereto on the day and year first above written.
AUSTAD HOLDINGS, INC.
By: /s/ Michael Sherman
-------------------------------
Name: Michael Sherman
Title: Vice President
THE AUSTAD COMPANY
By: /s/ Michael P. Sherman
-------------------------------
Name: Michael P. Sherman
Title: Vice President
HANOVER DIRECT, INC.
By: /s/ Wayne Garten
-------------------------------
Name: Wayne Garten
Title: Executive VP
THE DAVID AUSTAD GROUP:
/s/ David Austad
-----------------------------------
David Austad, individually
/s/ David Austad
-----------------------------------
David Austad, as custodian under
the SDUTMA for each of Ryan, Sara
and Melissa Austad
/s/ Denise Austad
-----------------------------------
Denise Austad
26
<PAGE> 1
Exhibit 4.2
FIRST SUPPLEMENTAL INDENTURE, dated as of March 28, 1995 (the "First
Supplemental Indenture"), to the Indenture, dated as of August 17, 1993 (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 Life Insurance Company of America ("Sun Life") is the sole
Holder of all the outstanding Securities;
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 Sun Life has provided its written consent to
the substance of such amendments in consideration of the payment to it of an
amendment fee in the amount of $70,000 (the "Amendment Fee") concurrently with
the execution of this First Supplemental Indenture.
NOW THEREFORE, each party agrees as follows:
<PAGE> 2
ARTICLE I
AMENDMENTS
1.1 Definitions. The definitions of "CFC Credit Agreement" and
"Permitted Investments" set forth in Section 1.1 of the Indenture are amended
and restated in their entirety to read as follows:
"CFC Credit Agreement" means that certain Revolving Credit and Term
Loan Agreement, dated as of October 12, 1994, by and among HDI, the lenders from
time to time party thereto and NationsBank of North Carolina, National
Association, as Agent, and that certain Credit Facilities and Reimbursement
Agreement, dated as of October 12, 1994, by and among HDI, the lenders from time
to time party thereto and NationsBank of North Carolina, National Association,
as Agent, as the same may be amended, modified or supplemented.
"Permitted Investments" means (i) Cash and Marketable Securities, (ii)
investments in Restricted Subsidiaries that are Consolidated Subsidiaries, (iii)
investments consisting of the acquisition of (a) up to 50.1% of the outstanding
capital stock of Tiger Direct, Inc., in accordance with the terms of the
purchase agreement dated as of February 28, 1995, as amended by an amendment
thereto dated as of March 20, 1995, between Software Investment Corporation and
Tiger Direct, Inc., for which the aggregate of funds invested by way of direct
or indirect equity purchase, loans, advances or other extensions of credit shall
in the aggregate be less than $18,000,000, and (b) up to 67.5% of the
outstanding capital stock of The Austad Company in accordance with the terms of
the letter of intent dated March 15, 1995 between HDI and The Austad Company,
for which the aggregate of funds invested by way of direct or indirect equity
purchase, loans, advances or other extensions of credit shall in the aggregate
be less than $8,500,000, (iv) investments in the capital stock or other equity
interests (or equity equivalents) of another Person which, when added to the
equity interests (and equity equivalents) held prior to such investment,
constitute less than 35% of the capital stock or other equity interests (and
equity equivalents), and (v) with the written consent of the Holders of at least
a majority in principal amount of the then outstanding Securities, investments
in the capital stock or other equity interests (or equity equivalents) of
another Person which, when added to the equity interests (and equity
equivalents) held prior to such investment, constitute 35% or more of the
capital stock or other equity interests (and equity equivalents).
-2-
<PAGE> 3
1.2 Indebtedness to Consolidated Earnings Ratio. Section 4.10 of the
Indenture is amended to delete the table therein and substitute the following:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
December 31, 1993 to December 31, 1994 5.00 to 1.0
January 1, 1995 to April 1, 1995 8.50 to 1.0
April 2, 1995 to July 1, 1995 9.00 to 1.0
July 2, 1995 to September 30, 1995 6.75 to 1.0
October 1, 1995 to December 28, 1996 4.50 to 1.0
December 29, 1996 to August 1, 1998 4.00 to 1.0
</TABLE>
1.3 Maintenance of Consolidated Net Worth. Section 4.12 of the
Indenture is amended to delete such section in its entirety and substitute
therefore the following:
"HDI shall not permit Consolidated Net Worth of HDI during the periods
commencing on April 1, 1995 and ending on the last day of the most recently
completed fiscal quarter to be less than the greater of (i) $90,000,000 or (ii)
$90,000,000 plus 85% of HDI's cumulative net income (including 100% of any
losses) as shown on its consolidated statements of income for such periods."
1.4 Fixed Charge Coverage Ratio. Section 4.20 of the Indenture is
amended to delete the table therein and substitute the following:
<TABLE>
<CAPTION>
Minimum
Fixed Charge
Period Coverage Ratio
------ --------------
<S> <C>
July 1, 1993 to December 31, 1993 1.70 to 1.0
January 1, 1994 to December 31, 1994 1.80 to 1.0
January 1, 1995 to April 1, 1995 1.25 to 1.0
April 2, 1995 to July 1, 1995 1.18 to 1.0
July 2, 1995 to September 30, 1995 1.35 to 1.0
October 1, 1995 to December 30, 1995 1.75 to 1.0
December 31, 1995 to December 28, 1996 2.00 to 1.0
December 29, 1996 to August 1, 1998
and at all times thereafter 2.15 to 1.0
</TABLE>
1.5 Accounting Changes. Section 4.26(a)(ii) of the Indenture is amended
to add after the words "change its fiscal year" the words "or any fiscal
quarter".
-3-
<PAGE> 4
ARTICLE II
MISCELLANEOUS
2.1 The Guarantor Subsidiaries shall have submitted each and every
Guaranty contemplated by Article 11 of the Indenture and HDI shall have paid the
Amendment Fee to Sun Life prior to the execution of this First Supplemental
Indenture.
2.2 Except as expressly supplemented by this First Supplemental
Indenture, the Indenture is in all respects hereby ratified and confirmed and
shall remain in full force and effect.
2.3 This First 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 First Supplemental Indenture shall be
governed by and construed in accordance with the laws of the State of New York.
2.4 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 First Supplemental Indenture.
2.5 This First 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.
2.6 Capitalized terms used herein but not otherwise defined shall have
the meanings ascribed to them in the Indenture.
2.7 Upon the execution and delivery of this First 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.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this First
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
--------------------------
Wayne Garten
Title: Executive Vice President
[CORPORATE SEAL]
ATTEST:
/s/
- -----------------------------
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.
LEAVITT ADVERTISING AGENCY,
INC.
YORK FULFILLMENT COMPANY, INC.
COMPANY STORE HOLDINGS, INC.
TWEEDS, INC.
HANOVER CASUALS, INC.
HANOVER DIRECT VIRGINIA INC.
HANOVER FULFILLMENT OF
VIRGINIA, INC.
HANOVER HOLDINGS INC.
HANOVER VENTURES, INC.
LWI HOLDINGS, INC.
HANOVER REALTY, INC.
HANOVER CATALOG HOLDINGS, INC.
By: /s/ Wayne Garten
--------------------------
Wayne Garten
Title: Vice President
[CORPORATE SEAL]
ATTEST:
/s/
- -----------------------------
-5-
<PAGE> 6
FIRST TRUST NATIONAL
ASSOCIATION, as Trustee
By:
---------------------------
Title:
[CORPORATE SEAL]
ATTEST:
- -----------------------------
-6-
<PAGE> 1
Exhibit 4.3
SECOND SUPPLEMENTAL INDENTURE
SECOND SUPPLEMENTAL INDENTURE, dated as of November 14, 1995
(the "Second Supplemental Indenture"), to the Indenture, dated as of August 17,
1993, as supplemented by a First Supplemental Indenture, dated as of March 25,
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 the date hereof, the sole Holder of all the outstanding Securities;
WHEREAS, as of the date hereof, 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> 2
NOW THEREFORE, each party agrees as follows:
ARTICLE I
AMENDMENTS
1.1 Financial Covenants. Section 4.10 and 4.20 of the
Indenture are hereby deleted in their entirety.
1.2 Maintenance of Consolidated Net Worth. Section 4.12 of the
Indenture is hereby amended and restated in its entirety to read as set forth in
Section 6.20 of the CFC Credit Agreement (together with related definitions)
except that the number set forth in the penultimate line thereof shall be
Seventy Six Million Dollars ($76,000,000) rather than Eighty Million Dollars
($80,000,000).
1.3 Working Capital Adequacy. Section 4.33 of the Indenture is
hereby amended and restated in its entirety to read as set forth in Section 6.19
of the CFC Credit Agreement (together with related definitions) except that the
number set forth in the penultimate line thereof shall be Twenty Four Million
Seven Hundred Thousand Dollars ($24,700,000) rather than Twenty Six Million
Dollars ($26,000,000).
1.4 Definitions. The definitions of "CFC Credit Agreement,"
"Collateral Documentation" and "Subordination Agreement" set forth in Section
1.1 of the Indenture are hereby amended and restated in their entirety to read
as follows:
"CFC Credit Agreement" means that certain Loan and Security
Agreement, dated as of November 14, 1995, by and among Congress Financial
Corporation ("Congress") and Hanover Direct Pennsylvania, Inc., Brawn of
California, Inc., Gump's By Mail, Inc, Gump's Corp. The Company Store, Inc.,
Tweeds, Inc., LWI Holdings, Inc., Aegis Catalog Corporation and Hanover Realty
Inc., as the same may be amended, modified or supplemented.
"Collateral Documentation" shall mean the Escrow Agreement,
financing statements and all other deeds of trust, assignments, endorsements,
collateral assignments and other instruments, documents, agreements or
conveyances at any time creating or evidencing Liens or assigning Liens to the
Trustee, to secure the obligations of the Company, the Guarantor or the
Guarantor Subsidiaries under the Documents.
"Subordination Agreement" means the Subordination
Agreement among Congress and Intercontinental Mining &
Resources Incorporated, attached to the Second Supplemental
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<PAGE> 3
Indenture as Exhibit A, as in effect on the date thereof and as the same may be
amended, modified or supplemented.
1.5 Events of Default. Section 6.1(2) of the Indenture is
hereby amended to delete the language set forth in lines eleven through thirteen
thereof as follows: "... or any default under Section 6.18 or 6.19 of the CFC
Credit Agreement occurs and continues for a period of forty-five (45) days..."
and is hereby replaced with the following "... or any default under Section 6.19
or 6.20 of the CFC Credit Agreement occurs and continues for a period of thirty
(30) days..."
1.6 Security. Article 12 of the Indenture is hereby amended to
add a new Section 12.4 which shall read as follows:
"Section 12.4. Customer Lists.
The performance of the Company, the Guarantor and the
Guarantor Subsidiaries shall also be secured by a continuing second security
interest in all existing and future mailing and customer lists used in the
direct mail marketing business of HDI, on the date hereof, and all future
customer and mailing lists used in the direct mail marketing business of HDI, as
such lists may be updated, modified, amended and supplemented, together with all
software (including, without limitation, 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 and
all other property useful or necessary to gain access to, transfer and fully
utilize for all purposes, including, without limitation, analysis,
cross-checking and compilation of, and the sale, rental or license of such
mailing and customer lists, together with all updates and additions thereto,
including, without limitation, all such mailing and customer lists which may be
purchased, created or complied in the future, but not including any customer
lists owned by third parties who are not Affiliates of Hanover Direct
Pennsylvania, Inc., Brawn of California, Inc., Gump's By Mail, Inc, Gump's Corp.
The Company Store, Inc., Tweeds, Inc., LWI Holdings, Inc. and Aegis Catalog
Corporation, which are leased to, or otherwise licensed for use by such
entities, with permission of such third party owners (the "Customer Lists"),
pursuant to a Customer and Mailing List Escrow Agreement, dated as of November
14, 1995, by and among HDI, HOSSCO, as storage and escrow agent, and the Trustee
(the "Escrow Agreement"), providing for, among other things, the deposit in
escrow of the Customer Lists with, and the storage of such Customer Lists by,
such agent, the obligation of HDI to update and deposit in escrow updated
Customer Lists periodically and for the storage and
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<PAGE> 4
escrow agent to hold and store the updated Customer Lists, and the right of the
Trustee to obtain from such agent possession of the Customer Lists, as such
Escrow Agreement now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced, or otherwise."
1.7 Subordination Agreement and Escrow Agreement. The Trustee
shall execute and deliver the Subordination Agreement dated as of the date
hereof with Congress in substantially the form attached hereto as Exhibit A and
the Escrow Agreement dated as of the date hereof with HOSSCO in substantially
the form attached hereto as Exhibit B.
1.8 Guarantors. Leavitt Advertising Agency, Inc. and Hanover
Fulfillment of Virginia, Inc. shall be deleted as Guarantor Subsidiaries
pursuant to Article 11 of the Indenture.
1.9 Certain Transactions. Section 4.29 of the Indenture is
hereby deleted in its entirety ab initio.
ARTICLE II
MISCELLANEOUS
2.1 Except as expressly supplemented by this Second
Supplemental Indenture, the Indenture is in all respects hereby ratified and
confirmed and shall remain in full force and effect.
2.3 This Second 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 Second Supplemental Indenture
shall be governed by and construed in accordance with the laws of the State of
New York.
2.4 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 Second Supplemental Indenture.
2.5 This Second 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.
2.6 Capitalized terms used herein but not otherwise defined
shall have the meanings ascribed to them in the Indenture.
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<PAGE> 5
2.7 This Second 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.
2.8 Upon the execution and delivery of this Second
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.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Second
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: Executive VP
[CORPORATE SEAL]
ATTEST:
/s/ Michael 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/ Wayne Garten
-----------------------------
Title: Vice President
[CORPORATE SEAL]
ATTEST:
/s/ Michael Sherman
- -----------------------------
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<PAGE> 7
FIRST TRUST NATIONAL
ASSOCIATION, as Trustee
By: /s/ Rick Prokofch
-----------------------------
Title: Trust Officer
[CORPORATE SEAL]
ATTEST:
/s/ Kathi Mohammadzadah
- -----------------------------
Kathi Mohammadzadah
-6-
<PAGE> 1
Exhibit 4.10
SECOND AMENDMENT TO WARRANT AGREEMENT
AND WARRANT CERTIFICATE BETWEEN
HANOVER DIRECT, INC.
AND
NORTH AMERICAN RESOURCES LIMITED
This Second Amendment, dated as of November 13, 1995 (this
"Amendment"), to that certain Warrant Agreement, dated as of October 25, 1991,
as amended by that certain First Amendment, dated as of July 8, 1991, between
The Horn & Hardart Company, a Nevada corporation and the predecessor-
in-interest to Hanover Direct, Inc. (the "Company"), and North American
Resources Limited, a British Virgin Islands corporation ("NAR"), and Warrant
Certificate No. 1.
WHEREAS, the Company and NAR are parties to that certain Warrant
Agreement, dated as of October 25, 1991, as amended by that certain First
Amendment, dated as of July 8, 1991 (as so amended, the "Warrant Agreement"),
and pursuant thereto the Company has issued to NAR Warrant Certificate No. 1
(the "Warrant Certificate"); and
WHEREAS, the Company and NAR desire to further amend the Warrant
Agreement and the Warrant Certificate.
NOW, THEREFORE, in consideration of the premises and agreements herein
contained and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
A. Amendment to the Warrant Agreement. The Warrant Agreement is hereby
amended as follows:
Section 5(a) is hereby amended to extend the Expiration Date through
August 1, 1998 as part of the total compensation to be paid to NAR by the
Company in connection with NAR's purchase from SunAmerica Life Insurance Company
of $14 million aggregate principal amount of the Company's 9.25% Senior
Subordinated Notes due August 1990. As a result, Section 5(a) is hereby amended
to delete the following: "May 8, 1996" and to substitute therefor the following:
"August 1, 1998".
B. Amendment to the Warrant Certificate. The Warrant Certificate is
hereby amended as follows:
(i) The words "MAY 8, 1996" are hereby deleted from the caption of
the Warrant Certificate and the words "AUGUST 1, 1998" are substituted therefor.
<PAGE> 2
(ii) The following is hereby deleted from the first paragraph of the
Warrant Certificate: "May 8, 1996" and the following is substituted therefor:
"August 1, 1998".
C. Ratification. Except as expressly amended hereby, all terms and
provisions of the Warrant Agreement, as heretofore amended, remain unamended,
unmodified and in full force and effect. The Warrant Agreement, as amended
hereby, and all rights and powers created thereby, is in all respects ratified
and confirmed. From and after the date hereof, all references to the Warrant
Agreement shall be deemed to mean the Warrant Agreement as amended by this
Amendment.
D. Counterparts. This Amendment may be executed in counterparts, each
of which, when executed and delivered, shall for all purposes be deemed an
original. Both of the counterparts, when taken together, shall constitute but
one and the same Amendment.
E. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
principles of conflict of laws.
F. Definitions. Except as otherwise expressed or provided or unless the
context otherwise requires, all terms used herein which are defined in the
Warrant Agreement shall have the meanings ascribed to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
HANOVER DIRECT, INC.
By: /s/ Michael P. Sherman
-----------------------------
Name: Michael P. Sherman
Title:
NORTH AMERICAN RESOURCES LIMITED
By: /s/ Thomas A. Huser
-----------------------------
Name: Thomas A. Huser
Title: Attorney-in-Fact
-2-
<PAGE> 1
Exhibit 4.11
FIRST AMENDMENT TO WARRANT AGREEMENT
AND WARRANT CERTIFICATE BETWEEN
HANOVER DIRECT, INC.
AND
INTERCONTINENTAL MINING AND RESOURCES LIMITED
This First Amendment, dated as of November 13, 1995 (this "Amendment"),
to that certain Warrant Agreement, dated as of July 8, 1991, between The Horn &
Hardart Company, a Nevada corporation and the predecessor-in- interest to
Hanover Direct, Inc. (the "Company"), and Intercontinental Mining Resources
Limited, a British Virgin Islands corporation ("IMR"), and Warrant Certificate
No. 1.
WHEREAS, the Company and IMR are parties to that certain Warrant
Agreement, dated as of July 8, 1991 (the "Warrant Agreement"), and pursuant
thereto the Company has issued to IMR Warrant Certificate No. 1 (the "Warrant
Certificate"); and
WHEREAS, the Company and IMR desire to amend the Warrant Agreement and
the Warrant Certificate.
NOW, THEREFORE, in consideration of the premises and agreements herein
contained and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
A. Amendment to the Warrant Agreement. The Warrant Agreement is hereby
amended as follows:
Section 5(a) is hereby amended to extend the Expiration Date through
August 1, 1998 as part of the total compensation to be paid to IMR by the
Company in connection with IMR's purchase from SunAmerica Life Insurance Company
of $14 million aggregate principal amount of the Company's 9.25% Senior
Subordinated Notes due August 1990. As a result, Section 5(a) is hereby amended
to delete the following: "the earlier to occur of (i) the 60th day after default
by IMR in its obligations under the Credit Agreement if such default shall not
have been cured or waived by such 60th day, and (ii) the fifth anniversary of
the date of this Agreement" and to substitute therefore the following: "August
1, 1998".
B. Amendment to the Warrant Certificate. The Warrant Certificate is
hereby amended as follows:
<PAGE> 2
(i) The words "JULY 10, 1996" are hereby deleted from the caption of
the Warrant Certificate and the words "AUGUST 1, 1998" are substituted
therefore.
(ii) The following is hereby deleted from the first paragraph of the
Warrant Certificate: "the earlier to occur of (i) the 60th day after default by
Intercontinental Mining & Resouirces Limited ("IMR") in its obligations under
the Credit Agreement, if such default shall not have been cured or waived by
such 60th day, and (ii) July 10, 1996" and the following is substituted
therefore: "August 1, 1998".
C. Ratification. Except as expressly amended hereby, all terms and
provisions of the Warrant Agreement, as heretofore amended, remain unamended,
unmodified and in full force and effect. The Warrant Agreement, as amended
hereby, and all rights and powers created thereby, is in all respects ratified
and confirmed. From and after the date hereof, all references to the Warrant
Agreement shall be deemed to mean the Warrant Agreement as amended by this
Amendment.
D. Counterparts. This Amendment may be executed in counterparts, each
of which, when executed and delivered, shall for all purposes be deemed an
original. Both of the counterparts, when taken together, shall constitute but
one and the same Amendment.
E. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
principles of conflict of laws.
F. Definitions. Except as otherwise expressed or provided or unless the
context otherwise requires, all terms used herein which are defined in the
Warrant Agreement shall have the meanings ascribed to them in the Warrant
Agreement.
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<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written.
HANOVER DIRECT, INC.
By: /s/ Michael P. Sherman
-------------------------------
Name: Michael P. Sherman
Title:
INTERCONTINENTAL MINING & RESOURCES
LIMITED
By: /s/ Thomas A. Huser
-------------------------------
Name: Thomas A. Huser
Title:
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<PAGE> 1
Exhibit 4.12
FIRST AMENDMENT TO WARRANT AGREEMENT
AND WARRANT CERTIFICATE BETWEEN
HANOVER DIRECT, INC.
AND
NORTH AMERICAN RESOURCES LIMITED
This First Amendment, dated as of November 13, 1995 (this "Amendment"),
to that certain Warrant Agreement, dated as of October 25, 1991, between The
Horn & Hardart Company, a Nevada corporation and the predecessor-in- interest to
Hanover Direct, Inc. (the "Company"), and North American Resources Limited, a
British Virgin Islands corporation ("NAR"), and Warrant Certificate No. 1.
WHEREAS, the Company and NAR are parties to that certain Warrant
Agreement, dated as of October 25, 1991 (the "Warrant Agreement"), and pursuant
thereto the Company has issued to NAR Warrant Certificate No. 1 (the "Warrant
Certificate"); and
WHEREAS, the Company and NAR desire to amend the Warrant Agreement and
the Warrant Certificate.
NOW, THEREFORE, in consideration of the premises and agreements herein
contained and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
A. Amendment to the Warrant Agreement. The Warrant Agreement is hereby
amended as follows:
Section 5(a) is hereby amended to extend the Expiration Date through
August 1, 1998 as part of the total compensation to be paid to NAR by the
Company in connection with NAR's purchase from SunAmerica Life Insurance Company
of $14 million aggregate principal amount of the Company's 9.25% Senior
Subordinated Notes due August 1990. As a result, Section 5(a) is hereby amended
to delete the following: "July 10, 1996" and to substitute therefore the
following: "August 1, 1998".
B. Amendment to the Warrant Certificate. The Warrant Certificate is
hereby amended as follows:
(i) The words "JULY 10, 1996" are hereby deleted from the caption of
the Warrant Certificate and the words "AUGUST 1, 1998" are substituted therefor.
<PAGE> 2
(ii) The following is hereby deleted from the first paragraph of the
Warrant Certificate: "July 10, 1996" and the following is substituted therefor:
"August 1, 1998".
C. Ratification. Except as expressly amended hereby, all terms and
provisions of the Warrant Agreement, as heretofore amended, remain unamended,
unmodified and in full force and effect. The Warrant Agreement, as amended
hereby, and all rights and powers created thereby, is in all respects ratified
and confirmed. From and after the date hereof, all references to the Warrant
Agreement shall be deemed to mean the Warrant Agreement as amended by this
Amendment.
D. Counterparts. This Amendment may be executed in counterparts, each
of which, when executed and delivered, shall for all purposes be deemed an
original. Both of the counterparts, when taken together, shall constitute but
one and the same Amendment.
E. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
principles of conflict of laws.
F. Definitions. Except as otherwise expressed or provided or unless the
context otherwise requires, all terms used herein which are defined in the
Warrant Agreement shall have the meanings ascribed to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written.
HANOVER DIRECT, INC.
By: /s/ Michael P. Sherman
------------------------------
Name: Michael P. Sherman
Title:
NORTH AMERICAN RESOURCES LIMITED
By: /s/ Thomas A. Huser
------------------------------
Name: Thomas A. Huser
Title: Attorney-in-Fact
-2-
<PAGE> 1
Exhibit 10.4
SECOND AMENDMENT TO ACCOUNT PURCHASE AGREEMENT
AMENDMENT, made and entered into as of June 1, 1995, by and among HANOVER
DIRECT, INC. ("HDI"), a Delaware corporation and the successor-in-interest to
The Hanover Companies, HANOVER DIRECT PENNSYLVANIA, INC. ("HDPI"), a
Pennsylvania corporation formerly known as Hanover Direct, Inc. and Hanover
Direct Fulfillment, Inc., BRAWN OF CALIFORNIA, INC. ("Brawn"), a California
corporation, GUMP'S BY MAIL, INC. ("Gump's By Mail"), a Delaware corporation,
GUMP'S CORP. ("GUMP'S"), a California corporation formerly known as GSF
Acquisition Corp., and GUMP'S HOLDINGS, INC. ("Gump's Holdings"), a Delaware
corporation (HDI, HDPI, Brawn, Gump's By Mail, Gump's and Gump's Holdings
being hereinafter collectively and individually referred to as "Hanover") and
GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital"), a New York corporation.
W I T N E S S E T H:
WHEREAS, Hanover and GE Capital are parties to an Account Purchase
Agreement dated as of December 21, 1992, as amended by an amendment dated as
of July 12, 1993 and as amended, restated and renamed as of April 25, 1994 and
as further amended as of November 2, 1994 (collectively the "Purchase
Agreement");
WHEREAS, it is the mutual desire of Hanover and GE Capital that the
Purchase Agreement be amended in accordance with the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises and subject to
the terms and conditions hereinafter set forth, the parties hereto hereby
agree as follows:
1. Capitalized terms used herein which are not otherwise defined shall
have the same meaning as in the Purchase Agreement.
2. All references to (i) "Hanover Companies" throughout the Purchase
Agreement shall be omitted and replaced with "HDI", (ii) "HDFI" and "Hanover
Direct" throughout the Purchase Agreement shall be omitted and replaced with
"HDPI", and (iii) "GSF" throughout the Purchase Agreement shall be omitted and
replaced with "GUMP'S".
3. The following definition shall be added after the definition of
"Collection Policy" in Section 1:
"Commercial Paper Rate" shall mean the rate of so-called sixty day
high-grade unsecured notes sold through dealers by major corporations in
multiples of one thousand dollars
<PAGE> 2
($1,000) as published by The Wall Street Journal in its "Money Rates" section
under the heading "Commercial Paper" (or if such publication is discontinued,
such other publication of similar type designated by GE Capital), on any
Business Day that such rate is published, whether or not such rate is actually
charged or paid by an entity.
4. The following definition shall be added after the definition of
"Agreement" in Section 1:
"Average Commercial Paper Rate" shall mean, for any period, the sum
of the Commercial Paper Rates for each Business Day on which such rate is
published during such period, divided by the number of Business Days on which
such rate is published during such period.
5. The following definition shall be added after the definition of
"Ineligible Indebtedness" in Section 1:
"Insurance Program" shall mean any program which may be offered
through GE Capital pursuant to Section 2.10 under which GE Capital or any
insurance company or other third party makes available insurance coverage to
Account Debtors.
6. The definition of "Termination Date" in Section 1 is deleted and
substituted in its place is the following:
"Termination Date" shall mean the last day of the Settlement Period
immediately after December 31, 2000 or after any subsequent fifth anniversary
thereafter, as the case may be, upon extension of the term of the arrangements
contemplated hereby as provided in Section 12.1 hereof.
7. The following definition shall be added after the definition of
"Total Equity Investment" in Section 1:
"Value-Added Program" shall mean any products or services which may
be offered by or through GE Capital to Account Debtors pursuant to Section
2.11 that enhance the features of the Accounts including, without limiting the
foregoing, credit card protection plans, legal services, auto clubs and
extended warranties; provided, however, that the term shall not be deemed to
include credit insurance or any offerings falling within the definition of
"Insurance Programs."
8. The first sentence of Section 2.3 shall be deleted, and the
following shall be added at the beginning of such Section:
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<PAGE> 3
2.3. Unit Fee. On each Settlement Date (including each Settlement
Date during any renewal term), Hanover shall pay GE Capital a Unit Fee of
$2.168 for each Account that is an Active Account during the immediately
preceding Settlement Period.
9. Section 2.3 (a) is deleted and substituted in its place is the
following:
(a) For each Settlement Period, the Unit Fee shall be
increased or decreased, respectively, by adding an amount equal to .9075 cents
($.009075) for each dollar by which the Average Net Account Balance exceeds
$132.00, or by subtracting an amount equal to .9075 cents ($.009075) for each
dollar by which the Average Net Account Balance is less than $132.00.
10. The Section Title and the first sentence of Section 2.4 (a) (i)
shall be deleted, and the following shall be added at the beginning of such
Section:
2.4. Service Fee Adjustment.
(a) (i) During the first thirty (30) Settlement Periods after
execution of the Existing Agreement, if the Prime Rate in effect on the last
Business Day of any Settlement Period exceeds 6.0%, Hanover shall be charged
an additional fee calculated by multiplying the Aggregate Investment in such
Settlement Period (to the extent that such Aggregate Investment exceeds the
Funding Date Aggregate Investment) by 74.8% of such excess in the Prime Rate
over 6.0%, and dividing the product by 12.
11. Section 2.4 (b) is deleted, and substituted in its place is the
following:
(b) After the first thirty (30) Settlement Periods through and
including the thirty-sixth Settlement Period after execution of the Existing
Agreement, Hanover shall be charged each Settlement Period an additional fee
equal to (i) the amount by which the product of the Average Commercial Paper
Rate (calculated as of the end of such Settlement Period) and ninety-four
percent (94%) exceeds 5.04%, multiplied by (ii) the Aggregate Investment in
such Settlement Period (to the extent that such Aggregate Investment exceeds
the Funding Date Aggregate Investment) and (iii) divided by twelve (12). Such
amount shall be payable on the next Settlement Date. GE Capital shall credit
to Hanover each Settlement Period an amount equal to (i) the amount by which
5.04% exceeds the product of the Average Commercial Paper Rate (calculated as
of the end of such Settlement Period) and ninety-four percent (94%),
multiplied by (ii) the Aggregate Investment in such Settlement Period (to the
extent that such Aggregate Investment exceeds the Funding Date Aggregate
Investment) and (iii) divided by twelve (12). Any amounts so due and owing to
Hanover shall be deducted from the Unit Fee due and owing to GE Capital on the
next Settlement Date.
-3-
<PAGE> 4
12. The following new Subsection 2.4 (c) shall be added:
(c) After the first thirty-six (36) Settlement Periods after
the execution of the Existing Agreement, Hanover shall be charged each
Settlement Period an additional fee equal to (i) the amount by which the
product of the Average Commercial Paper Rate (calculated as of the end of such
Settlement Period) and ninety-four percent (94%) exceeds 5.04%, multiplied by
(ii) the Aggregate Investment in such Settlement Period and (iii) divided by
twelve (12). Such amount shall be payable on the next Settlement Date. GE
Capital shall credit to Hanover each Settlement Period an amount equal to (i)
the amount by which 5.04% exceeds the product of the Average Commercial Paper
Rate (calculated as of the end of such Settlement Period) and ninety-four
percent (94%), multiplied by (ii) the Aggregate Investment in such Settlement
Period and (iii) divided by twelve (12). Any amounts so due and owing to
Hanover shall be deducted from the Unit Fee due and owing to GE Capital on the
next Settlement Date.
13. Section 2.10 is deleted, and substituted in its place is the
following:
2.10. Insurance Solicitation of Accounts. GE Capital, or its
agents, may solicit Account Debtors for Insurance Programs. GE Capital and
Hanover will, through solicitations, mailings and other advertising media,
jointly develop and cooperate with each other in the offering of such
Insurance Programs. These Insurance Program offerings may be made in the form
of Credit Agreement application enrollments, direct mail or statement inserts.
GE Capital shall pay Hanover an expense reimbursement allowance (which
reimbursement may include but not be limited to direct out-of-pocket expenses)
for enrolling Account Debtors in any such Insurance Program. The expense
reimbursement allowance will be paid once on each insured Account in the
amount of one dollar ($1.00) for each Account on which the Account Debtor
elects insurance. At Hanover's option and subsequent to the date which
Hanover provides evidence of proper insurance licensing either on Hanover's
part or on behalf of one of its affiliated companies, GE Capital shall pay
Hanover forty percent (40%) of GE Capital's net annual income (exclusive of
any insurance proceeds) derived from such Insurance Programs, to the extent
allowable under applicable law.
14. The following new Section 2.11 shall be added:
2.11 Value-Added Solicitation of Account. GE Capital, or its
agents, may solicit Account Debtors for Value-Added Programs. GE Capital
shall pay Hanover forty percent (40%) of the net annual income derived from
such Value-Added Programs.
15. The first sentence of Section 3.4 shall be deleted, and the
following shall be added at the beginning of such Section:
3.4 Promotion.
-4-
<PAGE> 5
(a) Hanover agrees to actively promote the credit program and
will promote the purchase of merchandise on credit, including without
limitation in Hanover's mail-order catalogues, to create Accounts for
submission to, or establishment and/or addition by, GE Capital, all
substantially in accordance with its past practices.
16. The following new Subsections 3.4 (b) and (c) shall be added:
(b) Beginning June 1, 1995 and fifteen (15) days after the end
of each Settlement Period, provided there exists no Event of Default on the
part of Hanover on any such date and neither party has delivered a notice of
termination in accordance with Section 12 hereof as of such date, GE Capital
shall contribute an amount equal to one-twelfth (1/12) of the product of the
Aggregate Investment for the prior Settlement Period, multiplied by .005. The
amounts contributed pursuant to the immediately preceding sentence shall be
known as the "Promotion Fund".
(c) The costs of all mutually agreed upon marketing promotions
shall be paid on a matching basis, whereby Hanover shall direct GE Capital to
pay one-half (1/2) of the costs of any such promotions from the Promotion Fund
and Hanover shall pay directly one-half (1/2) of such costs. Hanover shall
have the right to use the Promotion Fund on a matching basis until it is fully
expended and any unused portion can be carried over from year to year during
the term of this Purchase Agreement; provided, however, that it is the
intention of Hanover and GE Capital to fully utilize the Promotion Fund during
each year of the term of this Purchase Agreement; and, provided, further, that
amounts not so utilized in the calendar year after the year in which such
amounts were contributed shall thereafter be forfeited by Hanover.
17. The last sentence of Section 6.2 shall be deleted, and the following
shall be added at the end of the Section:
During each Settlement Period thereafter the Required Reserve
has been or shall be adjusted as described in Sections 6.4 and 6.5 below to an
amount equal to the sum of: (i) 10% of Eligible Indebtedness as of the
relevant Billing Dates, plus (ii) 100% of Ineligible Indebtedness as of such
Billing Dates.
18. Subsection 12.1 (a) is deleted, and substituted in its place is the
following:
(a) Subject to the provisions of subsection (b) below and
Section 13 hereof, this Agreement shall be in effect until the Termination
Date and shall automatically renew itself for successive five-year terms
thereafter unless either party terminates such arrangement at the end of any
term by giving the other party written notice of such termination at least one
hundred eighty (180) days prior thereto, in which event termination of this
Agreement
-5-
<PAGE> 6
shall be effective as of the last day of the Settlement Period ending
immediately after the Termination Date.
19. The last sentence of Section 12.2 shall be deleted, and the
following shall be added at the end of the Section:
Without in any way limiting the generality of the foregoing,
upon such termination, (a) Hanover shall continue to be liable for (i) the
Unit Fee and other fees provided for in Sections 2.3 and 2.4 hereof and for
(ii) RPR Indebtedness to the extent specified in Section 2 5 hereof, (b) the
Unit Fee under 2.3 shall in no event be less than $2.168 plus adjustments for
postage and delinquency under Section 2.3(b) and (c), until such time as there
is no Indebtedness owned by GE Capital pursuant to Section 12.2 hereof,
whichever shall occur earlier, and (c) GE Capital shall continue to perform
its obligations under this Agreement, other than those set forth in Section
2.1 hereof and related functions including, but not limited to, new account
processing and promotions.
20. Each party shall pay its own out-of-pocket legal expenses in
connection with the execution and delivery of this Amendment and the closing
of the transactions relating thereto.
21. Except as specifically provided herein, the terms and conditions of
the Purchase Agreement shall continue in full force and effect and shall be
fully binding on the parties hereto. Upon execution of this Amendment, each
reference in the Purchase Agreement to "this Purchase Agreement," "hereunder,"
"hereof," or words of like import, shall mean and be a reference to the
Purchase Agreement as amended hereby. In the event of any conflict between
the terms of the Purchase Agreement and the terms of this Amendment, the terms
of this Amendment shall prevail.
22. This Amendment may be executed in any number of counterparts, all of
which taken together shall constitute one and the same amendatory instrument,
and any of the parties hereto may execute this Amendment by signing any such
counterpart.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first above written.
HANOVER DIRECT, INC.
By: /s/ Edward J. O'Brien
-----------------------------------------
Name: Edward J. O'Brien
-------------------------------
-6-
<PAGE> 7
Title: Vice President
-------------------------------
HANOVER DIRECT PENNSYLVANIA, INC.
By: /s/ Edward J. O'Brien
-----------------------------------------
Name: Edward J. O'Brien
--------------------------------
Title: Vice President
--------------------------------
BRAWN OF CALIFORNIA
By: /s/ Edward J. O'Brien
-----------------------------------------
Name: Edward J. O'Brien
--------------------------------
Title: Vice President
--------------------------------
GUMP'S BY MAIL, INC.
By: /s/ Edward J. O'Brien
-----------------------------------------
Name: Edward J. O'Brien
--------------------------------
Title: Vice President
--------------------------------
GUMP'S CORP.
By: /s/ Edward J. O'Brien
-----------------------------------------
Name: Edward J. O'Brien
---------------------------------
Title: Vice President
--------------------------------
-7-
<PAGE> 8
GUMP'S HOLDINGS, INC.
By: /s/ Edward J. O'Brien
-----------------------------------------
Name: Edward J. O'Brien
---------------------------------
Title: Vice President
--------------------------------
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Richard C. McKenzie
-----------------------------------------
Name: Richard C. McKenzie
---------------------------------
Title: Manager
-------------------------------
-8-
<PAGE> 1
Exhibit 10.5
WAIVER AND AMENDMENT NO. 3 TO
AMENDED AND RESTATED ACCOUNT PURCHASE AGREEMENT
Waiver and Amendment No. 3, dated as of November 14, 1995 to Account
Purchase Agreement dated as of December 21, 1992, and amended, restated and
renamed as of April 25, 1994, and as further amended as of November 2, 1994
and June 1, 1995, by and among Hanover Direct, Inc., a Delaware corporation
(the legal successor by merger to the Hanover Companies, a Nevada corporation)
("HDI"), Hanover Direct Pennsylvania, Inc. (f/k/a Hanover House Industries,
Inc.,), a Pennsylvania corporation ("HDPI"), Brawn of California, a California
corporation ("Brawn"), Gump's By Mail, Inc. a Delaware corporation ("Gump's By
Mail"), Gump's Corp. (f/k/a/ GSF Acquisition Corp.), a California corporation
("GSF"), and Gump's Holdings, Inc., a Delaware corporation ("Gump's
Holdings"), (HDI, HDPI, Brawn, Gump's By Mail, GSF and Gump's Holdings being
hereinafter collectively referred to as "Hanover"), on the one hand, and
General Electric Capital Corporation, a New York corporation ("GE Capital"),
on the other hand (the "Account Purchase Agreement").
W I T N E S S E T H:
WHEREAS, Hanover and GE Capital are parties to the Account Purchase
Agreement and capitalized terms used herein without definition shall have the
respective meanings ascribed to them in the Account Purchase Agreement; and
WHEREAS, Hanover has entered into certain financing arrangements,
dated as of the date hereof, with Congress Financial Corporation ("Congress")
pursuant to which Hanover will grant to Congress a security interest in
certain assets of Hanover, including Hanover's rights in the Reserve Account,
and in connection therewith certain existing liens in favor of other parties
will be released.
WHEREAS, Hanover anticipates that it will not be in compliance with
certain financial covenants set forth in the Account Purchase Agreement at
December 31, 1995, and has requested that GECC waive compliance currently with
respect to such covenants.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and with the intent to be legally
bound hereby, the parties hereto agree as follows:
<PAGE> 2
I. Amendments:
1. The last sentence of Section 6.2 (as amended in Amendment No. 2
to the Account Purchase Agreement) shall be deleted, and the following shall
be added at the end of the Section:
During each Settlement Period thereafter the Required Reserved
has been or shall be adjusted as described in Sections 6.4 and 6.5 below to an
amount equal to the sum of (i) 15% of Eligible Indebtedness as of the relevant
Billing Dates for each Billing Date on and after the date hereof, plus (ii)
100% of Ineligible Indebtedness as of such Billing Dates.
2. Section 8.7 of the Account Purchase Agreement is hereby amended
by deleting same in its entirety and substituting the following in lieu
thereof:
"8.7. Liens. Hanover shall not create or permit any Lien, in
and to the Accounts in which GE Capital has an interest hereunder,
the Indebtedness in which GE Capital has an interest hereunder, or
the Reserve Account except presently existing or hereafter created
Liens in favor of GE Capital and Liens created by or through GE
Capital; provided, however, that Hanover may create in favor of
Congress Financial Corporation a lien, junior in right and subject
to the terms and conditions acceptable to GE Capital, in the Reserve
Account.
3. Sections 7.12 and 8.24 of the Account Purchase Agreement are
hereby deleted in their entirety
II. Waivers. GECC hereby waives compliance by Hanover with the
provisions of Section 8.19 of the Account Purchase Agreement solely with
respect to Section 4.1(e)(iii) and Section 4.1(e)(iv) as at December 31, 1995.
This waiver shall not relate to any subsequent period.
III. General.
1. Except as specifically provided herein, the terms and
conditions of the Account Purchase Agreement as amended herein shall continue
in full force and effect and shall be fully binding on the parities hereto.
Upon the execution of this Amendment, each reference in the Account Purchase
Agreement to "this agreement," "hereunder," "hereof," or words of like import,
shall mean and be a reference to the Agreement as amended hereby. In the
event of any conflict between the terms of the Account Purchase Agreement and
the terms of this Amendment, the terms of this Amendment shall prevail.
-2-
<PAGE> 3
2. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have cause this Amendment to
be executed as of the date and year first stated above.
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Daniel W. Porter
---------------------------------------------
Name: Daniel W. Porter
Title: VP and General Manager
HANOVER DIRECT, INC.
By: /s/ Edward J. O'Brien
---------------------------------------------
Name: Edward J. O'Brien
Title: Senior Vice President and
Treasurer
HANOVER DIRECT PENNSYLVANIA, INC.
By: /s/ Edward J. O'Brien
---------------------------------------------
Name: Edward J. O'Brien
Title: Senior Vice President
BRAWN OF CALIFORNIA, INC.
By: /s/ Edward J. O'Brien
---------------------------------------------
Name: Edward J. O'Brien
Title: Vice President
GUMP'S BY MAIL, INC.
By: /s/ Edward J. O'Brien
---------------------------------------------
Name: Edward J. O'Brien
Title: Vice President
-3-
<PAGE> 4
-4-
<PAGE> 5
GUMP'S CORP.
By: /s/ Edward J. O'Brien
---------------------------------------------
Name: Edward J. O'Brien
Title: Vice President
GUMP'S HOLDINGS, INC.
By: /s/ Edward J. O'Brien
---------------------------------------------
Name: Edward J. O'Brien
Title: Vice President
-5-
<PAGE> 1
Exhibit 10.24
LOAN AND SECURITY AGREEMENT
by and among
CONGRESS FINANCIAL CORPORATION
and
HANOVER DIRECT PENNSYLVANIA, INC.,
BRAWN OF CALIFORNIA, INC.,
GUMP'S BY MAIL, INC.
GUMP'S CORP.
THE COMPANY STORE, INC.
TWEEDS, INC.
LWI HOLDINGS, INC.
AEGIS CATALOG CORPORATION
HANOVER DIRECT VIRGINIA INC.
HANOVER REALTY, INC.
Dated as of November 14, 1995
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 1. DEFINITIONS........................................................ 2-31
SECTION 2. CREDIT FACILITY.................................................... 34
2.1 Revolving Loans.................................................... 34
2.2 Lending Sublimits.................................................. 37
2.3 Letter of Credit Accommodations.................................... 38
2.4 Term Loans......................................................... 42
2.5 Maximum Credit..................................................... 43
2.6 Reserves........................................................... 43
2.7 Fees............................................................... 44
2.8 Interest........................................................... 45
2.9 Conduct of Accounts; Cross-Collateralization....................... 46
2.10 Use of Proceeds.................................................... 49
SECTION 3. CONDITIONS PRECEDENT TO LOANS
AND OTHER FINANCIAL ACCOMMODATIONS................................. 51
3.1 Conditions to Loans................................................ 51
3.2 Additional and Continuing Condition................................ 54
SECTION 4. COLLATERAL......................................................... 54
4.1 Security Interests in Borrowers' Property.......................... 54
4.2 Guarantees......................................................... 56
4.3 Security Interests in Property of Guarantors....................... 56
SECTION 5. REPRESENTATIONS AND WARRANTIES..................................... 56
5.1 Organization....................................................... 56
5.2 Corporate Power and Authority...................................... 57
5.3 Capitalization; Solvency........................................... 58
5.4 Compliance with Other
Agreements and Applicable Law...................................... 58
5.5 Environmental Compliance........................................... 59
5.6 Governmental Approval.............................................. 61
5.7 Chief Executive Offices; Collateral Locations...................... 61
5.8 Priority of Liens; Title to Properties............................. 62
5.9 Taxes.............................................................. 62
5.10 Litigation......................................................... 63
5.11 Intellectual Property.............................................. 63
5.12 Employee Benefits.................................................. 64
5.13 Investment Company................................................. 65
5.14 Regulation G; Securities
Exchange Act of 1934 ........................................... 65
5.15 No Material Adverse Change......................................... 66
5.16 Financial Statements............................................... 66
5.17 Disclosure......................................................... 66
5.18 Labor Disputes..................................................... 67
5.19 Corporate Name; Prior Transactions................................. 67
5.20 [Reserved]......................................................... 67
5.21 Schedule of Indebtedness........................................... 67
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C> <C>
5.22 Certain Affiliated Ownership........................................................ 68
5.23 Common Enterprise................................................................... 68
5.24 Subordination of Certain Obligations................................................ 69
SECTION 6. ADDITIONAL COVENANTS................................................................ 69
6.1 Tradenames.......................................................................... 69
6.2 Subsidiaries........................................................................ 70
6.3 Indebtedness........................................................................ 71
6.4 Limitation on Liens................................................................. 73
6.5 Loans; Investments; Guarantees; Etc................................................. 74
6.6 Transactions with Affiliates........................................................ 77
6.7 Maintenance of Existence............................................................ 79
6.8 Sale and Leasebacks................................................................. 79
6.9 Sale of Assets, Consolidation,
Merger, Dissolution, Etc. .......................................................... 79
6.10 Compliance with Laws, Regulations, Etc.............................................. 80
6.11 Compliance with Environmental Laws.................................................. 80
6.12 Payment of Taxes and Claims......................................................... 82
6.12A Accounts Covenants.................................................................. 83
6.13 Properties in Good Condition........................................................ 85
6.14 Insurance........................................................................... 87
6.15 Appraisals.......................................................................... 88
6.16 Compliance with ERISA............................................................... 89
6.17 Notice of Default................................................................... 90
6.18 Financial Statements and Other Information.......................................... 90
6.19 Consolidated Working Capital........................................................ 94
6.20 Consolidated Net Worth.............................................................. 95
6.21 Further Assurances.................................................................. 95
6.22 Sales of Outdated and Surplus Inventory............................................. 95
6.23 Maintenance and Delivery of Customer Lists; MACS
Software............................................................................ 96
6.24 Rental or License of Customer Lists................................................. 96
6.25 No Termination or Amendment of Credit Card
Agreements.......................................................................... 97
6.26 Obligations to be Senior Indebtedness............................................... 97
6.27 Mail Order Joint Ventures........................................................... 97
6.28 9.25% Notes......................................................................... 99
6.29 Litigation Notices.................................................................. 99
SECTION 7. EVENTS OF DEFAULT AND REMEDIES...................................................... 100
7.1 Events of Default................................................................... 100
7.2 Remedies............................................................................ 102
SECTION 8. COLLECTION AND ADMINISTRATION....................................................... 105
8.1 Receipts............................................................................ 105
8.2 Depository Accounts; Blocked Accounts;
Customer Prepayment Accounts........................................................ 107
8.3 Right of Inspection; Access......................................................... 108
8.4 Specific Powers..................................................................... 108
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 9. EFFECTIVE DATE; TERMINATION; COSTS;
MISCELLANEOUS........................................................................ 109
9.1 Term................................................................................. 109
9.2 Expenses and Additional Fees......................................................... 112
9.3 Survival of Agreement................................................................ 113
9.4 No Waiver; Remedies Cumulative....................................................... 113
9.5 Notices.............................................................................. 114
9.6 Entire Agreement..................................................................... 114
9.7 Amendments and Waivers............................................................... 115
9.8 Applicable Law....................................................................... 115
9.9 Successors and Assigns............................................................... 115
9.10 Severability......................................................................... 115
9.11 Headings............................................................................. 116
9.12 Security Interests of Participants................................................... 116
9.13 WAIVER OF JURY TRIAL................................................................. 116
9.14 Waiver of Counterclaims;
Jurisdiction; Service of Process..................................................... 116
9.15 Counterparts......................................................................... 117
</TABLE>
(iii)
<PAGE> 5
INDEX TO EXHIBITS
EXHIBIT A JURISDICTIONS OF
QUALIFICATION Section 5.1
EXHIBIT B-1 EXISTING SUBSIDIARIES Section 5.1
EXHIBIT B-2 EXISTING MAIL ORDER Section 5.1
JOINT VENTURES
EXHIBIT B-3 EXISTING RESTAURANT Section 5.1
BUSINESS SUBSIDIARIES
EXHIBIT B-4 ADDITIONAL EXISTING NON- SECTION 5.1
GUARANTOR SUBSIDIARIES
EXHIBIT C PRINCIPAL PLACES OF BUSINESS, Sections 1.35, 5.7
CHIEF EXECUTIVE OFFICES
AND LOCATIONS OF COLLATERAL
EXHIBIT D EXISTING LIENS Section 5.8
EXHIBIT E LIST OF HANOVER DEBT Section 3.1(b)
INSTRUMENTS
EXHIBIT F PENDING LITIGATION Section 5.10
EXHIBIT G TRADENAMES Sections 5.19, 6.1
EXHIBIT H-1 EXISTING INDEBTEDNESS Section 5.21
EXHIBIT H-2 EXISTING LETTERS OF CREDIT Section 5.21
UNDER NATIONS BANK CREDIT
AGREEMENT
EXHIBIT H-3 EXISTING INTERCOMPANY Sections 5.21,
INDEBTEDNESS 6.5(b)
EXHIBIT I FORM OF MORTGAGEE/LANDLORD Section 1.35, 6.8
WAIVER, ACCESS AND USE
AGREEMENT
EXHIBIT J LIST OF LABOR DISPUTES Section 5.18
EXHIBIT K ENVIRONMENTAL DISCLOSURE Section 5.5
-1-
<PAGE> 6
LOAN AND SECURITY AGREEMENT
LOAN AND SECURITY AGREEMENT, dated as of November __, 1995, by and
among CONGRESS FINANCIAL CORPORATION, a California corporation ("Lender", as
hereinafter further defined), HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania
corporation ("HDPI", as hereinafter further defined), BRAWN OF CALIFORNIA, INC.,
a California corporation ("Brawn", as hereinafter further defined), GUMP'S BY
MAIL, INC., a Delaware corporation ("GBM", as hereinafter further defined),
GUMP'S CORP., a California corporation ("Gump's", as hereinafter further
defined), THE COMPANY STORE, INC., a Wisconsin corporation ("TCS", as
hereinafter further defined), TWEEDS, INC., a Delaware corporation ("Tweeds", as
hereinafter further defined), LWI HOLDINGS, INC., a Delaware corporation ("LWI",
as hereinafter further defined), AEGIS CATALOG CORPORATION, a Delaware
corporation ("Aegis", as hereinafter further defined), HANOVER DIRECT VIRGINIA
INC. ("HDV", as hereinafter further defined) and HANOVER REALTY, INC., a
Virginia corporation ("Hanover Realty", as hereinafter further defined; and
together with HDPI, Brawn, GBM, Gump's, TCS, Tweeds, LWI, Aegis and HDV, each
individually a "Borrower" and collectively, "Borrowers", as hereinafter further
defined).
W I T N E S S E T H :
WHEREAS, Borrowers, together with certain other members of the
Affiliated Borrower Group (as hereinafter defined), operate a direct mail order
and retail merchandise business; and
WHEREAS, Borrowers have requested that Lender make loans and advances
and provide other financial accommodations to Borrowers; and
WHEREAS, Lender is willing to make such loans and advances and provide
such financial accommodations, subject to the terms and conditions set forth
herein and in the other Financing Agreements (as hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
and agreements herein contained and other good and valuable consideration, the
adequacy and receipt of which is hereby acknowledged, Lender and Borrowers
hereby mutually covenant, warrant and agree as follows (the covenants,
warranties and agreements of Borrowers, except as otherwise expressly set forth
herein, being joint and several):
<PAGE> 7
SECTION 1. DEFINITIONS
For the purposes of this Agreement, the following terms shall have the
respective meanings given to them below:
1.1 "Account Debtor" shall mean account debtor, as such term is defined
in the UCC, including, without limitation, each debtor or obligor in any way
obligated on or in connection with any Account.
1.2 "Accounts" shall mean, as to any Person, all present and future
accounts, contract rights, chattel paper, documents and instruments of such
Person, as such terms are defined in the UCC, including, without limitation, all
obligations for the payment of money arising out of such Person's sale, lease or
other disposition of goods or other property or rendition of services. Such term
also includes, without limitation, credit card receivables and all credit card
charge records and other evidences of credit card transactions.
1.3 "Accounts Loan Financial Test" shall mean Lender's determination,
as to any Program Quarter, whether Hanover's actual consolidated net income or
loss before taxes for the applicable Measurement Quarter represents a positive
net income before taxes equal to or greater than, or a net loss equal to, or a
smaller net loss than, the applicable Adjusted Forecast Amount for such
Measurement Quarter.
1.4 "Accounts Loan Formula" shall have the meaning given in Section
2.1(a) hereof.
1.5 "Adjusted Forecast Amount" shall mean, as to a Measurement Quarter,
Hanover's projected consolidated net income or loss before taxes for such
Measurement Quarter, as shown on the financial budget of Hanover approved by
Hanover's Board of Directors and delivered to Lender prior to the commencement
of the fiscal year in which the Measurement Quarter occurs (or such updated
financial projection for the Measurement Quarter approved by Hanover's Board of
Directors, submitted to and approved by Lender in writing, in its sole
discretion, expressly for purposes of calculating the Adjusted Forecast Amount
for one or more Measurement Quarters, in lieu of the originally-delivered
financial projections as aforesaid), multiplied by (i) eighty-five (85%)
percent, if the projected amount for such Measurement Quarter is a positive
amount, or (ii) one hundred fifteen (115%) percent, if the projected amount for
such Measurement Quarter is a negative amount (loss).
1.6 "Aegis" shall mean Aegis Catalog Corporation, a Delaware
corporation, and its successors and assigns.
- 2 -
<PAGE> 8
1.7 "Aegis Eligible Inventory" shall mean all finished goods Inventory
of Aegis in the merchandise categories of safety and anti-hazard products,
personal fitness, home and personal care, and comfort and security products,
offered for sale by Aegis in its "The Safety Zone" catalog, or such other
catalogs created or acquired by Aegis covering substantially similar merchandise
which Aegis has requested Lender to include in this Inventory category.
1.8 "Affiliate" shall mean with respect to a specified Person, a
partnership, corporation or any other Person which, directly or indirectly
through one or more intermediaries, controls or is controlled by or is under
common control with such Person, and without limiting the generality of the
foregoing, includes, with respect to a Person (a) any other Person which
beneficially owns or holds twenty percent (20%) or more of any class of voting
securities or other securities convertible into voting securities of such Person
or beneficially owns or holds twenty percent (20%) or more of any other equity
interests in such Person, (b) any other Person with respect to which such Person
beneficially owns or holds twenty percent (20%) or more of any class of voting
securities or other securities convertible into voting securities of such
Person, or owns or holds twenty percent (20%) or more of the equity interests of
the other Person, and (c) any director, officer or employee of such Person.
Notwithstanding the foregoing, for so long as any one or more members of the NAR
Group shall have the ability, through ownership of voting securities, by
contract or otherwise, directly or indirectly, to elect a majority of the Board
of Directors of any member of the Affiliated Borrower Group, each member of the
NAR Group shall in any event be deemed an Affiliate of each Person which is a
member of, or an Affiliate of any member of, the Affiliated Borrower Group
pursuant to the preceding definition. For purposes of this definition, the term
"control" (including, with correlative meanings, the terms "controlled by" and
"under common control with"), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or by contract or otherwise.
1.9 "Affiliated Borrower Group" shall mean each of Borrowers, Hanover
and any other entity that is now or hereafter a direct or indirect Subsidiary of
Hanover, other than a Non-Guarantor Subsidiary.
1.10 "Appraisal" the appraisal dated September 28, 1995, prepared by
the Appraiser with respect to Borrowers' Inventory, as updated by the Appraiser
from time to time as provided herein, in each case, in form, scope and
methodology acceptable to Lender.
- 3 -
<PAGE> 9
1.11 "Appraiser" shall mean Daley-Hodkin Appraisal Corporation, or such
other appraisal firm acceptable to Lender.
1.12 "Assignment of Partnership Interest" shall mean the Collateral
Assignment and Security Agreement of General Partnership Interest, dated of even
date herewith, made by Tweeds in favor of Lender, as the same now exists or may
hereafter be amended, supplemented, modified, renewed, restated or replaced.
1.13 "Austad" shall mean, individually and collectively, Austad
Holdings, Inc., a Delaware corporation, and The Austad Company, a South Dakota
corporation, and their respective successors and assigns.
1.14 "Banking Day" shall mean any day, other than Saturday or Sunday,
when Lender and commercial banks are open in New York, New York and the place(s)
where the bank account(s) designated by Borrowers and approved by Lender for the
disbursement of loans hereunder are located.
1.15 "Bankruptcy Code" shall mean the United States Bankruptcy Code,
being Title 11 of the United States Code as enacted in 1978, as the same may
have heretofore been or may hereafter be amended, recodified, modified or
supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
1.16 "Blocked Accounts" shall have the meaning set forth in Section 8.2
hereof.
1.17 "Board" shall mean the Board of Governors of the Federal Reserve
System, and any successor or replacement board, governmental agency or other
entity having the same or similar authority and responsibilities.
1.18 "Borrowers" shall mean, individually and collectively, Revolving
Loan Borrowers and Term Loan Borrowers.
1.19 "Brawn" shall mean Brawn of California, Inc., a California
corporation, and its successors and assigns.
1.20 "Collateral" shall have the meaning set forth in Section 4 hereof.
1.21 "Congress" shall mean Congress Financial Corporation, a California
corporation, and its successors and assigns.
1.22 "Consolidated Net Worth" shall mean, as to any Person, at any
time, in accordance with generally accepted accounting principles, as in effect
from time to time consistently applied, on a consolidated basis for such Person
and its Subsidiaries, the amount equal to the result obtained by
- 4 -
<PAGE> 10
taking total assets and subtracting therefrom total liabilities of such Person
and its Subsidiaries; provided, however, that solely for purposes of calculating
Consolidated Net Worth of Hanover and its Subsidiaries as at the end of
Hanover's 1995 fiscal year, up to $4,500,000 in write-downs of Hanover's
deferred taxes asset, as required pursuant to Financial Accounting Standards No.
109, due to losses incurred by Hanover and its Subsidiaries in such fiscal year,
shall not be considered reductions of the deferred taxes asset of Hanover.
1.23 "Consolidated Working Capital" shall mean, as to any Person, at
any time, in accordance with generally accepted accounting principles as in
effect from time to time, consistently applied, on a consolidated basis for such
Person and its Subsidiaries, the amount equal to the difference between (a) the
aggregate net book value of all assets of such Person and its Subsidiaries, on a
consolidated basis, which would, in accordance with generally accepted
accounting principles as in effect from time to time, consistently applied, be
classified as current assets, calculating the book value of Inventory for this
purpose on a first-in-first-out basis and (b) all Indebtedness (including, for
this purpose, notwithstanding clause (c) of the definition of Indebtedness,
trade accounts payable incurred in the ordinary course of business whether
current or any number of days past due) of such Person and its Subsidiaries, on
a consolidated basis, which would in accordance with generally accepted
accounting principles as in effect from time to time, consistently applied, be
classified as current liabilities; provided, however, that solely for purposes
of calculating Consolidated Working Capital hereunder, the outstanding balance
of the Revolving Loans and Term Loans shall not be considered current
liabilities.
1.24 "Credit Card Agreements" shall mean, individually and
collectively, the Private Credit Card Agreement, the Third Party Credit Card
Agreements, together with all agreements now or hereafter entered into between
or among Lender and the parties to the Private Credit Card Agreement or Third
Party Credit Card Agreements.
1.25 "Credit Facility" shall mean, individually and collectively, the
Revolving Loans, the Letter of Credit Accommodations and the Term Loans.
1.26 "Customer Lists" shall mean the existing and future mailing and
customer lists used in the direct mail marketing business of Borrowers, together
with all software (including, without limitation, 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 and all other property useful or necessary to gain access to,
transfer and fully utilize for all
- 5 -
<PAGE> 11
purposes, including, without limitation, analysis, cross-checking and
compilation of, and the sale, rental or license of such mailing and customer
lists, together with all updates and additions thereto, including, without
limitation, all such mailing and customer lists which may be purchased, created
or compiled in the future, but not including any customer lists owned by third
parties who are not Affiliates of Revolving Loan Borrowers, which are leased to,
or otherwise licensed for use by Revolving Loan Borrowers, with permission of
such third party owners.
1.27 "Customer List Escrow Agreement" shall mean the Customer and
Mailing List Escrow Agreement, dated on or about the date hereof, by and among
HDI on behalf of its Subsidiaries and Affiliates, Lender and a storage and
escrow agent acceptable to Lender, providing for, among other things, the
deposit in escrow of the Customer Lists and source and executable code,
documentation and related media for the then-current MACS system software
utilized by Borrowers ("MACS Software") with, and the storage of such Customer
Lists and MACS Software by, such agent, the obligation of Hanover, on behalf of
its Subsidiaries and Affiliates, including Revolving Loan Borrowers and certain
Guarantors, to update and deposit in escrow updated Customer Lists and MACS
Software periodically and for the storage and escrow agent to hold and store the
updated Customer Lists and MACS Software, and the right of Lender to obtain from
such agent possession of the Customer Lists and MACS Software, as such Escrow
Agreement now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
1.28 "DM Advertising" shall mean D.M. Advertising, Inc., a New Jersey
corporation, and its successors and assigns.
1.29 "Deferred Billing Agreement" shall mean the letter agreement,
dated on or before the date hereof, by and among Litle and Hanover with respect
to Deferred Billing Option Programs of certain Borrowers, as the same now exists
or may hereafter be amended, modified, supplemented, extended, restated, renewed
or replaced.
1.30 "Deferred Billing Borrowers" shall mean, individually and
collectively, each Revolving Loan Borrower who sells goods under a Deferred
Billing Option Program.
1.31 "Deferred Billing Option Program" shall mean a deferred billing
option program from time to time made available by a Revolving Loan Borrower to
its mail order customers who wish to purchase merchandise from such Revolving
Loan Borrower offered for sale in its mail order catalogs pursuant to which (a)
such Revolving Loan Borrower, or Hanover as agent for such Revolving Loan
Borrower, upon the placement of an order by such customer, verifies with the
applicable Third Party Credit Card Issuer or
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its agent that such customer's bank credit card is valid, (b) after such
verification, such Revolving Loan Borrower ships the Inventory purchased by such
customer together with an invoice dated the sale date, (c) such Revolving Loan
Borrower completes the credit card transaction and sales records for such sales
in accordance with the Litle Agreements, (d) such sales are accepted by Litle
for purchase within ninety (90) days from the date of sale, and (e) Litle remits
payment for the sale to the Blocked Accounts one (1) business day following
purchase by Litle in accordance with the Litle Agreements.
1.32 "Early Termination Fee" shall have the meaning set forth in
Section 9.1(f) hereof.
1.33 "Eligible Deferred Billing Receivables" shall mean MasterCard/VISA
Receivables of Deferred Billing Borrowers arising from sales of merchandise
offered for sale under a Deferred Billing Option Program through mail order
catalogs of Deferred Billing Borrowers offering Eligible Inventory of Deferred
Billing Borrowers, and which Master Card/VISA Receivables are and continue to be
acceptable to Lender based on the criteria set forth below. In general, such
MasterCard/VISA Receivables shall be Eligible Deferred Billing Receivables if:
(a) such MasterCard/VISA Receivables arise from the
actual and bona fide sale and delivery to customers by Deferred Billing
Borrowers in the ordinary course of business, which sales are completed in
accordance with the terms and provisions contained in any agreements between
Deferred Billing Borrowers and their customers related thereto;
(b) the credit card transaction and sales records
evidencing such MasterCard/VISA Receivables are submitted to Litle by Deferred
Billing Borrowers and/or Hanover in its capacity as their agent in accordance
with the Deferred Billing Agreement and the other Litle Agreements;
(c) such MasterCard/VISA Receivables are purchased
by Litle at the end of the deferred submission period (which
shall not exceed ninety (90) days from the date of sale);
(d) Litle remits payment of the MasterCard/VISA
Receivables to the Blocked Account specified by Lender, within ninety-one (91)
days from the date of sale and, if earlier, one (1) business day after purchase
by Litle;
(e) such MasterCard/VISA Receivables comply with the
applicable terms and conditions contained in Section 6.12A of
this Agreement;
(f) Litle has not asserted a counterclaim, defense
or dispute, and does not have any right of setoff against such
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MasterCard/VISA Receivables, other than in respect of chargebacks for returns
and customer disputes in the ordinary course of business in accordance with the
terms of the Litle Agreements;
(g) there are no facts, events or occurrences which
would impair the validity, enforceability or collectability of such
MasterCard/VISA Receivables or reduce the amount payable or delay payment by
Litle or the purchase thereof;
(h) such MasterCard/VISA Receivables, until
purchased and paid for in full by Litle, are subject to the first priority,
valid and perfected security interest of Lender and any goods giving rise
thereto are not, and were not at the time of the sale thereof, subject to any
liens except those permitted in this Agreement;
(i) Lender shall have received, in form and
substance reasonably satisfactory to Lender, a Third Party Credit Card
Acknowledgement and a copy of the Deferred Billing Agreement, upon which Lender
is expressly permitted to rely, each duly authorized, executed and delivered by
Litle, and no cancellation, termination, or default by Litle or Hanover or any
Revolving Loan Borrower, or any suspension of Hanover or any Revolving Loan
Borrower, or any institution of or increase in reserves or designation of
special member status, shall have occurred under the Litle Agreements;
(j) neither Litle nor any officer or employee of
Litle with respect to such MasterCard/VISA Receivable is an officer, employee or
agent of or affiliated with a member of the Affiliated Borrower Group directly
or indirectly by virtue of family membership, ownership, control, management or
otherwise;
(k) there are no proceedings or actions which are
threatened or pending against Litle which might result in any material adverse
change in the financial condition of Litle or impair its ability to purchase and
pay for any Master Card/VISA Receivables.
General criteria for Eligible Deferred Billing Receivables may be established
and revised from time to time by Lender in good faith. Any Master Card/VISA
Receivables or other Accounts of Borrowers which are not Eligible Deferred
Billing Receivables shall nevertheless be part of the Collateral.
1.34 "Eligible Inventory" shall be determined by Lender from time to
time, and generally shall consist of Aegis Eligible Inventory, Gump's Eligible
Inventory, GBM Eligible Inventory, General Merchandise Inventory, Home
Furnishings Inventory, LWI Eligible Inventory, Men's Fashion Inventory, TCS
Eligible Inventory, Tweeds Eligible Inventory and Women's Fashion Inventory of
Revolving Loan Borrowers which are first quality,
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finished goods recorded and carried in a computerized perpetual inventory
accounting system, are located at Eligible Inventory Locations and held for
resale in the ordinary course of the business of Revolving Loan Borrowers.
Inventory acquired by Revolving Loan Borrowers under documentary letters of
credit issued as a Letter of Credit Accommodation pursuant to Section 2.3
hereof, which would otherwise be determined by Lender to be Eligible Inventory
in all respects, except that such Inventory is in transit to Eligible Inventory
Locations, shall be considered Eligible Inventory, if documents of title
covering such goods in form and substance satisfactory to Lender are in the
possession of Lender or its agent which shall, for these purposes, include the
bank issuing such Letter of Credit Accommodation if such issuer has been
reimbursed or paid by Lender with respect to drawings paid by the issuer under
such Letter of Credit Accommodation and the loan account of Revolving Loan
Borrower(s) requesting such Letter of Credit Accommodation has been charged for
the amounts so reimbursed or paid by Lender to such issuer. Standards of
eligibility may be fixed and revised from time to time solely by Lender in its
exclusive judgment. In determining eligibility, Lender may, but need not, rely
on reports and schedules of Inventory furnished to Lender by Revolving Loan
Borrowers, but reliance thereon by Lender from time to time shall not be deemed
to limit Lender's right to revise standards of eligibility and amounts of
Inventory deemed Eligible Inventory at any time. In general, except in Lender's
discretion, Eligible Inventory shall exclude (a) raw materials, work-in-process,
packaging and shipping materials, (b) Inventory located at retail stores of
Revolving Loan Borrowers, other than Eligible Inventory of Gump's located at the
Gump's Main Store, or Inventory located at the premises of third parties, except
for Inventory which is otherwise Eligible Inventory and is located on the
premises of any third parties which are Eligible Inventory Locations hereunder,
(c) Inventory subject to any Mail Order Joint Venture or other joint venture or
licensing agreement with a third party, (d) Inventory subject to a security
interest or lien in favor of any third party, including, without limitation, any
Inventory at any time, contrary to the provisions hereof, subject to a lien or
security interest in favor of the Private Credit Card Purchaser or any of the
parties to the Third Party Credit Card Agreements (the exclusion of any such
Inventory from Eligible Inventory shall not limit or impair any other rights of
Lender provided in this Agreement or the other Financing Agreements if any such
liens or security interests exist), (e) bill and hold goods, (f) Inventory of
Revolving Loan Borrowers which is not subject to the first priority perfected
security interest of Lender (subject to the provisions of Section 6.4 hereof),
(g) damaged or defective goods, (h) Inventory purchased on consignment, (i)
merchandise of Revolving Loan Borrowers, other than Gump's, that may otherwise
be Eligible Inventory but which is not among the product categories included in
the calculation of the Net Orderly Liquidation Value as set forth in the most
current Appraisal, (j)
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merchandise that may otherwise be Gump's Eligible Inventory but which is not
among the product categories included in the calculation of Net GOB Value as set
forth in the most current Appraisal, and (k) merchandise of Revolving Loan
Borrowers on hand six (6) months after the catalog through which it is offered
is discontinued or disposed of by a Revolving Loan Borrower. Any Inventory of
Revolving Loan Borrowers which Lender determines to be ineligible or
unacceptable for lending purposes at any time shall nevertheless be and remain
at all times part of the Collateral.
1.35 "Eligible Inventory Locations" shall mean (a) the fulfillment
centers or warehouses owned or leased by Revolving Loan Borrowers listed on
Exhibit C attached hereto and the Gump's Main Store, and (b) additional
fulfillment centers or warehouses first leased or owned by Revolving Loan
Borrowers after the date hereof, not located in the State of California, with
respect to the acquisition of which Revolving Loan Borrowers provide thirty (30)
days prior written notice to Lender; provided, however, as to both (a) and (b),
Eligible Inventory Locations shall not include the Gump's Main Store or any
fulfillment center or warehouse owned or leased by Revolving Loan Borrowers,
unless Revolving Loan Borrowers shall have delivered to Lender all instruments
and documents required by Lender to perfect or maintain perfection of Lender's
first priority security interest in and liens upon such Inventory, subject to no
other liens or claims, except those, if any, expressly permitted hereunder,
together with, and without limiting the foregoing, a written agreement in the
form of Exhibit I attached hereto or such other agreement in form and substance
satisfactory to Lender, from each owner, operator and mortgagee of such
location, as the case may be, pursuant to which such owner, operator or
mortgagee, if required by Lender: (i) acknowledges the first priority security
interest of Lender in such Inventory, (ii) agrees to waive any and all liens,
claims and rights of distraint such owner, operator or mortgagee may, at any
time, have against such Inventory, whether for unpaid rent, storage or
otherwise, and (iii) agrees to permit Lender access to the Inventory, and the
premises upon which such Inventory is located, for such time and upon such terms
as Lender shall require to exercise its rights and remedies under this
Agreement.
1.36 "Environmental Laws" shall mean all Federal, State and local laws,
rules, regulations, ordinances, and consent decrees relating to health,
hazardous substances, pollution and environmental matters, as now or at any time
hereafter in effect, applicable to the Affiliated Borrower Group's business and
facilities (whether or not owned by it), including laws relating to emissions,
discharges, releases or threatened releases of pollutants, contamination,
chemicals, or hazardous, toxic or dangerous substances, materials or wastes into
the environment (including, without limitation, ambient air, surface water,
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ground water, land surface or subsurface strata) or otherwise relating to the
generation, manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants, chemicals, or
hazardous, toxic or dangerous substances, materials or wastes.
1.37 "Equipment" shall mean, as to any Person, all of such Person's now
owned and hereafter acquired equipment and fixtures, of every kind and
description, wherever located, including, without limitation, any and all
equipment, telephones, telex and facsimile machines, machinery, computers,
computer hardware, vehicles, tools, dies, jigs, furniture, trade fixtures and
fixtures, all attachments, accessions and property now or hereafter affixed
thereto or used in connection therewith, and all substitutions and replacements
thereof that are owned by such Person.
1.38 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as the same now exists or may hereafter from time to time be amended,
modified, recodified or supplemented, together with all rules, regulations and
interpretations thereunder or related thereto.
1.39 "Event of Default" shall have the meaning set forth in Section 7.1
hereof.
1.40 "Excess Availability" shall mean, at any time, the amount, if any,
as determined by Lender, by which:
(i) the amount of the Revolving Loans determined
by Lender to be available to Revolving Loan Borrowers pursuant to the Revolving
Loan Formulas (but not to exceed (A) in the case of each Revolving Loan
Borrower, the applicable lending sublimits hereunder, (B) in the case of
Revolving Loan Borrowers considered together, the Revolving Loan Limit) exceeds
(ii) the sum of:
(A) the amount of all outstanding and unpaid
Obligations of Revolving Loan Borrowers,
plus
(B) the aggregate amount of all reserves
established by Lender hereunder, plus
(C) the aggregate amount of accounts
payable of Borrowers more than sixty
(60) days past due, plus
(D) the aggregate amount of principal
payments due on or prior to, or
within thirty (30) days after, the
date of
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calculation, (x) on Indebtedness for
Borrowed Money of Borrowers, (y) on
Indebtedness for Borrowed Money of
any other member of the Affiliated
Borrower Group, and (z) for
dividends declared or otherwise
mandatorily payable by any member of
the Affiliated Borrower Group,
whether or not Borrowers are
obligated on such Indebtedness of,
and dividends declared or payable
by, such other member of the
Affiliated Borrower Group (other
than dividends declared and payable
solely in capital stock of the
Person declaring such dividend), but
excluding (I) any such principal
payments and dividends which are not
and will not be permitted hereunder
to be paid or funded directly or
indirectly by or through Borrowers
and (II) daily revolving loan
repayments due to Lender and to be
made through application of customer
remittances and other sales proceeds
in the ordinary course.
1.41 "Financing Agreements" shall mean this Agreement, the Mortgages,
the HDPI Term Note, the Hanover Realty Term Note, the Supplemental Security
Agreements, the Guarantees, the 9.25% Note Subordination Agreement, the Customer
List Escrow Agreement, the Third Party Credit Card Acknowledgments, the GECC
Lien Clarification Agreement, the Intercompany Subordination Agreement (referred
to in Section 3.1(b)), the General Security Agreements and the Assignment of
Partnership Interest, together with all supplements, agreements, documents and
instruments, heretofore, now or at any time hereafter executed and/or delivered
to Lender in connection therewith or otherwise relating to this Agreement, the
Obligations of Borrowers or Guarantors or the Collateral or Guarantor
Collateral, as this Agreement and the foregoing and such supplements,
agreements, documents and instruments now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
1.42 "GBM" shall mean Gump's By Mail, Inc., a Delaware corporation, and
its successors and assigns.
1.43 "GBM Eligible Inventory" shall mean all Inventory of GBM in the
merchandise categories or gifts, tabletop, interior design, outdoor furnishings,
stationery, decorative art, collectibles, home furnishings, home textiles,
apparel, jewelry and fashion, offered for sale by GBM in its "Gump's" and
"Gump's Interiors" catalog, or such other catalogs created or acquired by GBM
covering substantially similar merchandise which GBM has requested Lender to
include in this Inventory category.
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1.44 "GECC" shall mean General Electric Capital Corporation, a New York
corporation, and its successors and assigns.
1.45 "GECC Collateral" shall mean the following, wherever located,
unless excluded in the proviso below: (a) all GECC Accounts, including GECC
Accounts purchased by Borrowers from GECC pursuant to the GECC Account Purchase
Agreement, (b) the Written-off Accounts, (c) Account Documentation to the extent
pertaining to the GECC Accounts and the Written-off Accounts, (d) guaranties,
security interests, or other security held by or granted to Borrowers, any
Lessee or GECC by the Retail Sale Account Debtor or a guarantor of the Retail
Sale Account Debtor (other than Borrowers or any of their affiliates), as
security for or guaranteeing payment or performance of, any of the GECC Accounts
and the Written-off Accounts, (e) the GECC Reserve Balance, (f) all Borrowers'
right, title and interest in and to any and all contracts, whether now or
hereafter existing or acquired, with Lessees, but only the provisions of such
contracts, if any, which allow Borrowers to charge such Lessees for the unpaid
amount of GECC Accounts and the Written-off Accounts, (g) all Merchandise, the
Retail Sale of which has given rise to a GECC Account or a Written-off Account,
but only to the extent that such Merchandise is subject to a lien or security
interest in favor of Borrowers and then only to the extent such Merchandise is
not, and does not become, returned, repossessed or reclaimed goods in the
possession or under the control of Borrowers or Lender or other Inventory of
Borrowers, and (h) the proceeds of the foregoing in any form whatsoever not
excluded in the proviso below; provided, however, that the following property of
Borrowers, now owned or hereafter arising or acquired, shall not, in any event,
be included in the term GECC Collateral and shall be part of the Collateral of
Lender covered by this Agreement:
(i) all returned, repossessed or reclaimed goods in the
possession or under the control of Borrowers or Lender or other Inventory of
Borrowers;
(ii) all Customer Lists, mailing lists, catalogs,
promotional materials, trademarks, trade names, copyrights or other intellectual
property or the goodwill symbolized thereby;
(iii) all accounts, contract rights, instruments or
chattel paper which do not arise from the Retail Sale of Merchandise pursuant to
a Credit Agreement or a Lender Credit Card Agreement and all general intangibles
which do not consist of an obligation for the payment of money arising from the
Retail Sale of Merchandise pursuant to a Credit Agreement or Lender Credit Card
Agreement, except this clause (iii) shall not exclude the GECC Reserve Balance
and the Written-off Accounts (but the
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<PAGE> 19
GECC Reserve Balance shall nevertheless be part of the Collateral);
(iv) all accounts, contract rights, instruments,
chattel paper or general intangibles arising from the Retail Sale of Merchandise
pursuant to a Credit Agreement or a Lender Credit Card Agreement which neither
(A) are purchased by GECC from Borrowers for New Value, nor (B) are established
or added by GECC for New Value under a Lender Credit Card Agreement, nor (C)
constitute security upon which New Value has otherwise been given by GECC to
Borrowers, in each case, pursuant to the GECC Account Purchase Agreement, except
this clause (iv) shall not exclude the Written-off Accounts or accounts charged
back to Borrowers by GECC or purchased by Borrowers pursuant to the GECC Account
Purchase Agreement;
(v) all accounts, contract rights, instruments,
chattel paper or general intangibles arising from the Retail Sale of Merchandise
under a Credit Agreement or a Lender Credit Card Agreement after non-renewal or
any termination of the GECC Account Purchase Agreement, whether at maturity or
by reason of default by Borrowers or otherwise, except for accounts, contract
rights, instruments and chattel paper arising from the Retail Sale of
Merchandise pursuant to a Credit Agreement or a Lender Credit Card Agreement, or
general intangibles which consist of an obligation for the payment of money
arising from the Retail Sale of Merchandise pursuant to a Credit Agreement or a
Lender Credit Card Agreement, which accounts, contract rights, instruments,
chattel paper or general intangibles are purchased by GECC from Borrowers for
New Value, or established or added by GECC for New Value under a Lender Credit
Card Agreement, or upon the security of which GECC has otherwise given New Value
to Borrowers, in any case during the ten (10) day period following the effective
date of non-renewal or any termination of the GECC Account Purchase Agreement,
provided that, in respect of the underlying Retail Sales, GECC has, prior to
such effective date of non-renewal or termination, given Borrowers its credit
authorization;
(vi) all accounts, contract rights, general
intangibles, chattel paper or instruments generated pursuant to
layaway plans;
(vii) all Non-Tendered Accounts; and
(viii) all products and proceeds, in whatever form,
of the foregoing types or items of property described in subparagraphs (i)
through (vii) above, other than the items or types of property expressly
excepted therefrom.
For purposes of the definition of GECC Collateral contained in this
Section 1.45, the following terms shall have the following meanings:
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(a) "Account Documentation" shall mean any and all
documentation of Borrowers relating to accounts, contract rights, instruments,
chattel paper and, to the extent consisting of an obligation for the payment of
money, general intangibles, in each case arising from the Retail Sale of
Merchandise, including, without limitation, customer applications, Credit
Agreements, Lender Credit Card Agreements, sales slips, delivery receipts,
billing statements, checks and stubs, and all correspondence, memoranda,
computer printouts, magnetic tapes, disks, or hardcopy formats, or any other
computer-readable data transmissions or software related thereto, all other
written material relating thereto, and any microfilm or microfiche copy of any
of the foregoing.
(b) "Borrowers" as used in the definition of GECC
Collateral and in the other definitions set forth in this Section 1.45 and in
the definition of GECC Lien Clarification Agreement, shall mean HDPI, Brawn, GBM
and Gump's (but such definition shall not limit the definition of Borrowers set
forth in Section 1.45 hereof for purposes of all other provisions of this
Agreement and the other Financing Agreements).
(c) "Credit Agreement" shall mean a credit agreement
initially between Borrowers and an Account Debtor pursuant to which an Account
Debtor may be permitted to purchase, from time to time, Merchandise from
Borrowers or any Lessee on credit, whether or not there is a finance charge
computed from time to time, and includes, without limitation, revolving charge
plans, extended payment plans and interest free plans.
(d) "GECC Account Purchase Agreement" shall mean that
certain Account Purchase Agreement, dated December 21, 1992, by and among
Debtor, Brawn, Hanover Direct, Inc. and GECC, as amended by that certain
Amendment to Account Purchase Agreement, dated as of July 12, 1993, as amended,
restated and renamed by that certain Amended and Restated Account Purchase
Agreement, dated as of April 25, 1994, as amended by Amendment No. 1 to Amended
and Restated Account Purchase Agreement, dated as of November, 1994, and as
amended by that certain Second Amendment to Account Purchase Agreement, made and
entered into as of June 1, 1995, and as amended by that certain Amendment No. 3
to Amended and Restated Account Purchase Agreement dated on or about the date
hereof, as the same may hereafter be amended and/or restated from time to time.
(e) "GECC Accounts" shall mean all Borrowers' accounts,
contract rights, instruments and chattel paper arising from the Retail Sale of
Merchandise pursuant to a Credit Agreement or a Lender Credit Card Agreement,
and general intangibles which consist of an obligation for the payment of money
arising from the Retail Sale of Merchandise pursuant to a Credit Agreement or a
Lender Credit Card Agreement, whether now
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<PAGE> 21
existing or hereafter coming into existence, which accounts, contract rights,
instruments, chattel paper and general intangibles are purchased by GECC from
Borrowers for New Value, or established or added by GECC for New Value under a
Lender Credit Card Agreement, or upon the security of which GECC has otherwise
given New Value to Borrowers, in any case so purchased, established, added or
given pursuant to and during the term of the GECC Account Purchase Agreement or
during the ten (10) day period following the effective date of non-renewal or
any termination of the GECC Account Purchase Agreement, provided that, in
respect of the underlying Retail Sales, GECC has, prior to such effective date
of non-renewal or any termination of the GECC Account Purchase Agreement, given
Borrowers its credit authorization. Anything contained herein to the contrary
notwithstanding, in no event shall the "GECC Accounts" include any accounts,
contract rights, instruments, chattel paper or general intangibles for the
payment of money, which are not, following their creation, actually submitted by
Borrowers to GECC, and accepted by GECC, for purchase by GECC under the terms of
the GECC Account Purchase Agreement, whether or not the failure by Borrowers to
actually so submit the same shall be a breach or default under the GECC Account
Purchase Agreement (the "Non-Tendered Accounts").
(f) "GECC Reserve Balance" shall mean all credit balances
and reserve balances now or hereafter due Borrowers from GECC, and other monies
now or hereafter due Borrowers from GECC or held by GECC, to the extent of the
terms of the GECC Account Purchase Agreement.
(g) "Lender Credit Card Agreement" shall mean an agreement
between GECC and an Account Debtor who is issued a card or device by GECC in
connection with Borrowers' private label credit card programs giving such
Account Debtor the privilege of purchasing Merchandise from Borrowers or any
Lessee on credit to be paid in accordance with such agreement.
(h) "Lessee" shall mean any person or entity who, now or
hereafter, leases or licenses space in any of Borrowers' Stores and who has an
agreement with Borrowers authorizing such person to sell Merchandise.
(i) "Merchandise" shall mean those goods and services,
including accessories and delivery services sold in conjunction therewith, sold
at retail by Borrowers or any Lessee through its mail-order catalog business and
in Stores to the general public for personal, family, or household use, and,
without limitation, also includes returned, repossessed and reclaimed goods
which are resold by Borrowers in a Retail Sale.
(j) "New Value" shall have the meaning set forth in
Section 547(a)(2) of the Bankruptcy Code. For purposes
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hereof, Reserve Adjustments shall be considered New Value, but any other amounts
credited to the GECC Reserve Balance shall not be considered New Value.
(k) "Reserve Adjustments" shall mean amounts
credited to the GECC Reserve Balance under the terms of the GECC Account
Purchase Agreement.
(l) "Retail Sale" shall mean any sale by
Borrowers or a Lessee in the ordinary course of Borrowers' business through
Borrowers' direct mail catalogs or Stores (including "closeout" or outlet
stores), but shall not include a sale to a liquidator or other bulk purchaser.
(m) "Stores" shall mean Borrowers retail stores
operated as of the date hereof or thereafter by Borrowers directly or through
another Revolving Loan Borrower or operating under the trade name "Hanover
Direct" or "International Male" or "Gump's" or any other trade name hereafter
used by Borrowers.
(n) "Written-off Accounts" shall mean those
accounts, chattel paper, instruments, and general intangibles consisting of an
obligation for the payment of money, written-off by (1) HDPI or Brawn prior to
December 21, 1992, which are subject to recovery efforts by GECC pursuant to
Section 3.6 of the GECC Account Purchase Agreement as in effect on December 21,
1992, or (2) written-off by Gump's or GBM or their predecessors in interest
prior to the date of the initial purchase by GECC of accounts from GBM and
Gump's, which are subject to recovery efforts by GECC pursuant to Section 3.6 of
the GECC Account Purchase Agreement as in effect on such date of the initial
purchase by GECC of accounts from GBM and Gump's.
1.46 "GECC Lien Clarification Agreement" shall mean that certain
Agreement by and between GECC and Lender, dated of even date herewith, setting
forth, among other things, the respective rights of each party to certain
collateral of Borrowers, as the same now exists or may hereafter be amended,
supplemented, renewed, restated or replaced.
1.47 "General Merchandise Inventory" shall mean all Inventory of
Borrowers offered for sale in the "Hanover House" and "Colonial Garden
Kitchens", "Kitchen & Home" catalogs of HDPI, or such other catalogs created or
acquired by any Revolving Loan Borrower covering substantially similar
merchandise, that such Revolving Loan Borrower has requested Lender to include
in this Inventory category, which Inventory shall include, among other items,
novelties and housewares, kitchen, cookware and storage items, and merchandise
for senior citizens.
1.48 "General Security Agreement" shall have the meaning set forth in
Section 4.3 hereof.
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1.49 "Guarantee" or "Guarantees" shall have the meaning set forth in
Section 4.2 hereof.
1.50 "Guarantor Collateral" shall have the meaning set forth in Section
4.3 hereof.
1.51 "Guarantors" shall mean, jointly and severally, individually and
collectively (i) Hanover and each existing and future direct or indirect
Subsidiary of Hanover which owns any assets in excess of Ten Thousand Dollars
($10,000), other than Non-Guarantor Subsidiaries, and (ii) each of their
respective successors and assigns.
1.52 "Gump's" shall mean Gump's Corp., formerly known as GSF
Acquisition Corp., a California corporation, and its successors and assigns.
1.53 "Gump's Eligible Inventory" shall mean all Inventory of Gump's in
the merchandise categories of gifts, tabletop, interior design, outdoor
furnishings, stationery, decorative art, collectibles, home furnishings, home
textiles, apparel, jewelry and fashion, offered for sale by Gump's at the Gump's
Main Store.
1.54 "Gump's Main Store" shall mean the retail store operated by
Gump's, known as Gump's San Francisco, located at 135 Post Street, San
Francisco, California.
1.55 "Hanover" or "HDI" shall mean Hanover Direct, Inc., a Delaware
corporation, as successor by merger to The Horn & Hardart Company, a Nevada
corporation, and The Hanover Companies, a Nevada corporation, and its successors
and assigns.
1.56 "Hanover Catalog Holdings" shall mean Hanover Catalog Holdings,
Inc., a Delaware corporation, and its successors and assigns.
1.57 "Hanover Finance" shall mean Hanover Finance Corporation, a
Delaware corporation, d/b/a Horn & Hardart Finance Corporation, and its
successors and assigns.
1.58 "Hanover Realty" shall mean Hanover Realty, Inc., a Virginia
corporation, and its successors and assigns.
1.59 "Hanover Realty Term Loan" shall mean the term loan made by Lender
to Hanover Realty as provided for in Section 2.4(b) hereof.
1.60 "Hanover Ventures" shall mean Hanover Ventures, Inc., a Delaware
corporation, and its successors and assigns.
1.61 "Hazardous Materials" shall mean any hazardous, toxic
or dangerous substances, materials and wastes, including, without
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limitation, hydrocarbons (excluding hydrocarbons naturally occurring on the
premises), flammable explosives, asbestos, urea formaldehyde insulation,
radioactive materials, biological substances, polychlorinated biphenyls,
pesticides, herbicides and any other kind and/or type of pollutants or
contaminants (including, without limitation, materials which include hazardous
constituents), sewage, sludge, industrial slag, solvents and/or any other
similar substances, materials, or wastes and including any other substances,
materials or wastes that are or become regulated under any Environmental Law
(including, without limitation any that are or become classified as hazardous or
toxic under any Environmental Law).
1.62 "HDI Floating Rate Bond Financing" shall mean the Twenty-Million
Dollar ($20,000,000) Series A and Series B floating rate notes of Hanover due
October 1, 2009 in connection with the acquisition and development of the
warehouse and distribution center owned by Hanover Realty located in Roanoke,
Virginia, and for improvements to the Gump's Main Store, and all agreements,
documents and instruments relating thereto, as such bonds and related
agreements, documents and instruments now exist or may hereafter be amended,
supplemented, extended, renewed, restated or replaced.
1.63 "HDPI" shall mean Hanover Direct Pennsylvania, Inc., a
Pennsylvania corporation, f/k/a Hanover Direct Fulfillment, Inc. and prior
thereto known as Hanover Direct, Inc. and, prior thereto known as Hanover House
Industries, Inc., and its successors and assigns.
1.64 "HDPI Pennsylvania IRB Financing" shall mean the Eight Million
Dollar ($8,000,000) Industrial Revenue Bond financing arrangements of HDPI
involving secured financing of the acquisition, construction or improvement of a
fulfillment center located at Kindig Lane, in Conewago Township, Adams County,
Pennsylvania, and the ground lease held by HDPI as lessee of the underlying
land, as such arrangements now exist or may hereafter be amended, supplemented,
extended, renewed, restated or replaced.
1.65 "HDPI Term Loan" shall mean the term loan made by Lender to HDPI
as provided for in Section 2.4(a) hereof.
1.66 "Home Furnishings Inventory" shall mean all Inventory of Revolving
Loan Borrowers offered for sale in the "Domestications" and "Tapestry" catalogs
of HDPI, or such other catalogs created or acquired by any Revolving Loan
Borrower covering substantially similar merchandise which such Revolving Loan
Borrower has requested Lender to include in this Inventory category, which
Inventory shall include, among other items, home textiles (including sheets,
towels, curtains, comforters,
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blankets, pillows, featherbeds and other such items) and decorative home
products and loungewear.
1.67 "IMR" shall mean Intercontinental Mining & Resources Incorporated,
a British Virgin Islands corporation, its successors and assigns.
1.68 "Incipient Default" shall mean the occurrence of an event or
existence of a condition which, upon the lapse of time or giving of notice or
both, would constitute an Event of Default.
1.69 "Indebtedness" shall mean, as to any Person, any obligation or
liability which is required by generally accepted accounting principles to be
shown as part of liabilities on a balance sheet of such Person (other than trade
accounts payable, incurred in the ordinary course of business that are sixty
(60) days or less past due) and, in any event, shall also include: (a)
obligations for borrowed money or capital leases; (b) obligations evidenced by
bonds, debentures, notes or other similar instruments; (c) obligations to pay
the deferred purchase price of property or for services (other than trade
accounts payable incurred in the ordinary course of business that are sixty (60)
days or less past due); (d) obligations or liabilities secured by a lien on any
asset of the obligor thereunder, whether or not such obligation or liability is
assumed; (e) contingent obligations (other than those incurred in the ordinary
course of business); (f) obligations under or in connection with letters of
credit; (g) obligations under acceptance facilities; and (h) any guarantees of
any of the foregoing obligations.
1.70 "Indebtedness for Borrowed Money" shall mean, as to any Person,
Indebtedness of the kind described in clauses (a), (b), (c), (f) or (g)
described in the definition of Indebtedness, and guarantees thereof.
1.71 "Interest Rate" shall mean (a) a rate of one and one quarter
percent (1.25%) per annum in excess of the Prime Rate on all Revolving Loans or,
after the occurrence and during the continuance of any Event of Default, or
after termination or non-renewal hereof, a rate of three and one quarter percent
(3.25%) per annum in excess of the Prime Rate and (b) a rate of one and one half
percent (1.5%) per annum in excess of the Prime Rate on all Term Loans or, after
the occurrence and during the continuance of any Event of Default, or after
termination or non-renewal hereof, a rate of three and one half percent (3.5%)
per annum in excess of the Prime Rate. In the event that the aggregate amount of
Revolving Loans and Letter of Credit Accommodations to one or more Revolving
Loan Borrowers exceeds the amounts determined by Lender to be available pursuant
to the Revolving Loan Formulas, net of reserves and subject to the applicable
lending sublimits as to each Revolving Loan Borrower,
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and subject to the Revolving Loan Limit as to all Revolving Loan Borrowers
considered together, the Interest Rate hereunder shall be three and one half
percent (3.5%) per annum in excess of the Prime Rate as to the amount of any
such excess(es) (whether or not such excess(es) arise or are made with or
without Lender's knowledge or consent and whether made before or after an Event
of Default); provided, however, that if such excess(es) arise solely by virtue
of the exercise of Lender's discretion under this Agreement to reduce the
Revolving Loan Formulas in the absence of an Event of Default which is
continuing, the Interest Rate hereunder shall be one and one half percent (1.5%)
per annum greater than the Prime Rate as to the amount of any such excess(es)
for a period of five (5) days after Lender notifies the affected Revolving Loan
Borrowers of such discretionary reduction in the Revolving Loan Formulas and, at
and after the expiration of such period of five (5) days, the Interest Rate
hereunder shall be three and one half percent (3.5%) per annum in excess of the
Prime Rate as to the amount of any such excess(es) then remaining. The Interest
Rate shall increase or decrease by an amount equal to each increase or decrease,
respectively, in the Prime Rate, effective on the first day of the month after
any change in the Prime Rate, based on the Prime Rate in effect on the last day
of the month in which any such change occurs.
1.72 "Inventory" shall mean, as to any Person, all of such Person's raw
materials, work-in-process, finished goods and all other inventory of any kind,
nature or description, wherever located, whether now owned or hereafter existing
or acquired by such Person, including, without limitation, any parts or
accessories, all wrapping, packaging, advertising and shipping materials, and
all other goods used or consumed in the business of such Person, all labels and
other devices, names or marks affixed to or to be affixed thereto for purposes
of identifying the same or the seller or manufacturer thereof and all of such
Person's right, title and interest therein and thereto.
1.73 "Inventory Loan Formulas" shall have the meaning set forth in
Section 2.1(b) hereof.
1.74 "IRC" shall mean the Internal Revenue Code of 1986, as the same
now exists or may from time to time hereafter be amended, modified, recodified
or supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
1.75 "Lender" shall mean Congress Financial Corporation, a California
corporation, its successors and assigns.
1.76 "Letter of Credit Accommodations" shall have the meaning set forth
in Section 2.3(a) hereof.
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1.77 "Litle" shall mean, collectively, Litle & Company, Inc., a
Delaware corporation, and First USA Merchant Services, a Nevada corporation, and
their respective successors and assigns.
1.78 "Litle Agreements" shall mean (a) the Member Agreement, dated May
26, 1995, by and among Litle and Hanover and its Affiliates, (b) the Deferred
Billing Agreement, and (c) the Third Party Credit Card Acknowledgment, dated of
even date herewith, by and among Litle and Hanover, as each of the same now
exist or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.
1.79 "LWI" shall mean LWI Holdings, Inc., a Delaware corporation, and
its successors and assigns.
1.80 "LWI Eligible Inventory" shall mean all Inventory of LWI in the
merchandise categories of do-it-yourself, home care and convenience and
woodworking products offered for sale by LWI in its "Improvements" and
"Leichtung Workshops" catalogs, or such other catalogs created or acquired by
LWI covering substantially similar merchandise which LWI has requested Lender to
include in this Inventory category.
1.81 "Mail Order Joint Venture" shall mean one or more Persons, not
Affiliate(s) of Revolving Loan Borrowers, engaged in a joint undertaking with
Revolving Loan Borrowers or their Subsidiaries, including, without limitation, a
joint venture, a partnership, business trust or other jointly owned and
controlled entity for the purpose of jointly engaging in research, marketing and
development of the mail order business of Revolving Loan Borrowers, with respect
to products or markets not previously sold or engaged in by Revolving Loan
Borrowers at the time of formation.
1.82 "MasterCard/VISA Receivables" shall mean Third Party Credit Card
Receivables that arise solely from goods sold by Revolving Loan Borrowers or
Guarantors to customers who have purchased goods using a valid MasterCard or
VISA bank-issued credit card, which are processed, purchased and paid for by
Litle.
1.83 "Maximum Credit" shall mean the aggregate principal amount of
Seventy-Five Million Dollars ($75,000,000), less payments and prepayments in
respect of the Term Loans.
1.84 "Measurement Quarter" shall mean, as to a Program Quarter, the
second preceding fiscal quarter of Hanover ending prior to the commencement of
such Program Quarter.
1.85 "Men's Fashion Inventory" shall mean all Inventory of Revolving
Loan Borrowers offered for sale in the "International Male", "Undergear",
"Outtakes" catalogs of Brawn, or such other
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catalogs created or acquired by any Revolving Loan Borrower covering
substantially similar merchandise that such Revolving Loan Borrower has
requested Lender to include in this Inventory category, including, without
limitation, men's activewear and fashion underwear, discount men's fashions,
contemporary men's fashions, shoes, costume jewelry and accessories, and other
apparel offered in such catalogs.
1.86 "Mortgages" shall mean, individually and collectively, each of the
following (as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced): (a) the Open-End Fee and
Leasehold Mortgage and Security Agreement, dated of even date herewith, by HDPI
in favor of Lender with respect to the Real Property and related assets of HDPI
located in Hanover, Pennsylvania, (b) the Credit Line Deed of Trust, Assignment
and Security Agreement, dated of even date herewith, by Hanover Realty in favor
of Lender with respect to the Real Property and related assets of Hanover Realty
in Roanoke, Virginia, and (c) the Open-End Fee and Leasehold Mortgage and
Security Agreement, dated of even date herewith, by LWI in favor of Lender with
respect to the Real Property and related assets of LWI in Cleveland, Ohio.
1.87 "NAR" shall mean North American Resources Limited, a British
Virgin Islands corporation, its successors and assigns.
1.88 "NAR Group" shall mean NAR and each Person who is now or hereafter
controlled by NAR, including, but not limited to, Westmark, Quadrant Group, IMR,
QCC and their successors and assigns.
1.89 "NationsBank" shall mean, collectively, NationsBank, National
Association, formerly known as NationsBank, National Association (Carolinas), as
successor-in-interest to NationsBank of North Carolina, National Association,
individually as lender and as agent for Chemical Bank, The First National Bank
of Maryland, Fleet Bank and The Bank of Tokyo Trust Company under the
NationsBank Credit Agreements, and each of their respective successors and
assigns.
1.90 "NationsBank Credit Agreements" shall mean the Credit Facilities
and Reimbursement Agreement, dated as of October 12, 1994, by and among Hanover
and NationsBank (the "NationsBank Credit Agreement"), together with any
agreements, documents and instruments executed and/or delivered in connection
therewith or related thereto and any amendments, supplements, extensions,
renewals, restatements of any of the foregoing, including, without limitation
all of the security agreements, documents and instruments executed and/or
delivered by Hanover and certain Borrowers and Guarantors, as guarantors of the
NationsBank Credit Agreement, being held in escrow pursuant to the Waiver
Letter, dated September 29, 1995, among NationsBank, Hanover and certain
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other Borrowers and subsidiaries, as guarantors of the NationsBank Credit
Agreement, under the Escrow Agreement, dated September 29, 1995 by and among
Hanover, those Borrowers and Guarantors, NationsBank and Smith, Helms, Mulliss &
Moore, L.L.P.
1.91 "Net Amount of Eligible Deferred Billing Receivables" shall mean
the gross amount of Eligible Deferred Billing Receivables, less (a) discounts
and fees payable by Deferred Billing Borrowers to Litle or claimed by Litle with
respect thereto, and (b) to the extent not included under clause (a) any
prepayments, holdbacks, chargeback deposits, chargeback reserves, refund
reserves, processing fees and other reserves, claims, credits (including credits
for returned goods), allowances or other charges payable to or claimed by Litle.
1.92 "Net GOB Percentage" shall mean, as to Gump's Eligible Inventory,
the Net GOB Value thereof, expressed as a percentage of cost thereof.
1.93 "Net GOB Value" shall mean, as to Gump's Eligible Inventory, an
amount equal to (a) the amount of gross proceeds that could be realized in cash
if such Inventory were sold within a ninety (90) day period in a going out of
business liquidation sale, as set forth or calculated in the most recent
Appraisal, minus (b) the estimated costs, expenses, fees, including reasonable
attorneys fees, taxes and other charges which would be incurred in connection
with such sale, and estimated returns, all as set forth in, or calculated using,
the most recent Appraisal.
1.94 "Net Orderly Liquidation Value" shall mean, as to Eligible
Inventory other than Gump's Eligible Inventory, an amount equal to (a) eighty
(80%) percent of the gross proceeds that could be realized in cash if such
Inventory were sold within a six (6) to nine (9) month period in an orderly
liquidation sale, minus (b) the estimated costs, expenses, fees, including
reasonable attorneys fees, taxes and other charges which would be incurred in
connection with such sales, and estimated returns, all as set forth in, or
calculated using, the most recent Appraisal.
1.95 "Net OLV Percentage" shall mean, as to Eligible Inventory other
than Gump's Eligible Inventory, the Net Orderly Liquidation Value thereof,
expressed as a percentage of cost thereof.
1.96 "9.25% Guarantors" shall mean those Subsidiaries of Hanover and
any other entity which now or hereafter has guaranteed payment or performance of
the obligations of Hanover under the 9.25% Notes.
1.97 "9.25% Notes" shall mean the aggregate of $14,000,000 in principal
amount of outstanding 9.25% Senior Subordinated
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Notes of Hanover due August 1, 1998, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, exchanged, restated or
replaced.
1.98 "9.25% Note Assignment" shall mean the Repurchase and Option
Agreement dated as of September 29, 1995 among Sun America Life Insurance
Company, IMR and Hanover with respect to the 9.25% Notes, Hanover and the 9.25%
Note Guarantors, together with all instruments and agreements delivered
thereunder, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.99 "9.25% Subordination Agreement" shall mean the Subordination
Agreement, dated of even date herewith, between Lender and acknowledged by the
Indenture Trustee (as defined therein), Hanover and the 9.25% Guarantors, as the
same may now exist or may hereafter be amended, modified, supplemented, restated
or replaced.
1.100 "Non-Guarantor Subsidiary" shall mean each of (a) Austad, (b) the
Restaurant Business Subsidiaries and (c) any direct Subsidiary of Hanover that,
on the date hereof, owns assets having an aggregate value of less than Ten
Thousand Dollars ($10,000). In addition, Non-Guarantor Subsidiaries shall mean
any Subsidiary of Hanover that:
(i) is formed or acquired after the date hereof on
not less than thirty (30) days prior written notice to Lender that is received
by Lender prior to the occurrence of an Event of Default or Incipient Default
which is continuing at the time of receipt of such notice;
(ii) is not a direct or indirect Subsidiary of or in
the same business as any Borrower or any Guarantor, other than Hanover, and is
not a Mail Order Joint Venture or a party thereto;
(iii) has been formed or acquired without any direct
or indirect investment, whether in cash or in property, other than capital stock
of any member of the Affiliated Borrower Group upon which no dividends are paid
or payable (except dividends paid or payable in additional capital stock
similarly restricted as to dividends), by Borrowers or any other member of the
Affiliated Borrower Group and without the incurrence of any Indebtedness in
connection with such acquisition, or the business to be engaged in by such
Subsidiary, directly or indirectly, by any of Borrowers or any other member of
the Affiliated Borrower Group;
(iv) engages in no transaction, direct or indirect,
with Borrowers or any other member of the Affiliated Borrower Group, other than
such Subsidiary's declaration and
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payment to members of the Affiliated Borrower Group of dividends in its own
capital stock, or the payment by such Subsidiary to Borrowers or any other
member of the Affiliated Borrower Group, of overhead and other administrative
charges in the ordinary course of business; and
(v) obtains financing, if any, on a completely stand
alone basis, i.e., not requiring any direct or indirect guarantee or other form
of financial support or credit enhancement from Borrowers or any other member of
the Affiliated Borrower Group, other than the non-recourse pledge of the capital
stock of another Non-Guarantor Subsidiary and cross-corporate guaranties between
or among Non-Guarantor Subsidiaries formed or acquired at the same time as part
of a single transaction upon the consummation of which such cross-guaranties are
executed in favor of the provider of such stand alone financing; and provides
Lender with a thirty (30) day right of first refusal to elect to provide
financing to such Subsidiary on the same terms as set forth in any bona fide
commitment, proposal or offer solicited or received by such Subsidiary or an
Affiliate thereof. If Lender elects to exercise its right of first refusal, by
written notice, within such thirty (30) day period, of Lender's willingness to
provide such financing on such terms, the Six Hundred Dollar ($600) per person
per diem field examination charges of Lender plus all out-of-pocket expenses of
Lender incurred in respect of its initial field work or other preliminary review
and due diligence shall be payable by such Subsidiary or charged to Borrowers'
loan accounts hereunder whether or not the transaction closes. If Lender does
not exercise its right of first refusal, such charges and expenses of Lender
shall not be charged to such Subsidiary or Borrowers' loan accounts hereunder.
If any Subsidiary of Hanover formed or acquired after the date hereof at any
time, or Austad, with respect to clauses (ii), (iv) or (v), at any time, does
not meet or no longer meets any of the foregoing requirements, such Subsidiary
or Austad shall not be considered, for purposes hereof, or if initially so
considered, shall lose its status as, a Non-Guarantor Subsidiary and shall be
subject to all of the requirements set forth herein with respect to Subsidiaries
which are members of the Affiliated Borrower Group.
1.101 "Obligations" shall mean, as to any Person, any and all now
existing and hereafter arising obligations, liabilities and Indebtedness of such
Person to Lender of every kind and description, however evidenced, whether
direct or indirect, absolute or contingent, joint or several, secured or
unsecured, due or not due, primary or secondary, liquidated or unliquidated,
whether arising before, during or after the initial or any renewal term hereof
or any other Financing Agreement, or after the commencement of any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person
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under the Bankruptcy Code or any similar statute, whether arising directly or
acquired by Lender from any other Person, conditionally or as collateral
security, by assignment, merger with any other Person, assumption, subrogation
or otherwise (excluding participations or interests of Lender in the obligations
of such Person to others), whether arising under this Agreement, the other
Financing Agreements, by operation of law or otherwise and whether incurred by
such Person as principal, surety, endorser, guarantor or otherwise. Without
limiting the generality of the foregoing, "Obligations" shall include: (a) such
Person's liability to Lender for all balances owing to Lender in any account
maintained on Lender's books under this Agreement, the other Financing
Agreements or under any other agreement or arrangement now or hereafter entered
into between such Person and Lender, (b) such Person's liability to Lender as
maker or endorser of any promissory note or other instrument for the payment of
money, (c) such Person's liability to Lender under any instrument of guaranty or
indemnity, or arising under or with respect to any letter of credit, acceptance,
instrument, guarantee, endorsement or undertaking which Lender may make, endorse
or issue to others for the account of such Person, (d) Indebtedness owing by
such Person to Lender or to present or future parents, subsidiaries, affiliates
or Participants of or with Lender arising under or in connection with any of the
foregoing types of agreements, instruments or transactions, and (e) all
principal, interest, financing charges, letter of credit fees, closing fees,
facility fees, unused line fees, servicing fees, early termination and other
fees, commissions and expenses payable or reimbursable to Lender, including, but
not limited to, reasonable attorneys', paralegals' and accountants' fees and
disbursements, chargeable to such Person and due from such Person under this
Agreement, the other Financing Agreements, or under any other agreement or
arrangement which was heretofore or may be now or hereafter entered into between
such Person and Lender. Unless the context otherwise requires, the term
"Obligations" refers to Obligations of Borrowers.
1.102 "Participant" shall mean any Person which at any time
participates with Lender in respect of the Revolving Loans, the Term Loans, the
Letter of Credit Accommodations or other Obligations of Borrowers or any portion
thereof.
1.103 "Person" or "person" shall mean an individual, a partnership, a
limited partnership, a corporation (including a business trust), a joint stock
company, a trust, an unincorporated association, a joint venture, a limited
liability company, a limited liability partnership or other entity or a
government or any agency, instrumentality or political subdivision thereof.
1.104 "Prime Rate" shall mean the prime commercial interest rate from
time to time publicly announced by CoreStates Bank,
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N.A., Philadelphia, Pennsylvania, whether or not such announced rate is the best
rate available at such bank.
1.105 "Private Credit Card Agreement" shall mean (a) that certain
Account Purchase Agreement, dated December 21, 1992, by and among Debtor, Brawn,
Hanover Direct, Inc. and GECC, as amended by that certain Amendment to Account
Purchase Agreement, dated as of July 12, 1993, as amended, restated and renamed
by that certain Amended and Restated Account Purchase Agreement, dated as of
April 25, 1994, as amended by Amendment No. 1 to Amended and Restated Account
Purchase Agreement, dated as of November, 1994, and as amended by that certain
Second Amendment to Account Purchase Agreement, made and entered into as of June
1, 1995, and as amended by that certain Amendment No. 3 to Amended and Restated
Account Purchase Agreement dated on or about the date hereof, as the same may
hereafter be amended and/or restated from time to time and (b) any extended,
renewal or replacement Private Credit Card Receivables purchase arrangement with
GECC or a Private Credit Card Purchaser who replaces or succeeds GECC on terms
acceptable to Lender as set forth in agreements in form and substance
satisfactory to Lender.
1.106 "Private Credit Card Programs" shall mean the Hanover Shop at
Home Card of HDPI and the International Male Card of Brawn, or such other
private credit card issued by Revolving Loan Borrowers and approved for
inclusion in this definition by Lender, in writing, in Lender's sole discretion.
1.107 "Private Credit Card Purchaser" shall mean GECC, its successors
and assigns, or such other successor or replacement purchaser under the Private
Credit Card Agreement.
1.108 "Private Credit Card Receivables" shall mean all Accounts
representing the rights of certain Revolving Loan Borrowers to payment for
Inventory sold and delivered to customers who have purchased such goods under
the Private Credit Card Programs, together with all finance charges and late
fees payable therewith, and the proceeds thereof, but excluding returned,
repossessed or reclaimed goods relating to such Accounts and excluding all other
Inventory of Revolving Loan Borrowers.
1.109 "Program Quarter" shall mean each fiscal quarter of Hanover
during which a Deferred Billing Option Program is commenced or remains in effect
as to new sales.
1.110 "Purchase Money Lien" shall mean the liens meeting the
requirements in Section 6.4(d) hereof.
1.111 "Real Property" shall mean all now owned and hereafter acquired
real property of Borrowers, together with all buildings, structures, and other
improvements located thereon and
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all licenses, easements and appurtenances relating thereto, wherever located,
including without limitation, the real property, leasehold interests and related
assets more particularly described in the Mortgages, located in Hanover,
Pennsylvania, Roanoke, Virginia and Warrensville Heights, Ohio.
1.112 "Renewal Date" shall have the meaning set forth in Section 9.1(a)
hereof.
1.113 "Restaurant Business Subsidiaries" shall mean, the Subsidiaries
of Hanover listed on Exhibit B-3 attached hereto.
1.114 "Responsible Officer" shall mean any one or more of the
following: the President, Chief Financial Officer, Treasurer, Controller,
Secretary or General Counsel of Hanover or any Borrower.
1.115 "Revolving Accounts Loans" shall mean the outstanding Obligations
owed to Lender by Deferred Billing Borrowers consisting of the secured loans and
advances, heretofore, now or hereafter made by Lender to Deferred Billing
Borrowers as provided for in Section 2.1(a) hereof, on a revolving basis
(involving advances, repayments and readvances), subject to the terms and
conditions of this Agreement and the other Financing Agreements.
1.116 "Revolving Inventory Loans" shall mean the outstanding
Obligations owed to Lender by Revolving Loan Borrowers consisting of the secured
loans and advances, heretofore, now or hereafter made by Lender to Revolving
Loan Borrowers as provided for in Section 2.1(b) hereof, on a revolving basis
(involving advances, repayments and readvances), subject to the terms and
conditions of this Agreement and the other Financing Agreements.
1.117 "Revolving Loan Borrowers" shall mean, individually and
collectively, HDPI, Brawn, GBM, Gump's, TCS, Tweeds, LWI, HDV and Aegis.
1.118 "Revolving Loan Formulas" shall mean, collectively, the Accounts
Loan Formula and the Inventory Loan Formulas.
1.119 "Revolving Loan Limit" shall mean, at any time, the amount of
Sixty Five Million ($65,000,000) Dollars, less the amount of outstanding Letter
of Credit Accommodations at such time.
1.120 "Revolving Loans" shall mean, individually and collectively,
Revolving Accounts Loans and Revolving Inventory Loans.
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1.121 "Sears" shall mean Sears Shop At Home Services, Inc., a Delaware
corporation, together with its affiliates, and its and their successors and
assigns.
1.122 "Sears Agreements" shall mean (a) the License Agreement,
effective January 1, 1994, between Hanover Ventures and Sears, together with any
agreements, operating policies and procedures, guidelines, advertising policies,
information transfer requirements, settlement procedures and schedules thereto
and any other documents, instruments or agreements executed and/or delivered in
connection therewith or relating thereto, (b) the letter agreement, dated April
5, 1995, between LWI and Sears, and (c) any license or other agreement between
Sears and a member of the Affiliated Borrower Group providing for substantially
similar arrangements as those contemplated by the agreements referred to in
clauses (a) and (b) of this definition, together with all agreements, documents
and instruments executed and/or delivered in connection therewith or related
thereto, as each of the foregoing now exist or may hereafter be amended,
modified, supplemented, extended, renewed or restated.
1.123 "SEC" shall mean the United States Securities and Exchange
Commission.
1.124 "Specified Action" shall mean the meaning set forth in Section
9.1(g) hereof.
1.125 "Subsidiary" or "subsidiary" shall mean, as to any Person, any
corporation, association or organization, active or inactive, as to which fifty
percent (50%) or more of the outstanding voting stock or shares or interests
shall now or hereafter be owned or controlled, directly or indirectly, by such
Person or any direct or indirect Subsidiary of such Person, but excluding any
such corporation, association, or organization which is itself a Mail Order
Joint Venture, unless more than fifty percent (50%) of the outstanding voting
stock or shares, or interests are now or hereafter owned or controlled, directly
or indirectly, by such Person or any direct or indirect Subsidiary of such
Person.
1.126 "Tax Sharing Agreement" shall mean that certain Tax Sharing
Agreement, dated as of February 1, 1987, presently by and among Hanover and
HDPI, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.127 "TCS Factory" shall mean The Company Factory, Inc., a Wisconsin
corporation, and its successors and assigns.
1.128 "TCS Office" shall mean The Company Office, Inc., a Wisconsin
corporation and its successors and assigns.
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1.129 "TCS" shall mean The Company Store, Inc., a Wisconsin
corporation, and successors and assigns.
1.130 "TCS Eligible Inventory" shall mean: all Inventory of TCS in the
merchandise categories of comforters, blankets, sheets, towels, curtains,
pillows, featherbeds, decorative home products, loungewear and outer garments
offered for sale by TCS in its "The Company Store" catalog, or such other
catalog created by TCS covering substantially similar merchandise which TCS has
requested Lender to include in this Inventory category.
1.131 "Term" shall have the meaning set forth in Section 9.1(a) hereof.
1.132 "Term Loans" shall mean the HDPI Term Loan and
Hanover Realty Term Loan.
1.133 "Term Loan Borrowers" shall mean, individually and collectively,
HDPI and Hanover Realty.
1.134 "Third Party Credit Card Acknowledgments" shall mean those
certain letter agreements addressed to the parties to the Third Party Credit
Card Agreements setting forth such parties' acknowledgment of the security
interest of Lender in the monies due and to become due, including, credits and
reserves, under the Third Party Credit Card Agreements, and such parties'
agreement to transfer to the Blocked Accounts established pursuant to Section
8.2 hereof, all monies due and other funds payable to or for the account of
Revolving Loan Borrowers under the Third Party Credit Card Agreements, as the
same now exist or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced.
1.135 "Third Party Credit Card Agreements" shall mean all agreements
now or hereafter entered into by Revolving Loan Borrowers with any Third Party
Credit Card Issuer or any servicing or processing agent or any factor or
financial intermediary in order to facilitate, service and manage the credit
authorization, billing, transfer and/or payment procedures with respect to
Revolving Loan Borrowers' sales transactions involving credit card purchases by
customers using credit cards issued by any Third Party Credit Card Issuer. Such
term includes, but is not limited to the following, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced:
(a) the agreements referred to in subparagraphs (a) and
(b) of the definition of Litle Agreements;
(b) the Agreement for American Express Card Acceptance,
effective April 1, 1995, between American Express Travel Related Services
Company, Inc. and HDPI;
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(c) the Diners Club Establishment Application and
Agreement, dated effective April 27, 1990, by and between HDPI and Citicorp
Diners Club Inc., supplementing and replacing all prior agreements between HDPI
(or its trade names) and Citicorp Diners Club Inc. covering individual catalogs
of HDPI; and
(d) the Merchant Services Agreement, made as of October
14, 1986, by and between Discover Card Services, Inc. and Hanover.
1.136 "Third Party Credit Card Issuer" shall mean an entity or
organization which issues or whose members issue credit cards, including,
without limitation, MasterCard and VISA bank credit cards, and American Express,
Discover, Diners Club, Carte Blanche, and Sears Card non-bank credit cards.
1.137 "Third Party Credit Card Receivables" shall mean all Accounts
representing the Revolving Loan Borrowers' and Guarantors' rights to payment for
Inventory sold and delivered to customers who have purchased such goods using a
credit card issued by a Third Party Credit Card Issuer, including, without
limitation, rights to payment from the customer and from any Third Party Credit
Card Issuer or party to a Third Party Credit Card Agreement, together with the
proceeds of the foregoing, but excluding returned, repossessed or reclaimed
goods relating to such Accounts and excluding other Inventory of Revolving Loan
Borrowers.
1.138 "Trademark Security Agreements" shall mean the Trademark
Collateral Assignment and Security Agreements, by and between each of Hanover
Catalog Holdings, Company Store Holdings, Inc., Scandia Down Corporation,
Hanover, Aegis Safety Holdings, Inc., Gump's, Tweeds and Brawn, and each other
Borrower or Guarantor who at any time owns any registered trademarks or service
marks, in favor of Lender, and instruments thereunder, as the same now exist or
may hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
1.139 "Tradename" shall have the meaning set forth in Section 6.1
hereof.
1.140 "Tweeds Eligible Inventory" shall mean all Inventory of Tweeds in
the merchandise categories of men's and women's apparel, shoes, hosiery, costume
jewelry, accessories and outerwear offered for sale by Tweeds in its "Tweeds"
catalog or such other catalogs created or acquired by Tweeds covering
substantially similar merchandise which Tweeds has requested Lender to include
in this Inventory category.
1.141 "UCC" shall mean the Uniform Commercial Code as from time to time
in effect in the State of New York.
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1.142 "Value" shall mean, as determined by Lender, with respect to
Eligible Inventory, the lower of (a) cost computed for Eligible Inventory of
Revolving Loan Borrowers other than Gump's, on a first-in-first-out basis in
accordance with generally accepted accounting principles consistently applied,
and, in the case of Eligible Inventory of Gump's, computed under a retail
accounting methodology acceptable to Lender, (excluding, in any event, and as to
all Eligible Inventory, indirect costs such as purchasing, warehousing,
distribution, but including incoming freight costs) or (b) market value, as
determined by Lender.
1.143 "Voluntary Termination Notice" shall have the meaning given in
Section 9.1(g).
1.144 "Westmark" shall mean Westmark Holdings Limited, a British Virgin
Islands corporation, its successors and assigns.
1.145 "Women's Fashion Inventory" shall mean all Inventory of Revolving
Loan Borrowers offered for sale in the "Silhouettes" catalog of HDPI, or such
other catalogs created or acquired by any Revolving Loan Borrower covering
substantially similar merchandise that such Revolving Loan Borrower has
requested Lender to include in this Inventory category, including, without
limitation, women's apparel, shoes, hosiery, costume jewelry, accessories and
outerwear (including moderately priced, discount, contemporary women's fashions,
contemporary apparel for larger sized women and unique and other women's
fashions).
1.146 Accounting Terms
All accounting terms not specifically defined herein shall be construed
in accordance with generally accepted accounting principles from time to time in
effect, consistently applied, except as otherwise stated herein. To the extent
generally accepted accounting principles require a change in accounting
practices, references herein to "generally accepted accounting principles from
time to time in effect, consistently applied", shall include such required
changes.
1.147 Other Defined Terms
The words "hereof", "herein", "hereunder", "this Agreement" and words
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, as the same now
exists or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced. Whether or not expressly so provided herein or in a
separate amendment, all references to the "Loan Agreement" or the "Loan and
Security Agreement" or words of similar import contained in the Supplemental
Security Agreements or other Financing Agreements shall mean this Agreement and
references therein to the respective parties to and borrowers
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under the "Loan Agreement" or the "Loan and Security Agreement" or words of
similar import are each hereby amended to refer to the respective parties and
Borrowers under this Agreement.
1.148 Uniform Commercial Code Definitions
All terms not specifically defined herein which are defined in the UCC
shall have the meanings as defined in the UCC.
1.149 Interpretation
For purposes of this Agreement, unless the context otherwise requires,
all other terms hereinbefore or hereinafter defined, including but not limited
to those terms defined in the recitals hereto, shall have the meanings herein
assigned to such terms. All references to Borrowers, Guarantors and other
Persons pursuant to the definitions set forth in the recitals hereto shall
include their respective successors and assigns. All references to Borrowers and
Guarantors shall mean each of them, and all of them, jointly and severally,
individually and collectively. All references to any term in the plural shall
include the singular and all references to any term in the singular shall
include the plural.
SECTION 2. CREDIT FACILITY
2.1 Revolving Loans
(a) Revolving Accounts Loans. Subject to and upon the
terms and conditions contained herein and in the other Financing Agreements,
Lender shall, from time to time, make Revolving Loans to each of the Deferred
Billing Borrowers, at its request, of up to eighty percent (80%) of their
respective Net Amounts of Eligible Deferred Billing Receivables, or such greater
or lesser percentages thereof as Lender shall, in its sole discretion, determine
from time to time (the "Accounts Loan Formula"); provided, however, that no
Revolving Accounts Loans shall be made available or be permitted to remain
outstanding, unless (a) Lender receives written notification from the applicable
Deferred Billing Borrowers of their intention to commence or continue as to new
sales one or more Deferred Billing Option Programs, which notice shall describe
the program in reasonable detail and be received by Lender not less than thirty
(30) days prior to the commencement of each applicable Program Quarter, and (b)
with respect to each Program Quarter commencing after the first fiscal quarter
of 1996, Lender determines that the Deferred Billing Borrowers meet the Accounts
Loan Financial Test with respect to such Program Quarter.
(b) Revolving Inventory Loans. Subject to, and upon the
terms and conditions contained herein and in the other
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Financing Agreements, Lender shall, from time to time, make Revolving Inventory
Loans (i) to each Revolving Loan Borrower, other than Gump'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, or, in each of clauses (b)(i) or (b)(ii), 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 (60%) percent lending formula component referred to in
clauses (b)(i)(A) and (b)(ii)(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) or (b)(ii)(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.
(c) Borrowing Procedures. For each Revolving Loan
requested by Revolving Loan Borrowers, a Responsible Officer or other authorized
Person of such respective Revolving Loan Borrower(s) shall give Lender
telephonic notice of its request not later than 11:00 a.m., New York, New York
time, on the Banking Day on which the disbursement is requested to be made.
Lender shall not be responsible for determining whether the Person making the
telephonic request purportedly on behalf of a Revolving Loan Borrower is a
Responsible Officer or other authorized Person of such Revolving Loan Borrower.
Lender may, but shall have no duty to, require borrowing requests to be made or
confirmed in writing.
(d) Approval and Disbursement of Loans. Upon Lender's
receipt of a borrowing request pursuant to Section 2.1(b) hereof, Lender shall
determine whether the Revolving Loan Borrower(s) making the request for a
Revolving Loan is entitled to such loan, based upon and subject to all of the
other terms and conditions hereof. If Lender determines that the Revolving Loan
Borrower(s) making the request is not so entitled hereunder to a requested loan,
Lender shall so advise such Revolving Loan Borrower(s) by telephonic or other
notice by no later than 2:00 p.m. New York, New York time on the same Banking
Day that Lender receives such borrowing request, if received by Lender on the
same Banking Day prior to 11:00 a.m. New York, New York time. If such borrowing
request shall have been received by Lender on a Banking Day prior to 11:00 a.m.,
New York, New York time, and if
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Lender approves a requested loan, or if Lender fails to notify such Revolving
Loan Borrower(s) by 2:00 p.m. New York, New York time that Lender declines to
make the requested loan(s), as provided above, Lender shall take steps through
Lender's disbursing banks to arrange, by not later than 4:00 p.m. New York, New
York time, a wire or other transfer of funds (in the amount of such approved
borrowing request or request for which Lender fails to timely notify Revolving
Loan Borrowers that it declines to make such loan) from Lender's disbursing bank
or banks to the respective Revolving Loan Borrower's bank account from time to
time designated and approved by Lender and Revolving Loan Borrowers for receipt
of loan proceeds disbursed under this Agreement; provided, that no Event of
Default or Incipient Default shall have occurred and be continuing. As to any
borrowing requests received by Lender after 11:00 a.m. New York, New York time
on a Banking Day, Lender shall use reasonable efforts to review, and if
approved, effectuate, a disbursement by 4:00 p.m. New York, New York time on the
Banking Day so received.
(e) Liability of Lender. Lender shall not have any
liability to Revolving Loan Borrowers for any delay or failure on the part of
any bank or banks to transfer the funds to Revolving Loan Borrowers in
accordance with the instructions of Lender, or for any delay or failure by
Lender or any such bank or banks in the approval of borrowing requests, or the
initiation or transfer of such funds. Notwithstanding the foregoing, if Lender
shall have advised Revolving Loan Borrower(s) that it has approved, or is deemed
under Section 2.1(d) hereof to have approved, a request to make a Revolving Loan
which request was timely made by such Revolving Loan Borrower(s) as provided in
Section 2.1(c) hereof, then, unless an Event of Default or Incipient Default has
occurred and is continuing, if, by reason of Lender's own negligence, such
Revolving Loan Borrower(s) shall fail to receive the wire or other transfer of
funds to its bank account previously designated and approved by Lender for such
purposes by no later than 4:00 p.m. local time of the recipient bank, on the
same Banking Day requested and approved, Lender shall reimburse such Revolving
Loan Borrower(s) for any customary and reasonable administrative service charges
and overdraft interest charges, if any, actually imposed on such Revolving Loan
Borrower(s) by its bank in connection with any permitted overdrafts or
dishonored instruments which would not have arisen had such wire or other
transfer been received by 4:00 p.m. such local time on such Banking Day;
provided, however, in no event shall Lender incur any liability to such
Revolving Loan Borrower(s) or any other Person for direct or consequential
losses or damages by reason of any such failure or delay, whether or not
foreseeable and whether or not the possibility of incurring such damages or
losses is communicated to or otherwise known by Lender.
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2.2 Lending Sublimits
(a) Subject to, and upon the terms and conditions
contained herein (i) the aggregate principal amount of Revolving Inventory Loans
and Letter of Credit Accommodations made available to Brawn shall not exceed
Eight Million Dollars ($8,000,000) at any one time outstanding.
(b) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving Inventory Loans
and Letter of Credit Accommodations made available to HDPI shall not exceed, in
the aggregate (i) until HDPI and HDV have notified lender in writing, that the
"Domestications" catalog business has been transferred to HDV, Forty Million
Dollars ($40,000,000) at any one time outstanding, and (ii) following Lender's
receipt of such notice, Twenty Million Dollars ($20,000,000), at any one time
outstanding.
(c) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving Inventory Loans
and Letter of Credit Accommodations made available to GBM shall not exceed Seven
Million Dollars ($7,000,000).
(d) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving Inventory Loans
and Letter of Credit Accommodations made available to Gump's shall not exceed
Five Million Dollars ($5,000,000) at any one time outstanding.
(e) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving Inventory Loans
and Letter of Credit Accommodations made available to TCS shall not exceed
Fifteen Million Dollars ($15,000,000) at any one time outstanding.
(f) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving Inventory Loans
and Letter of Credit Accommodations made available to Tweeds shall not exceed
Eight Million Dollars ($8,000,000) at any one time outstanding.
(g) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving Inventory Loans
and Letter of Credit Accommodations made available to Aegis shall not exceed One
Million Five Hundred Thousand Dollars ($1,500,000) at any one time outstanding.
(h) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving Inventory Loans
and Letter of Credit Accommodations made available to LWI shall not exceed Three
Million Dollars ($3,000,000) at any one time outstanding.
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(i) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving Inventory Loans
and Letter of Credit Accommodations made available to HDV shall not exceed, in
the aggregate (i) until HDPI and HDV have notified Lender in writing that the
"Domestications" catalog business has been transferred to HDV, zero ($0); and
(ii) following Lender's receipt of such notice, Twenty Million Dollars
($20,000,000), at any one time outstanding.
(j) Without limiting the foregoing lending sublimits, (i)
the aggregate amount of Revolving Loans shall not at any one time outstanding
exceed the Revolving Loan Limit for all Revolving Loan Borrowers and (ii) the
aggregate amount of Revolving Accounts Loans for all Deferred Billing Borrowers
shall not at any one time outstanding exceed Ten Million Dollars ($10,000,000).
Lender shall have the right, from time to time, to establish and revise
Revolving Accounts Loan sublimits for each Deferred Billing Borrower, within the
overall Ten Million Dollar ($10,000,000) sublimit applicable to all Revolving
Accounts Loans.
2.3 Letter of Credit Accommodations
(a) Lender shall, from time to time, on terms and
conditions acceptable to Lender, at the request of a Revolving Loan Borrower,
provide one or more of the following financial accommodations to such Borrower
("Letter of Credit Accommodations"): (i) issue, open or cause the issuance or
opening of letters of credit or purchase or other guarantees for the purchase of
goods and services in the ordinary course of a Revolving Loan Borrower's
business or for any other purpose approved by Lender or provide for the
amendment or extension of any of the foregoing or (ii) assist a Revolving Loan
Borrower in establishing or opening letters of credit for such purposes by
indemnifying the issuer thereof or guaranteeing the payment or performance of
such Borrower to such issuer in connection therewith, including standby letters
of credit (collectively, the "Distribution Center Standby LCs") issued to
replace, or issued to NationsBank as sole security for, letters of credit
previously issued by NationsBank for the account of Hanover or its subsidiaries,
not to exceed the aggregate amount of Thirty Million Dollars ($30,000,000), to
secure the HDPI Pennsylvania IRB Financing and the HDI Floating Rate Bond
Financing.
(b) Without limiting Lender's continuing discretion under
Section 2.3(a) hereof, the extension of such Letter of Credit Accommodations by
Lender shall be subject to the satisfaction of each of the following additional
conditions precedent: (i) additional Revolving Loans pursuant to the Revolving
Loan Formulas, subject to reserves against availability established by Lender
hereunder and within all applicable lending sublimits and the Revolving Loan
Limit, shall be available to the
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respective Revolving Loan Borrower immediately before giving effect to the
proposed issuance of the Letter of Credit Accommodation as follows: (A) if the
proposed Letter of Credit Accommodation is for the purpose of purchasing
Eligible Inventory, such additional availability to such Revolving Loan Borrower
must be in an amount equal to or greater than the sum of (1) forty percent (40%)
of the landed cost of such Eligible Inventory (or such greater percentage as
shall equal one hundred percent (100%) minus the applicable Inventory Loan
Formula determined by Lender under Section 2.1(b) hereof), plus (2) the freight,
duty and other amounts which Lender estimates must be paid for or in connection
with such Inventory upon arrival or for delivery to or within the United States;
and (B) if the proposed Letter of Credit Accommodation is in the form of a
Distribution Center Standby LC or for any other purpose, such additional
availability of Revolving Loans to such Revolving Loan Borrower must be in an
amount not less than one hundred percent (100%) of the face amount thereof; (ii)
if such Letter of Credit Accommodation is for the purpose of purchasing goods,
Lender shall have, upon passage of title to Revolving Loan Borrower purchasing
same, a valid and perfected first security interest in and lien upon goods being
acquired in connection therewith subject to the provisions of Section 6.4
hereof; (iii) the form and content of all such Letter of Credit Accommodations
shall be satisfactory to Lender and the issuer, and all documents, instruments,
notices and statements relating thereto, if any, which Lender or the issuer may
request, shall be promptly delivered to Lender; and (iv) Revolving Loan
Borrowers shall have fully complied to Lender's satisfaction with all terms and
provisions hereof and of the terms and provisions of any agreements relating to
the Letter of Credit Accommodations heretofore, now or hereafter entered into
between Revolving Loan Borrowers and Lender, or between Lender and/or Revolving
Loan Borrowers and any issuer, including the payment of all fees, commissions
and charges set forth herein and therein.
(c) Revolving Loan Borrowers hereby agree to and do
indemnify and hold harmless, Lender, and its officers, directors, employees,
attorneys and agents, with respect to all loss, cost, liability or expense which
Lender may suffer or incur in connection with the Letter of Credit
Accommodations. Revolving Loan Borrowers further agree that payments made or
other obligations incurred by, and all indemnities given by, Lender in
connection with Letter of Credit Accommodations are part of the Obligations of
Revolving Loan Borrowers, and shall be payable in accordance with the terms
hereof and of the other Financing Agreements. Any such payments made by Lender,
including, without limitation, any of the same made after termination or
non-renewal of this Agreement or the other Financing Agreements with respect to
Letter of Credit Accommodations provided to Revolving Loan Borrowers prior to
such termination or non-renewal, shall automatically be treated for
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purposes hereof as Revolving Loans and shall accrue interest at the Interest
Rate then payable by Revolving Loan Borrowers commencing on the date such
payment is made by Lender.
(d) The aggregate amount of Revolving Loans which may
otherwise be made available to the respective Revolving Loan Borrowers by Lender
pursuant to the Revolving Loan Formulas and within the Revolving Loan Limit and
subject to the applicable lending sublimits for the respective Revolving Loan
Borrowers, shall be reduced from time to time as follows: (i) as to Letter of
Credit Accommodations for the purpose of purchasing Eligible Inventory, by an
amount equal to the sum of (A) forty (40%) percent of the value of Eligible
Inventory purchased with such Letter of Credit Accommodations (or such greater
percentage as shall equal one hundred percent (100%) minus the applicable
Inventory Loan Formula applied by Lender under Section 2.1(b) hereof), plus (B)
the freight, duty and other amounts which Lender estimates must be paid for or
in connection with such Inventory upon arrival or for delivery to or within the
United States, and (ii) as to Letter of Credit Accommodations in the form of the
Distribution Center Standby LCs or for any other purpose, one hundred percent
(100%) of the then outstanding aggregate amount thereof and all other
commitments and obligations made or incurred by Lender with respect thereto.
(e) In the case of any Letter of Credit Accommodation for
the purchase of Inventory, one hundred percent (100%) of the amount thereof,
plus the freight, duty and other amounts which Lender estimates must be paid for
or in connection with such Inventory upon arrival or for delivery to or within
the United States, shall be considered as outstanding Obligations hereunder for
purposes of applying the respective Revolving Loan Borrowers' lending sublimits,
and the aggregate lending sublimit set forth in Section 2.2 hereof.
(f) In addition to any charges, fees or expenses charged
by any bank or issuer in connection with the Letter of Credit Accommodations,
Revolving Loan Borrowers agree to pay to Lender a letter of credit fee at a rate
equal to (i) one and one-half percent (1.5%) per annum on the daily outstanding
balance of the Distribution Center Standby LCs and (ii) two percent (2%) per
annum on the daily outstanding balance of all other Letter of Credit
Accommodations, in each case payable monthly in arrears and (iii) any other
commissions, fees and charges set forth herein.
(g) Notwithstanding anything to the contrary contained
herein or in any of the other Financing Agreements, the aggregate amount of all
Letter of Credit Accommodations pursuant hereto and all other commitments and
obligations made or incurred by Lender pursuant hereto for the account or
benefit of Revolving Loan Borrowers in connection therewith shall not, at any
one time
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outstanding, exceed Forty Million Dollars ($40,000,000). Lender shall have the
right, from time to time, to establish and revise sublimits for Letter of Credit
Accommodations for the account of the respective Revolving Loan Borrowers,
within the overall Forty Million Dollar ($40,000,000) limit on Letter of Credit
Accommodations.
(h) In connection with, in addition to, and without
limiting that which is otherwise set forth in this Section 2.3, from time to
time each Revolving Loan Borrower shall execute and deliver such applications
and other agreements relating to the Letter of Credit Accommodations, in form
and substance satisfactory to Lender, and, as applicable, the issuer of any
Letter of Credit Accommodation.
(i) At any time upon or after the occurrence and during
the continuance of an Event of Default, upon Lender's request, Revolving Loan
Borrowers shall either furnish cash collateral to secure the reimbursement
obligations to the issuer in connection with any Letter of Credit Accommodations
or furnish cash collateral to Lender for the Letter of Credit Accommodations,
and in either case, the Revolving Loans otherwise available to Revolving Loans
Borrowers shall not be reduced as provided in Section 2.3(c) to the extent of
such cash collateral. Revolving Loan Borrowers shall indemnify and hold Lender
harmless from and against any and all losses, claims, damages, liabilities,
costs and expenses which Lender may suffer or incur in connection with any
Letter of Credit Accommodations and any documents, drafts or acceptances
relating thereto, including, but not limited to, any losses, claims, damages,
liabilities, costs and expenses due to any action taken by any issuer or
correspondent with respect to any Letter of Credit Accommodation. Revolving Loan
Borrowers assume all risks with respect to the acts or omissions of the drawer
under or beneficiary of any Letter of Credit Accommodation and for such purposes
the drawer or beneficiary shall be deemed the agent of Revolving Loan Borrowers.
Revolving Loan Borrowers assume all risks for, and agree to pay, all foreign,
Federal, State and local taxes, duties and levies relating to any goods subject
to any Letter of Credit Accommodations or any documents, drafts or acceptances
thereunder. Revolving Loan Borrowers hereby release and hold Lender harmless
from and against any acts, waivers, errors, delays or omissions, whether caused
by Revolving Loan Borrowers, by any issuer or correspondent or otherwise with
respect to or relating to any Letter of Credit Accommodation. The provisions of
this Section 2.3(i) shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
(j) Nothing contained herein shall be deemed or construed
to grant Revolving Loan Borrowers any right or authority to pledge the credit of
Lender in any manner. Lender shall have no liability of any kind with respect to
any Letter of
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Credit Accommodation provided by an issuer other than Lender unless Lender has
duly executed and delivered to such issuer the application or a guarantee or
indemnification in writing with respect to such Letter of Credit Accommodation.
Revolving Loan Borrowers shall be bound by any interpretation made in good faith
by Lender, or any issuer or correspondent under or in connection with any Letter
of Credit Accommodation or any documents, drafts or acceptances thereunder,
notwithstanding that such interpretation may be inconsistent with any
instructions of Revolving Loan Borrowers. Lender shall have the sole and
exclusive right and authority to, and Revolving Loan Borrowers shall not: (i) at
any time an Event of Default exists or has occurred and is continuing, (A)
approve or resolve any questions of non-compliance of documents, (B) give any
instructions as to acceptance or rejection of any documents or goods or (C)
execute any and all applications for steamship or airway guaranties, indemnities
or delivery orders, and (ii) at all times, (A) grant any extensions of the
maturity of, time of payment for, or time of presentation of, any drafts,
acceptances, or documents, and (B) agree to any amendments, renewals,
extensions, modifications, changes or cancellations of any of the terms or
conditions of any of the applications, Letter of Credit Accommodations, or
documents, drafts or acceptances thereunder or any letters of credit included in
the Collateral. Lender may take such actions either in its own name or in any
Borrower's name.
(k) Any rights, remedies, duties or obligations granted or
undertaken by Revolving Loan Borrowers to any issuer or correspondent in any
application for any Letter of Credit Accommodation, or any other agreement in
favor of any issuer or correspondent relating to any Letter of Credit
Accommodation, shall be deemed to have been granted or undertaken by Revolving
Loan Borrowers to Lender. Any duties or obligations undertaken by Lender to any
issuer or correspondent in any application for any Letter of Credit
Accommodation, or any other agreement by Lender in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed to
have been undertaken by Revolving Loan Borrowers to Lender and to apply in all
respects to Revolving Loan Borrowers.
2.4 Term Loans.
(a) Subject to and upon the terms and conditions contained
herein and in the other Financing Agreements, Lender shall make a term loan to
HDPI in the aggregate original principal amount of Four Million Dollars
($4,000,000) (the "HDPI Term Loan"). The HDPI Term Loan is (a) evidenced by the
HDPI Term Note in such original principal amount duly executed and delivered by
Borrower to Lender concurrently herewith; (b) to be repaid, together with
interest and other amounts, in accordance with this Agreement, the HDPI Term
Note, and the other Financing Agreements and (c) secured by all of the
Collateral.
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(b) Subject to and upon the terms and conditions contained
herein and in the other Financing Agreements, Lender shall make a term loan to
Hanover Realty in the aggregate original principal amount of Six Million Dollars
($6,000,000) (the "Hanover Realty Term Loan"). The Hanover Realty Term Loan is
(a) evidenced by the Hanover Term Hanover Realty Note in such original principal
amount duly executed and delivered by Borrower to Lender concurrently herewith;
(b) to be repaid, together with interest and other amounts, in accordance with
this Agreement, the Hanover Realty Term Note, and the other Financing Agreements
and (c) secured by all of the Collateral.
2.5 Maximum Credit
(a) The aggregate principal amount of the Revolving Loans,
Term Loans and Letter of Credit Accommodations, at any one time outstanding,
shall not exceed the Maximum Credit.
(b) Lender may, from time to time, in its discretion,
permit the outstanding amount of any component of the Revolving Loans or Letter
of Credit Accommodations, or the aggregate amount of the outstanding Revolving
Loans and/or Letter of Credit Accommodations to exceed the amounts available
under the Revolving Loan Formulas, or the applicable lending sublimits or the
Revolving Loan Limit; provided, that, should Lender so permit any such
excess(es) in any one instance such event shall not operate to limit, waive or
otherwise affect any rights of Lender on any future occasions. In the event
Lender so permits any such excess(es), and without limiting the right of Lender
to demand payment of the Obligations of Revolving Loan Borrowers, or any portion
thereof, in accordance with any other term of this Agreement or the other
Financing Agreements, Revolving Loan Borrowers shall remain liable therefor and
Revolving Loan Borrowers shall, upon demand by Lender, which may be made at any
time and from time to time, immediately repay to Lender the entire amount of any
such excess(es).
2.6 Reserves
(a) Without limiting any other rights or remedies of
Lender hereunder or under the other Financing Agreements, all Revolving Loans
and Letter of Credit Accommodations made or otherwise available to Revolving
Loan Borrowers hereunder shall be subject to Lender's continuing right, in its
discretion, to establish a reserve against the availability of such Revolving
Loans and Letter of Credit Accommodations, and to increase and decrease such
reserve from time to time, if and to the extent that, in Lender's good faith
belief, such reserve is necessary to protect Lender against any material
liability to third parties or impairment of the Collateral or its value, or an
Event of Default or Incipient Default has occurred and is continuing.
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(b) With respect to sales and/or use taxes, the right of
Lender to establish reserves shall be limited to sales and use taxes owed or
claimed plus interest and penalties, if any, thereon (i) for which a judgment,
warrant or levy in favor of any taxing authority of the United States or
territory or possession thereof, or of any State or political subdivision
thereof, has been obtained and any enforcement proceeding, action or suit has
been taken or commenced against any Revolving Loan Borrower; or (ii) for which a
lien exists by statute or at common law or which has arisen by any filing,
assessment, recording or other action by any such taxing authority against any
property of any Revolving Loan Borrower and in respect of which lien any
enforcement proceeding, action or suit has been taken or commenced; or (iii) for
which, under generally accepted accounting principles, any Borrower should take
a charge or record an accrual or reserve; or (iv) that are required to be
collected (or have been collected and are required to be remitted) under the
laws of any State in which any Borrower owns any Inventory or owns or leases any
property, including, without limitation, the States of Pennsylvania, New Jersey,
California, Ohio, Virginia and Wisconsin. Nothing contained in this Section
2.6(b) or in Section 2.6(c) shall be construed to limit the continuing right of
Lender to establish reserves against availability in respect of any other
matters or to limit any other rights and remedies of Lender hereunder or under
the other Financing Agreements.
(c) Lender shall be entitled to establish and maintain a
reserve against Revolving Loan availability of Revolving Loan Borrowers in the
amount of $2,000,000, being the maximum amount of the obligations of Hanover
Ventures to Sears for unpaid royalties owed by Hanover Ventures to Sears under
the Sears Agreements, as to which obligations (but as to no other obligations to
Sears) Lender has, at the request of Borrowers and Guarantors, subordinated its
rights to payment from Hanover Ventures of the Obligations of Hanover Ventures
to Lender.
2.7 Fees
(a) Closing Fee. Borrowers shall pay to Lender,
contemporaneously herewith, a closing fee in the amount of Seven Hundred Fifty
Thousand Dollars ($750,000), which fee is fully earned as of the date hereof;
provided, that Borrowers shall be entitled to a credit of Two Hundred Fifty
Thousand Dollars ($250,000) against such closing fee in respect of the
commitment fee paid by Hanover in consideration of the issuance of the
Commitment Letter, dated November 9, 1995, among Hanover, Borrowers and Lender.
(b) Facility Fees. Borrowers shall pay to Lender an annual
facility fee of One Hundred Eighty-Seven Thousand Five Hundred Dollars
($187,500), for each year or part thereof during
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the Term of this Agreement, which fee shall be fully earned and payable in
advance on the date hereof and on each anniversary date of this Agreement during
the Term and for so long thereafter as any of the Obligations are outstanding.
(c) Unused Line Fee. With respect to each calendar month
(or part thereof) during the Term, Borrowers shall pay to Lender monthly an
unused line fee, fully earned and payable on the first day of each month, at a
rate equal to one half of one percent (.5%) per annum, calculated upon the
excess, if any, of (i) Sixty-Five Million Dollars ($65,000,000) over (ii) the
average of the daily aggregate principal balances of the outstanding Revolving
Loans and Letter of Credit Accommodations during the preceding month (or part
thereof); provided, however, that if Lender, solely on the basis of the exercise
of its discretion, reduces any Inventory Loan Formula for any calendar month (or
part thereof) in the absence of an Event of Default or Incipient Default which
is continuing, the amount of the unused line fee shall be calculated for such
month by decreasing the base amount of Sixty-Five Million Dollars ($65,000,000)
set forth in clause (i) by a percentage thereof equal to the difference between
the Inventory Loan Formula otherwise applicable under Section 2.1(b) and the
Inventory Loan Formula as so reduced solely by virtue of Lender's discretion.
(d) Servicing Fee. With respect to each calendar month (or
part thereof) during the Term, Borrowers shall pay to Lender a servicing fee in
the amount of Twenty Thousand Dollars ($20,000) per calendar month, fully earned
and payable in advance on the date hereof and on the first day of each month (or
part thereof) hereafter.
(e) Fees as Obligations. The fees provided for in this
Section 2.7 shall be in addition to all other amounts payable by Borrowers under
this Agreement and the other Financing Agreements and shall constitute part of
the Obligations of Borrowers. Such fees may, at Lender's option, be charged
directly to any of the loan accounts of Borrowers maintained by Lender.
2.8 Interest
(a) Interest on all of the Revolving Loans, the Term Loans
and other non-contingent Obligations of Borrowers shall be payable by Borrowers
to Lender at the applicable Interest Rate, calculated on the basis of a year
consisting of three hundred and sixty (360) days and actual days elapsed.
(b) In no event shall the Interest Rate and other charges
hereunder exceed the highest rate or amount permissible under any law which a
court of competent jurisdiction shall, in a final determination, deem applicable
hereto. In the event that a
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court determines that Lender has received interest or other charges hereunder in
excess of the highest rate or amount applicable hereto, such excess shall be
deemed received on account of, and shall automatically be applied to reduce, the
Obligations of Borrowers other than interest in the inverse order of maturity,
and the provisions hereof shall be deemed amended to provide for the highest
permissible rate or amount. If there are no Obligations of Borrowers
outstanding, Lender shall refund to Borrowers such excess.
(c) Subject to the foregoing, all interest charges
hereunder or in connection herewith shall be (i) computed as provided herein and
in the other Financing Agreements and (ii) paid monthly to Lender on the first
day of each calendar month, or, at Lender's option, charged to Borrowers' loan
accounts maintained by Lender as of the first day of each calendar month and
deemed paid by the first amounts subsequently credited thereto.
(d) With respect to each day during a given calendar month
during the Term that the closing daily balance in each of the Revolving Loan
accounts maintained by Lender for Borrowers hereunder is a credit balance,
Lender shall monthly, on the first day of the next succeeding calendar month,
credit the respective revolving loan accounts with an amount equal to interest
on the respective credit balances therein, at a per annum rate equal to the
Prime Rate minus three percent (3%) per annum.
(e) Without limiting Lender's continuing right to demand
payment of the Revolving Loans, the Term Loans, the Letter of Credit
Accommodations and other Obligations of Borrowers, or any portion thereof, in
accordance with the terms of this Agreement, or any of the other Financing
Agreements, all interest accruing hereunder during the continuance of any Event
of Default, and on and after termination or non-renewal hereof, shall be payable
on demand.
2.9 Conduct of Accounts; Cross-Collateralization
(a) Lender may maintain one or more accounts reflecting
the Revolving Loans, the Term Loans, the Letter of Credit Accommodations,
repayments of the Revolving Loans, the Term Loans, Obligations relating to
Letter of Credit Accommodations and the other Obligations of Borrowers and/or
Guarantors and any of the Collateral or Guarantor Collateral contemplated under
this Agreement or the other Financing Agreements as Lender shall, in its
discretion, determine. All Revolving Loans and Term Loans shall be charged to a
loan account in the name of the respective Borrower on Lender's books. The
outstanding amount of Obligations relating to Letter of Credit Accommodations
may be reflected on Lender's books as a cash loan
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the proceeds of which are held as cash Collateral or in such other manner as
Lender shall determine. All Collateral, Guarantor Collateral or other collateral
security held by or granted to Lender by Borrowers, Guarantors or any third
persons shall be security for the payment and performance of any and all
Obligations of Borrowers, Guarantors or such third persons to Lender, as the
case may be, notwithstanding the maintenance of separate accounts for Borrowers,
Guarantors or third persons or the existence of any notes.
(b) All Revolving Loans, Term Loans, Obligations relating
to Letter of Credit Accommodations, and other Obligations of Borrowers and
Guarantors shall be payable to Lender at its address specified herein or at such
other place in the United States as Lender may hereafter designate in writing
from time to time. Lender may apply payments received or collected from
Borrowers or Guarantors or for the account of Borrowers or Guarantors
(including, without limitation, the proceeds of sale, collection or other
realization upon any Collateral or Guarantor Collateral) to such of the
Obligations of Borrowers and/or Guarantors then due, in whatever order and
manner Lender, in its discretion, determines. Lender shall have the continuing
and exclusive right to apply and reverse and reapply any and all such proceeds
and payments to any portion of the Obligations of Borrowers and/or Guarantors
then or thereafter due. Upon the request of Lender, Borrowers shall execute and
deliver to Lender one or more promissory notes, in form and substance
satisfactory to Lender, to further evidence the Revolving Loans and the
Obligations of Borrowers with respect to the Letter of Credit Accommodations or
any portion(s) thereof.
(c) Subject to the terms and conditions of this Agreement,
the Term Loan Borrowers may prepay the Term Loans, in whole or in part, at any
time prior to an Event of Default and not in contemplation of the termination of
the Credit Facility, without payment of any separate prepayment premium or
prepayment penalty. Any such partial prepayment of the Term Loans shall be
applied to principal payments coming due thereunder in the inverse order of
maturity. No proceeds of any Revolving Loans shall be used for the prepayment of
all or any part of the Term Loans. Any amounts paid or prepaid in respect of the
Term Loans may not be thereafter reborrowed.
(d) If Lender is for any reason required to surrender any
payment of, or proceeds of Collateral or Guarantor Collateral applied to the
payment of, all or any part of the Obligations of Borrowers and/or Guarantors to
any Person (including any creditor or creditors' representative of any Borrower
or any Guarantor), or if any interest of Lender in any Collateral or Guarantor
Collateral is set aside or avoided, whether because such payment or proceeds is
invalidated, declared fraudulent as to any Person (including any creditor or
creditors'
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representative of any Borrower or any Guarantor), set aside, determined to be
void or voidable as a preference, or a diversion of trust funds, or for any
other reason, or are determined to be subject to a claim for restitution, or
otherwise are required to be surrendered, set aside or avoided, then the
Obligations of Borrowers and/or Guarantors or any part thereof intended to be
reduced, paid or satisfied, as a result of such payment or application of
proceeds or the apparent interests of Lender in such Collateral and Guarantor
Collateral shall be revived and reinstated, and the Guarantees, shall be revived
and reinstated and this Agreement and the Guarantees shall continue in full
force and effect as if such payment or proceeds had not been received by Lender,
and such reductions in or release of liability under any Guarantees, Borrowers
and Guarantors shall be jointly and severally liable to pay to Lender, and shall
jointly and severally indemnify Lender and hold Lender harmless for, the amount
of such payment or proceeds surrendered and the value of any such Collateral or
Guarantor Collateral set aside or avoided, plus any interest and other amounts
paid and all costs and expenses (including reasonable attorneys' fees and
disbursements incurred by Lender in connection therewith). The provisions of
this Section 2.9(d) shall be and remain effective notwithstanding any contrary
action which may have been taken by Lender in reliance upon such payment or
proceeds, and any such contrary action so taken shall be without prejudice to
Lender's rights under this Agreement and shall be deemed to have been
conditioned upon such payment or proceeds having become final and indefeasible.
The provisions of this Section 2.9(d) shall survive the termination of this
Agreement and the other Financing Agreements.
(e) At Lender's option, all principal, interest, fees,
commissions, costs, expenses or other charges hereunder, under the other
Financing Agreements or in connection herewith or therewith, may be charged
directly to any loan account or other account of Borrowers and/or Guarantors
maintained by Lender. Revolving Loan Borrowers expressly agree that principal,
interest, fees and other obligations of Term Loan Borrowers in respect of the
Term Loans may, at Lender's sole option, be charged to the Revolving Loan
accounts of Revolving Loan Borrowers who may thereafter obtain reimbursement
from the Term Loan Borrowers.
(f) Lender shall deliver to Hanover, on behalf of the
Borrowers at the address set forth in Section 9.5 hereof, each calendar month,
one or more statements with respect to any loan account maintained by Lender
with respect to Borrowers pursuant to the provisions hereof, as of the end of
each calendar month while this Agreement is in effect. Such statements of
account shall be considered correct, and deemed accepted by and conclusively
binding upon Borrowers and Guarantors, except to the extent Lender shall have
received from Borrowers or any Guarantor
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written notice of all exceptions to such statement of account with specificity,
within forty-five (45) days after the date of such statement.
2.10 Use of Proceeds
(a) Borrowers shall use the proceeds of all Revolving
Loans, Term Loans and Letter of Credit Accommodations made or arranged by Lender
on the date hereof (i) for the repayment by Borrowers of intercompany
indebtedness to Hanover, to be used by Hanover to satisfy, or as sole security
for, the outstanding obligations of Hanover to NationsBank, and to satisfy, or
as sole security for, the outstanding obligations of Borrowers as guarantors of
all outstanding obligations of Hanover to NationsBank and (ii) for the costs,
expenses and fees incurred by Borrowers in connection with this Agreement and
the other Financing Agreements.
(b) All Revolving Loans and Letter of Credit
Accommodations provided on or after the date hereof to Revolving Loan Borrowers
pursuant to the provisions hereof shall be used to purchase Inventory and for
general operating, working capital and capital expenditures of Revolving Loan
Borrowers, and other proper corporate purposes of Revolving Loan Borrowers, not
otherwise prohibited by the terms hereof.
2.11 Additional Borrower.
(c) The parties hereto contemplate that The Austad Company
may become a Revolving Loan Borrower hereunder, and that certain Accounts of The
Austad Company under future Deferred Billing Option Programs and certain
Inventory of The Austad Company held for sale through its mail order catalogs
may be considered by Lender to be Eligible Deferring Billing Receivables and
Eligible Inventory, respectively, conditioned upon the following:
(i) Lender shall have determined, after a field
examination of Austad conducted by Lender at Revolving Loan Borrowers' expense
(including payment by Revolving Loan Borrowers of per diem charges of Six
Hundred Dollars ($600.00) per person per day plus reimbursement of out-of-pocket
expenses) (A) that such Accounts and such Inventory of The Austad Company meet
Lender's criteria for Eligible Deferred Billing Receivables and Eligible
Inventory, respectively, and (B) that the results of such field examination of
Austad, its property, business and operations are in all other respects
satisfactory to Lender;
(ii) Lender shall have received a current
Appraisal with respect to the Inventory of The Austad Company, prepared at
Revolving Loan Borrowers' expense by the Appraiser in form, scope and
methodology acceptable to Lender and addressed to
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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;
(iii) The Austad Company shall have executed and
delivered to and in favor of Lender such documents and instruments as Lender
requires in order for The Austad Company (A) to become a Revolving Loan Borrower
hereunder by, inter alia, assuming the Obligations of a Revolving Loan Borrower
hereunder, making the representations, warranties and covenants of the Borrowers
hereunder in favor of Lender and granting Lender a security interest in and lien
upon its Collateral and (B) to guarantee payment to Lender of the Obligations of
all other Borrowers, all in form and substance satisfactory to Lender;
(iv) Austad Holdings Inc. shall become a
Guarantor hereunder with respect to the Obligations to Lender of The Austad
Company and all other Borrowers, and shall have executed and delivered to and in
favor of Lender such guaranties, security agreements, mortgages, documents and
instruments as are required to be delivered by a Guarantor under Sections 4.2
and 4.3 hereof, all in form and substance satisfactory to Lender;
(v) Each other Borrower and Guarantor shall have
executed and delivered to Lender a supplemental or amended Guarantee with
respect to the Obligations to Lender of The Austad Company;
(vi) Austad shall deliver or cause to be
delivered to and in favor of Lender, all agreements, documents and instruments,
including, without limitation, agreements, documents and instruments executed by
third parties, of the kinds required to be delivered by Borrowers and Guarantors
under Section 3.1 hereof, and such other agreements, documents and instruments
from Austad and third parties as Lender requires to perfect and protect Lender's
interests in the Collateral and Guarantor Collateral of Austad and its rights
thereto;
(vii) 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 and the other Borrowers and Guarantors of the
agreements, documents and instruments to be delivered pursuant to this Section
2.11, together with such opinions of counsel to Austad, Borrowers and Guarantors
with respect thereto, addressed to Lender as Lender shall reasonably require,
all in form and substance and satisfactory to Lender; and
(viii) No Event of Default or Incipient Default
shall have occurred, after giving effect to the assumption of
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Obligations, representations, warranties and covenants made by Austad as
provided above.
(d) Notwithstanding the foregoing, Lender shall have, at
all times, the rights (i) to determine those portions (if any) of the Accounts
and Inventory of The Austad Company that are and remain Eligible Deferred
Billing Receivables or Eligible Inventory, respectively, pursuant to the other
provisions of this Agreement, (ii) to establish sublimits for Revolving Loans
and/or Letter of Credit Accommodations requested by The Austad Company, (iii) to
determine initially whether the Inventory Loan Formula and the Accounts Loan
Formula, or some lesser percentage(s), shall apply to The Austad Company (and
thereafter to adjust such percentage(s) as permitted herein) and (iv) to
establish initially such availability reserves as Lender shall require in
respect of The Austad Company and thereafter to establish and adjust additional
availability reserves as permitted herein.
(e) Nothing set forth in this Section 2.11 shall in any
manner be construed to limit or impair any other rights or remedies of Lender
hereunder or under any of the other Financing Agreements.
SECTION 3. CONDITIONS PRECEDENT TO LOANS
AND OTHER FINANCIAL ACCOMMODATIONS
3.1 Conditions to Loans
The making and providing of Revolving Loans, the Term Loans and Letter
of Credit Accommodations heretofore, on the date hereof or hereafter were, are
and shall be subject to the satisfaction of each of the following conditions
precedent (any of which may be waived, in whole or in part, only by Lender in
writing):
(a) Termination of NationsBank Credit Agreements.
Borrowers shall have provided evidence to Lender of the termination of the
NationsBank Credit Agreements as in effect immediately prior to the date hereof
and the release and termination of the NationsBank Credit Agreements held in
escrow prior to the date hereof, except only such surviving obligations to
NationsBank as are set forth in the Amended and Restated Reimbursement Agreement
dated as of the date hereof among NationsBank, Hanover, Borrowers and
Guarantors, in form and substance satisfactory to Lender.
(b) Subordination of Certain Obligations. The Indebtedness
owed by any member of the Affiliated Borrower Group to holders of the Hanover
debt instruments described on Exhibit E attached hereto shall be subordinate in
right of payment to the Obligations of such members of the Affiliated Borrower
Group to
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Lender. In addition, Hanover shall have executed and delivered in favor of
Lender an Intercompany Subordination Agreement subordinating, to the extent
provided therein, their rights to payment of all Obligations of Borrowers and
Guarantors to them, to the prior indefeasible payment and satisfaction of all
Obligations of Borrowers and Guarantors to Lender.
(c) Delivery of Financing Agreements. Borrowers and
Guarantors shall have delivered the Financing Agreements required by Lender and
all instruments and documents hereunder and thereunder shall have been executed
and delivered to Lender, in form and substance satisfactory to Lender, and all
UCC financing statements relating and other necessary filings, if any, to the
Collateral and Guarantor Collateral shall have been duly filed and recorded.
(d) Private Credit Card Agreement. Borrowers shall have
delivered, in form and substance satisfactory to Lender, (i) the Private Credit
Card Agreement (ii) an irrevocable payment instruction issued by Borrowers party
to the Private Credit Card Agreement directing the Private Credit Card Purchaser
to remit to (and only to) an account designated from time to time by Lender, all
monies from time to time to be remitted to Borrowers under the Private Credit
Card Agreement, and (iii) the GECC Lien Clarification Agreement excluding and
releasing from any liens or security interests of the Private Credit Card
Purchaser, the Collateral (or such parts thereof as to which Lender shall
require clarification or express exclusion and release, each in form and
substance satisfactory to Lender).
(e) Closing Excess Availability. Borrowers shall have
Excess Availability, as of the date hereof, in the aggregate amount of not less
than Five Million Two Hundred Thousand Dollars ($5,200,000).
(f) Consents; Waivers; Acknowledgements. Lender shall have
received, in form and substance satisfactory to Lender, all consents, waivers,
acknowledgements and other agreements from third Persons which Lender may deem
necessary or desirable to permit, protect and perfect its security interest in
liens upon the Collateral and the Guarantor Collateral and which Lender shall
have requested from Borrowers, including, but not limited to: (i) waivers by
lessors, operators and mortgagees of any security interests or other claims
against personal property located at their premises and agreements to grant
access to Lender and the right to remain thereon to exercise all remedies with
respect to any Collateral and Guarantor Collateral located on each premise,
including, without limitation, the Eligible Inventory Locations and (ii)
agreements from lessors and licensors of distribution equipment and computer
software, granting Lender the right to use such equipment and software.
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(g) Opinions of Counsel. Lender shall have received, in
form and substance satisfactory to Lender, one or more opinion letters of
independent counsel to Borrowers, Guarantors and IMR in respect of the Financing
Agreements, the Collateral and Guarantor Collateral and such other matters as
Lender may reasonably request.
(h) Perfection. Lender's lien on and security interests in
each item of Collateral and Guarantor Collateral shall have been granted and
perfected by the filing, recording or registration of documents, instruments, or
financing statements in the appropriate governmental offices or by possession or
such other action as is necessary to perfect each such lien or security
interest, and Lender shall have received evidence satisfactory to it that all
such liens and security interests are of first priority, subject only to
permitted liens set forth in Section 6.4 hereof.
(i) Insurance. Lender shall have received evidence of
insurance required hereunder and under the other Financing Agreements, and
mortgagee's and lender's loss payable endorsements in favor of Lender with
respect thereto, all in form and substance satisfactory to Lender.
(j) Appraisals. Lender shall have received (i) the
Appraisal, (ii) a current appraisal, conducted at Borrowers' expense by an
appraiser acceptable to Lender and in form, scope and methodology acceptable to
Lender, addressed to Lender or upon which Lender is expressly permitted to rely,
setting forth a current orderly liquidation value of not less than Six Million
Dollars ($6,000,000) with respect to the Equipment owned by Borrowers and
Guarantors at Eligible Inventory Locations that will be subject to Lender's
first priority liens and security interests as provided herein and (iii) current
appraisals conducted at Borrowers' expense by an appraiser or appraisers
acceptable to Lender and in form, scope and methodology acceptable to us,
addressed to Lender or upon which Lender is expressly permitted to rely, setting
forth the fair market value of the Real Property owned by Term Loan Borrowers,
which shall not be less than an aggregate of Seventeen Million Dollars
($17,500,000).
(k) Environmental Audits. Lender shall have received
environmental audits of Borrowers' plants and the Real Property conducted by an
independent environmental engineering firm acceptable to Lender, and in form,
scope and methodology satisfactory to Lender, confirming to the satisfaction of
Lender and its environmental consultant (who shall review such audits and
follow-up work requested by such consultant at Borrowers' expense) (i) Borrowers
are in compliance with all material applicable Environmental Laws and (ii) the
absence of any material environmental problems.
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(l) Title Insurance. Lender shall have received, in form
and substance satisfactory to Lender, a valid and effective title insurance
policy issued by a company and agent acceptable to Lender (i) insuring the
priority, amount and sufficiency of the Mortgages, (ii) insuring against matters
that would be disclosed by surveys and (iii) containing any legally available
endorsements, assurances or affirmative coverage requested by Lender for
protection of its interests.
3.2 Additional and Continuing Condition
Each Revolving Loan and each Letter of Credit Accommodation to be made
on the date hereof and hereafter is subject to the prior or contemporaneous
satisfaction of the additional condition precedent (which may be waived, in
whole or in part, only by Lender in writing) that no Event of Default or
Incipient Default shall have occurred and be continuing.
SECTION 4. COLLATERAL
4.1 Security Interests in Borrowers' Property
As collateral security for the prompt performance, observance and
payment in full of all of the Obligations of Borrowers, Borrowers hereby grant
to Lender, a continuing security interest in, and liens upon, and rights of
setoff against, and Borrowers hereby pledge and assign to Lender, all now owned
and hereafter acquired and arising assets and properties of Borrowers (which
assets and properties, together with all other collateral security for the
Obligations of Borrowers heretofore, now or hereafter granted to or otherwise
held or acquired by Lender are referred to herein as the "Collateral"),
including, but not limited to, 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 Borrowers, whether for safekeeping, pledge,
custody, transmission, collection or otherwise, and all of Borrowers' deposits
(general or special), balances, sums and credits with Lender at any time
existing; (B) all right, title and interest, and all rights, remedies, security
and liens, in, to and in respect of the Accounts and other Collateral,
including, without
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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 Borrowers in and to Mail Order Joint Ventures, and other joint
ventures, partnerships and other Persons;
(ii) Inventory;
(iii) Equipment;
(iv) Real Property;
(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;
(vi) all present and future real property owned
by Borrowers; and
(vii) 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 (a) the GECC
Collateral, other than the GECC Reserve Balance or (b) any leasehold interests
in real property other than the ground leases with respect to the Kindig Lane,
Conewago Township, Adams County, Pennsylvania facility of HDPI and the
Warrensville Heights, Ohio facility of LWI.
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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, the Guarantees by the Guarantors and the Guarantees by Borrowers, each
Borrower shall execute and deliver to Lender, and Borrowers shall cause
Guarantors, 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").
4.3 Security Interests in Property of Guarantors
As collateral security for the prompt performance, observance and
payment in full of all of the Obligations of Guarantors, under their respective
Guarantees and otherwise, Borrowers shall cause to be delivered to Lender a
general security agreement by Guarantors in favor of Lender, providing for a
grant of a security interest in and pledge of all assets of such Guarantor,
except for (i) any capital stock of any Non-Guarantor Subsidiary owned by
Hanover, and (ii) all now owned and hereafter acquired fixtures and real
property in LaCrosse, Wisconsin owned by TCS Factory and TCS Office in form and
substance satisfactory to Lender (each, a "General Security Agreement"). (All of
the collateral security now or hereafter granted to or held by Lender by the
Guarantors pursuant to the General Security Agreements, or otherwise, and the
products and proceeds thereof, herein the "Guarantor Collateral".)
SECTION 5. REPRESENTATIONS AND WARRANTIES
Borrowers, jointly and severally, represent and warrant to Lender, as
follows, (a) which representations and warranties shall survive the execution
and delivery hereof, and, except those, if any, expressly limited to the date
hereof, or other specified dates, are continuing representations and warranties
deemed repeated on each day this Agreement is in effect, and (b) the truth and
accuracy of each of which, together with the representations and warranties in
the other Financing Agreements shall be a continuing condition precedent of
loans and other financial accommodations hereunder and under the other Financing
Agreements:
5.1 Organization
(a) Each Borrower and Guarantor is a duly organized and
validly existing corporation in good standing under the laws of its State or
jurisdiction of incorporation, with perpetual corporate existence, and has the
corporate power and authority to own its properties and to transact the business
in
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which it is engaged or presently proposes to engage. Each Borrower and Guarantor
has qualified to do business as a foreign corporation in the States and other
jurisdictions listed on Exhibit A attached hereto, which constitute all States
or other jurisdictions where the nature of its business or the ownership or use
of property requires such qualification and failure to so qualify would have a
material adverse affect on either Borrower or on the rights and interests of
Lender in the Collateral or Guarantor Collateral.
(b) All of the direct and indirect Subsidiaries of NAR and
Borrowers that are Guarantors are set forth on Exhibit B-1.
(c) None of the Borrowers, or any of their Subsidiaries or
Hanover has any direct or indirect interest in or is a party to any Mail Order
Joint Venture as of the date hereof, except as set forth on Exhibit B-2 attached
hereto.
(d) All of the direct or indirect Restaurant Business
Subsidiaries are set forth on Exhibit B-3 attached hereto.
(e) As of the date hereof, there are no Non-Guarantor
Subsidiaries, except for the Restaurant Business Subsidiaries, Austad and those
Subsidiaries, if any, set forth on Exhibit B-4 attached hereof.
(f) None of the Borrowers or Hanover has any
direct or indirect Subsidiaries as of the date hereof, except as set forth on
Exhibit B-1 attached hereto, which sets forth the owner and ownership
percentages as to each member of the Affiliated Borrower Group.
(g) As of the date hereof, each of the Non-Guarantor
Subsidiaries, other than the Restaurant Subsidiaries and Austad, has less than
Ten Thousand Dollars ($10,000) of assets.
5.2 Corporate Power and Authority
Each Borrower and Guarantor has the corporate power and authority to
execute, deliver and carry out the terms of the Financing Agreements to which it
is a party and all other agreements, instruments and documents delivered by
Borrowers and Guarantors pursuant hereto and thereto applicable to each, and
each Borrower and Guarantor has taken or caused to be taken all necessary
corporate action to authorize the execution, delivery and performance of the
Financing Agreements and the other agreements relating hereto to which it is a
party, the present and future borrowings and other financial accommodations
which may be obtained by Borrowers hereunder and thereunder, and the
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execution, delivery and performance of the instruments and documents delivered
and to be delivered by it pursuant hereto and thereto. This Agreement and the
other Financing Agreements constitute the legal, valid and binding obligations
of each Borrower and Guarantor signatory thereto, enforceable in accordance with
their respective terms, except (i) to the extent the availability of equitable
remedies may be subject to judicial discretion and (ii) to the extent that
enforcement of certain rights and remedies of Lender may be limited by
provisions of the Bankruptcy Code or other laws affecting the rights of
creditors generally.
5.3 Capitalization; Solvency
(a) All of the outstanding shares of common stock of each
Borrower 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.
(b) Hanover and its Subsidiaries, including Borrowers, on
a consolidated basis, have sufficient capital to carry on all businesses and
transactions in which they now engage or propose to engage, are solvent and will
continue to be solvent after the creation or incurrence of the Obligations and
the security interests in favor of Lender, and are able to pay their debts as
they mature.
5.4 Compliance with Other
Agreements and Applicable Law
(a) Each Borrower and Guarantor is not in default in any
respect under any indenture, mortgage, deed of trust, deed to secure debt,
material lease, material license agreement or other material agreement or
instrument to which it is a party or by which it or any of its assets or
properties may be or are bound.
(b) Neither the execution nor delivery of this Agreement,
the other Financing Agreements, or any of the instruments and documents to be
delivered pursuant hereto or thereto, nor the consummation of the transactions
herein or therein contemplated, nor compliance with the provisions hereof or
thereof, violates any law or regulation or any order or decree of any court or
governmental instrumentality in any respect or does or will conflict with or
result in the breach of, or constitute a default in any respect under, any
indenture, mortgage, deed of trust, deed to secure debt, lease or agreement or
instrument to which any Borrower or any Guarantor is a party or may be bound,
which violation, breach or default could have or result in a material adverse
effect on or change in the assets or business of Hanover and its Subsidiaries
taken as a whole, or result in the creation or imposition of any lien, charge or
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encumbrance upon any of the property of any Borrower or any Guarantor (except as
specifically contemplated hereunder or under the other Financing Agreements) or
violate any provision of the Certificates of Incorporation or By-Laws of any
Borrower or any Guarantor.
(c) Subject to Sections 5.5 and 5.9 hereof as to the
matters described therein, each Borrower and Guarantor has obtained all material
permits, licenses, approvals, consents, orders or authorizations of any
governmental regulatory authority or other governmental body or authority
required for the lawful conduct of its business and is in compliance in all
material respects with the requirements of all applicable laws, rules,
regulations and orders of any governmental authority relating to its business
(including, without limitation, those set forth in or promulgated pursuant to
ERISA, the IRC, the Occupational Safety and Health Act of 1970, as amended, all
Federal, State and local statutes, regulations, rules and orders relating to
consumer credit (including, without limitation, as each has been amended, the
Truth-in-Lending Act, the Fair Credit Billing Act, the Equal Credit Opportunity
Act and the Fair Credit Reporting Act and regulations, rules and orders
promulgated thereunder), the Fair Labor Standards Act of 1938, as amended, all
Federal, State and local statues, regulations, rules and orders pertaining to
sales of consumer goods and mail order sales (including, without limitation, the
Consumer Products Safety Act of 1972, as amended, and the Federal Trade
Commission Act of 1914, as amended, and all regulations, rules and orders
promulgated thereunder).
5.5 Environmental Compliance
(a) Except as set forth on Exhibit K hereto, to the
knowledge of each Responsible Officer of Borrowers and Guarantors, no Borrower
or Guarantor has generated, used, stored, treated, transported, manufactured,
handled, produced or disposed of any Hazardous Materials, on or off its premises
(whether or not owned by it) in violation of any applicable Environmental Law or
any license, permit, certificate, approval or similar authorization thereunder,
and the operations of each Borrower and Guarantor complies with all
Environmental Laws and all licenses, permits, certificates, approvals and
similar authorizations thereunder, except to the extent that any violation or
non-compliance, would not result in either (i) a fine, judgment, penalty, loss
or liability, including any remediation expenses and including costs and
engineering and attorneys' fees, not covered by insurance, which exceeds
$250,000 with respect to any individual violation or non-compliance, or series
of related violations or non-compliance or (ii) a restraint on operations of any
Borrower which prevents such Borrower from conducting its operations in the
ordinary course, or (iii) any adverse effect on any Collateral having a value of
$250,000 or more, or a material
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adverse effect on the business, assets, liabilities or financial condition of
any Borrower or of the Affiliated Borrower Group taken as a whole.
(b) Except as set forth on Exhibit K hereto, no
Responsible Officer of any Borrower or Guarantor has knowledge of any
investigation, proceeding, complaint, order, directive, claim, citation or
notice by any governmental authority or any other person nor, to the best of any
such Responsible Officer's knowledge, is any of the same pending or threatened
with respect to any non-compliance with or violation of the requirements of any
Environmental Law by any Borrower, or the release, spill or discharge,
threatened or actual, of any Hazardous Material or the generation, use, storage,
treatment, transportation, manufacture, handling, production or disposal of any
Hazardous Materials or any other environmental, health or safety matter, which
affects any Borrower or Guarantor or its business, operations or assets or any
properties at which any Borrower or Guarantor has transported, stored or
disposed of any Hazardous Materials, except to the extent that any such matter,
if adversely determined, would not result in either (i) a fine, judgment,
penalty, loss or liability, including remediation expenses and including costs
and engineering and attorneys' fees, not covered by insurance, which exceeds
$250,000 with respect to any individual violation or non-compliance or series of
related violations or non-compliance or (ii) a restraint on operations of any
Borrower which prevents such Borrower from conducting its operations in the
ordinary course, or (iii) any adverse effect on any Collateral having a value of
$250,000 or more, or a material adverse effect on the business, assets,
liabilities or financial condition of any Borrower or of the Affiliated Borrower
Group taken as a whole.
(c) Except as set forth on Exhibit K hereto, no
Responsible Officer of any Borrower or Guarantor has knowledge of any liability
(contingent or otherwise) of any one or more Borrowers and Guarantors in
connection with a release, spill or discharge, threatened or actual, of any
Hazardous Materials or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials, except
to the extent the potential liability (contingent or otherwise) of any Borrowers
or Guarantors with respect thereto (including any fines, liabilities,
remediation expenses, costs and engineering and attorneys' fees), does or would
not exceed $250,000 as to any individual releases, spill or discharge,
threatened or actual, or any series of related releases, spills or discharges,
threatened or actual, or any generation, use, storage, treatment,
transportation, manufacture, handling, production or disposal of any Hazardous
Materials.
(d) Each Borrower and Guarantor has all licenses, permits,
certificates, approvals or similar authorizations
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required to be obtained or filed in connection with the operations of such
Borrower or Guarantor under any Environmental Law and all of such licenses,
permits, certificates, approvals or similar authorizations are valid and in full
force and effect, except where the failure to obtain the same would not have an
adverse effect upon any Collateral having a value of $250,000 or more, or a
material adverse effect upon business, assets, liabilities or financial
condition of any Borrower or of the Affiliated Borrower Group taken as a whole.
5.6 Governmental Approval
No action of, or filing with, any governmental or public body or
authority is required in connection with the execution, delivery and performance
by Borrowers and Guarantors of this Agreement, the other Financing Agreements or
any of the instruments or documents to be delivered pursuant hereto or thereto,
except for filing of UCC financing statements and the recording of the Mortgages
and other instruments required to perfect security interests or liens in certain
property constituting Collateral or Guarantor Collateral.
5.7 Chief Executive Offices; Collateral Locations
(a) The addresses of the principal places of business and
chief executive offices of each Borrower and each member of the Affiliated
Borrower Group are set forth on Exhibit C attached hereto, which addresses are
the mailing addresses for said principal places of business and chief executive
offices. The books and records of each Borrower and each member of the
Affiliated Borrower Group are located at said addresses. Subject to Section
5.7(b) hereof, as of the date hereof, the Collateral and Guarantor Collateral is
located only at the addresses set forth on Exhibit C attached hereto.
(b) A Borrower or Guarantor may open any new location
within the continental United States, provided it (i) gives Lender thirty (30)
days prior written notice of the intended opening of any such new location and
(ii) executes and delivers, or causes to be executed and delivered, to Lender
such mortgages, security agreements, and other agreements, documents and
instruments as Lender may deem necessary or desirable to protect its interests
in the Collateral or Guarantor Collateral to be located in or with respect to
such location, including, without limitation, leasehold mortgages, UCC financing
statements and agreements from appropriate Persons acknowledging the liens of
Lender on the Collateral or Guarantor Collateral to be located in such location,
waiving any lien or claim by such Person to the Collateral or Guarantor
Collateral and permitting Lender access to the premises to exercise its rights
and remedies and otherwise deal with the Collateral or Guarantor Collateral, as
the case may be.
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5.8 Priority of Liens; Title to Properties
(a) The security interests and liens granted to Lender
under this Agreement and the other Financing Agreements constitute valid and
perfected first priority liens and security interests in and upon the Collateral
and Guarantor Collateral, subject only to the liens indicated on Exhibit D
attached hereto and the liens permitted under Section 6.4 hereof or permitted
under the other Financing Agreements.
(b) Each Borrower and Guarantor has good and marketable
title to all of its properties and assets subject to no liens, mortgages,
pledges, security interests, encumbrances or charges of any kind, except those
in favor of Lender and those specifically permitted under the provisions of this
Agreement or the other Financing Agreements. Each Borrower and Guarantor has
peaceful and undisturbed possession of all of its Inventory, Equipment and such
other assets as may be necessary for its business as presently conducted or
proposed to be conducted and has all leases, licenses and easements necessary
for the operation of its properties and business. All such leases, licenses and
easements are valid and subsisting and in full force and effect.
5.9 Taxes
(a) Each Borrower and Guarantor has filed, or has caused
to be filed all Federal, State, county, local, foreign and other tax returns,
reports and declarations which are required to be filed by it and as to which an
extension has not been granted, and has paid or caused to be paid all such taxes
due and payable, and has collected, deposited and remitted all taxes applicable
to the conduct of its business, except, in each case, taxes the validity or
applicability of which are being contested in good faith by appropriate
proceedings and with respect to which adequate reserves have been set aside on
its books, in the determination of Lender, or if requested by Lender, to protect
Lender's security interests or liens in any Collateral or Guarantor Collateral,
adequate amounts have been escrowed with or reserved against availability by
Lender or other arrangements satisfactory to Lender have been made to cover all
amounts which are claimed due plus interest and possible penalties thereon
(subject in the case of sales and/or use taxes, to the provisions of Section
2.6(b) hereof).
(b) Each Borrower, and to the extent applicable each
member of the Affiliated Borrower Group, has collected, deposited and remitted
all sales and/or use taxes applicable to its business required to be collected
under the valid laws of the United States and each possession or territory
thereof, and each State or political subdivision thereof, including any State in
which any Revolving Loan Borrower owns any Inventory or owns or
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leases property, including, without limitation, the States of Pennsylvania, New
Jersey, California, Ohio, Virginia and Wisconsin; provided, however, the
representations and warranties as to sales and use taxes contained in this
Section 5.8(b) shall be considered materially untrue if, but only if, the
aggregate amount of such applicable sales and use taxes not collected, deposited
or remitted shall in the aggregate be equal to or greater than Two Hundred Fifty
Thousand Dollars ($250,000).
5.10 Litigation
Except as set forth in Exhibit F attached hereto, as of the date hereof
there is no investigation by any governmental agency pending or threatened
against or affecting any Borrower or any other member of the Affiliated Borrower
Group or their properties or business, and there is no action, suit, proceeding
or claim by any Person pending or threatened against any Borrower or any other
member of the Affiliated Borrower Group or their properties or business (other
than future pending or threatened litigation involving the enforcement of lease
obligations by or against Hanover as successor to The Horn & Hardart Company as
to leased properties not used in or related to the business of Borrowers), or
against or affecting any transactions contemplated by this Agreement, the other
Financing Agreements, or other instruments, agreements or documents delivered in
connection herewith or therewith, which could reasonably be expected to result
in a determination adverse to any Borrower or any other member of the Affiliated
Borrower Group, and which, if so adversely determined with respect to any of
them, would result in either (i) a fine, judgment, penalty, loss or liability,
including costs and attorneys' fees, not covered by insurance, which,
individually, exceeds Three Hundred Thousand Dollars ($300,000) or (ii) any
material adverse change in the business, assets, liabilities or financial
condition of any Borrower or of the Affiliated Borrower Group taken as a whole.
Except as set forth on Exhibit F attached hereto, (i) there are no product
recall directives presently in effect, and (ii) to the knowledge of any
Responsible Officer of Borrowers and Guarantors, there are no investigations by
any governmental agency, pending or threatened, in each instance concerning a
possible product recall involving goods of or sold by Borrowers or Guarantors
having an aggregate value of Three Hundred Thousand Dollars ($300,000) or more.
5.11 Intellectual Property
Each Borrower individually and the other members of the Affiliated
Borrower Group taken as a whole, own or license all patents, trademarks and
copyrights and holds all licenses, which are necessary for the operation of
their business as presently conducted or proposed to be conducted. No product,
process, method, substance, part or other material presently sold by or employed
by Borrowers or the other members of the Affiliated
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Borrower Group, infringes any patent, trademark, service-mark, trade name,
copyright, license or other right owned by any other Person, except as set forth
on Exhibit F attached hereto and no claim or litigation is pending or threatened
against or affecting any Borrower or the other members of the Affiliated
Borrower Group, contesting its right to sell or use any such product, process,
method, substance, part or other material, except for any claims or litigation,
which if adversely determined against any one of them, would result in either
(i) a fine, judgment, penalty, loss or liability, including costs and attorneys'
fees not covered by insurance, which, individually exceeds Three Hundred
Thousand Dollars ($300,000) or (ii) any material adverse change in the business,
assets, liabilities or financial condition of any Borrower or of the Affiliated
Borrower Group taken as a whole. No patent, invention, device or application is
pending, or, to the best of Borrowers' knowledge, proposed which would
substantially reduce the projected revenues of, or otherwise materially
adversely affect the business, assets, liabilities, or financial condition of
any Borrower individually, or the other members of the Affiliated Borrower Group
taken as a whole.
5.12 Employee Benefits
(a) None of the Borrowers or any other member of the
Affiliated Borrower Group, has engaged in any transaction in connection with
which any Borrower or any other member of the Affiliated Borrower Group could be
subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA
or a tax imposed by Section 4975 of the IRC, which, individually or in the
aggregate, is greater than Two Hundred Fifty Thousand Dollars ($250,000).
(b) No liability to the Pension Benefit Guaranty
Corporation has been or is expected by Borrowers or any other member of the
Affiliated Borrower Group to be incurred with respect to any employee pension
benefit plan of any Borrower or any other member of the Affiliated Borrower
Group, except for insurance premiums that are required to be paid to the Pension
Benefit Guaranty Corporation that are not past due. There has been no reportable
event (within the meaning of Section 4043(b) of ERISA) or any other event or
condition with respect to any employee pension benefit plan which presents a
risk of (i) termination of any such plan by the Pension Benefit Guaranty
Corporation and (ii) potential liability of any Borrower or any other member of
the Affiliated Borrower Group to the Pension Benefit Guaranty Corporation in
connection with such termination which in the aggregate potential liability may
be greater than Two Hundred Fifty Thousand ($250,000).
(c) Full payment has been made of all amounts which any
Borrower or any other member of the Affiliated Borrower
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Group is required to have paid under the terms of each employee pension benefit
plan as contributions to such plan as of the last day of the most recent fiscal
year of such plan, and no accumulated funding deficiency (as defined in Section
302 of ERISA and Section 412 of the IRC), whether or not waived, exists with
respect to any employee pension benefit plan.
(d) The current value of all vested accrued benefits under
all employee pension benefit plans of Borrowers or any other member of the
Affiliated Borrower Group does not exceed the current value of the assets of
such plans allocable to such vested accrued benefits. The terms "current value"
and "accrued benefit" have the meanings specified in Section 3(26) and Section
3(23) of ERISA, respectively.
(e) None of the Borrowers or any other member of the
Affiliated Borrower Group is or has ever been obligated to contribute to any
"multiemployer plan" (as such term is defined in Section 3(37) or 4001(a)(3) of
ERISA or Section 414 of the IRC) that is subject to Title IV of ERISA.
5.13 Investment Company
None of the Borrowers or any Guarantor is an "investment company", or
an "affiliated person" or "promoter" or "principal underwriter", as such terms
are defined in the Investment Company Act of 1940, as amended (15 U.S.C.
sub-section 80a-1, et seq.). The making of the loans and provisions of the other
financial accommodations hereunder by Lender, the application of the proceeds
and the repayment thereof by Borrowers and/or Guarantors and the performance of
the transactions contemplated herein and in the other Financing Agreements will
not violate any provision of said Act, or any rule, regulation or order issued
pursuant thereto.
5.14 Regulation G; Securities
Exchange Act of 1934
None of the Borrowers or any Guarantor owns any "margin stock" as such
term is defined in Regulation G, as amended (12 C.F.R. Part 207) of the Board.
The proceeds of the borrowings and other financial accommodations made pursuant
to the Existing Loan Agreement, this Agreement and the other Financing
Agreements have been and will be used by Borrowers only for the purposes
contemplated thereunder and hereunder. None of the proceeds have been or will be
used, directly or indirectly, for the purpose of purchasing or carrying any
margin stock or for the purpose of reducing or retiring any Indebtedness which
was originally incurred to purchase or carry any margin stock or for any other
purpose which might cause any portion of the loans and other financial
accommodations under the Existing Loan Agreement or hereunder to be considered a
"purpose credit" within the meaning of Regulation G of the Board, as amended.
None of the Borrowers
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or any Guarantor will take, nor will they permit any agent acting in any of
their behalves to take, any action which might cause this Agreement or the other
Financing Agreements, or instruments delivered pursuant hereto or thereto, to
violate any regulation of the Board or to violate the Securities Exchange Act of
1934 or any state or other securities laws, in each case as in effect on the
date hereof or as amended hereafter.
5.15 No Material Adverse Change
There has been no material adverse change in the business, assets,
liabilities or financial condition of the Affiliated Borrower Group taken as a
whole since September 30, 1995.
5.16 Financial Statements
(a) None of the financial statements, reports and other
information furnished or to be furnished by Borrowers to Lender with respect to
Borrowers, Guarantors or other members of the Affiliated Borrower Group
contains, as of their respective dates, any untrue statement of material fact or
omits to state any material fact necessary to make the information therein not
misleading. Such financial statements and reports were and shall be prepared in
accordance with generally accepted accounting principles, in effect on the date
thereof, consistently applied, and shall fairly, completely and accurately
present the financial condition and results of operations of the applicable
Persons, as of the dates and for the periods indicated thereon.
(b) The cash flow projections for Borrowers (together with
any summaries of assumptions and projected assumptions, based on historical
performance with respect thereto) furnished by Borrowers to Lender have been
prepared in a manner consistent with the generally accepted accounting
principles used to prepare their financial statements, and represent the
reasonable, good faith opinion of Borrowers and their management as to the
subject matter thereof and based on assumptions as set forth therein which
Borrowers have determined to be fair and reasonable in view of current and
reasonably foreseeable business conditions.
5.17 Disclosure
(a) The information contained in, and the representations
and warranties set forth in this Agreement, the other Financing Agreements, or
in any other instrument, document, list, certificate, written statement, oral
statement by a Responsible Officer, schedule or exhibit delivered or to be
delivered to Lender, as contemplated in this Agreement or in the other Financing
Agreements, does not contain any untrue statement of a material fact and does
not omit and will not omit to state a
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material fact necessary in order to make the information contained herein or
therein not misleading.
(b) After giving effect to the transactions contemplated
by this Agreement, the other Financing Agreements, and the other instruments or
documents delivered in connection herewith and therewith, there does not exist
and there has not occurred any condition or event which constitutes an Event of
Default or Incipient Default.
5.18 Labor Disputes
As of the date hereof, there is no collective bargaining agreement or
other labor contract covering employees of Borrowers or any other member of the
Affiliated Borrower Group. Except as set forth on Exhibit K attached hereto, as
of the date hereof, no Borrower has any knowledge that any union or other labor
organization is seeking to organize, or to be recognized as, a collective
bargaining unit of employees of Borrowers or any other member of the Affiliated
Borrower Group. As of the date hereof, there is no pending or, to the best
knowledge of each Borrower, threatened strike, work stoppage, material unfair
labor practice claims, or other material labor dispute against or affecting any
Borrower or any other member of the Affiliated Borrower Group or any of their
respective employees.
5.19 Corporate Name; Prior Transactions
Borrowers and Guarantors have not, during the one (1) year period
ending on the date hereof, been known by or used any other corporate or
fictitious name or been a party to any merger or consolidation, or acquired all
or substantially all of the assets of any Person, or acquired any material
amount of their property or assets out of the ordinary course of business,
except as set forth on Exhibit G attached hereto.
5.20 [Reserved]
5.21 Schedule of Indebtedness
(a) Exhibit H-1 attached hereto is a complete and correct
list of (i) all credit agreements, notes, indentures, debt purchase agreements,
purchase agreements, agreements involving aggregate deferred payment obligations
for the purchase of assets in excess of Two Hundred Fifty Thousand Dollars
($250,000), capitalized leases and other investments, arrangements and
agreements in effect as of the date hereof providing for or relating to
extensions of credit in which Hanover or any Subsidiaries of Hanover (including
Borrowers and any of their Subsidiaries) are in any manner directly or
contingently liable; (ii) the maximum principal amounts of the credit and the
current amount outstanding under all such
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agreements; and (iii) an accurate description of any security interest, lien,
mortgage or other charge or encumbrance whatsoever given as security therefor.
(b) Exhibit H-2 attached hereto is a complete and correct
list of all (i) letters of credit made available under the NationsBank Credit
Agreements in effect as of the date hereof pursuant to which Hanover or any
Subsidiary of Hanover are directly or contingently liable; (ii) the expiration
date of each such letter of credit; and (iii) an accurate description of any
security interest, lien, mortgage or other charge or encumbrance whatsoever
given as security therefor and not released on or prior to the date hereof.
(c) Exhibit H-3 attached hereto is a complete and correct
list of all intercompany balances each of Borrowers owed to Hanover and each
other Subsidiary of Hanover as of September 30, 1995, all of which constitute
the unpaid balances as of such date of legal, valid and binding Indebtedness
incurred for fair consideration consisting of money or property or rendition of
services, in each case in the amounts and owed by the Persons as indicated on
such Exhibit H-3 attached hereto; and there have been no changes in such
balances since that date and through the date hereof, except for payments and
advances in the ordinary course of business of the kinds that would be permitted
hereunder.
5.22 Certain Affiliated Ownership
As of the date hereof, based upon a certificate of the
Secretary of NAR, NAR is the direct beneficial owner of all of the issued and
outstanding voting shares of Westmark and IMR, which own, in the aggregate,
directly and beneficially, approximately fifty and two-tenths (50.2%) percent of
all of the issued and outstanding voting shares of Hanover, and NAR is entitled,
through Westmark and IMR, to elect a majority of the members of the Board of
Directors of Hanover.
5.23 Common Enterprise
Borrowers and the other members of the Affiliated Borrower Group
collectively operate as interdependent businesses and constitute a unitary
business enterprise for the retail sale through direct mail marketing and stores
of, among other things, men's fashions, women's fashions, home furnishings,
general merchandise and giftware, down comforters, blankets, sheets, towels,
outer garments, woodworking products, and safety equipment in which, among other
things: (i) certain Borrowers effect the processing of orders and the collection
and disbursement of funds by virtue of the same Private Credit Card Agreement
and certain Borrowers are joint parties to, or have jointly appointed Hanover to
act as their agent under, Third
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Party Credit Card Agreements in order to facilitate administrative efficiency
and cost savings; (ii) the collections of customer payments of certain Borrowers
are remitted to and otherwise deposited into a common account, (iii) the
Borrowers and other members of the Affiliated Borrower Group share office and
warehouse space, computer and accounting systems, distribution and other
equipment; (iv) Borrowers operate a common telephonic answering, order taking
and transmission service for the mail order business of Borrowers; (v) DM
Advertising Inc., a Guarantor, assists in the development and production of the
mail order catalogs of each of Borrowers and of other promotional and
advertising materials; (vi) Hanover furnishes managerial and other services on
behalf of Borrowers and the other Subsidiaries of Hanover; (vii) Hanover and the
Subsidiaries of Hanover file consolidated tax returns; (viii) certain Borrowers
have made, and Borrowers may in the future make, intercompany loans to and
borrow money from each other, and HDPI has made, and may in the future make
loans to and borrow money from Hanover and the other Subsidiaries of Hanover;
and (ix) Hanover and its Subsidiaries have many common officers and directors.
5.24 Subordination of Certain Obligations
The payment terms and subordination provisions contained in the debt
instruments of Hanover described in Exhibit E attached hereto have not been
amended, modified or revised and shall not be amended, modified or revised
without the prior written consent of Lender, except for extensions of the
maturity date beyond the then current Term which do not involve any increase in
the principal amount outstanding greater than the amount outstanding as of the
date hereof as set forth on Exhibit H-1 attached hereto.
SECTION 6. ADDITIONAL COVENANTS
In addition to the covenants set forth in the other Financing
Agreements, Borrowers hereby, jointly and severally, covenant to and agree with
Lender that Borrowers shall comply with the following covenants, or cause the
same to be complied with, unless Lender shall otherwise consent in writing:
6.1 Tradenames
Borrowers may from time to time use the tradenames listed on Exhibit G
attached hereto (which, together with any new tradenames used after the date
hereof are referred to collectively as the "Tradenames" and individually, as a
"Tradename"). As to the respective Tradenames used by each of them, each
Revolving Loan Borrower hereby agrees that:
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(a) Each Tradename is a tradestyle (and not an independent
corporation or other legal entity) by which such Borrower may identify and sell
or lease certain of its goods or services and conduct a portion of its
respective business.
(b) All proceeds (including any returned merchandise)
which arise from the sale or lease of goods sold under a Tradename, including
proceeds of goods sold through catalogs bearing a Sears tradename pursuant to
the Sears Agreements, shall, except to the extent indicated on Exhibit G hereto,
be owned solely by the respective Borrower whose goods were sold either directly
or as assignee pursuant to an intercompany assignment (and further assignment to
Lender) pursuant to Section 8.1(c) hereof, and shall be subject to the security
interests of Lender and the other terms of this Agreement and the other
Financing Agreements.
(c) New Tradenames may be used by Borrowers, but only if
(i) Lender is given at least thirty (30) days prior written notice of the
intended use of any new Tradename and (ii) such supplemental financing
statements or similar instruments Lender may request shall be executed and
delivered to Lender by the respective Borrower intending to use same for filing
or recording by Lender prior to the use of such new Tradename.
6.2 Subsidiaries
Borrowers shall not form or acquire, and Hanover shall not form or
acquire, any direct or indirect Subsidiaries without the prior written consent
of Lender, other than Non-Guarantor Subsidiaries acquired or formed by Hanover
and other than Mail Order Joint Ventures which are Subsidiaries of Borrowers. In
the sole discretion of Lender, in the event Lender's consent is required and
Lender so consents, and in the case of Mail Order Joint Ventures which are
Subsidiaries of Borrowers, upon such formation or acquisition, each Borrower or
Hanover, as the case may be, shall cause each such Subsidiary, so formed or
acquired by it, that owns, or is contemplated to own, assets having a fair
market value greater than Ten Thousand Dollars ($10,000) to execute and deliver
to Lender, in form and substance satisfactory to Lender: (a) an absolute and
unconditional guarantee of payment of any and all present and future Obligations
of Borrowers to Lender, (b) an agreement to be bound by the terms of this
Agreement as though it were an original party hereto or a General Security
Agreement, as Lender may require, (c) related UCC financing statements, and (d)
such other mortgages, security and other agreements, documents and instruments
as Lender may require, including, but not limited to, supplements and amendments
hereto and other loan agreements or instruments evidencing Indebtedness of such
new Subsidiary to Lender. With respect to each direct or indirect Subsidiary of
Hanover listed on Exhibit B-1 attached hereto that owns assets
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with a fair market value greater than Ten Thousand Dollars ($10,000), Borrowers
shall cause each such Subsidiary to execute and deliver to Lender each of the
items referred to in subsections (a) through (d) of this Section 6.2, unless
such Subsidiary is dissolved by December 31, 1995.
6.3 Indebtedness
Borrowers shall not, and shall not permit any of their respective
Subsidiaries, and Hanover shall not permit any of its Subsidiaries, other than
Non-Guarantor Subsidiaries, to incur, create, assume or permit to exist any
Indebtedness for Borrowed Money, except:
(a) the Obligations of Borrowers and any Subsidiary to
Lender;
(b) Indebtedness of Borrowers or such Subsidiary where
payment is secured solely by liens permitted under Section 6.4 hereof;
(c) Indebtedness of Borrowers to the Private Credit Card
Purchaser under the Private Credit Card Agreement and Indebtedness of Borrowers
to the parties to the Third Party Credit Card Agreements pursuant to the terms
thereof;
(d) Indebtedness described on Exhibits H-1 through H-3
attached hereto and any successor or replacement financing with terms and
evidenced by documents, instruments or agreements in form and substance
acceptable to Lender in its discretion;
(e) Intercompany loans or advances permitted under Section
6.5 hereof;
(f) Indebtedness of Borrowers or other Subsidiaries of
Hanover, and guaranties thereof by Hanover, incurred for the establishment or
acquisition of, and improvements to, new Eligible Inventory Locations, first
leased or acquired by Borrowers after the date hereof, or incurred in connection
with the ongoing upgrading of Borrowers' computer system, provided (i) the
aggregate amount of all such Indebtedness at any one time outstanding does not
exceed Five Million Dollars ($5,000,000) and (ii) the principal amounts or
components of debt service and/or lease payments in respect of such Indebtedness
and related expenditures for improvements do not exceed One Million Two Hundred
Fifty Thousand Dollars ($1,250,000) in the aggregate in any one fiscal year of
Borrowers; provided, however, that any Indebtedness incurred by Borrowers or
other Subsidiaries of Hanover, and guaranties thereof by Hanover, for the
purposes of refinancing or repaying the Term Loans shall not be subject to the
restrictions set forth
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in clauses (i) and (ii) of this Section 6.3(f), so long as Lender has granted
its prior written consent to the incurrence of such Indebtedness, including the
form of the transaction, its terms and the form and content of any agreements to
be entered into by Borrowers or any other member of the Affiliated Borrower
Group in connection therewith, and Borrowers and Guarantors execute and deliver,
or cause to be executed and delivered, to Lender, such agreements, documents and
instruments, as Lender shall require as a condition of its consent (if Lender
determines to provide its consent); and
(g) Indebtedness of the 9.25% Guarantors to IMR as holder
of the 9.25% Notes, as guarantors thereof, provided the 9.25% Notes and all
Indebtedness evidenced thereby or related thereto, including the guarantees
thereof by the 9.25% Guarantors, shall be subordinated in right of payment to
the Obligations of Hanover and of the 9.25% Guarantors upon the terms set forth
in the 9.25% Subordination Agreement and shall be secured only by a junior
security interest upon customer lists to the extent permitted in and subject to
restrictions on enforcement and other restrictions set forth in the 9.25%
Subordination Agreement; provided, that, (i) the aggregate principal amount of
such Indebtedness at any time outstanding shall not exceed Fourteen Million
Dollars ($14,000,000), (ii) Hanover shall promptly furnish to the Lender such
information and documents with respect thereto and as Lender may, from time to
time, reasonably request, (iii) the 9.25% Guarantors and Hanover shall not,
directly or indirectly, (A) make any payments or prepayments in respect of
principal or interest in respect of such Indebtedness, or any expenses related
thereto, except as expressly permitted under the 9.25% Subordination Agreement,
or (B) amend, modify, alter or change the terms of the arrangements or any
agreements with respect to such Indebtedness, or (C) redeem, retire, defease,
purchase or otherwise acquire any such Indebtedness, or set aside or otherwise
deposit or invest any sums for such purpose; except that, so long as no Event of
Default or Incipient Default has occurred that is continuing, the 9.25% Notes
may be (x) repaid or prepaid with the proceeds of an equity offering of Hanover,
(y) repaid at scheduled maturity on August 1, 1998, and (z) refinanced on the
same subordinated basis, with Hanover as the borrower and no additional obligors
within the Affiliated Borrower Group, in an amount not to exceed the
then-outstanding principal balance of the 9.25% Notes in the aggregate for such
refinancing(s) provided (I) the proceeds are used to repay the 9.25% Notes and
(II) there is no increase in the rate of interest above twelve (12%) percent per
annum or in the frequency of interest payments or any change in the scope or
terms of subordination and limitations on collateral (which terms of
subordination and limitations on collateral shall be set forth in a
subordination agreement having the same terms as the 9.25% Subordination
Agreement, modified as appropriate, to refer to the debt and the holders and
other parties thereto, the proceeds of
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which are used for such refinancing) other than any changes which are not
adverse to Lender, and (iv) Hanover and the 9.25% Guarantors shall furnish to
Lender all notices, demands or other materials in connection with such
Indebtedness promptly after the receipt thereof by them or concurrently with the
sending thereof by them or on their behalf, as the case may be.
6.4 Limitation on Liens
Each Borrower shall not, and shall not permit any of its respective
Subsidiaries, and Hanover shall not permit any of its Subsidiaries, other than
Non-Guarantor Subsidiaries, to, create, incur, assume, or permit to exist any
mortgage, pledge, security interest, lien, encumbrance, defect in title or
restriction upon the use of its respective real or personal properties, whether
now owned or hereafter acquired, except:
(a) the liens, encumbrances, or security interests in
favor of Lender;
(b) tax, mechanics and other non-consensual statutory
liens arising in the ordinary course of Borrowers' or such Subsidiary's business
to the extent: (i) such liens secure Indebtedness which is not overdue or (ii)
until foreclosure or similar proceedings shall have been commenced, such liens
secure Indebtedness relating to claims or liabilities which are (A) fully
insured and being defended at the sole cost and expense and at the sole risk of
the insurer or (B) being contested in good faith by appropriate proceedings
available to each Borrower and are adequately escrowed for or reserved against
loan availability by Lender (subject in the case of reserves established for
sales and/or use taxes to the provisions of Section 2.6(b) hereof), or as
otherwise provided for under arrangements satisfactory to Lender;
(c) liens arising in connection with worker's
compensation, unemployment insurance, surety, insurance or financial
responsibility, appeal and release bonds, in each case limited to securities
pledged as collateral for any of the foregoing;
(d) liens or security interests constituting purchase
money liens or security interests upon specific fixed assets acquired, or liens
or security interests existing on any such fixed assets at the time of
acquisition thereof and including capital leases; provided, that:
(i) no such purchase money lien or security
interest (or capital lease, as the case may be) with respect to specific fixed
assets shall extend to or cover any other property other than the specific fixed
assets so acquired, or acquired
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subject to such lien or security interest (or lease), or accessions thereto and
the proceeds thereof;
(ii) such lien or security interest only secures
the obligation to pay the purchase price of such specific fixed assets (or the
obligations under the capital lease);
(iii) the principal amount secured thereby shall
not exceed one hundred percent (100%) of the cost of the fixed assets so
acquired; and
(iv) no Event of Default or Incipient Default
shall have occurred and be continuing;
(e) liens of the Private Credit Card Purchaser on the GECC
Collateral;
(f) liens or rights of set off against credit balances,
but not liens on or rights of set off against other property of Borrowers,
arising under the Third Party Credit Card Agreements; and
(g) liens on equipment or leasehold improvements securing
the Indebtedness under the capital lease obligations and incurred for leasehold
establishment and improvements as permitted by Section 6.3(g) and (h) hereof;
(h) liens on the real property and fixtures of TCS Office
and TCS Factory, each located in LaCrosse, Wisconsin; and
(i) liens on customer lists of the Borrowers, junior in
priority to Lender's liens thereon, to the extent permitted by and subject to
the restrictions on enforcement and other restrictions set forth in the 9.25%
Subordination Agreement.
6.5 Loans; Investments; Guarantees; Etc.
Borrowers shall not, and shall not permit any of their respective
Subsidiaries, and Hanover shall not permit any of its Subsidiaries, other than
Non-Guarantor Subsidiaries, to, directly or indirectly, make any loans or
advance money or property to any Person, or invest in (by capital contribution,
dividend or otherwise) or purchase or repurchase the stock or Indebtedness or
all or a substantial part of the assets or properties of any Person, or
guarantee, assume, endorse, or otherwise become responsible for (directly or
indirectly) or pay the Indebtedness, performance, obligations, stock or
dividends of any person or agree to do any of the foregoing, except:
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(a) the Guarantees of the Obligations of Borrowers in
favor of Lender;
(b) Provided no Event of Default or Incipient Default has
occurred and is continuing:
(i) short-term loans or advances of money by one
Borrower to another Borrower in the ordinary course of business, or by a
Borrower to any other Subsidiary of Hanover, other than to a Non-Guarantor
Subsidiary, in the ordinary course of business;
(ii) repayment by Borrowers to Hanover of valid
intercompany Indebtedness described on Exhibit H-3 attached hereto:
(A) in the aggregate amount during
Borrowers' fiscal year ending on or about December
31, 1996 not to exceed One Hundred Sixty Thousand
Dollars ($160,000), solely to be used by Hanover to
pay (x) dividends, sinking fund payments or
redemption payments required under the terms and
conditions existing on the date hereof of the Series
A and Series B Convertible Additional Preferred Stock
of Hanover, and (y) interest on The Horn & Hardart
Company 7 1/2% Convertible Subordinated Debentures
according to their terms existing as of the date
hereof;
(B) in the aggregate amount during
Borrowers' fiscal year ending on or about December
31, 1997 not to exceed Fifty Seven Thousand Dollars
($57,000), solely to be used by Hanover to pay (x)
dividends, sinking fund payments or redemption
payments required under the terms and conditions
existing on the date hereof of the Series A and
Series B Convertible Additional Preferred Stock of
Hanover, and (y) interest on The Horn & Hardart
Company 7 1/2% Convertible Subordinated Debentures
according to their terms existing as of the date
hereof;
(C) in the aggregate amount necessary to
pay, and so used by Hanover to pay, the regularly
scheduled payments of principal and interest upon,
and annual placement and remarketing agent fees
payable under, the HDI Floating Rate Bond Financing;
and
(D) in the aggregate amount necessary to
pay, and so used by Hanover to pay, a portion of
the regularly scheduled payments of interest under
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the 9.25% Notes, but not to exceed such interest upon
Fourteen Million Dollars ($14,000,000) in principal
amount of the 9.25% Notes, or up to Fourteen Million
Dollars ($14,000,000) in principal of the 9.25%
Notes, if and to the extent permitted to be repaid
pursuant hereto, or in the amount necessary to pay
the out-of-pocket expenses of IMR and the Indenture
Trustee in respect of the 9.25% Notes, in each case
according to the terms of the 9.25% Notes as in
effect on the date hereof and provided that such
payments are permitted to be made and received under
the terms of the 9.25% Subordination Agreement.
(c) the endorsement of instruments for collection or
deposit in the ordinary course of business;
(d) investments in any new Mail Order Joint Venture that
is formed in accordance with Section 6.2 hereof or, if not a Subsidiary of a
Revolving Loan Borrower, is permitted under Section 6.27 hereof;
(e) the guarantee by any of the Revolving Loan Borrowers
in favor of American Express Travel Related Services Company,. Inc., a Third
Party Credit Card Issuer, of any Indebtedness of any of the other Revolving Loan
Borrowers arising under the Agreement for American Express Card Acceptance,
effective April 1, 1995, among Revolving Loan Borrowers and American Express
Travel Related Services Company, Inc. with respect to rights of chargeback or
setoff or otherwise, subject nevertheless to the rights of Lender under the
Third Party Credit Card Acknowledgments to which such Third Party Credit Card
Issuer (or its Affiliates) is a party; and
(f) investments in the following instruments, which shall
be pledged and delivered to Lender upon Lender's request, (i) marketable
obligations issued or guaranteed by the United States of America or an
instrumentality or agency thereof, maturing not more than one (1) year after the
date of acquisition thereof, (ii) certificates of deposit or other obligations
maturing not more than one (1) year after the date of acquisition thereof issued
by any bank or trust company organized under the laws of and located in the
United States of America or any State thereof and having capital, surplus and
undivided profits of at least One Hundred Million Dollars ($100,000,000), and
(iii) open market commercial paper with a maturity not in excess of two hundred
seventy (270) days from the date of acquisition thereof which have the highest
credit rating by either Standard & Poor's Corporation or Moody's Investors
Service, Inc.
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6.6 Transactions with Affiliates
Borrowers shall not, and shall not permit any of their respective
Subsidiaries, and Hanover shall not permit any of its Subsidiaries, other than
Non-Guarantor Subsidiaries, to, directly or indirectly:
(a) purchase, acquire or lease any property from, or sell,
transfer or lease any property to, any shareholder, officer, director, agent,
employee or Affiliate, except on prices or terms no less favorable than would
have been obtained in an arm's length transaction with a non-Affiliated Person,
unless such transaction either (i) involves the sale of Inventory in the
ordinary course of business at no less than cost by a Borrower to another
Borrower or to a Guarantor who has assigned its rights to the proceeds of any
resale of such Inventory pursuant to an intercompany assignment (subject to
further assignment to Lender) pursuant to Section 8.1(c) hereof, or (ii) is
permitted by another provision of this Section 6.6 or Section 6.5 hereof, but in
no event shall any such transaction be engaged in by Borrowers or other members
of the Affiliated Borrower Group with a Non-Guarantor Subsidiary without
Lender's prior written consent in each instance; or
(b) make any payment of management fees, tax sharing
payments, dividends, distributions (other than its own capital stock), or the
principal amount of or interest on any Indebtedness owing to any Affiliate,
except
(i) with respect to any entire fiscal year of
Borrowers for which a consolidated Federal income tax return is filed by Hanover
that includes Borrowers and a positive consolidated tax liability is due, as
calculated and shown in the consolidated federal income tax return as filed by
Hanover, as the case may be, each Borrower may pay to Hanover, as the case may
be, an amount, not to exceed the lesser of (x) such Borrower's allocable share
of the consolidated Federal income tax liability for each such year and (y) the
accrued and unpaid liability of such Borrower to Hanover arising under the Tax
Sharing Agreement in respect of the prior use by such Borrower of Hanover's net
operating losses to reduce the amount of Federal income tax liability otherwise
payable for any prior fiscal year of such Borrower had its Federal income tax
liability for such year been computed on a separate Federal income tax return
instead of a consolidated Federal income tax return with Hanover, as the case
may be; provided, that, such Borrower is required to make each such payment to
Hanover pursuant to the Tax Sharing Agreement;
(ii) payments of interest and principal to IMR as
the holder of the 9.25% Notes, to the extent permitted under this Agreement and
under the 9.25% Subordination Agreement;
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(iii) management fees to NAR or an Affiliate of
NAR in the aggregate amount of not greater than Seven Hundred Fifty Thousand
Dollars ($750,000) in each calendar year during the Term;
(iv) customary and reasonable directors' fees to
directors of Borrowers or Hanover, in the same amounts as are paid to its
non-Affiliate directors, not to exceed $500,000 in the aggregate for all
directors' fees in any calendar year;
(v) payments of legal expenses incurred by
Hanover on behalf of Borrowers, not to exceed Five Hundred Thousand Dollars
($500,000) in any one fiscal year of Borrowers; and
(vi) payments of corporate expenses of Hanover
incurred for the joint benefit of Borrowers and Guarantors in the ordinary
course of business in accordance with past practices, in the amount of up to Six
Hundred Thousand Dollars ($600,000) in Hanover's 1995 fiscal year, One Million
Three Hundred Fifty Thousand Dollars ($1,350,000) in Hanover's 1996 fiscal year,
and One Million Five Hundred Thousand Dollars ($1,500,000) in Hanover's 1997
fiscal year; and
(vii) payments made by one Borrower to another
Borrower to reconcile the payments posted in due course to the respective
Accounts of such Borrower and other receipts with the application of daily
collections and receipts to the respective loan accounts of Borrowers hereunder
or payments by Term Loan Borrowers to reimburse a Revolving Loan Borrower for
payments in respect of its Obligations in respect of the Term Loan that are
charged to such Revolving Loan Borrower's Revolving Loan account; provided,
however, in each case under clauses (i) through (v) of Section 6.6(b) hereof
that no Event of Default or Incipient Default has occurred and is continuing; or
(c) declare or pay any dividend on account of any share of
any class of capital stock of Borrowers or any Subsidiary of Hanover, or any
other Person, now or hereafter outstanding, or set aside or otherwise deposit or
invest any sum for such purpose, or redeem, retire, defease, purchase,
repurchase or otherwise acquire for value any share of any class of capital
stock of Borrowers or any Subsidiary of Hanover (or set aside, pay into a
sinking fund or otherwise deposit or invest any sum for such purpose) for any
consideration other than its own capital stock or apply or set apart any sum, or
make any other distribution (by reduction of capital or otherwise) in respect of
any such shares or agree to do any of the foregoing, except that dividends may
be declared and paid by Hanover on any preferred stock of Hanover issued or
outstanding on the date hereof in accordance with its terms as of the date
hereof, in
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each case out of legally available funds therefor, and provided no Event of
Default or Incipient Default has occurred and is continuing.
6.7 Maintenance of Existence
Each Borrower and each Guarantor shall at all times preserve, renew and
keep in full force and effect its corporate existence and rights and franchises
with respect thereto and each Borrower and each Guarantor shall maintain in full
force and effect all permits, licenses, trademarks, tradenames, approvals,
authorizations, leases and contracts necessary to carry on the business as
presently or proposed to be conducted, provided that (i) any Guarantor, other
than Hanover, may be dissolved at such time as it ceases to conduct business and
owns less than Ten Thousand Dollars ($10,000) of assets, (ii) the assets of
Leavitt Advertising Agency, Inc. and Ring Response Ltd. shall be liquidated into
Hanover by no later than December 31, 1995 and (iii) on not less than ten (10)
days' prior written notice to Lender, (A) DM Advertising may be merged into
Hanover Direct New Jersey, Inc. and the name of the surviving corporation
changed to DM Advertising, Inc., (B) TW Acquisitions, Inc. may be merged into
Tweeds, Inc. and (C) Hanover Realty may be merged into HDV. None of the
Borrowers or any Guarantor shall engage, directly or indirectly, in any line of
business other than the business in which it is engaged on the date hereof.
6.8 Sale and Leasebacks
None of the Borrowers shall enter into, and Hanover shall not permit
any of its Subsidiaries to enter into, any arrangement, directly or indirectly,
with any Person whereby such Borrower or Subsidiary shall sell or transfer any
property, real or personal, whether now owned or hereafter acquired, and
thereafter rent or lease such property which it intends to use for substantially
the same purpose or purposes as the property being sold or transferred, unless
such sale and leaseback relates to real property first acquired and occupied
after the date hereof and such Borrower delivers to Lender all applicable
mortgagee and landlord waivers, access and use agreements, in the form of
Exhibit I attached hereof.
6.9 Sale of Assets, Consolidation,
Merger, Dissolution, Etc.
None of the Borrowers, or any of their respective Subsidiaries or Mail
Order Joint Ventures or any Subsidiary of Hanover shall, directly or indirectly,
merge into or with or consolidate with any other Person or permit any other
Person to merge into or with or consolidate with Borrowers, any of their
respective Subsidiaries or Mail Order Joint Ventures or any Subsidiary of
Hanover, or sell, assign, lease, transfer, abandon
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or otherwise dispose of any stock or Indebtedness of Borrowers, any of their
respective Subsidiaries or Mail Order Joint Ventures or of any Subsidiary of
Hanover to any other Person, or any of their property or assets to any other
Person (other than sales of Inventory in the ordinary course of business and
sales of Equipment as permitted under Section 6.13 hereof and except as
permitted under Sections 6.22 and 6.24 hereof) or wind up, liquidate or dissolve
or agree to do any of the foregoing; provided, however, that (i) the foregoing
shall not restrict transactions otherwise permitted by the terms of Section
6.5(b), 6.6(b) or 6.7 hereof, as applicable, and (ii) any Subsidiary of
Borrowers which is a Guarantor, shall be dissolved at such time as it ceases to
actively conduct business and owns less than Ten Thousand Dollars ($10,000) of
assets.
6.10 Compliance with Laws, Regulations, Etc.
Each Borrower and each member of the Affiliated Borrower Group shall at
all times comply in all material respects with all applicable provisions of
laws, rules, regulations, licenses, permits, approvals and orders and duly
observe all requirements, of any foreign, Federal, State or local governmental
authority, including, without limitation, ERISA, the IRC, the Occupational
Safety and Health Act of 1970, as amended, the Fair Labor Standards Act of 1938,
as amended, all Federal, State and local statutes, regulations, rules and orders
relating to consumer credit (including, without limitation, as each has been or
may be amended the Truth-in-Lending Act, the Fair Credit Billing Act, the Equal
Credit Opportunity Act and the Fair Credit Reporting Act and the regulations,
rules and orders promulgated thereunder), all Federal, State and local statutes,
rules and orders relating to sale of consumer goods and mail order sales
(including, without limitation, the Consumer Product Safety Act of 1972, as
amended, and the Federal Trade Commission Act of 1914, as amended, and the
rules, regulations and orders promulgated thereunder) subject, in the case of
any such law relating to the payment or collection and remittance of sales
and/or use taxes, to the provisions of Sections 5.9(b) and 2.6(b) hereof, which
shall control with respect to such matters in lieu of this Section 6.10.
6.11 Compliance with Environmental Laws
(a) Each Borrower and Guarantor shall, at all times,
comply in all material respects with all the Environmental Laws.
(b) Each Borrower and Guarantor shall establish and
maintain, at its expense, a system to assure and monitor its continued
compliance with all Environmental Laws in all of its operations, which system
shall include annual reviews of such compliance by employees or agents of each
Borrower and Guarantor
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who are familiar with the requirements of the Environmental Laws. Copies of all
environmental surveys, audits, assessments, feasibility studies and results of
remedial investigations shall be promptly furnished, or caused to be furnished,
by Borrowers and Guarantors to Lender. Each Borrower and Guarantor shall take
prompt and appropriate action to respond to any non-compliance with any of the
Environmental Laws and shall regularly report to Lender on such response.
(c) Each Borrower and Guarantor shall give both oral and
written notice to Lender, as soon as practicable after a Responsible Officer's
receipt of any notice of, or his or her otherwise obtaining knowledge of, (i)
the occurrence of any event involving the release, spill or discharge,
threatened or actual, of any Hazardous Material or (ii) any investigation,
proceeding, complaint, order, directive, claims, citation or notice with respect
to: (A) any non-compliance with or violation of any Environmental Law by any
Borrower or Guarantor or (B) the release, spill or discharge, threatened or
actual, of any Hazardous Material or (C) the generation, use, storage,
treatment, transportation, manufacture, handling, production or disposal of any
Hazardous Materials or (D) any other environmental matter, which can reasonably
be expected to (1) involve any potential liability (contingent or otherwise) of
any Borrowers or Guarantors with respect thereto (including any fines,
liabilities, remediation expenses, costs and engineering and attorneys' fees)
greater than Two Hundred Fifty Thousand Dollars ($250,000), or (2) result in a
restraint on operations of any Borrower which prevents such Borrower from
conducting its operations in the ordinary course, or (3) have an adverse effect
on any Collateral having a value of Two Hundred Fifty Thousand Dollars
($250,000) or more, or a material adverse effect on the business, assets,
liabilities or financial condition of any Borrower or of the Affiliated Borrower
Group taken as a whole, or on any properties at or to which any Borrower or
Guarantor transported, stored or disposed of any Hazardous Materials.
(d) Without limiting the generality of the foregoing,
whenever Lender reasonably determines that there is non-compliance, or any
condition which requires any action by or on behalf of any Borrower or Guarantor
in order to avoid any material non-compliance with any Environmental Law, which
could reasonably be expected to (i) involve any potential liability (contingent
or otherwise) of any Borrowers or Guarantors with respect thereto (including any
fines, liabilities, remediation expenses, costs and engineering and attorneys'
fees) greater than Two Hundred Fifty Thousand Dollars ($250,000), or (ii) result
in a restraint on operations of any Borrower which prevents such Borrower from
conducting its operations in the ordinary course, or (iii) have an adverse
effect on any Collateral having a value of Two Hundred Fifty Thousand Dollars
($250,000) or more, or a material adverse effect on the business, assets,
liabilities or
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financial condition of any Borrower or of the Affiliated Borrower Group taken as
a whole, each Borrower and Guarantor shall, at Lender's request and Borrowers'
and Guarantors' expense: (i) cause an independent environmental engineer
acceptable to Lender to conduct such tests as are reasonably necessary of the
site where such non-compliance or alleged non-compliance with such Environmental
Laws has occurred as to such non-compliance and prepare and deliver to Lender a
report as to such non-compliance setting forth the results of such tests, a
proposed plan for responding to any environmental problems described therein,
and an estimate of the costs thereof and (ii) provide to Lender a supplemental
report of such engineer whenever the scope of such non-compliance, or such
Borrower's or Guarantor's response thereto or the estimated costs thereof, shall
change in any material respect.
(e) Each Borrower and Guarantor shall indemnify and hold
harmless Lender, its directors, officers, employees, agents, invitees,
representatives, successors and assigns, from and against any and all losses,
claims, damages, liabilities, costs, and expenses (including reasonable
attorneys' fees and legal expenses) directly or indirectly arising out of or
attributable to the use, generation, manufacture, reproduction, storage,
release, threatened release, spill, discharge, disposal or presence of a
Hazardous Material, including, without limitation, the costs of any required or
necessary repair, cleanup or other remedial work with respect to any property of
any Borrower or Guarantor and the preparation and implementation of any closure,
remedial or other required plans. All representations, warranties, covenants and
indemnifications in this Section 6.11 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
(f) Borrowers and Guarantors may contest the assertion by
any governmental authority or any third party of any obligation or liability for
alleged non-compliance with Environmental Laws or otherwise relating to the
release, spill or discharge, threatened or actual, of Hazardous Materials, or
the generation use, storage, treatment, transportation, manufacturing, handling,
production or disposal of Hazardous Materials, but no such contest shall relieve
Borrowers and Guarantors from their obligations to Lender in regard to such
matters as provided in this Agreement and the other Financing Agreements.
6.12 Payment of Taxes and Claims
Borrowers shall duly pay and discharge all taxes, assessments,
contributions and governmental charges upon or against them or their properties
or assets, except for taxes which are being contested in good faith by
appropriate proceedings and with respect to which reserves have been set
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aside in accordance with generally accepted accounting principles consistently
applied, in the determination of Lender, or if requested by Lender to protect
Lender's security interests or liens in any Collateral or Guarantor Collateral,
adequate amounts have been escrowed with or reserved against by Lender or other
arrangements satisfactory to Lender are made to cover all amounts which are
claimed due plus interest and possible penalties thereon; provided, however,
that with respect to sales and/or use taxes the provisions of Sections 5.9(b)
and 2.6(b) hereof shall control with respect to such matters in lieu of this
Section 6.12. Borrowers shall be liable for any tax or penalty imposed upon any
transaction under this Agreement or any of the other Financing Agreements or
giving rise to any Collateral or Guarantor Collateral or which Lender may be
required to withhold or pay for any reason and Borrowers shall indemnify and
hold Lender harmless with respect thereto, and shall repay to Lender on demand
the amount thereof, and, until paid by Borrowers, such amount shall be added and
deemed part of the Obligations, provided, that, nothing contained herein shall
be construed to require Borrowers to pay any income tax attributable to the
income of Lender in respect of any compensation charged or paid hereunder to
Lender.
6.12A Accounts Covenants
(a) Borrower shall notify Lender promptly, but in any
event within two (2) Banking Days after any Responsible Officer of Borrower
knows of: (i) any delay of more than five (5) days attributable to computer
breakdown or processing errors, or any delay of more than one (1) Banking Day
for any other reason, or any default in performance by any Borrower or Guarantor
of, any of its obligations to any party to a Credit Card Agreement, or by any
party to a Credit Card Agreement, to any Revolving Loan Borrower or Hanover, or
any suspension or cessation by any party to Credit Card Agreement in purchasing
or refusal by any party to a Credit Card Agreement to purchase credit card sales
transactions, or the assertion of any claims, offsets, defenses or counterclaims
by, or existence of any disputes with, any party to a Credit Card Agreement, or
any settlement, adjustment or compromise thereof, (ii) all material adverse
information relating to the financial condition of any party to a Credit Card
Agreement, and (iii) any event or circumstance which, to Borrower's knowledge
would cause Lender to consider any MasterCard/VISA Receivables as no longer
constituting Eligible Deferred Billing Receivables. No credit, discount,
allowance or extension or agreement for any of the foregoing shall be granted to
any party to a Credit Card Agreement except in the ordinary course of Borrowers'
or any other Borrowers' business in accordance with its then current practices
and policies consistently applied. So long as no Event of Default exists or has
occurred and is continuing, Borrowers shall settle, adjust or compromise any
claim, offset,
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counterclaim or dispute with any party to a Credit Card Agreement. At any time
that an Event of Default exists or has occurred and is continuing, Lender shall,
at its option, have the exclusive right to settle, adjust or compromise any
claim, offset, counterclaim or dispute with any party to a Credit Card
Agreement, or grant any credits, discounts or allowances.
(b) At any time that Inventory sold under a Deferred
Billing Option Program is returned, reclaimed or repossessed, the related
Account shall not be deemed an Eligible Deferred Billing Receivable.
(c) At any time an Event of Default exists or has occurred
and is continuing, Borrower shall, upon Lender's request, (i) hold any returned
Inventory in trust for Lender, (ii) dispose of the returned Inventory solely
according to Lender's instructions, and (iii) not issue any credits, discounts
or allowances with respect thereto without Lender's prior written consent.
(d) With respect to each Credit Card Agreement: (i) no
payments shall be made thereunder except payments delivered to Lender pursuant
to the terms of this Agreement, (ii) there shall be no material setoffs,
deductions, contras, defenses, counterclaims or disputes existing or asserted
with respect thereto except as reported to Lender in accordance with the terms
of this Agreement, and (iii) none of the transactions giving rise thereto will
violate any applicable State or Federal laws or regulations in any material
respect, all documentation relating thereto will be legally sufficient under
such laws and regulations in all material respects and all such documentation
will be legally enforceable in accordance with its terms.
(e) Each Account represents a valid and legally
enforceable indebtedness based upon an actual bona fide sale and delivery of
goods or lease or license of customer or mailing lists or rendition of services,
in each case in the ordinary course of the business of Borrowers which has been
finally accepted by the Account Debtor and for which the Account Debtor is
unconditionally liable to make payment of the amount stated in each invoice,
customer or mailing list rental or license agreement, credit card transaction
record, instrument or other document evidencing the Account in accordance with
the terms thereof, without any offset, defense or counterclaim known to
Borrowers, except those offsets, defenses or counterclaims, related to Accounts
not in excess of the applicable amount set forth in Section 6.12A(g) hereof,
disclosed in writing to Lender upon Borrowers' acquiring knowledge thereof
(which disclosure need only be made by disclosing the gross amount of
non-conforming Accounts).
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(f) To the best of Borrowers' knowledge, all statements
made and all unpaid balances appearing in the invoices, customer or mailing list
rental or license agreements, credit card transaction records, instruments or
other documentation evidencing each Account are true and correct and are in all
respects what they purport to be and all signatures and endorsements that appear
thereon are genuine and all signatories and endorsers have full capacity to
contract and each Account Debtor, and each issuer, purchaser or factor thereof
under the Credit Card Agreements, is solvent and financially able to pay in full
the Account when it matures, except as disclosed in writing to Lender upon
Borrowers' acquiring information to the contrary involving Accounts not in
excess of the applicable amount set forth in Section 6.12A(g) hereof (which
disclosure need only be made by disclosing the gross amount of non-conforming
Accounts).
(g) The representations and warranties as to the Accounts
contained in Sections 6.12A(e) and (f) hereof shall be considered materially
untrue if, but only if, there are non-conforming Accounts of Borrowers, whether
or not known to Borrower or disclosed to Lender, which, on an aggregate basis at
any one time outstanding, shall be equal to or greater than Two Hundred Fifty
Thousand Dollars ($250,000).
(h) None of the transactions underlying or giving rise to
any Account violates on the part of any Borrower any State, Federal or foreign
laws or regulations, and all documents relating to the Accounts are legally
sufficient under such laws or regulations and shall be legally enforceable in
accordance with their terms, subject to the bankruptcy of the Account Debtor and
judicial discretion affecting equitable remedies, and all recording, filing and
other requirements of giving public notice under any applicable law have been
duly satisfied, including, without limitation, the filing of any report in the
States of New Jersey, Minnesota and Indiana with the New Jersey Division of
Taxation, the Minnesota Department of Revenue and the Indiana Department of
State Revenue, respectively.
(i) Each Revolving Loan Borrower shall give Lender written
notice of its intention to commence or continue as to new sales any Deferred
Billing Option Program at least thirty (30) days prior to the commencement of
each Program Quarter (whether or not the Accounts Loan Financial Test would be
satisfied and whether or not such Revolving Loan Borrower intends to request
Revolving Accounts Loans with respect to such Program.)
6.13 Properties in Good Condition
(a) Each Borrower and Guarantor shall keep its properties
in good repair, working order and condition (reasonable wear and tear excepted)
and, from time to time, make
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all needful and proper repairs, renewals, replacements, additions and
improvements thereto, so that the business carried on may be properly and
advantageously conducted at all times in accordance with prudent business
management. The Inventory and the Equipment of each Borrower and Guarantor shall
be used in its business and not for personal, family, household or farming use.
(b) All of the Inventory of each Borrower is and shall be
held for sale in the ordinary course of such Borrower's mail order and retail
business and is and shall be fit for such purposes. Borrowers shall not sell or
otherwise dispose of any Inventory except for mail order and retail sales in the
ordinary course of business and except for sales of outdated and surplus
Inventory in the absence of an Event of Default or Incipient Default which is
continuing that comply with the provisions of Section 6.22 hereof. Borrowers
shall maintain all Inventory according to a computerized perpetual inventory
accounting system. Borrowers shall keep the Inventory in good and marketable
condition, at their own expense. Borrowers shall not, without the prior written
notice to Lender, acquire or accept any Inventory on consignment or approval.
Borrowers shall conduct a physical count of the Inventory of Borrowers, at their
expense, at least annually prior to an Event of Default and at least twice a
year during the continuance of an Event of Default, and shall promptly supply
Lender with a copy of each such count. Borrowers shall not, without the prior
written consent of Lender, sell any Inventory on a bill-and-hold, guaranteed
sale, sale and return, sale on approval, or other repurchase or return basis,
except for Borrowers' existing return policies for their mail order sales and
retail store sales, in each case in the ordinary course of business and prior to
an Event of Default.
(c) Borrowers shall use the Equipment with all reasonable
care and caution and in accordance with applicable standards of any insurance
and in conformity with all applicable laws.
(d) Borrowers shall not remove any Equipment from the
locations set forth for the respective Borrowers on Exhibit C hereto or
otherwise permitted herein for the applicable Borrower, except to the extent
necessary to have any Equipment repaired or maintained in the ordinary course of
the business of Borrowers or to move Equipment directly from one location set
forth on Exhibit C hereto for that Borrower or otherwise permitted herein for
that Borrower, to another such location and except for the movement of motor
vehicles used by or for the benefit of the Borrowers in the ordinary course of
business.
(e) The Equipment of Borrowers is now and shall remain
personal property and Borrowers shall not permit any of their Equipment to be or
become a part of or affixed to real property.
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(f) The Equipment of each Borrower, other than any
Equipment constituting fixtures as of the date hereof, is now and shall remain
personal property and Borrowers shall not permit any material part of such
Equipment to be or become a part of or affixed to real property without (i)
prior written notice to Lender and the written consent of Lender and (ii) first
making all arrangements, and delivering or causing to be delivered to Lender,
such agreements and other documentation requested by Lender for the protection
and preservation of its security interests and liens, in form and substance
satisfactory to Lender.
(g) Borrowers shall not, without Lender's prior written
consent, sell, lease as a lessor, or otherwise dispose of any part of their
Equipment that has a fair market value greater than Two Hundred Fifty Thousand
Dollars ($250,000) in the aggregate for all such transactions in any fiscal year
of Borrowers. In the event any such Equipment is sold, transferred or otherwise
disposed of with Lender's prior written consent or as permitted hereunder
without such consent and: (i) such sale, transfer or disposition is effected
without replacement of such Equipment, or such Equipment is replaced by
Equipment leased by Borrowers, or by Equipment purchased by Borrowers subject to
a Purchase Money Lien, then Borrowers shall deliver all of the cash proceeds of
any such sale, transfer or disposition to Lender, which proceeds shall be (A)
applied to the repayment of the Obligations of Borrowers as applicable, in such
order and manner as Lender shall determine or (B) retained by Lender as cash
Collateral; or (ii) such sale, transfer or disposition is made in connection
with the purchase by Borrowers of replacement Equipment, then Borrowers shall
use the proceeds of such sale, transfer or disposition to finance the purchase
by Borrowers of replacement Equipment and shall deliver to Lender written
evidence of the use of the proceeds for such purchase. All replacement Equipment
purchased by Borrowers shall be free and clear of all liens, claims and
encumbrances, except as otherwise permitted hereunder.
(h) Borrowers assume and shall indemnify Lender from and
against all responsibility and liability arising from or relating to the use,
sale or other disposition of their respective Inventory and Equipment.
6.14 Insurance
Borrowers and Guarantors shall at all times maintain, with financially
sound and reputable insurers, insurance with respect to the Collateral and
Guarantor Collateral, insuring the same and their business against loss or
damage of the kind and in the amounts customarily insured against by
corporations of established reputation engaged in the same or similar business
and similarly situated, and Borrowers and Guarantors shall
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maintain public liability insurance against claims for personal injury, death or
property damage occurring upon, in, about or in connection with the use of any
properties owned, occupied or controlled by them and occurring in connection
with the use (or otherwise) of any products manufactured or sold by them,
worker's compensation insurance, and business interruption insurance. Said
policies of insurance shall be satisfactory to Lender as to form, amount and
insurer. Borrowers and Guarantors shall furnish certificates, policies or
endorsements to Lender as proof of such insurance, and, if they fail to do so,
Lender is authorized, but not required, to obtain such insurance at the expense
of Borrowers and Guarantors. All policies shall provide for at least thirty (30)
days prior written notice to Lender of any cancellation or reduction of
coverage. Lender, and its designees, are hereby irrevocably appointed to act as
attorney-in-fact for Borrowers and Guarantors in obtaining, and at any time
during the continuance of an Event of Default, adjusting, settling, amending and
canceling such insurance. Borrowers and each Guarantor shall obtain
non-contributory lender's loss payable endorsements to all insurance policies in
form and substance satisfactory to Lender specifying that the proceeds of such
insurance shall be payable to Lender and further specifying that Lender shall be
paid regardless of any act or omission by Borrowers and/or any Guarantor. At its
option, Lender may apply any insurance proceeds received by Lender at any time
to the cost of repairs or replacement of Collateral and/or to payment of the
Obligations of Borrowers and/or any Guarantor, whether or not then due, in any
order and in such manner as Lender, in its discretion, may determine. Lender may
retain such proceeds as cash Collateral for the Obligations.
6.15 Appraisals
(a) Borrowers shall, at Borrowers' expense and after
Lender's request, deliver to Lender at least one (1) time per location during
each calendar year during the Term (excluding the delivery of the Appraisal or
any update in connection with the closing hereunder), or permit Lender, with the
same frequency, to obtain, written reports, Appraisals or updated appraisals by
the Appraiser of any or all of the Inventory of Borrower, in form, scope and
methodology acceptable to Lender, and including, but not limited to, a report as
to the Net Orderly Liquidation Value of the Inventory of Borrowers, other than
Inventory of Gump's at the Gump's Main Store, and of the Net GOB Value of the
Inventory of Gump's at the Gump's main store; provided, however, that if an
Event of Default or Incipient Default shall have occurred and be continuing,
Borrowers shall, at Borrowers' expense, deliver to Lender, at Lender's request,
additional and more frequent written reports or appraisals by the Appraiser of
any or all of the Inventory of Borrowers, including, but not limited to, reports
as to the Net Orderly Liquidation Value and Net GOB Value of the Inventory of
Borrowers, as
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applicable, or such other reports in such form, scope and methodology acceptable
to Lender.
(b) Upon Lender's request, Borrowers shall, at their
expense, once in any calendar year during the Term (excluding any such reports
or appraisals delivered in connection with the closing hereunder) and at any
time or times as Lender may request on or after an Event of Default, deliver or
cause to be delivered to Lender written reports or appraisals as to their
Equipment in form, scope and methodology acceptable to Lender and by an
appraiser acceptable to Lender.
6.16 Compliance with ERISA
None of the Borrowers or any other member of the Affiliated Borrower
Group shall, with respect to all "employee pension benefit plans" maintained by
Borrowers or any other member of the Affiliated Borrower Group:
(a) (i) terminate any of such employee pension benefit
plans so as to incur any liability to the Pension Benefit Guaranty Corporation
established pursuant to ERISA, (ii) allow or suffer to exist any prohibited
transaction involving any of such employee pension benefit plans or any trust
created thereunder which would subject Borrowers or any member of the Affiliated
Borrower Group to a tax or penalty or other liability on prohibited transactions
imposed under Section 4975 of the IRC or under ERISA, (iii) fail to pay to any
such employee pension benefit plan any contribution which it is obligated to pay
under the terms of such plan, (iv) allow or suffer to exist any accumulated
funding deficiency, whether or not waived, with respect to any such employee
pension benefit plan, (v) allow or suffer to exist any occurrence of a
reportable event or any other event or condition which presents a material risk
of termination by the Pension Benefit Guaranty Corporation of any such employee
pension benefit plan that is a single employer plan, which termination could
result in any liability to the Pension Benefit Guaranty Corporation, or (vi)
incur any withdrawal liability with respect to any multiemployer plan which is
not fully bonded; except only, in the case of any of the foregoing, if the
resulting liability or potential liability of Borrowers or other member(s) of
the Affiliated Borrower Group, would not, individually or in the aggregate,
exceed Two Hundred Fifty Thousand Dollars ($250,000).
(b) As used in this Section 6.16, the terms "employee
pension benefit plan," "employee benefit plan", "single employer plan",
"multiemployer plan", "accumulated funding deficiency" and "reportable event"
shall have the respective meanings assigned to them in ERISA, and the term
"prohibited transaction" shall have the meaning assigned to it in Section 4975
of the IRC or under ERISA.
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6.17 Notice of Default
Promptly upon any Responsible Officer becoming aware of the existence
of any condition or event which constitutes an Event of Default or Incipient
Default, Borrowers shall give Lender written notice thereof specifying the
nature of such condition or event.
6.18 Financial Statements and Other Information
(a) Borrowers shall promptly furnish to Lender all such
financial information regarding each Borrower and each member of the Affiliated
Borrower Group as Lender shall reasonably request, and notify the auditors and
accountants of Borrowers and each member of the Affiliated Borrower Group that
Lender is authorized to obtain such information directly from them. Without
limiting the foregoing, Borrowers shall furnish to Lender, in such detail as
Lender shall request, the following:
(i) As soon as available, but in any event not later
than ninety (90) days after the close of each fiscal year, consolidated audited
balance sheets, and statements of income and expense, cash flows and
stockholders' equity for Hanover and its Subsidiaries for such fiscal year, and
the accompanying notes thereto, setting forth in each case, in comparative form,
figures for the previous fiscal year, all in reasonable detail, fairly
presenting the financial position and the results of operations of Hanover and
its Subsidiaries, as at the date thereof and for the fiscal year then ended, and
prepared in accordance with generally accepted accounting principles,
consistently applied. Such statements shall be examined in accordance with
generally accepted auditing standards by and accompanied by an unqualified
report and opinion thereon by Arthur Andersen & Co. or one of the following
independent certified public accountants selected by Hanover: Coopers and
Lybrand; Ernst & Young; Deloitte & Touche; KPMG Peat Marwick; or Price
Waterhouse & Co.
(ii) As soon as available, but in any event not later
than forty-five (45) days after the close of each fiscal quarter, the
consolidated and consolidating unaudited balance sheets of Hanover and its
Subsidiaries as at the end of such quarter, consolidated and consolidating
unaudited statements of income and expense and changes in financial position for
Hanover and its Subsidiaries for such quarter and for the period from the
beginning of the fiscal year to the end of such quarter, together with the
accompanying notes thereto, if any, all in reasonable detail, fairly presenting
the financial position and results of operation of Hanover and its Subsidiaries
as at the date thereof and for such periods, prepared in accordance with
generally accepted accounting principles, consistently applied. The foregoing
financial statements shall be certified to comply with this Section 6.18 by the
chief financial officer(s) of
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Hanover and Borrowers, as the case may be, subject to normal year-end
adjustments.
(iii) (A) As soon as available, but in any event not
later than (x) thirty (30) days after the end of each fiscal month (other than
the January fiscal month, in which case not later than forty-five (45) days
after the end of such fiscal month), the consolidated unaudited balance sheet of
Hanover and its Subsidiaries as at the end of such month, and (y) sixty (60)
days after the end of each fiscal month, the consolidating unaudited balance
sheets of Hanover and its Subsidiaries as at the end of such month.
(B) As soon as available, but in any event not
later than thirty (30) days after the end of each fiscal month (other than the
January fiscal month, in which case not later than ninety (90) days after the
end of such fiscal month, and other than the March, June and September fiscal
months, in which case not later than forty-five (45) days after the end of such
fiscal months), the consolidated unaudited statements of income and expense of
Hanover and its Subsidiaries for such month and for the period from the
beginning of the fiscal year to the end of such month.
All such statements in Sections 6.18(a)(iii)(A) and (B) hereof shall be in
reasonable detail, fairly presenting the financial position and results of
operation of Hanover and its Subsidiaries, as at the dates thereof and for such
periods, and prepared in accordance with generally accepted accounting
principles consistently applied. All such statements in Sections 6.18(a)(iii)(A)
and (B) shall be certified to comply with this Section by the chief financial
officer(s) of Borrowers, or of Hanover and Borrowers, as the case may be,
subject to normal year-end adjustments.
(iv) With each of the audited financial statements
delivered pursuant to Section 6.18(a)(i) above, a certificate of the independent
certified public accountants who examined such statements to the effect that
they have reviewed and are familiar with the Financing Agreements and that, in
examining such financial statements, they did not become aware of any fact or
condition which then constituted an Event of Default or Incipient Default,
except for those, if any, described in reasonable detail in such certificate.
(v) Simultaneously with the delivery of each of the
annual audited and quarterly and monthly unaudited financial statements as set
forth herein, Lender shall receive a certificate of the chief financial officer
of Borrowers:
(A) setting forth in reasonable detail the
calculations required to establish that Borrowers were in
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compliance with the covenants set forth in Sections 6.19 and 6.20 hereof during
the period covered in such financial statements; and
(B) stating that, except as explained in
reasonable detail in such certificate, (1) all of the representations,
warranties and covenants of Borrowers contained in this Agreement and the other
Financing Agreements are correct and complete as at the date of such certificate
and (2) no Event of Default then exists or existed during the period covered by
such financial statements.
If such certificate discloses that a representation or warranty is not correct
or complete, or that a covenant has not been complied with, or that an Event of
Default existed or exists, such certificate shall set forth what action
Borrowers have taken or propose to take with respect thereto (but without
prejudice to Lender's rights to declare an Event of Default immediately with
respect thereto and/or exercise any of its rights and remedies hereunder or
otherwise with respect thereto). At such time, Borrowers shall also provide a
narrative describing and analyzing in reasonable detail all material trends,
changes and developments in each and all financial statements.
(vi) Promptly after delivery thereof, any management
letters and reports by such independent certified public accountants to Hanover
and its Subsidiaries and Mail Order Joint Ventures.
(vii) Reports on sales, including:
(A) Weekly reports of sales, indicating for each
Borrower gross sales, returns, allowances and net sales;
(B) Monthly reports of sales for each category of
Inventory of each Borrower, indicating for such Inventory category, the sales
for each catalog of each Borrower and of each retail store of Borrowers and
Guarantors; and
(C) Quarterly reports of sales and operating
profits for that quarter with a comparison to the immediately preceding quarter
for each category of Inventory of each Borrower, indicating for such Inventory
category, the sales for each catalog of each Borrower and each retail store of
Borrowers and Guarantors.
(viii) Reports on Inventory, including:
(A) Weekly reports as to Inventory, indicating the
aggregate Value of each category of Inventory of each Borrower (showing catalog
and retail store Inventory of Borrowers and Guarantors separately);
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(B) Monthly reports as to Inventory, including
each category of Inventory of each Borrower, and each catalog of each Borrower
and each retail store of Borrowers and Guarantors on a perpetual basis by Value;
(C) Monthly reports in respect of each catalog of
each Borrower in respect of unfilled orders in the aggregate, indicating the
number of days that orders have not been filled for each catalog of each
Borrower; and
(D) Weekly reports as to Inventory by Borrowers
indicating items of Inventory in transit to Borrowers grouped according to the
documentary letter of credit and/or bill of lading number.
(ix) Monthly reports on sales and use tax collections,
deposits and payments, including a written analysis prepared by Borrowers in
respect of monthly sales and use tax accruals and, if requested by Lender,
copies of sales and use tax return, filed by Borrowers.
(x) Daily reports on the Accounts of each Borrower and
Guarantor under Deferred Billing Option Programs and other deferred billing
Accounts of Borrowers and Guarantors and monthly agings with respect to all
other Accounts of each Borrower and Guarantor, including, as to the foregoing,
the aggregate outstanding amounts, prepayments, accruals and returns and other
credits.
(xi) Any other financial and other information
regardingthe Collateral or Guarantor Collateral as Lender may reasonably request
from time to time.
(xii) As soon as available, but in any event not later
than five (5) days after receipt by Borrowers, any statements, reports, notices
or documents furnished to Borrowers by Sears under the Sears Agreements, the
Private Credit Card Purchaser or the parties to any of the Third Party Credit
Card Agreements, including any Third Party Credit Card Issuer or servicing agent
or purchaser or financial intermediary, together with such additional
information as shall be sufficient to enable Lender to monitor the transactions
pursuant to the Private Credit Card Agreement and the Third Party Credit Card
Agreements.
(b) Borrowers shall promptly notify Lender in writing when
any Responsible Officer becomes aware that any investigation, action, suit,
proceeding or claim involving a potential loss or liability to any Borrower or
any other member of the Affiliated Borrower Group in excess of Two Hundred Fifty
Thousand Dollars ($250,000), which exposure is not covered by insurance.
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(c) Borrowers and each Guarantor shall promptly provide
Lender with any material information, notices, requests or reports filed with,
or furnished to, or received from any governmental or regulatory authority,
including all Forms 10-K, 10-Q and 8-K, and proxy materials and other disclosure
materials filed with the SEC, or furnished to the shareholders of Borrowers
and/or Guarantors.
(d) In addition to and not by way of limiting the other
provisions of this Section 6.18, Borrowers and each Guarantor will promptly
provide Lender with such budgets, forecasts, projections, business plans, cash
flows and other information respecting the business operations and financial or
other condition of Borrowers and Guarantors, including information about
Borrowers' arrangements with trade creditors and such trade creditors' support
for the coming seasons, as Lender may, from time to time, request.
(e) Lender is authorized to deliver a copy of any financial
statement or any other information relating to the business, operations or
financial condition of Borrowers and any member of the Affiliated Borrower
Group, which may be furnished to it hereunder or otherwise, to any court,
regulatory body or agency having jurisdiction over Lender or to any other person
which shall, or shall have any right or obligation to, succeed to all or any
part of Lender's interests in any of the Obligations, this Agreement, the other
Financing Agreements, or the Collateral or Guarantor Collateral, including,
without limitation, any Participant.
(f) Each Borrower and each Guarantor hereby irrevocably
authorizes and directs all accountants, auditors and other third parties (but
excluding Borrower's and Guarantor's attorneys) to deliver to Lender at
Borrowers' expense, copies of the financial statements, papers related thereto
or other accounting records of any nature in their possession and to disclose to
Lender any information they may have regarding the business affairs and
financial condition of Borrowers and each other member of the Affiliated
Borrower Group. Lender shall obtain the applicable Borrower's or Guarantor's
prior written consent before making any request pursuant to this Section
6.18(f), which consent such Borrower or Guarantor shall not unreasonably
withhold or delay.
6.19 Consolidated Working Capital
Hanover shall, as at the end of each fiscal month, maintain
Consolidated Working Capital, calculated on a consolidated basis for Hanover and
its Subsidiaries, of not less than Twenty Six Million Dollars ($26,000,000).
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6.20 Consolidated Net Worth
Hanover shall, as at the end of each fiscal month, maintain
Consolidated Net Worth, calculated on a consolidated basis for Hanover and its
Subsidiaries, of at least Eighty Million Dollars ($80,000,000).
6.21 Further Assurances
Each Borrower and Guarantor has executed or shall execute and deliver
to Lender such of the other Financing Agreements to which it is a party and
financing statements pursuant to the UCC, in form and substance satisfactory to
Lender. Borrowers and each Guarantor shall, at their expense, at any time or
times duly execute and deliver, or shall cause to be duly executed and
delivered, such further agreements, instruments and documents, including,
without limitation, additional security agreements, mortgages, deeds of trust,
deeds to secure debt, collateral assignments, pledge agreements, Uniform
Commercial Code financing statements or amendments or continuations thereof,
landlord's or mortgagee's waivers of liens and consents to the exercise by
Lender of all the rights and remedies hereunder, under any of the other
Financing Agreements or applicable law with respect to the Collateral and/or
Guarantor Collateral, and do or cause to be done such further acts as may be
necessary or proper in Lender's opinion to evidence, perfect, maintain and
enforce the security interest and the priority thereof in the Collateral and
Guarantor Collateral and to otherwise effectuate the provisions or purposes of
this Agreement or any of the other Financing Agreements. Where permitted by law,
Borrowers and each Guarantor hereby authorize Lender to execute and file one or
more Uniform Commercial Code financing statements signed only by Lender. Upon
the request of Lender, at any time and from time to time, Borrowers and each
Guarantor shall, at their cost and expense, do, make, execute, deliver and
record, register or file financing statements, mortgages, deeds of trust, deeds
to secure debt, and other instruments, acts, pledges, assignments and transfers
(or cause the same to be done) and will deliver to Lender such instruments
evidencing items of Collateral or Guarantor Collateral as may be requested by
any of them.
6.22 Sales of Outdated and Surplus Inventory
(a) Borrowers may sell, transfer or dispose of outdated and
surplus Inventory to jobbers or other third parties only to the extent that any
one transaction or series of related transactions does not involve Inventory
having an aggregate original cost to Borrowers of greater than Four Million
Dollars ($4,000,000); provided, that (i) Borrowers remit, or
cause to be remitted, to Lender all the proceeds of such sales; (ii) Borrowers
account for all such sales separately in the weekly Inventory reports provided
to Lender; (iii) Borrowers provide to
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Lender written notice within five (5) calendar days after each such sale; and
(iv) no Event of Default or Incipient Default has occurred and is continuing.
(b) In the event that any sale by Borrowers referred to in
Section 6.22(a) hereof could result in the Excess Availability falling below One
Dollar ($1.00), Borrowers shall notify Lender in writing at least five (5)
business days prior to the consummation of such sale.
6.23 Maintenance and Delivery of Customer Lists; MACS Software
Borrowers shall create and maintain all Customer Lists in industry
standard formats stored on industry standard electronic data storage media and
accessible using industry standard hardware and software. Customer Lists shall
be updated and delivered to the storage and escrow agent under the Customer List
Escrow Agreement, not less frequently than monthly, on or before the tenth
(10th) day of each month. Updated revisions of the MACS Software shall be
delivered to the storage and escrow agent as soon as practicable following the
installation and use of such updated versions on Borrowers' systems (other than
testing). Receipt of the delivery of such updated Customer Lists and, as
applicable, updated MACS Software shall be acknowledged in writing by the
storage and escrow agent and a copy of each receipt delivered to Lender on or
before such tenth (10th) day of each month. Lender shall have the access to and
the right to inspect the Customer Lists and MACS Software in Borrowers'
possession or in the possession of the storage and escrow agent, at any time
during normal business hours. Upon and at any time after the occurrence and
during the continuance of an Event of Default or Incipient Default, Lender shall
have the right to direct the storage and escrow agent to deliver the Customer
Lists and MACS Software in its possession to Lender and Lender shall have the
right to require Borrowers to deliver all Customer Lists and MACS Software and
periodic updates thereof directly to Lender, without, in any case, limiting
Lender's other rights and remedies hereunder or under the other Financing
Agreements.
6.24 Rental or License of Customer Lists
Borrowers are and shall be the sole owners of all Customer Lists used
in Borrowers' business, except for the customer lists of Sears used under the
Sears Agreement until Hanover Ventures acquires rights to the lists of "Program
Customers" as provided in the Sears Agreement. No portion of the Customer Lists
shall be sold, leased, licensed or otherwise disposed of by Borrowers,
except, that so long as no Event of Default or Incipient Default has
occurred and is continuing, Borrowers may, in the ordinary course of business in
accordance with past practices, enter into non-exclusive rental agreements or
license agreements permitting
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the use of Borrowers' mailing and customer lists; provided, that (a)
such agreements do not impair the value, salability or disposability of the
Customer Lists as a whole; and (b) all proceeds of such rentals or licensing by
Borrowers are remitted to Lender hereunder. In addition, prior to an Event of
Default or Incipient Default that has occurred and is continuing, Borrowers may
sell outright to non-Affiliates such portions of the Customer Lists having a
fair market value aggregating not more than Two Hundred Fifty Thousand Dollars
($250,000) in any one fiscal year for all such sales to non-Affiliates;
provided, that all proceeds of such sale are remitted to Lender
hereunder.
6.25 No Termination or Amendment of Credit Card Agreements
Borrowers shall not, without Lender's prior written consent, terminate
or not renew any of the Credit Card Agreements, unless replacement agreements
satisfactory to Lender are entered into by Borrowers. Borrowers shall not,
without Lender's prior written consent, enter into any amendment or supplement
to the Credit Card Agreements which could in any manner adversely affect the
Collateral, the Obligations or the rights and interests of Lender hereunder or
under the other Financing Agreements.
6.26 Obligations to be Senior Indebtedness
Notwithstanding anything to the contrary in this Agreement, the
Indebtedness, if any, of Borrowers, Guarantors or any other direct or indirect
Subsidiary of Hanover in respect of any debt instruments Hanover described on
Exhibit E attached hereto shall be subordinated in right of payment to the
Obligations of Borrowers and Guarantors to Lender, and the Obligations of
Borrowers and Guarantors to Lender shall at all times be deemed senior in right
of payment to all such Indebtedness.
6.27 Mail Order Joint Ventures
Borrowers may directly or through a Subsidiary of Borrowers establish
or continue to own an interest in a Mail Order Joint Venture that is not a
Subsidiary of Borrowers, only to the extent that:
(a) the aggregate amount of capital, investments, equity,
loans, payments or assets of any kind contributed, directly or indirectly, by
Borrowers and its Subsidiaries to all Mail Order Joint Ventures shall not exceed
Five Hundred Thousand Dollars ($500,000) for the period from the date hereof
through the end of the Term, except that the foregoing limitations shall not
apply to sales of Inventory in the ordinary course of business by Borrowers
directly or through a Subsidiary of Borrowers to any Mail Order Joint Venture
under arrangements satisfactory to Lender such that timely payment to Borrowers
is made on normal trade terms, in cash, of the cost of such
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Inventory; provided, that in the case of Eligible Inventory so sold (but
not in the case of such sales of Inventory which is Eligible Inventory),
Borrowers shall receive and deposit each such payment to the Blocked Accounts
provided for in Section 8.2 hereof.
(b) Borrowers shall and shall cause each Subsidiary of
Borrowers owning an interest in such Mail Order Joint Venture to (i) grant a
security interest in and to, and pledge and assign to Lender, its interest in or
to such Mail Order Joint Venture; (ii) obtain and deliver to Lender any
necessary consents by the Mail Order Joint Venture or other Persons to the
security interest, pledge and assignment under clause (i); (iii) obtain an
acknowledgment from the Mail Order Joint Venture and each Person having an
interest therein waiving and releasing Lender from any liability for any
proceeds of Inventory or other assets owned by the Mail Order Joint Venture
commingled with or deposited to any of the Blocked Accounts maintained by Lender
hereunder or otherwise received by Lender; (iv) provide Lender written notice
thirty (30) days prior to the formation of each Mail Order Joint Venture; and
(v) agree in favor of Lender not to cause or permit such Mail Order Joint
Venture or any Person having an interest therein to encumber any assets of the
Mail Order Joint Venture, (all of the foregoing in clauses (i) through (v) shall
be evidenced by documents, instruments and/or agreements in form and substance
satisfactory to Lender). Borrowers shall at all times maintain all Inventory or
other assets of each Mail Order Joint Venture segregated and not commingled with
any of Borrowers' Inventory or other assets. Notwithstanding the foregoing, the
requirements of clauses (iii) and (iv) shall not apply to the Essence Joint
Venture.
(c) In the event a Mail Order Joint Venture is able to
obtain financing for its operations from a nonAffiliated lender on a completely
stand alone basis, i.e., not involving any investment (other than as
permitted herein), guarantee or other direct or indirect financial or credit
support or enhancement by Borrowers or any other member of the Affiliated
Borrower Group or any Non-Guarantor Subsidiary, then, provided Lender has been
given and has not exercised a thirty (30) day right of first refusal to elect to
provide such financing itself to such Mail Order Joint Venture on the same
economic terms as set forth in any bona fide financing
commitment, proposal or offer solicited or received by such Mail Order Joint
Venture and upon such other terms satisfactory to Lender, and provided no Event
of Default or Incipient Default has occurred and is continuing, Lender shall
release the Mail Order Joint Venture from the restriction on liens set forth in
subsection 6.27(b)(v) hereof to the extent required by the non-Affiliated lender
providing such stand alone financing.
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6.28 9.25% Notes
(a) Anything contained in this Agreement to the contrary
notwithstanding, if any existing or future member of the Affiliated Borrower
Group shall at any time guarantee, assume or otherwise become liable for all or
any part of the obligations under the 9.25% Notes, such member shall execute and
deliver to Lender all of the instruments and documents required under Section
6.2 hereunder and shall be treated as a Guarantor hereunder.
(b) Anything set forth in the 9.25% Subordination Agreement
to the contrary notwithstanding, Lender shall not cure any default or event of
default claimed to exist by the "Junior Creditor" under the 9.25% Notes or the
other "Junior Creditor Agreements" (as such quoted terms are defined in the
9.25% Subordination Agreement), without the prior written consent of Hanover if
and so long as the claimed default or event of default is being contested in
good faith by appropriate proceedings by Hanover or any other obligor against
whom a claim is made by reason of such claimed default or event of default,
Lender has been notified in writing of such contest, adequate reserves have been
set aside on the books of Hanover or such other obligor, as appropriate, in
accordance with generally accepted accounting principles consistently applied,
and no judgment or other enforcement action against any property of any member
of the Affiliated Borrower Group has been or is about to be obtained, enforced
or taken.
6.29 Litigation Notices
Borrowers and Guarantors shall provide written notice to Lender of each
investigation by any governmental agency that, to the knowledge of any
Responsible Officer, is pending or threatened against or affects any Borrower or
any other member of the Affiliated Borrower Group or their properties or
business, and of each action, suit, proceeding or claim by any Person that, to
the knowledge of any Responsible Officer, is pending or threatened against any
Borrower or any other member of the Affiliated Borrower Group or their
properties or business (other than future pending or threatened litigation
involving the enforcement of lease obligations by or against Hanover as
successor to The Horn & Hardart Company as to leased properties not used in or
related to the business of Borrowers), or against or affecting any transaction
contemplated by this Agreement, the other Financing Agreements, or other
instruments, agreements or documents delivered in connection herewith or
therewith, which could reasonably be expected to result in a determination
adverse to any Borrower or any other member of the Affiliated Borrower Group,
and which, if so adversely determined with respect to any of them, would result
in either (i) a fine, judgment, penalty, loss or liability, including costs and
attorneys' fees, not
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covered by insurance, which, individually, exceeds Three Hundred Thousand
Dollars ($300,000) or (ii) any material adverse change in the business, assets,
liabilities or financial condition of any Borrower or of the Affiliated Borrower
Group taken as a whole. Borrowers and Guarantors shall also provide written
notice to Lender of each investigation by any governmental agency or supplier
that, to the knowledge of any Responsible Officer, is pending or threatened
concerning a possible product recall, or that actually results in, a product
recall, of goods of or sold by Borrowers or Guarantors having an aggregate value
of Three Hundred Thousand dollars ($300,000) or more.
SECTION 7. EVENTS OF DEFAULT AND REMEDIES
7.1 Events of Default
The occurrence of any one or more of the following events shall
constitute an "Event of Default" hereunder:
(a) Any Borrower shall fail to pay to Lender when due any
amounts owing to Lender under any Obligation; or
(b) Any Borrower shall breach any of the terms, covenants,
conditions or provisions of this Agreement, any supplement hereto or any other
agreement between Lender and Borrowers, including any of the other Financing
Agreements or any other default or Event of Default occurs or exists under any
of the foregoing; or
(c) Any of the Guarantors or other endorser or other Person
liable on the Obligations of Borrowers shall terminate or breach any of the
terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such Person with, or in favor of, Lender; or
(d) Any representation, warranty or statement of fact made
to Lender at any time by any Borrower or any Guarantor or on behalf of any
Borrower or any Guarantor is false or misleading in any material respect; or
(e) Any Borrower, any Guarantor or any other Person at any
time liable on or in respect of the Obligations shall default in the payment of
an amount greater than Two Hundred Fifty Thousand Dollars ($250,000),
individually or in the aggregate, at any time due or any Indebtedness at any
time owing to any Person other than Lender or in the performance of any other
terms or covenants or any evidence of same or other agreement relating thereto
or securing same, or with respect to any material contract, lease (other than
leases under which Hanover, as successor to The Horn & Hardart Company, is the
sole obligor relating to property not used in the business of
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Borrowers), license or other obligation owed to any Person other than Lender,
which default continues for more than the applicable cure period, if any, with
respect thereto, but in no event more than thirty (30) days after the occurrence
of any such default; or
(f) The aggregate amount outstanding at any one time under
the Third Party Credit Card Agreements collectively owed to Borrowers and not
paid after the date such payment is due shall exceed Five Million Dollars
($5,000,000); or reserves or any other mechanism effecting a reduction of the
amount actually paid to Borrowers pursuant to any such Third Party Credit Card
Agreement have been implemented or imposed after the date hereof in an amount
exceeding One Hundred Thousand Dollars ($100,000) in the aggregate; or Borrowers
shall default in the performance of their obligations under any of the Credit
Card Agreements; or any of the Credit Card Agreements shall be terminated or not
renewed; or the Private Credit Card Purchaser shall suspend or cease purchasing
Private Credit Card Receivables; or any party to the Third Party Credit Card
Agreements shall cease purchasing and/or processing transactions involving Third
Party Credit Card Receivables; or
(g) Any Borrower or Hanover or any other Guarantor having
assets in excess of Two Hundred Fifty Thousand Dollars ($250,000), shall become
insolvent, fail to meet its debts as they mature, call a meeting of creditors or
have a creditors' committee appointed, make an assignment for the benefit of
creditors, commence or have commenced against it any action or proceeding for
relief under the Bankruptcy Code or any other bankruptcy law or similar statute
or statutes providing for reorganization, adjustment of debts, liquidation or
dissolution (except in the case of any such action or proceeding commenced
against any Borrower, Hanover or any other Guarantor having assets in excess of
Two Hundred Fifty Thousand Dollars ($250,000), such action or proceeding is
dismissed within thirty (30) days from the date such action or proceeding was
commenced, unless such Borrower, Hanover or Guarantor against whom such action
was brought shall acquiesce to the relief sought or such relief sought is sooner
granted; provided, however, that during such thirty (30) day
period Lender shall have no obligation to make or provide any Revolving Loans or
Letter of Credit Accommodations), or if any Borrower or Hanover or any other
Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars
($250,000) suspends or discontinues doing business for any reason, (other than
as permitted in Section 6.7 hereof), or if a receiver, custodian or trustee of
any kind is appointed for any Borrower or Hanover or any other Guarantor having
assets in excess of Two Hundred Fifty Thousand Dollars ($250,000) or any of
their respective properties; or
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(h) One (1) or more judgments, decrees or orders for the
payment of damages in an amount greater than Two Hundred Fifty Thousand Dollars
($250,000) in the aggregate at any time shall be issued by one or more courts,
governmental agencies, administrative tribunals or other bodies having
jurisdiction against any Borrower, Hanover or any other Guarantor with assets
greater than Two Hundred Fifty Thousand Dollars ($250,000) and a stay of
execution thereof shall not be procured within thirty (30) days after the date
of entry thereof, or such judgment(s), decree(s) or order(s) shall not be fully
bonded within such period of thirty (30) days, unless sooner enforced; or
(i) If there shall be a material adverse change in the
business, assets, liabilities or condition of the Affiliated Borrower Group,
taken as a whole, after September 30, 1995; or
(j) NAR shall cease, directly or through its Subsidiaries,
to be the direct or indirect beneficial owner of a sufficient number of issued
and outstanding shares of capital stock of Hanover and its Subsidiaries on a
fully diluted basis, to elect a majority of the members of the respective Boards
of Directors of Hanover and each member of the Affiliated Borrower Group.
7.2 Remedies
(a) Without limiting Lender's rights to demand payment
sooner as provided in this Agreement, upon or at any time after the occurrence
or existence of any one or more of such Events of Default, upon termination of
this Agreement or any of the other Financing Agreements, or if this Agreement
and the other Financing Agreements are not renewed, in addition to any other
rights Lender may have under the Financing Agreements or otherwise:
(i) Lender may, at any time thereafter, at its option,
without presentment for payment, demand, notice of dishonor or notice of protest
or any other or further notice, all of which are hereby expressly waived by
Borrowers and Guarantors, declare any or all of the Obligations of Borrowers
and/or Guarantors to be immediately due and payable, together with interest at
the highest rate of interest hereunder until fully and indefeasibly paid;
(ii) each Participant, to the fullest extent permitted
by applicable law, shall have the right to (A) set off against the Obligations
of Borrowers and Guarantors any and all deposits (whether general or special,
time or demand, provisional or final), credits, balances, accounts, monies or
other assets which are the property of Borrowers or any Guarantor and held by
such Participant or owed by such Participant to Borrowers or any
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Guarantor and (B) remit the same to Lender for application to the Obligations of
Borrowers and/or Guarantors;
(iii) without further notice to Borrowers or
Guarantors, Lender may appropriate, set off and apply to the payment of any or
all of the Obligations of Borrowers and/or Guarantors, any or all Collateral, in
such manner as Lender shall determine, enforce payment of any Collateral and/or
Guarantor Collateral, settle, compromise or release in whole or in part, any
amounts owing on the Collateral and/or Guarantor Collateral, make allowances and
adjustments with respect thereto, issue credits in Lender's or Borrowers' name,
sell, assign and deliver the Collateral and/or Guarantor Collateral (or any part
thereof), at public or private sale, at broker's board, for cash, upon credit or
otherwise, at Lender's option and discretion, and Lender may bid or become
purchaser at any such sale, if public, free from any right of redemption which
is hereby expressly waived;
(iv) without limiting the generality of the foregoing,
Lender is hereby authorized at any time and from time to time, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other Indebtedness at any time owing by any Lender
or any Affiliate of Lender to or for the credit or the account of Borrowers or
any Guarantor against any and all of the Obligations of Borrowers and/or
Guarantors, whether or not then due and payable; and
(v) Lender shall have the right, without notice to
Borrowers or any Guarantor (except as otherwise expressly provided herein), at
any time and from time to time in its discretion, with or without judicial
process or the aid or assistance of others and without cost to Lender (A) to
enter upon any premises on or in which any of the Inventory or Equipment of
Borrowers and/or Guarantors may be located and, without resistance or
interference by Borrowers or any Guarantor, take possession of such Inventory or
Equipment; (B) to sell, foreclose or otherwise dispose of any part or all of
such Inventory or Equipment on or in any premises of Borrowers, any Guarantor or
premises of any other party; (C) to require Borrowers and/or Guarantors, at
their expense, to assemble and make available to Lender any part or all of such
Inventory or Equipment at any place and time designated by Lender; and (D) to
remove any or all of such Inventory or Equipment from any premises on or in
which the same may be located, for the purpose of effecting the sale,
foreclosure or other disposition thereof or for any other purpose.
(b) Lender shall have all of the rights and remedies of a
secured party under the UCC or applicable law of any other State in which any
Collateral or Guarantor Collateral
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may be situated, in addition to all of the rights and remedies set forth in this
Agreement and the other Financing Agreements, and in any instrument or document
referred to herein or therein, and/or under any other applicable law relating to
this Agreement, the other Financing Agreements, the Obligations of Borrowers
and/or Guarantors, the Collateral or the Guarantor Collateral.
(c) Each Borrower and Guarantor agrees that in any case
where the giving of notice of sale or other disposition of Collateral and/or
Guarantor Collateral is required by law, the giving of ten (10) days notice to
such Borrower or Guarantor by Lender at their addresses set forth below,
designating the place and time of any public sale or of the time after which any
private sale or other intended disposition of the Collateral and/or Guarantor
Collateral, as the case may be, is to be made, shall be deemed to be reasonable
notice thereof and each Borrower and Guarantor waives any other notice with
respect thereto.
(d) The net cash proceeds resulting from the exercise of any
of the foregoing rights or remedies shall be applied by Lender to the payment of
the Obligations of Borrowers and/or Guarantors in such order as Lender may
elect, and Borrowers and Guarantors shall remain liable to Lender for any
deficiency. Without limiting the generality of the foregoing, if Lender enters
into any credit transaction, directly or indirectly, in connection with the
disposition of any Collateral and/or Guarantor Collateral, Lender shall have the
option, at any time, in its discretion, to reduce the Obligations of Borrowers
and/or Guarantors by the principal amount of such credit transaction or to defer
the reduction thereof until actual receipt by Lender of cash or other
immediately available funds in connection therewith.
(e) In the event Lender institutes an action to recover any
Collateral and/or Guarantor Collateral or seeks recovery of any Collateral
and/or Guarantor Collateral by way of prejudgment remedy or otherwise, Borrowers
and Guarantors hereby irrevocably waive (i) the posting of any bond, surety or
security with respect thereto which might otherwise be required, (ii) any demand
for possession prior to the commencement of any suit or action to recover the
Collateral and/or Guarantor Collateral, and (iii) any requirement that Lender
retain possession and not dispose of any Collateral or Guarantor Collateral
until after trial or final judgment.
(f) Lender may, at its option, cure any default by Borrowers
under any agreement, law, regulation, permit, license or approval with, or
issued or promulgated by, any Person, which constitutes an Event of Default or
Incipient Default hereunder or under any of the other Financing Agreements, or
pay or bond on appeal any judgment entered against Borrowers (irrespective of
the amount of said judgment or the time elapsed
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since entry thereof), and charge Borrowers' loan account(s) therefor, such
amounts to be repayable by Borrowers on demand, together with interest thereon
at the highest rate of interest hereunder; provided, however,
Lender shall be under no obligation to effect such cure, payment or bonding and
shall not, by making any payment for Borrowers' account, be deemed to have
assumed any obligation or liability of Borrowers.
(g) The enumeration of the foregoing rights and remedies is
not intended to be exclusive, and such rights and remedies are in addition to
and not by way of limitation of any other rights or remedies Lender may have
under the other Financing Agreements, the UCC or other applicable law. Lender
shall have the right to determine which rights and remedies, and in which order
any of the same, are to be exercised, and to determine which Collateral or
Guarantor Collateral is to be proceeded against and in which order, and the
exercise of any right or remedy shall not preclude the exercise of any others,
all of which shall be cumulative.
(h) No act, failure or delay by Lender shall constitute a
waiver of any of the rights and remedies of Lender. No single or partial waiver
by Lender of any provision of this Agreement or any of the other Financing
Agreements, or breach or default thereunder, or of any right or remedy which
Lender may have, shall operate as a waiver of any other provision, breach,
default, right or remedy or of the same provision, breach, default, right or
remedy on a future occasion.
(i) Each Borrower and Guarantor waives presentment, notice
of dishonor, protest and notice of protest of all instruments included in or
evidencing any of the Obligations of Borrowers and/or Guarantors or the
Collateral or Guarantor Collateral and any and all notices or demands whatsoever
(except as expressly provided herein). Lender may, at all times, proceed
directly against any of the Borrowers or any of the Guarantors to enforce
payment of the Obligations of Borrowers and/or Guarantors and shall not be
required to take any action of any kind to preserve, collect or protect any
rights in the Collateral or Guarantor Collateral.
SECTION 8. COLLECTION AND ADMINISTRATION
8.1 Receipts
(a) Borrowers shall, at their expense and on behalf of
Lender, receive, as the property of Lender and in trust for Lender, all proceeds
from the sale of Borrowers' Inventory, in whatever form, including, without
limitation, all cash, checks, credit or debit card transaction records, and all
forms of retail store receipts (other than daily receipts of Brawn
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retail stores located in California used to fund the ordinary course of business
operations of such retail stores of Brawn), as well as all other proceeds of
Collateral, and Borrowers shall not commingle such proceeds with Borrowers' own
funds. Borrowers shall on the day received deposit all such proceeds into
blocked or other deposit accounts according to the provisions set forth below
for the collection and transfer of proceeds to Lender. All proceeds of
Collateral when received by Lender at such place as Lender may designate from
time to time shall be credited to the loan accounts of Borrowers one (1) Banking
Day after Lender's receipt at its designated bank account for such purposes of
federal funds wire transfers and one (1) Banking Day for all other remittances,
in each instance conditional upon final payment to Lender.
(b) Unless Borrowers shall, in fact, identify, at the time
of receipt by Lender, the amounts of proceeds of Inventory or Accounts received
by Lender which arise from sales of Inventory and collection of Accounts of each
Borrower, in view of the impracticality and difficulty of identifying at the
time of receipt the respective Borrowers' Accounts or other Collateral to which
proceeds relate, including, but not limited to, combined payments received under
the Credit Card Agreements, Lender shall be entitled to apply such proceeds to
the respective loan accounts of Borrowers based on the relative percentages of
sales of Inventory made by the Borrowers during the week ending immediately
preceding the week of receipt, as reported by Borrowers to Lender. Borrowers
shall on a monthly basis reconcile such application of proceeds with the posting
of payment to the proper Accounts and receipts, and adjust between themselves by
intercompany transfers for any excess application of proceeds to the loan
account of one or another Borrower as permitted in Section 6.6(b) hereof;
provided, however, that Lender shall not be required to adjust
its loan accounts nor shall Lender be required to provide funds for such
intercompany transfers, other than on the terms and subject to the conditions
set forth herein.
(c) Each Guarantor whose sale proceeds are remitted to one
of the Blocked Accounts shall enter into an intercompany assignment of its
Accounts and other proceeds of the sale of goods in favor of those of the
Revolving Loan Borrowers from whom such Guarantor acquired the goods sold. Such
assigned rights and agreements therefor shall in turn, be deemed further
assigned by the Revolving Loan Borrowers to Lender as part of the Collateral.
All such proceeds collected in the Blocked Accounts or otherwise applied to the
Revolving Loan shall be treated as payments (or prepayments) for good sold (or
to be sold) by Revolving Loan Borrowers to the respective Guarantors.
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8.2 Depository Accounts; Blocked Accounts;
Customer Prepayment Accounts
(a) Borrowers shall, in a manner satisfactory to Lender from
time to time, enter into deposit account arrangements and merchant payment
arrangements with respect to all sales of Inventory, including sales at
Borrowers' retail stores, such that all proceeds of the sale of Borrowers'
Inventory in every form, subject to the sale and transfer of credit card
transaction records pursuant to the Credit Card Agreements to the extent
permitted hereunder, and all amounts payable upon Accounts, letters of credit,
banker's acceptances and all other proceeds of Collateral, shall be deposited
into a blocked account under the control of Lender or deposited into deposit
accounts approved by Lender with respect to which irrevocable instructions from
Borrowers have been accepted by the depository bank to transfer all collected
funds to a blocked account under the control of Lender (all such blocked
accounts and such deposit accounts, collectively, the "Blocked Accounts"). In
connection therewith Borrowers shall execute and shall cause the depository
bank(s) to execute or accept such irrevocable instructions, blocked account and
other agreements as Lender in its discretion shall specify. Without limiting the
provisions of Section 8.4 below in favor of Lender, each of the Borrowers and
Guarantors hereby irrevocably appoints Hanover and HDPI, acting jointly or
singly, as its agent for all purposes in connection with the Blocked Accounts,
including, without limitation, the execution, delivery and performance on its
behalf of all Blocked Account agreements, Third Party Credit Card
Acknowledgments and the performance of such obligations thereunder as Lender,
the depository, or any other party thereto shall require.
(b) Without limiting any of the rights of Lender or
obligations of Borrowers under this Section 8, Borrowers shall also establish
separate deposit accounts subject to the lien and security interest of Lender,
according to such agreements with the depository bank as Lender shall require,
into which Borrowers shall deposit checks, gift certificate receipts, deposits
and other customer prepayments in any other form representing customer
prepayments, including prepayments for merchandise ordered but not yet delivered
or received. Nothing set forth herein shall impair any right which Borrowers
would otherwise have under applicable law to utilize amounts deposited in such
accounts for expenditures, investments or other purposes in the ordinary course
of business of Borrowers. Any balances remaining in such accounts on the last
business day of each week, representing amounts of prior prepayments earned by
performance or otherwise, shall be transferred to Borrowers' blocked account for
transfer thereafter to Lender for credit to the respective loan accounts of each
Borrower in accordance with Section 8.1 hereof.
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8.3 Right of Inspection; Access
Lender and its representatives shall at any time have free access to
and right of inspection of the Collateral and Guarantor Collateral and have full
access to and the right to examine and make copies of Borrowers' and each
Guarantor's books and records, to confirm and verify all purchases and sales of
Borrowers' Inventory and proceeds thereof including Accounts, to perform general
audits and to do whatever else Lender deems necessary to protect the interests
of Lender. Without limiting any of Lender's rights under this Section 8.3 or
elsewhere herein or in the other Financing Agreements, upon and after the
occurrence of an Event of Default that is continuing, Lender may, if Lender
reasonably believes such action is necessary to preserve the books and records
or to protect or effect Lender's rights and remedies with respect thereto,
remove from the premises of Borrowers or Guarantors any books and records and
Lender may, without cost or expense to it, use such of Borrowers' or any of the
Guarantors' personnel, supplies, computer equipment (to the extent permitted by
the lessor thereof, as to leased computer equipment or software) and space at
their places of business as may be reasonably necessary for the handling of
proceeds from the sale of Borrowers' Inventory or other proceeds of any
Collateral or Guarantor Collateral.
8.4 Specific Powers
Each Borrower and Guarantor hereby constitutes Lender, and its
designees, as its attorney-in-fact, at Borrowers' and Guarantors' own cost and
expense, to exercise at any time all or any of the following powers which, being
coupled with an interest, shall be irrevocable until all Obligations of
Borrowers and Guarantors have been paid in full: (i) to receive, take, endorse,
assign, deliver, accept and deposit, in the name of Lender, or such Borrower or
Guarantor, as the case may be, any and all checks, notes, drafts, remittances
and other instruments and documents relating to any Collateral and Guarantor
Collateral as the case may be; (ii) after the occurrence and upon and during the
continuance of an Event of Default or Incipient Default, to receive, open and
dispose of all mail addressed to such Borrower or Guarantor, as the case may be,
and to notify postal authorities to change the address for delivery thereof to
such address as Lender may designate; (iii) to transmit to Account Debtors
obligated in respect of any Collateral notice of Lender's interest therein and
to request from such Account Debtors at any time, in the name of Lender, or such
Borrower or Guarantor, as the case may be, or that of Lender's or designee,
information concerning the Accounts that are part of any Collateral and the
amounts owing thereon; (iv) after the occurrence and upon and during the
continuance of an Event of Default or Incipient Default, to notify Account
Debtors obligated in respect of the Collateral to make payment directly to
Lender; (v) after the
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occurrence and upon and during the continuance of an Event of Default or
Incipient Default, to take or bring, in the name of Lender, or such Borrower or
Guarantor, as the case may be, all steps, actions, suits or proceedings deemed
by Lender necessary or desirable to effect collection of the Collateral and
Guarantor Collateral; and (vi) to execute in such Borrower's or such Guarantor's
name and on its behalf any UCC financing statements or amendments thereto. Each
Borrower and Guarantor hereby releases Lender, and its officers, employees,
attorneys, agents and designees, from any liability arising from any act or acts
under this Agreement or in furtherance thereof, whether of omission or
commission, and whether based upon any error of judgment or mistake of law or
fact, other than for Lender's own gross negligence or wilful misconduct.
SECTION 9. EFFECTIVE DATE; TERMINATION; COSTS; MISCELLANEOUS
9.1 Term
(a) This Agreement and the other Financing Agreements shall
become effective as of the date hereof and this Agreement shall continue in full
force and effect for a term ending on the date three (3) years from the date
hereof (the "Renewal Date"), and from year-to-year thereafter, unless sooner
terminated pursuant to the terms hereof; provided, that, Lender
may, at its option extend the Renewal Date four (4) years from the date hereof
by giving Borrowers notice at least sixty (60) days prior to the third
anniversary of this Agreement. (Such initial term together with all extensions
and renewals thereof, the "Term".)
(b) Lender may, or all Borrowers (but not less than all
Borrowers) may (subject to Lender's right to extend the Renewal Date as provided
in Section 9.1(a) hereof), terminate this Agreement and the other Financing
Agreements effective on the Renewal Date or on the anniversary of the Renewal
Date in any year by giving to the other parties at least sixty (60) days prior
written notice; provided, that, this Agreement and all other Financing
Agreements must be terminated simultaneously.
(c) In addition, Lender shall have the right to terminate
this Agreement and the other Financing Agreements immediately at any time after
the occurrence and during the continuance of an Event of Default. Lender shall
have no obligation to make additional loans or provide additional credit
accommodations hereunder at any time after and during the continuance of an
Event of Default or Incipient Default.
(d) Upon the effective date of termination of the Financing
Agreements, Borrowers shall pay to Lender in full, by wire transfer in federal
funds to such bank account of Lender as
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Lender may, in its discretion, designate in writing to Borrowers for such
purpose, all outstanding and unpaid non-contingent Obligations of Borrowers
(including, but not limited to the Revolving Inventory Loans, the Term Loans and
all interest, fees (including the Early Termination Fees, if any, provided
herein), charges, expenses and other amounts provided for hereunder, under the
other Financing Agreements or otherwise) and shall furnish cash Collateral to
Lender, or a clean irrevocable letter of credit issued in Lender's favor by a
bank acceptable to Lender in its discretion and having documentary requirements
and other terms acceptable to Lender in its discretion, in order to secure and
provide for payment in full of all contingent Obligations, including all undrawn
amounts available pursuant to previously issued and outstanding Letter of Credit
Accommodations, and all other contingent Obligations. Interest at the Interest
Rate shall be due until and including the next business day, if the amounts so
paid by Borrowers to the bank account designated by Lender are received in such
bank account later than 12:00 noon, New York, New York time.
(e) No termination of the Financing Agreements shall relieve
or discharge Borrowers or any Guarantor of their respective duties, obligations
and covenants under the Financing Agreements until all Obligations of Borrowers
and Guarantors have been fully indefeasibly paid and discharged, and following
such termination, Lender's continuing security interests in the Collateral and
Guarantor Collateral shall remain in effect until all such Obligations have been
fully indefeasibly paid and discharged. At Borrowers' written request, following
termination of this Agreement as provided herein, and after all Obligations have
been fully and indefeasibly paid and discharged, Lender shall execute and
deliver to Borrowers and Guarantors any and all documents and instruments
reasonably required to terminate all liens and security interests granted to
Lender pursuant hereto and pursuant to the other Financing Agreements, all at
Borrowers' and Guarantors' expense; provided, however, that,
following termination of this Agreement as provided herein, upon Lender's
receipt of full and final payment in immediately available funds of all unpaid
non-contingent Obligations and Borrower's compliance with Section 9.1(d) as to
all contingent Obligations, Lender shall notify the depository bank(s) with
which blocked accounts have been established under Section 8 hereof, that Lender
has relinquished its control over such blocked accounts and that such banks may
follow the instructions of Borrowers with respect to the disposition of funds
thereafter received in or deposited to such previously blocked accounts.
(f) If Lender terminates this Agreement or the other
Financing Agreements after the occurrence and during the continuance of an Event
of Default or at the request of Borrowers prior to the Termination Date, in view
of the impracticality and extreme difficulty of ascertaining actual damages, and
by mutual
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agreement of the parties as to a reasonable calculation of Lender's lost profits
as a result thereof, Borrowers hereby agree to pay to Lender, upon the effective
date of such termination, a fee (the "Early Termination Fee") in an amount equal
to:
(i) five percent (5%) of the Maximum Credit, if such
termination is effective on or prior to the first anniversary of this Agreement;
(ii) one percent (1%) of the Maximum Credit, if such
termination is effective after the first anniversary of this Agreement, but on
or prior to the second anniversary of this Agreement; or
(iii) one-half of one percent (.5%) of the Maximum
Credit, if such termination is effective after the second anniversary of this
Agreement but prior to the third anniversary of this Agreement, or, if the
Renewal Date is extended by Lender provided in Section 9.1(a) hereof, prior to
the fourth anniversary of this Agreement.
The Early Termination Fee shall be presumed to be the amount of damages
sustained by said early termination and each Borrower and Guarantor agrees that
it is reasonable under the circumstances currently existing. The Early
Termination Fee provided for in this Section 9.1 shall be deemed included in the
Obligations of Borrowers.
(g) Notwithstanding the foregoing provisions of this Section
9.1, the Early Termination Fee otherwise payable by Borrowers to Lender in
connection with the termination of this Agreement upon Borrowers' written
request shall not be payable if such termination is effected and all of the
Obligations of Borrowers are fully and indefeasibly paid and satisfied within
ninety (90) days following Lender's receipt of written notice from Borrowers
("Voluntary Termination Notice") requesting voluntary termination of this
Agreement by reason of the occurrence, not more than sixty (60) days prior to
Lender's receipt of the Voluntary Termination Notice, of a Specified Action (as
defined below); provided, however, that at the time of any such
Specified Action (i) no Event of Default or Incipient Default had occurred and
was continuing, and (ii) the Excess Availability, after adding back, for these
purposes only, the aggregate amount of principal payments on direct Indebtedness
for Borrowed Money of Hanover subtracted under clause (ii)(D) of the definition
of Excess Availability, was at least One Dollar ($1.00); provided,
further, that Borrowers have obtained replacement financing upon
termination under this Section 9.1(g) from an asset-based lender on terms
affording Borrowers an aggregate amount of loans, advances and other financial
accommodations greater by at least One Million Dollars ($1,000,000) than the
aggregate amount of loans, advances and
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other financial accommodations available under the Credit Facility, based on the
same items of Collateral and Guarantor Collateral as under the Credit Facility,
after giving effect to the reduced Inventory Loan Formula. For purposes hereof,
the term "Specified Action" shall mean the reduction by Lender of a Inventory
Loan Formula to a percentage less than the Inventory Loan Formula otherwise
applicable under Section 2.1(b) in respect of Eligible Inventory, other than
Eligible Inventory of Gump's, based on the exercise of its discretionary rights
to do so at any time and from time to time.
9.2 Expenses and Additional Fees
(a) Borrowers and Guarantors shall pay to Lender on demand
all costs and expenses that Lender pays or incurs in connection with the
negotiation, preparation, consummation, administration, enforcement, and
termination of this Agreement and the other Financing Agreements, including,
without limitation: (i) reasonable attorneys' and paralegals' fees and
disbursements of counsel to Lender and any Participant; (ii) costs and expenses
(including reasonable attorneys' and paralegals' fees and disbursements) for any
amendment, supplement, waiver, consent, or subsequent closing in connection with
the Financing Agreements and the transactions contemplated thereby; (iii) costs
and expenses of lien and title searches; (iv) taxes, fees and other charges for
recording the Mortgages or any agreements or documents with the United States
Office of Patents and Trademarks, The United States Office of Copyrights or any
other governmental authority, and the filing of UCC financing statements and
continuations, and other actions to perfect, protect, and continue the security
interests and liens of Lender in the Collateral and/or Guarantor Collateral; (v)
sums paid or incurred to take any action required of Borrowers and/or any
Guarantors under the Financing Agreements that Borrowers and/or any Guarantors
fail to pay or take; (vi) costs of appraisals, environmental audits,
inspections, and verifications of the Collateral and/or Guarantor Collateral,
including, without limitation, travel and lodging, plus a per
diem charge at a rate of Six Hundred Dollars ($600) per person for
periodic field examinations of the Collateral and/or Guarantor Collateral and
Borrowers' and/or any Guarantor's operations by Lender, or its agents; (vii)
costs and expenses of forwarding loan proceeds, collecting checks and other
items of payment, and establishing and maintaining Blocked Accounts including,
without limitation, wire transfer fees and check dishonor fees; (viii) costs and
expenses of preserving and protecting the Collateral and/or Guarantor
Collateral; (ix) costs and expenses and fees for title insurance and other
insurance premiums, environmental audits, surveys, assessments, engineering
reports and inspections, appraisal fees and search fees; and (x) costs and
expenses (including reasonable attorneys' and paralegals' fees and
disbursements) paid or incurred to obtain payment of the
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Obligations of Borrowers and/or Guarantors, enforce the security interests and
liens of Lender, sell or otherwise realize upon the Collateral and/or Guarantor
Collateral, and otherwise enforce the provisions of this Agreement and the other
Financing Agreements (including, without limitation, premiums on bonds and
undertakings, fees of marshals, sheriffs, custodians, auctioneers and others,
travel expenses and all court costs and collection charges), or to defend any
claims made or threatened against Lender arising out of the transactions
contemplated hereby (including, without limitation, preparations for and
consultations concerning any such matters). The foregoing shall not be construed
to limit any other provisions of the Financing Agreements regarding costs and
expenses to be paid by Borrowers and/or Guarantors.
(b) All sums provided for in this Section 9.2 shall be part
of the Obligations of Borrowers and Guarantors, shall be payable on demand, and
shall accrue interest after demand for payment thereof at the highest rate of
interest then payable hereunder. Lender is hereby irrevocably authorized to
charge any amounts payable hereunder directly to any of the account(s)
maintained by Lender with respect to Borrowers and/or any Guarantors.
9.3 Survival of Agreement
All agreements, representations and warranties contained herein or made
in writing by the parties hereto in connection with the transactions
contemplated hereby shall survive the execution and delivery of this Agreement,
the other Financing Agreements and the consummation of the transactions
contemplated herein or therein regardless of any investigation made by or on
behalf of Lender.
9.4 No Waiver; Remedies Cumulative
No failure to exercise, and no delay in exercising on the part of
Lender of, any right, power or privilege under this Agreement or under any of
the other Financing Agreements or other documents referred to herein or therein
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, power or privilege hereunder or thereunder preclude any other or
further exercise thereof or the exercise of any other right, power and
privilege. No notice to or demand on Borrowers or any Guarantor not required
hereunder or any of the other Financing Agreements shall entitle Borrowers or
Guarantors to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of Lender to any other or
further action in any circumstances without notice or demand. The rights and
remedies of Lender under this Agreement, the other Financing Agreements and any
other present and future agreements between or among Lender, Borrowers and
Guarantors, as the case
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may be, are cumulative and not exclusive of any rights or remedies provided by
law or under any of the Financing Agreements or such other agreements and all
such rights and remedies may be exercised successively or concurrently in
whatever order and manner Lender shall elect.
9.5 Notices
All notices, requests and demands to or upon the respective parties
hereto shall be in writing and shall be deemed to have been duly given or made:
if by hand, immediately upon delivery; if by telex, telecopier or telegram,
immediately upon sending; if by express mail or any other overnight delivery
service, one (1) day after dispatch; and if by registered or certified mail,
return receipt requested, five (5) days after mailing. All notices, requests and
demands upon the parties are to be given to the following addresses and
telecopier numbers (or to such other address or telecopier number as any party
may designate by notice in accordance with this Section):
If to HDPI: Hanover Direct Pennsylvania, Inc.
1500 Harbor Boulevard
Weehawken, New Jersey 07087
Attention: Michael P. Sherman, Esq.
Telecopier: 201-319-3468
If to any other
Borrower: c/o Hanover Direct Pennsylvania, Inc.
1500 Harbor Boulevard
Weehawken, New Jersey 07087
Attention: Michael P. Sherman, Esq.
Telecopier: 201-319-3468
If to any Guarantor: c/o Hanover Direct, Inc.
1500 Harbor Boulevard
Weehawken, New Jersey 07087
Attention: Michael P. Sherman, Esq.
Telecopier: 201-319-3468
If to Lender: Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Attention: Mr. Mark Fagnani
Telecopier: 212-545-4555
9.6 Entire Agreement
This Agreement, the other Financing Agreements, any supplements 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
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<PAGE> 120
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.
9.7 Amendments and Waivers
Neither this Agreement, nor any of the other Financing Agreements or
any other instrument or document referred to herein or therein may be changed,
waived, discharged or terminated orally, except by an instrument in writing
signed by the party against whom enforcement of the change, waiver, discharge or
termination is sought.
9.8 Applicable Law
This Agreement and the other Financing Agreements and all other
documents referred to herein or therein are being executed and delivered in New
York, New York and together with all transactions and the obligations and rights
thereunder, shall be governed by, construed and interpreted in accordance with
the laws of the State of New York.
9.9 Successors and Assigns
This Agreement, the other Financing Agreements and any other document
referred to herein or therein shall be binding upon Borrowers and Guarantors and
their respective successors or assigns and inure to the benefit of and be
enforceable by Lender and its successors and assigns. None of the Borrowers or
any Guarantor may assign its respective rights under this Agreement, the other
Financing Agreements and any other document referred to herein or therein
without the prior written consent of Lender. Lender may assign its rights and
delegate its obligations under this Agreement and the other Financing Agreements
and further may assign, or sell participations in, all or any part of the
Revolving Loans, Term Loans and Letter of Credit Accommodations or any other
interest herein, in which event, the assignee or participant shall have, to the
extent of such assignment or participation, the same rights and benefits as it
would have if it were the Lender hereunder, except as otherwise provided by the
terms of such assignment or participation. Lender may furnish any information
concerning Borrowers or Guarantors in the possession of Lender from time to time
to assignees and Participants (including prospective assignees and
Participants).
9.10 Severability
If any provision of this Agreement or the other Financing Agreements is
held to be invalid or unenforceable, such invalidity or unenforceability shall
not invalidate this
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<PAGE> 121
Agreement or the other Financing Agreements as a whole but this Agreement or the
particular Financing Agreement, as the case may be, shall be construed as though
it did not contain the particular provision or provisions held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by law.
9.11 Headings
The headings used herein are for convenience only and do not constitute
matters to be considered in interpreting this Agreement.
9.12 Security Interests of Participants
If a Participant shall at any time participate with Lender in the
Credit Facility or any portion thereof, Borrowers and Guarantors hereby grant to
such Participant and Lender and such Participant shall have and is hereby given,
a continuing lien on and security interest in any money, securities and other
property of Borrowers and Guarantors in the custody or possession of the
Participant, including the right of setoff, to the extent of the Participant's
participation in the Obligations of Borrowers and Guarantors and such
Participant shall be deemed to have the same right of setoff to the extent of
its participation in the Obligations, as it would have if it were a direct
lender.
9.13 WAIVER OF JURY TRIAL
THE PARTIES HERETO HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR
PROCEEDING OF ANY KIND WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF
THIS AGREEMENT, THE OTHER FINANCING AGREEMENTS, THE OBLIGATIONS OF BORROWERS AND
GUARANTORS, THE COLLATERAL, THE GUARANTOR COLLATERAL, OR ANY INSTRUMENT,
DOCUMENT OR GUARANTY DELIVERED PURSUANT HERETO OR TO ANY OF THE FOREGOING, OR
THE VALIDITY, PROTECTION, INTERPRETATION, ADMINISTRATION, COLLECTION OR
ENFORCEMENT HEREOF OR THEREOF, OR ANY OTHER CLAIM OR DISPUTE HEREUNDER OR
THEREUNDER.
9.14 Waiver of Counterclaims;
Jurisdiction; Service of Process
Each Borrower and Guarantor hereby waives all rights of setoff and
rights to impose counterclaims (other than compulsory counterclaims) in the
event of any litigation with respect to any matter connected with this
Agreement, the other Financing Agreements, the Obligations of Borrowers and
Guarantors, the Collateral, the Guarantor Collateral or any transaction between
the parties hereto, and irrevocably consents and submits to the non-exclusive
jurisdiction of the Supreme Court of the State of New York in New York County,
and of the United States District
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<PAGE> 122
Court for the Southern District of New York and the courts of any State in which
any of the Collateral and/or Guarantor Collateral is located and of any Federal
Court located in such States in connection with any action, proceeding or claim
arising out of or relating to this Agreement, the other Financing Agreements,
the Obligations of Borrowers and Guarantors, the Collateral, the Guarantor
Collateral or any document, instrument or guaranty delivered pursuant hereto or
to any of the foregoing. In any such litigation, each Borrower and Guarantor
waives personal service of any summons, complaint or other process and agrees
that the service thereof may be made by certified or registered mail, return
receipt requested, directed to it at its chief executive office set forth
herein, or designated in writing pursuant to this Agreement, or in any other
manner permitted by the rules of said Courts. Within thirty (30) days after such
mailing, Borrowers and any Guarantor named in any such summons, complaint or
other process shall appear to answer such summons, complaint or other process,
failing which Borrowers and such Guarantors shall be deemed in default and
judgment may be entered by Lender against Borrowers and/or such Guarantors for
the amount of the claim and other relief requested therein.
9.15 Counterparts
This Agreement may be executed in any number of counterparts, and by
Lender and Borrowers and any of the Guarantors in separate counterparts, each of
which shall be an original, but all of which shall together constitute one and
the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their duly authorized officers as of the day and year
first above written.
CONGRESS FINANCIAL CORPORATION
By: /s/ Peter R. Seekel
------------------------
Title: Senior Vice President
HANOVER DIRECT PENNSYLVANIA, INC.
By: /s/ Wayne Garten
------------------------
Title: Executive VP
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
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<PAGE> 123
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
BRAWN OF CALIFORNIA, INC.
By: /s/ Wayne Garten
------------------------
Title: Vice President
GUMP'S BY MAIL, INC.
By: /s/ Wayne Garten
------------------------
Title: Executive VP
GUMP'S CORP.
By: /s/ Wayne Garten
------------------------
Title: President
THE COMPANY STORE, INC.
By: /s/ Wayne Garten
------------------------
Title: Vice President
TWEEDS, INC.
By: /s/ Wayne Garten
------------------------
Title: Vice President
LWI HOLDINGS, INC.
By: /s/ Wayne Garten
------------------------
Title: President
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
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<PAGE> 124
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
AEGIS CATALOG CORPORATION
By: /s/ Wayne Garten
------------------------
Title: President
HANOVER DIRECT VIRGINIA INC.
By: /s/ Wayne Garten
------------------------
Title: President
HANOVER REALTY, INC.
By: /s/ Wayne Garten
------------------------
Title: President
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
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<PAGE> 125
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
By their signatures below, the
undersigned Guarantors acknowledge
and agree to be bound by the
applicable provisions of this
Agreement:
HANOVER DIRECT, INC.,
a Delaware corporation
By: /s/ Wayne Garten
----------------------------
Title: Executive VP
AEGIS RETAIL CORPORATION
By: /s/ Wayne Garten
----------------------------
Title: President
AEGIS SAFETY HOLDINGS, INC.
By: /s/ Wayne Garten
----------------------------
Title: President
AEGIS VENTURES, INC.
By: /s/ Wayne Garten
----------------------------
Title: President
AMERICAN DOWN & TEXTILE COMPANY
By: /s/ Wayne Garten
----------------------------
Title: Vice President
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
- 120 -
<PAGE> 126
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
BRAWN WHOLESALE CORP.
By: /s/ Wayne Garten
----------------------------
Title: Vice President
THE COMPANY FACTORY, INC.
By: /s/ Wayne Garten
----------------------------
Title: Vice President
THE COMPANY OFFICE, INC.
By: /s/ Wayne Garten
----------------------------
Title: Vice President
COMPANY STORE HOLDINGS, INC.
By: /s/ Wayne Garten
----------------------------
Title: Vice President
D.M. ADVERTISING, INC.
By: /s/ Wayne Garten
----------------------------
Title: Vice President
GUMP'S CATALOG, INC.
By: /s/ Wayne Garten
----------------------------
Title: Executive Vice President
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
- 121 -
<PAGE> 127
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
GUMP'S HOLDINGS, INC.
By: /s/ Wayne Garten
----------------------------
Title: Vice President
HANOVER CASUALS, INC.
By: /s/ Wayne Garten
----------------------------
Title: President
HANOVER CATALOG HOLDINGS, INC.
By: /s/ Wayne Garten
----------------------------
Title: President
HANOVER DIRECT NEW JERSEY, INC.
By: /s/ Wayne Garten
----------------------------
Title: President
HANOVER FINANCE CORPORATION
By: /s/ Wayne Garten
----------------------------
Title: President
HANOVER HOLDINGS, INC.
By: /s/ Wayne Garten
----------------------------
Title: President
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
- 122 -
<PAGE> 128
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
HANOVER LIST MANAGEMENT, INC.
By: /s/ Wayne Garten
---------------------------
Title: Vice President
HANOVER VENTURES, INC.
By: /s/ Wayne Garten
---------------------------
Title: President
LEICHTUNG OF MICHIGAN, INC.
By: /s/ Wayne Garten
---------------------------
Title: President
LWI RETAIL, INC.
By: /s/ Wayne Garten
---------------------------
Title: President
SCANDIA DOWN CORPORATION
By: /s/ Wayne Garten
---------------------------
Title: Vice President
SKANDIA DOWN SALES, INC.
By: /s/ Wayne Garten
---------------------------
Title: Vice President
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
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<PAGE> 129
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
TW ACQUISITIONS, INC.
By: /s/ Wayne Garten
---------------------------
Title: President
TWEEDS OF VERMONT, INC.
By: /s/ Wayne Garten
---------------------------
Title: President
YORK FULFILLMENT COMPANY, INC.
By: /s/ Wayne Garten
---------------------------
Title: President
- 124 -
<PAGE> 130
EXHIBIT A
JURISDICTIONS OF QUALIFICATION
- 125 -
<PAGE> 131
EXHIBIT B-1
EXISTING SUBSIDIARIES
- 126 -
<PAGE> 132
EXHIBIT B-2
EXISTING MAIL ORDER JOINT VENTURES
- 127 -
<PAGE> 133
EXHIBIT B-3
EXISTING RESTAURANT BUSINESS SUBSIDIARIES
- 128 -
<PAGE> 134
EXHIBIT B-4
ADDITIONAL NON-GUARANTOR SUBSIDIARIES
- 129 -
<PAGE> 135
EXHIBIT C
PRINCIPAL PLACES OF BUSINESS, CHIEF
EXECUTIVE OFFICES AND LOCATIONS
OF COLLATERAL
- 130 -
<PAGE> 136
EXHIBIT D
EXISTING LIENS
- 131 -
<PAGE> 137
EXHIBIT E
LIST OF HANOVER DEBT INSTRUMENTS
- 132 -
<PAGE> 138
EXHIBIT F
PENDING LITIGATION
- 133 -
<PAGE> 139
EXHIBIT G
TRADENAMES
- 134 -
<PAGE> 140
EXHIBIT H-1
EXISTING INDEBTEDNESS OTHER THAN LETTERS OF CREDIT
- 135 -
<PAGE> 141
EXHIBIT H-2
EXISTING LETTERS OF CREDIT
UNDER NATIONSBANK CREDIT AGREEMENT
- 136 -
<PAGE> 142
EXHIBIT H-3
EXISTING INTERCOMPANY INDEBTEDNESS
- 137 -
<PAGE> 143
EXHIBIT I
FORM OF MORTGAGEE/LANDLORD
WAIVER, ACCESS AND USE AGREEMENT
- 138 -
<PAGE> 144
EXHIBIT J
LIST OF LABOR DISPUTES
- 139 -
<PAGE> 145
EXHIBIT K
ENVIRONMENTAL DISCLOSURE
- 140 -
<PAGE> 1
Exhibit 10.25
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT is made as of the 14th day of November,
1995 among CONGRESS FINANCIAL CORPORATION, a California corporation (together
with its transferees, successors and assigns, "Senior Creditor"),
INTERCONTINENTAL MINING & RESOURCES INCORPORATED, a British Virgin Islands
corporation (together with its transferees, successors and assigns, "IMR", and
together with the Indenture Trustee (as defined below), individually and
collectively, "Junior Creditor"). Senior Creditor and Junior Creditor are
sometimes individually referred to herein as "Creditor" and collectively as
"Creditors."
W I T N E S S E T H:
WHEREAS, The Hanover Companies, a Nevada corporation ("THC") entered
into certain debt financing arrangements, pursuant to which THC issued and Sun
Life Insurance Company of America (now known as SunAmerica Life Insurance
Company, "SunAmerica") purchased from THC an aggregate of $20,000,000 in
principal amount of 9.25% Senior Subordinated Notes due August 1, 1998 (as the
same now exist or may hereafter be amended, modified, supplemented, extended,
renewed, exchanged, restated or replaced, the "Notes"); and
WHEREAS, payment of the obligations of THC to Junior Creditor under the
Notes was guaranteed by The Horn & Hardart Company ("H&H"), which was, at the
time the Notes were issued, the parent company of THC, and by certain direct and
indirect Subsidiaries of THC; and
WHEREAS, Hanover Direct, Inc. (together with its successors and
assigns, "Hanover"), as successor to THC and H&H, has previously repaid
$6,000,000 in principal amount of the Notes, plus accrued interest thereto; and
WHEREAS, as of the date hereof, the unpaid balance of the Notes is
guaranteed by only those Subsidiaries of Hanover listed on Exhibit A annexed
hereto (the "Subsidiary Guarantors") (such guarantees of the Notes,
collectively, the "Guarantees"); and
WHEREAS, IMR has, on or before the date hereof, purchased from
SunAmerica, all of SunAmerica's right, title and interest in and to the
remaining Notes, in the outstanding principal amount of $14,000,000, and the
Guarantees, pursuant to a Repurchase and Option Agreement dated as of September
29, 1995; and
WHEREAS, in connection with its purchase of the remaining Notes,
Hanover and certain of the Subsidiary Guarantors, are about to grant to Junior
Creditor a security interest in their customer lists to secure payment of the
Notes; and
<PAGE> 2
WHEREAS, Senior Creditor is about to enter into financing arrangements
with certain Subsidiaries of Hanover, pursuant to which Senior Creditor may from
time to time make loans and provide other financial accommodations to certain
direct and indirect Subsidiaries of Hanover, upon the terms and conditions set
forth in that certain Loan and Security Agreement, dated as of the date hereof,
among Senior Creditor, and certain direct and indirect Subsidiaries of Hanover,
as acknowledged and agreed to by Hanover and various other direct and indirect
Subsidiaries of Hanover (as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced, the "Loan
Agreement"; and together with any and all supplements thereto, and all other
agreements, acknowledgments, documents and instruments now or at any time
hereafter executed and/or delivered in connection therewith or related thereto,
as the same now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced, collectively, the "Financing
Agreements"); and
WHEREAS, payment and performance of the obligations of the Borrowers to
Senior Creditor under the Financing Agreements have been guaranteed by Hanover
and its direct and indirect Subsidiaries; and
WHEREAS, as a condition of its willingness to enter into the Financing
Agreements, Senior Creditor has required that Junior Creditor enter into this
Subordination Agreement to provide for (i) the terms and conditions of the
subordination in favor of Senior Creditor of the obligations of Hanover to
Junior Creditor in respect of the Junior Debt (as defined below), and of any
other persons now or hereafter obligated, as borrower, guarantor or otherwise,
in respect of all or any part of the Junior Debt (Hanover, the Subsidiary
Guarantors, together with any other persons so obligated to Junior Creditor in
respect of all or any part of the Junior Debt and also obligated to Senior
Creditor, as borrower, guarantor or otherwise, in respect of all or any part of
the Obligations under the Financing Agreements, individually, an "Obligor" and,
collectively, "Obligors"), (ii) the relative priorities of Senior Creditor and
Junior Creditor with respect to liens upon and security interests in the
property of Obligors, and (iii) related matters;
NOW THEREFORE, in consideration of the mutual benefits accruing to
Creditors hereunder and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. DEFINITIONS
As used in this Subordination Agreement, the following terms shall have
the meanings ascribed to them below:
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<PAGE> 3
1.1. "Agreements" shall mean, collectively, the Senior Creditor
Agreements and the Junior Creditor Agreements.
1.2. "Borrowers" shall have the meaning ascribed to such term in the
Loan Agreement.
1.3. "Complete Standstill Event" shall mean the giving of
notice to the Indenture Trustee by Senior Creditor of the occurrence of one or
more of the following dates or events: (i) a default in payment of any portion
of the Senior Debt when due under the Senior Credit Agreements (whether or not
payment of the Senior Debt is accelerated) or (ii) Senior Creditor accelerates
payment of the Senior Debt at any time following any event of default under the
Senior Creditor Agreements, or (iii) the effective date the Loan Agreements are
terminated or not renewed, by either Senior Creditor or the Borrowers, whether
at the end of the stated term or any renewal thereof, by reason of default,
through voluntary termination by the parties, or otherwise. No subsequent,
contemporaneous or prior judicial action or taking of possession of Collateral
(as defined below) or foreclosure of Liens thereon or other action shall be
required in order for the occurrence of any of the dates or events set forth in
this definition to constitute a Complete Standstill Event. A Complete Standstill
Event shall be deemed terminated upon Senior Creditor's waiver in writing,
signed by Senior Creditor, waiving the event of default and/or rescinding the
acceleration constituting the Complete Standstill Event, and/or Senior
Creditor's acceptance of any permitted cure of any such event of default or
acceleration.
1.4. "Customer Lists" shall mean the existing and future
mailing and customer lists used in the direct mail marketing business of
Borrowers, together with all software (including, without limitation, 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 and all other property useful or necessary to
gain access to, transfer and fully utilize for all purposes, including, without
limitation, analysis, cross-checking and compilation of, and the sale, rental or
license of such mailing and customer lists, together with all updates and
additions thereto, including, without limitation, all such mailing and customer
lists which may be purchased, created or compiled in the future, but not
including any customer lists owned by third parties who are not Affiliates (as
defined in the Loan Agreement) of Borrowers, which are leased to, or otherwise
licensed for use by Borrowers, with permission of such third party owners.
1.5. "IMR Agreements" shall mean, collectively, the Repurchase and
Option Agreement, dated as of September 29, 1995, among IMR, SunAmerica and
Hanover, together with all instruments
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<PAGE> 4
and agreements delivered thereunder, the Second Supplemental Indenture dated on
or about the date hereof among Hanover, the Subsidiary Guarantors and the
Indenture Trustee, and the Customer and Mailing List Escrow Agreement dated on
or about the date hereof, among Hanover, the Indenture Trustee, and HOSSCO, as
escrow agent, as the same now exist or may hereafter be amended, modified,
supplemented, restated or replaced.
1.6. "Indenture" shall mean that certain Indenture dated as of
August 1, 1993, among H&H, THC, the Subsidiary Guarantors and the Indenture
Trustee, as supplemented by the First Supplemental Indenture dated as of March
27, 1995, and the Second Supplemental Indenture dated on or about the date
hereof, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.7. "Indenture Trustee" shall mean First Trust National Association,
as Trustee under the Indenture, any successor Trustee, and their respective
successors and assigns.
1.8. "Junior Creditor Agreements" shall mean, collectively, the
Notes (including any notes exchanged therefor), the Purchase Agreement dated as
of August 17, 1993 presently among Hanover, certain of the Subsidiary Guarantors
and IMR as assignee of SunAmerica, the Indenture, the guarantees by the
Subsidiary Guarantors, the IMR Agreements and all other agreements, documents
and instruments now or at any time hereafter executed and/or delivered by H&H,
THC, Hanover, the Subsidiary Guarantors or any other person to, with or in favor
of Junior Creditor in connection therewith or related thereto, as all of the
foregoing now exist or may hereafter be amended, modified, supplemented,
extended, renewed, exchanged, restated or replaced.
1.9. "Junior Creditor Representative" shall mean the Indenture Trustee.
1.10. "Junior Debt" shall mean all of the following evidenced
by or arising under or in connection with the Notes or the other Junior Creditor
Agreements to the extent relating to the Notes or the debt evidenced thereby:
all loans, obligations, liabilities, letters of credit, credit facilities and
other indebtedness of any kind, nature and description owing by any Obligor to
Junior Creditor, including principal, interest, charges, fees, premiums,
indemnities and expenses, whether as principal, surety, endorser, guarantor or
otherwise, whether now existing or hereafter arising, whether arising after the
commencement of any case with respect to any Obligor under the U.S. Bankruptcy
Code or any similar statute, whether direct or indirect, absolute or contingent,
joint or several, due or not due, primary or secondary, liquidated or
unliquidated, secured or unsecured, original, renewed or extended, and whether
arising
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<PAGE> 5
directly or howsoever acquired by Junior Creditor including from any other
person outright, conditionally or as collateral security, by assignment, merger
with any other person, participations or interests of Junior Creditor in the
obligations of any Obligor to others, or by assumption or operation of law, or
by way of a claim or right of contribution, exoneration, reimbursement,
indemnification, subrogation or otherwise, however evidenced, and shall also
include all amounts chargeable to any Obligor under the Junior Creditor
Agreements or in connection with any of the foregoing.
1.11. "Lien" shall mean any pledge, hypothecation, assignment,
deposit arrangement, right of setoff, security interest, encumbrance, mortgage,
deed of trust (including, but not limited to, easements, rights of way and the
like), lien (statutory or other), security agreement or transfer intended as
security, including, without limitation, any conditional sale or other title
retention agreement, the interest of a lessor under a capital lease or any
financing lease having substantially the same economic effect as any of the
foregoing.
1.12. "Payment Block Notice" shall have the meaning set forth in
Section 3.2 hereof.
1.13. "Person" or "person" shall mean an individual, a
partnership, a corporation (including a business trust), a joint stock company,
a limited liability company, a limited liability partnership, a trust, an
unincorporated association, a joint venture, or other entity or a government or
any agency, instrumentality or political subdivision thereof.
1.14. References. All terms defined in the Uniform Commercial
Code as in effect in the State of New York, unless otherwise defined herein,
shall have the meanings set forth therein. All references to any term in the
plural shall include the singular and all references to any term in the singular
shall include the plural. References in the singular include the plural and
references in the plural include the singular. Use of the term "or" shall mean
"and/or" unless the context otherwise clearly requires. Unless the context
otherwise clearly requires, references to "herein" or "hereunder" shall mean
this entire Subordination Agreement, not only the particular provision in which
such reference appears.
1.15. "Senior Creditor Agreements" shall mean, individually and
collectively, the Loan Agreement, the other Financing Agreements, and all
agreements, documents and instruments now or at any time hereafter executed
and/or delivered by any Obligor or any other person to, with or in favor of
Senior Creditor in connection therewith or related thereto, as all of the
foregoing now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
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<PAGE> 6
1.16. "Senior Debt" shall mean any and all loans, obligations,
liabilities, letters of credit, credit facilities and indebtedness of every
kind, nature and description owing by any Obligor to Senior Creditor or its
participants, including principal, interest, charges, fees, premiums,
indemnities and expenses, however evidenced, whether as principal, surety,
endorser, guarantor or otherwise, in each case arising under the Senior Creditor
Agreements, whether now existing or hereafter arising, whether arising before,
during or after the initial or any renewal term of the Senior Creditor
Agreements, or after the commencement of any case with respect to any Obligor
under the U.S. Bankruptcy Code or any similar statute, whether or not allowable
in whole or in part against any Obligor or any successor of any Obligor in any
case under the U.S. Bankruptcy Code or similar statute, whether direct or
indirect, absolute or contingent, joint or several, due or not due, primary or
secondary, liquidated or unliquidated, secured or unsecured, original, renewed
or extended and whether arising directly or howsoever acquired by Senior
Creditor under the Senior Creditor Agreements or by assumption or operation of
law, or by way of any claim or right of contribution, indemnification,
exoneration, reimbursement, subrogation or otherwise and shall also include all
amounts chargeable to any Obligor under the Senior Creditor Agreements or in
connection with any of the foregoing.
1.17. "Standstill Period" shall mean the period beginning on
the earlier of the date that Junior Creditor has received a Payment Block Notice
or the date that Junior Creditor has given written notice to Senior Creditor
that an event of default under the Junior Creditor Agreements has occurred and
specifying such event of default and ending 180 days after such date;
provided, however, that the aggregate number of days that any
one or more Standstill Periods shall be in effect may not exceed 180 days in any
consecutive 365 day period; and provided, further, that no event
of default under the Senior Creditor Agreements which (i) is specified in the
written notice under this Section commencing a Standstill Period and (ii) is
subsequently waived by Senior Creditor, shall be or be made the basis for the
commencement of a subsequent Standstill Period unless such event of default
shall be waived by Senior Creditor as to the specific circumstances giving rise
to such event of default, for a period of not less than 365 days following the
occurrence of such event of default.
1.18. "Subsidiary" shall have the meaning ascribed to such term in the
Loan Agreement.
1.19. "Triggering Default" shall mean the occurrence or
existence of any event of default in respect of the Junior Debt under the Junior
Creditor Agreements, which remains uncured and unwaived or otherwise continues
beyond the expiration of the Standstill Period hereunder with respect to such
event of default.
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2. SECURITY INTERESTS; PRIORITIES; COVENANTS
2.1. Acknowledgment of Senior Creditor Security Interests.
Junior Creditor hereby agrees and acknowledges that, pursuant to the Loan
Agreement, Senior Creditor has been granted a Lien upon all of the assets of
Hanover, the Borrowers and all other direct and indirect Subsidiaries of
Hanover, whether such assets are now owned or are hereafter arising or acquired,
including, without limitation, all present and future accounts, contract rights,
general intangibles (including, without limitation, Customer Lists), documents,
instruments, chattel paper, inventory, equipment, fixtures and real property,
and the proceeds and products thereof, excluding only such assets of Hanover,
the Borrowers and other direct and indirect Subsidiaries of Hanover as are
expressly excluded from the Liens of Senior Creditor pursuant to the terms of
the Loan Agreement (such assets subject to the Lien of Senior Creditor at any
time and from time to time, the "Collateral").
2.2. No Contest of Creditor Liens.
(a) Junior Creditor agrees that it shall not contest the
validity, perfection, priority or enforceability of the Liens granted to or held
by Senior Creditor upon the Collateral and that, as between Senior Creditor and
Junior Creditor, the terms of this Subordination Agreement shall govern even if
part or all of the Senior Debt or the Liens securing payment and performance
thereof are avoided, disallowed, set aside or otherwise invalidated in any
judicial proceeding or otherwise.
(b) Senior Creditor agrees that it shall not contest the
validity, perfection, priority or enforceability of the Lien granted in or held
by Junior Creditor upon the Customer Lists of Hanover and certain of the
Subsidiary Guarantors, and that, as between Senior Creditor and Junior Creditor,
the terms of this Subordination Agreement shall govern even if part or all of
the Junior Debt or the Lien upon the Customer Lists securing payment and
performance thereof are avoided, disallowed, set aside or otherwise invalidated
in any judicial proceeding or otherwise.
2.3. Senior Creditor's Priority Liens.
Notwithstanding the order or time of attachment, or the order,
time or manner of perfection, or the order or time of filing or recordation of
any document or instrument, or other method of perfecting a security interest in
favor of each Creditor in any Collateral, and notwithstanding any conflicting
terms or conditions which may be contained in any of the Agreements, the Liens
of Senior Creditor upon the Collateral have and shall have priority over the
Liens of Junior Creditor upon the Collateral and such Liens of Junior Creditor
are and shall
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be, in all respects, subject and subordinate to the Liens of Senior Creditor
therein to the full extent of the Senior Debt outstanding at any time and from
time to time and secured thereby.
2.4. Priority Absolute.
The Lien priorities provided in Section 2.3 shall not be
altered or otherwise affected by any amendment, modification, supplement,
extension, renewal, restatement or refinancing of the Senior Debt or the Junior
Debt, nor by any invalidity of the Senior Debt or any failure to perfect or
lapse in perfection by Senior Creditor of any Lien on any Collateral, nor by any
action or inaction which any Creditor may take or fail to take in respect of the
Collateral.
2.5. Rights of Creditors to Enforce Collateral.
(a) Senior Creditor shall have the exclusive right to manage,
perform and enforce the terms of the Senior Creditor Agreements with respect to
the Collateral, to exercise and enforce all privileges and rights thereunder
according to its discretion and the exercise of its business judgment,
including, without limitation, the exclusive right to take or retake control of
possession of the Collateral and to hold, prepare for sale, process, sell,
lease, dispose of, collect upon, or liquidate the Collateral. The provisions of
this Section 2.5(a) shall not, however, restrict the rights of enforcement of
the Junior Creditor to the extent permitted under and subject to the terms of
Sections 2.6 and 3.5 hereof.
(b) Notwithstanding anything to the contrary contained in any
of the Agreements, only Senior Creditor shall have the right to restrict or
permit, or approve or disapprove, the sale, transfer or other disposition of
Collateral. Each of IMR and the Indenture Trustee shall, upon the request of
Senior Creditor, release or otherwise terminate the Liens held by or on behalf
of Junior Creditor on the Collateral to the extent such Collateral is sold or
otherwise disposed of either by Senior Creditor, its agents, or any Obligor as
permitted under the Senior Creditor Agreements or as otherwise consented to by
Senior Creditor, and the Indenture Trustee and IMR shall deliver such release of
Lien documents as Senior Creditor may reasonably require in connection
therewith. Senior Creditor may apply the proceeds so realized to the Senior Debt
in such order and manner provided or as otherwise permitted under the Senior
Creditor Agreement, and may relend such proceeds to any Borrower or other
Obligor as Senior Creditor shall deem fit, and all obligations to Senior
Creditor arising from such relending, shall be part of Senior Debt.
2.6. Restrictions on Junior Creditor Rights. Notwithstanding any right
or remedy available to Junior Creditor under any of the
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Junior Creditor Agreements, applicable law or otherwise, Junior Creditor may
accelerate the Junior Debt (subject to required rescission of acceleration upon
cure as provided below), but shall not, directly or indirectly take any of the
following actions until all of the Senior Debt has been indefeasibly paid and
satisfied:
(a) unless and until a Triggering Default has occurred and
provided a Complete Standstill Event has not occurred, exercise any of its
rights or remedies (other than acceleration of the Junior Debt as aforesaid) as
against any Obligor or its property upon an event of default by any Obligor
under the Junior Creditor Agreements or otherwise, including, without
limitation, the termination of the Junior Creditor Agreements or the
commencement of suit for the enforcement of any provisions of the Junior
Creditor Agreements or for collection of the Junior Debt as against or from any
Obligor or its property;
(b) hold, seek to obtain or enforce any Lien in or upon any
Collateral or any other property of any Obligor, except after a Triggering
Default has occurred and provided a Complete Standstill Event has not occurred,
Junior Creditor may hold, obtain or enforce, subject to the Liens of Senior
Creditor thereon, any non-consensual Lien upon property of any Obligor, to the
extent such Lien is acquired through judicial enforcement of the Junior Debt; or
(c) commence, any administrative, legal or equitable action or
proceeding against any Obligor or its properties seeking any reorganization,
arrangement, composition, readjustment, liquidation, bankruptcy or any other
action involving the readjustment of all or any part of any Obligor's
obligations, or other similar relief under the U.S. Bankruptcy Code or any
present or future statute, law or regulation relative to any Obligor or its
properties or any proceedings for voluntary liquidation, dissolution or other
winding up of any Obligor's businesses or the appointment of any trustee,
receiver or liquidator for any Obligor or any part of its properties or any
assignment for the benefit of creditors or any marshalling of assets of any
Obligor.
3. SUBORDINATION OF JUNIOR DEBT
3.1. Subordination. Except as specifically set forth in Sections 3.2
and 3.5 below, Junior Creditor hereby subordinates its right to payment and
satisfaction of the Junior Debt, and the payment thereof, directly or
indirectly, by any means whatsoever, is deferred and subordinated, to the prior
indefeasible payment and satisfaction in full of all Senior Debt.
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3.2. Permitted Payments.
(a) Subject to all the other terms and conditions of this
Subordination Agreement, Senior Creditor hereby agrees that, unless and until
Senior Creditor has notified the Junior Creditor Representative of the
occurrence of a default or an event of default or the occurrence of an event or
existence of a condition which does, or would, with notice or lapse of time or
both constitute an event of default under the Senior Creditor Agreements, and in
each case specifying such event (such notice a "Payment Block Notice"), Hanover
may make, and Junior Creditor may receive and retain from Hanover (i) payments
of interest when due as regularly scheduled, and (ii) payment of principal when
due at scheduled maturity on August 1, 1998, and (iii) prepayments of principal,
plus accrued interest thereon, funded with the proceeds of an equity offering of
Hanover, in each case under clauses (i) and (ii) in accordance with the terms of
the Notes and the Indenture as in effect on the date hereof (but not any other
prepayment of principal or interest or other payment of principal or any payment
pursuant to acceleration or claims of breach or any payment to acquire any
Junior Debt or otherwise), and (iv) reimbursement to Junior Creditor, prior to
an event of default under any Junior Debt, for out-of-pocket expenses payable by
Hanover pursuant to the Junior Creditor Agreements. After a Payment Block Notice
is given, no payment otherwise permitted to be made to or received in respect of
the Junior Debt may be made to or received by Junior Creditor until the
expiration of the Standstill Period hereunder, and no such payment may be made
or received after such period if a Complete Standstill Event has occurred or
shall thereafter occur and while such Complete Standstill Event is continuing.
(b) No event of default which existed or was continuing under
the Senior Creditor Agreements on the date any Payment Block Notice is given,
and which is subsequently waived by Senior Creditor, shall be or be made the
basis for the giving of a subsequent Payment Block Notice, unless such event of
default shall be waived by Senior Creditor as to the specific circumstances
giving rise to such event of default, for a period of not less than 365 days
following the occurrence of such event of default.
(c) Senior Creditor may give any number of Payment Block
Notices hereunder, provided that the aggregate number of days that any one or
more Standstill Period(s) hereunder shall be in effect shall not exceed 180 days
during any 365 consecutive days, irrespective of the number of defaults with
respect to the Senior Creditor Agreements; and provided further that, upon
expiration or rescission of such Standstill Period, Junior Creditor must receive
payment of all regularly scheduled payments of interest and, if applicable,
principal payments described in clauses (ii) and (iii) of Section 3.2(a) which
have become due
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(on an unaccelerated basis, whether or not there has been an acceleration of any
Junior Debt), plus interest on such overdue payments as provided in the
Indenture, before a subsequent Payment Block Notice may be given.
3.3. Distributions.
(a) In the event of any distribution, division, or application,
partial or complete, voluntary or involuntary, by operation of law or otherwise,
of all or any part of the assets of any Obligor or the proceeds thereof to the
creditors of any Obligor or readjustment of the obligations and indebtedness of
any Obligor, whether by reason of liquidation, bankruptcy, arrangement,
receivership, assignment for the benefit of creditors, marshalling of assets of
any Obligor or any other action or proceeding involving the readjustment of all
or any part of the obligations of any Obligor or the application of the assets
of any Obligor to the payment or liquidation thereof, or upon the dissolution or
other winding up of any Obligor's business, or upon the sale of all or
substantially all of the assets of any Obligor then, and in any such event,
Junior Creditor agrees that:
(i) Senior Creditor shall first receive indefeasible
payment in full in cash of all of the Senior Debt (including, without
limitation, interest after the commencement of any such liquidation, dissolution
or bankruptcy at the rate specified in the applicable Senior Creditor
Agreements, whether or not such interest is an allowable claim in any such
proceeding) prior to the payment of all or any part of the Junior Debt; and
(ii) Senior Creditor shall be entitled to receive any
payment or distribution of any kind or character, whether in cash, securities or
other property (including, without limitation, interest after the commencement
of any such liquidation, dissolution or bankruptcy at the rate specified in the
applicable Junior Creditor Agreements) which may be payable or deliverable in
respect of any or all of the Junior Debt.
Provided, however, that if the Senior Creditor accepts shares of
stock and/or debt securities issued by any Obligor in connection with any
liquidation, dissolution or bankruptcy case or proceeding, then, notwithstanding
clauses (i) and (ii) of this Section 3.3(a), Junior Creditor may receive shares
of stock and/or debt securities that are subordinated to the remaining Senior
Debt and the stock and debt securities issued to Senior Creditor at least to the
same extent and pursuant to the same or more stringent terms as is the Junior
Debt, as evidenced by a supplement hereto, executed by the Senior Creditor and
the Junior Creditor Representative.
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(b) In order to enable Senior Creditor to enforce its rights
under this Section 3.3, Senior Creditor is hereby irrevocably authorized and
empowered (in its own name or in the name of Junior Creditor or otherwise), but
shall have no obligation to:
(i) enforce claims comprising any of the Junior Debt
by proof of debt, proof of claim, suit or otherwise; and
(ii) demand, sue for, collect and receive any assets
of any Obligor distributed, divided or applied by way of payment, or any other
property or interest issued, on account of any of the Junior Debt and apply the
same, or the proceeds of any realization upon the same, to any of the Senior
Debt.
(c) Notwithstanding anything to the contrary in this Section
3.3, in the event of a case under the U.S. Bankruptcy Code involving any
Obligor, Junior Creditor shall be entitled, on ten (10) days' prior written
notice to Senior Creditor, to file a proof of claim with respect to the Junior
Debt if Senior Creditor has elected not to do so and if the failure to file such
a proof of claim within the succeeding thirty (30) day or lesser period would
result in the claim being barred from assertion; provided,
however, such proof of claim expressly states that the Junior Debt has
been subordinated in favor of Senior Creditor upon the terms and provisions of
this Subordination Agreement and which gives Senior Creditor the right, among
other things, to vote such claim of Junior Creditor.
(d) Junior Creditor shall execute and deliver to Senior
Creditor such powers of attorney as may be necessary so to enable Senior
Creditor to effect the filing of a proof of claim in respect of the Junior Debt.
3.4. Payments Received by Junior Creditor. Except for permitted
payments received by Junior Creditor as provided in Section 3.2 or through
permitted enforcement of the Junior Debt as provided in Sections 2.6 and 3.5
hereof, or distributions permitted under Section 3.3 hereof, if any payment or
distribution or security or instrument or proceeds thereof is received by the
Junior Creditor in respect of the Junior Debt, or if any sums are recovered in
respect of the Junior Debt upon enforcement not permitted pursuant to Sections
2.6 and 3.5 hereof, Junior Creditor shall receive and hold the same in trust, as
trustee, for the benefit of Senior Creditor. Junior Creditor shall segregate
each such payment, distribution or recovery from all other funds and property of
Junior Creditor and shall forthwith deliver such payment, distribution or
recovery to Senior Creditor (together with any endorsement or assignment of
Junior Creditor where necessary), for application to any of the Senior Debt. In
the event of the failure of the Junior Creditor to make any such endorsement or
assignment to Senior Creditor,
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Senior Creditor, or any of its officers or employees, is hereby irrevocably
authorized on behalf of Junior Creditor to make the same.
3.5. Permitted Enforcement.
(a) If any event of default under the Junior Creditor
Agreements has occurred and is continuing, Junior Creditor may (i) accelerate
such portion of the Junior Debt as is in default or any other amounts as may
otherwise be accelerated pursuant to the terms of the Junior Creditor
Agreements, and/or (ii) upon the expiration of any Standstill Period arising
with respect to such event of default, commence and prosecute judicial
enforcement of the Junior Creditor Agreements and collection of the Junior Debt
as against any Obligor or take other actions otherwise prohibited under Section
2.6(a), (b) or (c); provided that no Complete Standstill Event
has occurred or thereafter occurs; and further provided that any
such enforcement or other action shall be and remain subject to Senior
Creditor's prior Liens upon any Collateral as well as Senior Creditor's own
enforcement efforts then or thereafter commenced with respect to any Obligor or
any Collateral, and all proceeds or amounts realized or collected upon such
enforcement against any Collateral shall be delivered to Senior Creditor for
application to the Senior Debt.
(b) Senior Creditor shall have the right, but not any
obligation, to cure for the account of any Obligor any default or event of
default under the Junior Creditor Agreements, which cure may be effected at any
time during the Standstill Period (on an unaccelerated basis, whether or not
there has been an acceleration of any Junior Debt) or, with Junior Creditor's
consent, at any time after the expiration of the Standstill Period;
provided, however, that at or upon the effectuation of such
cure, Junior Creditor receives payment of all regularly scheduled payments of
interest and, if applicable, principal payment described in clause (ii) of
Section 3.2(a), which have become due (on an unaccelerated basis, whether or not
there has been an acceleration of any Junior Debt), plus interest on such
overdue payments as provided in the Indenture, prior to or during the Standstill
Period up to and through the date of such cure. Any sums paid by Senior Creditor
to effect any such cure shall be deemed a loan to Borrowers pursuant to the
Financing Agreements and shall be part of the Senior Debt. Upon any such cure,
Junior Creditor shall be deemed to have rescinded any acceleration and shall be
deemed to have restored the Notes to non-default status and good standing, but
nothing in this Section 3.5(b) shall be deemed to prevent Junior Creditor from
accelerating the Junior Debt again if there is thereafter another event of
default under the Junior Debt, subject to subsequent cure and subject to all
other provisions of this Subordination Agreement. No sum paid or other action
taken by Senior Creditor in connection with any default or event of default
under the Junior Creditor Agreements,
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or the cure thereof, shall constitute an assumption by Senior Creditor of any
obligation or liability to Junior Creditor or any other person.
3.6. Instrument Legend and Notation.
(a) Each of the Notes and any other instruments at any time
evidencing any Junior Debt, or any portion thereof, shall be permanently marked
on its face with a legend conspicuously indicating that payment thereof is
subordinated in right of payment to the Senior Debt and is subject to the terms
and conditions of this Subordination Agreement; and after being so marked
certified copies thereof shall be delivered to Senior Creditor.
(b) In the event any legend or endorsement is omitted, Senior
Creditor or any of its officers or employees, are hereby irrevocably authorized
on behalf of Junior Creditor to make the same. No specific legend, further
assignment or endorsement or delivery of notes, guarantees or instruments shall
be necessary to subject any Junior Debt to the subordination thereof contained
in this Subordination Agreement.
4. COVENANTS, REPRESENTATIONS AND WARRANTIES
4.1. Additional Covenants. Junior Creditor agrees in favor of
Senior Creditor that until all Senior Debt has been indefeasibly paid and
satisfied in full:
(a) except as specifically set forth in Sections 3.2, 3.3 and
3.5 above, Junior Creditor shall not, directly or indirectly, accept or receive
any payment of principal or interest or expenses or any prepayment or other
payment of principal or any payment pursuant to acceleration or claims of breach
or any payment to acquire Junior Debt or otherwise in respect of any Junior
Debt;
(b) Junior Creditor shall not, directly or indirectly, accept
or receive from any Obligor any loan, gift or, except as permitted herein,
distribution of assets to Junior Creditor, and Junior Creditor shall not accept
or hold any guaranties for the Junior Debt except the Guarantees of the
Subsidiary Guarantors whether now existing or as contemplated by the Junior
Creditor Agreements as in effect on the date hereof, and shall not hold or
acquire any Lien upon the assets of any Obligor, except the Lien on the Customer
Lists subject to the provisions of Section 3.5 and any Lien held and obtained to
the extent permitted under the exception contained in Section 2.6(b) and subject
to the enforcement restrictions of Section 2.6(b); and
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(c) IMR shall not sell, assign, transfer or encumber any
interest in the Notes, except upon terms expressly subject to the terms of this
Subordination Agreement, and then only if the Notes and the Guarantees are no
longer secured by any property of any Obligor and remain unsecured.
4.2. Additional Representations and Warranties. Junior Creditor
represents and warrants to Senior Creditor that:
(a) as of the date hereof, the total indebtedness owing by
Hanover to Junior Creditor in respect of the debt evidenced by the Notes and by
the Subsidiary Guarantors as guarantors thereof, is in the aggregate principal
amount of FOURTEEN MILLION ($14,000,000) DOLLARS, all of which is secured by,
but only by, the Customer Lists, to the extent provided in the Junior Creditor
Agreements as in effect on the date hereof;
(b) as of the date hereof, no default or event of default, or
event or condition which with notice or passage of time or both would constitute
a default or an event of default, exists or has occurred and is continuing under
the Junior Creditor Agreements;
(c) Junior Creditor is the exclusive legal and beneficial owner
of all of the Junior Debt;
(d) none of the rights of Junior Creditor in and to the Junior
Debt are subject to any lien, security interest, financing statements,
subordination, assignment or other claim, except in favor of Senior Creditor;
(e) true, correct and complete copies of all Junior Creditor
Agreements in effect as of the date hereof have been furnished to Senior
Creditor;
(f) the execution, delivery and performance of this Agreement
is within the corporate powers of Junior Creditor, has been duly authorized by
all necessary corporate action of Junior Creditor, and does not contravene any
law, any provision of the memorandum or articles of association or other charter
document of Junior Creditor or any agreement to which Junior Creditor is a party
or by which it or its properties are bound; and
(g) this Agreement constitutes the legal, valid and binding
obligations of Junior Creditor, enforceable in accordance with its terms.
4.3. Waivers. Notice of acceptance hereof, the making of loans,
advances and extensions of credit or other financial accommodations to, and the
incurring of any expenses by or in respect of, any Obligor or any other
subordinate creditor, by Senior Creditor, and presentment, demand, protest,
notice of
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protest, notice of nonpayment or default and all other notices to which Junior
Creditor and any Obligor are or may be entitled are hereby waived (except to the
extent, if any, expressly provided for herein). Junior Creditor also waives
notice of (a) any amendment, modification, supplement, renewal, restatement or
extensions of the Senior Creditor Agreements or any Collateral, or of the time
of payment of, or increase or decrease in the amount of, any of the Senior Debt,
(b) the taking, exchange, surrender and releasing of Collateral or guarantees
now or at any time held by or available to Senior Creditor for the Senior Debt
or any other person at any time liable for or in respect of the Senior Debt, (c)
the exercise of, or refraining from the exercise of any right against any
Obligor or any Collateral, (d) the settlement, compromise or release of, or the
waiver of any default with respect to, any of the Senior Debt, and/or (e) Senior
Creditor's election, in any proceeding instituted under the U.S. Bankruptcy Code
of the application of Section 1111(b)(2) of the U.S. Bankruptcy Code. None of
the foregoing shall, in any manner, affect the terms hereof or impair the
obligations of Junior Creditor hereunder or give rise to any claim by Junior
Creditor against Senior Creditor, whether or not any of the foregoing are or
purport to be restricted in any manner under the terms of the Junior Creditor
Agreements. All of the Senior Debt shall be deemed to have been made or incurred
in reliance upon this Subordination Agreement. Junior Creditor hereby agrees
that all payments received by Senior Creditor may be applied, reversed, and
reapplied, in whole or in part, to any of the Senior Debt, as Senior Creditor,
in its discretion, deems appropriate.
4.4. Subrogation; No Marshaling. After the full and
indefeasible payment and satisfaction of all Senior Debt, and after all of the
Senior Creditor Agreements have been terminated, Junior Creditor shall be
subrogated to the rights of the holders of Senior Debt to receive distributions
applicable to the Senior Debt to the extent that distributions otherwise payable
to Junior Creditor have been applied to payment of Senior Debt, and any such
distributions otherwise payable to Junior Creditor and applied to Senior Debt
shall not, as between Hanover and Junior Creditor, constitute a payment by
Hanover of Senior Debt. Junior Creditor hereby waives any and all rights to have
any of the Collateral held by or granted to Senior Creditor marshaled upon
foreclosure or other disposition of such Collateral by Senior Creditor, its
agents or by any Obligor with the consent of Senior Creditor.
4.5. Information Concerning Obligors.
(a) Junior Creditor hereby assumes sole responsibility for
keeping itself informed of the financial condition of Hanover, any and all
endorsers and any and all guarantors of the Junior Debt and any other Obligor,
and of all other circumstances
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bearing upon the risk of nonpayment of the Senior Debt and/or the Junior Debt
that diligent inquiry would reveal, and Junior Creditor hereby agrees that
Senior Creditor shall have no duty to advise Junior Creditor of information
known to Senior Creditor regarding such condition or any such circumstances.
(b) In the event Senior Creditor, in its discretion,
undertakes, at any time or from time to time, to provide any such information to
Junior Creditor, Senior Creditor shall be under no obligation (i) to provide any
such information to the Junior Creditor on any subsequent occasion or (ii) to
undertake any investigation and shall be under no obligation to disclose any
information obtained in any investigation, routine or otherwise.
5. MISCELLANEOUS
5.1. Amendments. Any waiver, permit, consent or approval by a
Creditor of or under any provision, condition or covenant to this Subordination
Agreement must be in writing executed by such Creditor, or its successors and
assigns, and shall be effective only to the extent it is set forth in such
signed writing and as to the specific facts or circumstances covered thereby.
Any amendment of this Subordination Agreement must be in writing and signed by
each of the parties to be bound thereby. Execution of any amendment by the
Junior Creditor Representative shall bind the Junior Creditor and its successors
and assigns, and shall be effective for any Junior Creditor.
5.2. Successors and Assigns.
(a) This Subordination Agreement shall be binding upon the
parties hereto and their respective successors and assigns and shall inure to
the benefit of each of the Creditors and its respective successors, participants
and assigns.
(b) Senior Creditor reserves the right to grant participations
in, or otherwise sell, assign, transfer or negotiate all or any part of, or any
interest in, the Senior Debt and the Collateral securing same.
(c) In connection with any assignment or transfer of any or all
of the Senior Debt, or any or all rights of Senior Creditor in the property of
any Obligor, (other than pursuant to a participation), Junior Creditor agrees to
execute and deliver an agreement containing terms substantially identical to
those contained herein in favor of any such assignee or transferee and, in
addition, shall execute and deliver an agreement containing terms substantially
identical to those contained herein in favor of any third person who succeeds to
or replaces any or all of Senior Creditor's financing of any Borrower which is
an Obligor or any other Obligor, whether such successor financing or
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replacement occurs by transfer, assignment, "takeout" or any other means or
vehicle.
5.3. Insolvency. This Subordination Agreement shall be
applicable both before and after the filing of any petition by or against any
Obligor under the U.S. Bankruptcy Code and all converted or succeeding cases in
respect thereof, and all references herein to any Obligor shall be deemed to
apply to a trustee for any Obligor as debtor and debtor-in-possession. The
relative rights of Senior Creditor and Junior Creditor to payment of the Senior
Debt and the Junior Debt, respectively, and in or to any distributions from or
in respect of any Obligor or any Collateral or proceeds of Collateral, shall
continue after the filing thereof on the same basis as prior to the date of the
petition.
5.4. Notices.
(a) All notices, requests and demands to or upon the respective
parties hereto shall be deemed duly given, made or received if in writing and:
if by hand, immediately upon sending; if by Federal Express, Express Mail or any
other overnight delivery service, one (1) day after dispatch; and if mailed by
certified mail, return receipt requested, five (5) days after mailing to the
parties at their addresses set forth below (or to such other addresses as the
parties may designate in accordance with the provisions of this Section 5.4):
To Senior
Creditor: Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Attention: Mr. Mark Fagnani
To any Junior
Creditor or to
the Junior
Creditor
Representative: First Trust National Association
180 East Fifth Street
P.O. Box 64111
St. Paul, Minnesota 55164
Attention: Mr. Scott Strodthoff
with a copy to: Intercontinental Mining & Resources
Incorporated
c/o Quadrant Management Inc.
127 East 73rd Street
New York, New York 10021
Attention: Thomas A. Huser, Esq.
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(b) A Creditor may change the address(es) to which all notices,
requests and other communications are to be sent by giving ten (10) days written
notice of such address change to the other Creditor in conformity with this
Section 5.4, but such change shall not be effective until notice of such change
has been received by the other Creditor.
5.5. Counterparts. This Subordination Agreement may be executed
in any number of counterparts, each of which shall be an original with the same
force and effect as if the signatures thereto and hereto were upon the same
instrument.
5.6. Governing Law. The validity, construction and effect of
this Subordination Agreement shall be governed by the laws of the State of New
York.
5.7. Consent to Jurisdiction; Waiver of Jury Trial. Each of
Junior Creditor and Senior Creditor hereby irrevocably consents to the
non-exclusive jurisdiction of the Supreme Court of the State of New York and the
United States District Court for the Southern District of New York and waives
trial by jury in any action or proceeding with respect to this Subordination
Agreement or any matter directly or indirectly arising out of or relating to
their financing arrangements with any Obligor.
5.8. Complete Agreement. This written Subordination Agreement is
intended by the parties as a final expression of their agreement and is intended
as a complete statement of the terms and conditions of their agreement.
5.9. No Third Parties Benefitted. This Subordination Agreement
is solely for the benefit of the Creditors and their respective successors,
participants and assigns, and no other person, including any other creditor or
creditor's representative of any Obligor shall have any right, benefit, priority
or interest under, or because of the existence of, this Subordination Agreement.
5.10. Disclosures, Non-Reliance. Each Creditor has the means
to, and shall in the future remain, fully informed as to the financial condition
and other affairs of each Obligor, and neither Creditor shall have any
obligation or duty to disclose any such information to the other Creditor.
Except as expressly set forth in this Subordination Agreement, the parties
hereto have not otherwise made to each other nor do they hereby make to each
other any warranties, express or implied, nor do they assume any liability to
each other with respect to: (a) the enforceability, validity, value or
collectibility of any of the Junior Debt or Senior Debt or any guarantee or
security which may have been granted to any of them in connection therewith, or
(b) any other matter except as expressly set forth in this Subordination
Agreement.
-19-
<PAGE> 20
5.11. Term. This Subordination Agreement is a continuing agreement and
shall remain in full force and effect until the indefeasible satisfaction in
full of all Senior Debt and the termination of the Senior Creditor Agreements.
5.12. Severability. If any provision of this Subordination
Agreement is held to be invalid or unenforceable, such invalidity or
unenforceability shall not invalidate this Subordination Agreement as a whole
but this Subordination Agreement shall be construed as though it did not contain
the particular provision or provisions held to be invalid or unenforceable and
the rights and obligations of the parties shall be construed and enforced only
to such extent as shall be permitted by law.
5.13. Senior Creditor's Rights under Indenture. The rights and
benefits afforded the Senior Creditor under this Subordination Agreement shall
be in addition to any and all rights and benefits which Senior Creditor may have
under the terms of the Indenture. The terms and provisions of the Indenture
shall in no way limit or impair the rights and benefits of Senior Creditor
hereunder or limit or otherwise modify the obligations of, or restrictions upon,
Junior Creditor hereunder.
5.14. Indenture Trustee's Compensation Not Prejudiced. Nothing in this
Subordination Agreement shall restrict the rights of the Indenture Trustee to
sue upon its claims for compensation under the Indenture.
5.15. No Fiduciary Duty to Senior Creditor. Indenture Trustee,
by its execution of the Acknowledgment and Agreement hereto, undertakes to
perform or observe and be bound by only the terms and provisions hereof
applicable to it or applicable to the holders of Junior Debt on whose behalf the
Indenture Trustee is acting in that capacity under the Indenture. The Indenture
Trustee shall not be deemed to owe any fiduciary duty to Senior Creditor.
5.16. Application of Monies Deposited with Trustee. Nothing in
this Subordination Agreement shall (i) prevent the application by the Indenture
Trustee or any paying agent of any monies or the proceeds of U.S. government
obligations received from Hanover at a time when such payment and receipt
thereof by Junior Creditor would not have been prohibited hereunder, or (ii)
prevent the application by the Indenture Trustee or any paying agent of any
monies or the proceeds of any U.S. government obligations deposited by Hanover
under the Indenture to the payment of or on account of the principal of or
interest on the Notes if, at the time of such deposit, payment of such amounts
by Hanover under the Notes, and the receipt thereof by Junior Creditor, would
not have been prohibited by this Subordination Agreement.
-20-
<PAGE> 21
5.17. Headings. The headings used herein are for convenience only and
do not constitute matters to be considered in interpreting this Subordination
Agreement.
IN WITNESS WHEREOF, the parties have caused this Subordination
Agreement to be duly executed as of the day and year first above written.
Junior Creditor:
INTERCONTINENTAL MINING & RESOURCES
INCORPORATED
By: /s/ Thomas A. Huser
---------------------------
Title: Attorney in Fact
Senior Creditor:
CONGRESS FINANCIAL CORPORATION
By: /s/ Peter R. Seekel
------------------------------
Title: Senior Vice President
-21-
<PAGE> 22
ACKNOWLEDGMENT AND AGREEMENT BY OBLIGORS
The undersigned hereby acknowledge and consent to the foregoing
Subordination Agreement. By its signature below, each of the undersigned agrees
that it will, together with its successors and assigns, be bound by the
provisions thereof.
Each of the undersigned acknowledges and agrees that: (i) although it
may sign this Acknowledgment and Agreement, it is not a party to the foregoing
Subordination Agreement and does not and will not receive any right, benefit,
priority or interest under or because of the existence of the foregoing
Subordination Agreement and (ii) it will execute and deliver such additional
documents and take such additional action as may be necessary or desirable in
the opinion of Senior Creditor to effectuate the provisions and purposes of the
foregoing Subordination Agreement.
HANOVER DIRECT, INC.
By: /s/ Edward O'Brien
-------------------------
Title: Senior Vice President
BRAWN OF CALIFORNIA, INC.
By: /s/ Edward O'Brien
-------------------------
Title: Senior Vice President
HANOVER DIRECT PENNSYLVANIA, INC.
By: /s/ Edward O'Brien
-------------------------
Title: Senior Vice President
GUMP'S BY MAIL, INC.
By: /s/ Edward O'Brien
-------------------------
Title: Senior Vice President
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
-22-
<PAGE> 23
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
HANOVER SYNDICATION CORP.
By: /s/ Edward O'Brien
-------------------------
Title: VP
HANOVER LIST MANAGEMENT, INC.
By: /s/ Edward O'Brien
-------------------------
Title: VP
YORK FULFILLMENT COMPANY, INC.
By: /s/ Edward O'Brien
-------------------------
Title: VP
GUMP'S HOLDINGS, INC.
By: /s/ Edward O'Brien
-------------------------
Title: VP
HANOVER DIRECT NEW JERSEY, INC.
By: /s/ Edward O'Brien
-------------------------
Title: VP
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
-23-
<PAGE> 24
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
COMPANY STORE HOLDINGS, INC.
By: /s/ Edward O'Brien
-------------------------
Title: VP
TWEEDS, INC.
By: /s/ Edward O'Brien
-------------------------
Title: VP
HANOVER CASUALS, INC.
By: /s/ Edward O'Brien
-------------------------
Title: VP
HANOVER DIRECT VIRGINIA INC.
By: /s/ Edward O'Brien
-------------------------
Title: VP
HANOVER HOLDINGS INC.
By: /s/ Edward O'Brien
-------------------------
Title: VP
HANOVER VENTURES, INC.
By: /s/ Edward O'Brien
-------------------------
Title: VP
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
-24-
<PAGE> 25
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
LWI HOLDINGS, INC.
By: /s/ Edward O'Brien
-------------------------
Title: VP
HANOVER REALTY, INC.
By: /s/ Edward O'Brien
-------------------------
Title: VP
HANOVER CATALOG HOLDINGS, INC.
By: /s/ Edward O'Brien
-------------------------
Title: VP
-25-
<PAGE> 26
ACKNOWLEDGMENT AND AGREEMENT BY INDENTURE TRUSTEE
The undersigned Trustee under the Indenture referred to in the
foregoing Subordination Agreement hereby acknowledges and consents to the
foregoing Subordination Agreement to the extent its consent is or may be
required. The undersigned agrees that it will be bound by the provisions of the
Subordination Agreement as applicable to the undersigned as a Junior Creditor
(as defined in the Subordination Agreement) in its capacity as Trustee under the
Indenture.
FIRST TRUST NATIONAL ASSOCIATION,
as Indenture Trustee
By: /s/ R. Prokofch
-------------------------
Title: Trust Officer
-26-
<PAGE> 27
EXHIBIT A
TO
SUBORDINATION AGREEMENT
Subsidiary Guarantors
Hanover Direct Pennsylvania, Inc.
Brawn of California, Inc.
Gump's By Mail, Inc.
Hanover Syndication Corp.
Hanover List Management, Inc.
York Fulfillment Company, Inc.
Gump's Holdings, Inc.
Hanover Direct New Jersey, 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.
-27-
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
COMPANY INCORPORATION
------- -------------
Aegis Safety Holdings, Inc. Delaware
American Down & Textile Company Wisconsin
Brawn of California, Inc. California
Company Store Holdings, Inc. Delaware
Gump's By Mail, Inc. Delaware
Gump's Corp. California
Hanover Direct Pennsylvania, Inc. Pennsylvania
Hanover Direct Virginia Inc. Delaware
Hanover Ventures, Inc. Pennsylvania
LWI Holdings, Inc. Delaware
Scandia Down Corporation Delaware
Tweeds, Inc. Delaware
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into The Horn & Hardart Company's
(predecessor to Hanover Direct, Inc.) previously filed Registration Statement
File Nos. 33-66394, 33-58760, 33-58756, 33-58758, 33-52687, 33-52059, 33-52061,
2-94286 and 2-92383.
New York, New York
February 26, 1996
<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 TWELVE MONTHS ENDED DECEMBER 30, 1995 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> YEAR
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-END> DEC-30-1995
<CASH> 2,682
<SECURITIES> 0
<RECEIVABLES> 32,773
<ALLOWANCES> (2,597)
<INVENTORY> 37,118
<CURRENT-ASSETS> 158,727
<PP&E> 83,152
<DEPRECIATION> (26,090)
<TOTAL-ASSETS> 279,009
<CURRENT-LIABILITIES> 129,953
<BONDS> 57,283
6,353
0
<COMMON> 62,461
<OTHER-SE> 18,396
<TOTAL-LIABILITY-AND-EQUITY> 279,009
<SALES> 749,767
<TOTAL-REVENUES> 749,767
<CGS> 483,493
<TOTAL-COSTS> 772,386
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,050
<INCOME-PRETAX> (27,150)
<INCOME-TAX> 1,003
<INCOME-CONTINUING> (28,153)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,837)
<CHANGES> 0
<NET-INCOME> (29,990)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
