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Filed pursuant to Rule 424(b)(4)
PROSPECTUS Registration No. 333-2743
48,544,000 SHARES
LOGO
COMMON STOCK
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Hanover Direct, Inc., a Delaware corporation (the "Company" or "Hanover"),
is distributing to holders of record of its common stock, par value $.66 2/3 per
share (the "Common Stock"), its 6% Series A Convertible Additional Preferred
Stock, par value $.01 and stated value $10.00 per share (the "Series A Preferred
Stock"), and its Series B Convertible Additional Preferred Stock, par value $.01
and stated value $10.00 per share (the "Series B Preferred Stock" and, together
with the Series A Preferred Stock, the "Convertible Preferred Stock")
outstanding as of Thursday, July 18, 1996 (the "Record Date") transferable
subscription rights (the "Rights") to subscribe for and purchase additional
shares of Common Stock for a price of $1.03 per share (the "Subscription
Price").
Each shareholder will receive .51 transferable Rights for each share of
Common Stock held of record on the Record Date, 3.72 transferable Rights for
each share of Series A Preferred Stock held of record on the Record Date and .77
transferable Rights for each share of Series B Preferred Stock held of record on
the Record Date. The number of Rights distributed by the Company to each holder
of Common Stock and Convertible Preferred Stock will be rounded up to the
nearest whole number. Each Right will be exercisable for one share of Common
Stock. No fractional Rights or cash in lieu thereof will be issued or paid.
Holders of Rights are entitled to purchase for the Subscription Price one share
of Common Stock for each Right held (the "Subscription Privilege"). Once a
holder of Rights has exercised such Rights, such exercise may not be revoked.
The Rights will be evidenced by transferable subscription certificates
("Subscription Certificates"). An aggregate of up to approximately 48,544,000
shares of Common Stock (the "Underlying Shares") will be sold upon exercise of
the Rights or pursuant to the Standby Purchase Agreement, executed on and dated
as of July 18, 1996 (the "Standby Purchase Agreement"), between the Company and
NAR Group Limited, a private investment holding company which owns approximately
53% of the Common Stock of the Company as of the date hereof on a fully-diluted
basis ("NAR"). The distribution of the Rights and the sale of the shares of
Common Stock upon the exercise of the Rights or pursuant to the Standby Purchase
Agreement is referred to herein as the "Rights Offering." See "THE RIGHTS
OFFERING."
The Rights will expire at 5:00 p.m., New York City time, on Friday, August
16, 1996 (the "Expiration Date"). Holders of Rights are encouraged to consider
carefully the exercise or sale of the Rights by the Expiration Date. After the
Expiration Date, unexercised Rights will be null and void. See "THE RIGHTS
OFFERING."
NAR has agreed, pursuant to and subject to the terms and conditions of the
Standby Purchase Agreement, to purchase, at the Subscription Price, any of the
Underlying Shares that are not purchased through the exercise of the
Subscription Privilege ("Unsubscribed Shares"). In the event that the conditions
contained in the Standby Purchase Agreement are not met by the Company and are
not waived by NAR, the obligation of NAR to purchase any Unsubscribed Shares may
be cancelled upon notice by NAR. In the event that the conditions contained in
the Standby Purchase Agreement are not met by the Company and are not waived by
NAR, the Subscription Price shall be returned to the subscribers as soon as
practicable after the Expiration Date and no Underlying Shares will be sold by
the Company. Although the Company believes that NAR would waive the
non-occurrence of any of the conditions, if NAR does not do so the cancellation
by NAR of its obligation to purchase any Unsubscribed Shares would have an
adverse effect on the Company's financial condition and, in such event, it is
possible that the Company may need to seek protection under applicable
insolvency laws. See "THE RIGHTS OFFERING -- STANDBY PURCHASE COMMITMENT." NAR
plans to exercise all of the Rights distributed to it but is not irrevocably
committed to do so. Assuming that all of the holders of Rights exercise such
Rights and that NAR exercises the Rights distributed to it, NAR would own
approximately 52% of the Common Stock of the Company after the Rights Offering
on a fully-diluted basis. Assuming that all the conditions of the Standby
Purchase Agreement are satisfied or waived and that no Rights are exercised by
the holders thereof but that NAR exercises its Rights and purchases all of the
Unsubscribed Shares pursuant to the Standby Purchase Agreement, NAR would own
approximately 69% of the Common Stock after the Rights Offering on a
fully-diluted basis.
REFERENCE IS MADE TO "RISK FACTORS" BEGINNING ON PAGE 5 WHICH CONTAINS
MATERIAL INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE SECURITIES
BEING OFFERED HEREBY.
The Common Stock is traded on the American Stock Exchange (the "AMEX")
under the symbol HNV. It is anticipated that the Rights will trade on the AMEX
and in the over-the-counter market. There can be no assurance, however, that a
market for the Rights will develop or as to the price at which the Rights will
trade. The closing price of the Common Stock on the American Stock Exchange on
July 18, 1996 was $1.3125 per share. See "PRICE RANGE OF COMMON STOCK."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is July 19, 1996.
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (together with any amendments
thereto, the "Registration Statement") under the Securities Act with respect to
the Rights and the Underlying Shares. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission and
certain items of which may be contained in schedules and exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission and to which reference is hereby made for further information with
respect to the Company and the Common Stock. Items of information omitted from
this Prospectus but contained in the Registration Statement may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: 7 World Trade Center, New York, New York
10048, and Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois
60661. Copies of such material can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission referred to above. In addition, copies of such reports, proxy
statements and other information concerning the Company may also be inspected
and copied at the offices of the American Stock Exchange at 86 Trinity Place,
New York, New York 10006 on which exchange the Common Stock is listed and
traded.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference: (a) the Annual Report on Form 10-K for the
fiscal year ended December 30, 1995, as amended by Amendments No. 1 and 2
thereto filed April 29, 1996 and April 30, 1996, respectively, and Amendment No.
3 thereto filed July 17, 1996; (b) the Quarterly Report on Form 10-Q for the
quarterly period ended March 30, 1996, as amended by Amendment No. 1 thereto
filed July 17, 1996; (c) Amendments No. 1 and 2 dated April 16, 1996 and July
12, 1996, respectively, to the Current Report on Form 8-K dated May 25, 1995;
and (d) the Registration Statement on Form 8-B (Registration No. 1-12082) filed
with the Commission on June 14, 1993.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
of the Common Stock shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the respective date of filing of each
such document. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is, or is deemed to be,
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superceded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request, a copy of any or all of
the documents incorporated by reference herein, other than certain exhibits to
such documents. Requests for such documents should be directed to Debra A.
Berliner, Vice President -- Investor Relations and Corporate Communications,
Hanover Direct, Inc. at 1500 Harbor Boulevard, Weehawken, New Jersey 07087 or
telephone number (201) 863-7300.
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THE COMPANY
The Company is a leading direct specialty retailer that publishes a
portfolio of branded catalogs offering home fashions, general merchandise and
apparel. The Company's 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 publishes Gump's(R), a leading upscale catalog of exclusive gifts from the
well-known San Francisco retailer acquired by the Company in 1993. The Company
also publishes catalogs in the kitchenware segment with Colonial Garden
Kitchens(R), a specialty catalog featuring worksaving and lifestyle enhancing
items for the kitchen and home, and Kitchen & Home(R), an upscale kitchen and
home product catalog. The Company's apparel portfolio includes Tweeds(R), the
European inspired women's fashion catalog, International Male(R), offering
unique men's fashions with an international flair, Silhouettes(R), a women's
fashion catalog featuring every day, workout, special occasion and career
fashions for larger sized women, and Undergear(R), a leader in activewear,
workout wear and fashion underwear for men. In 1995, the Company discontinued
six catalogs, One 212(R), Simply Tops(R), Essence By Mail(R), Hanover House(R),
Mature Wisdom(R) and Tapestry(R). The Company did not discontinue any catalogs
during 1994 or 1993. The Company has no current plans to dispose of any further
catalogs in 1996 but reviews its portfolio of catalogs as well as new
opportunities to acquire or develop catalogs from time to time.
In 1994, Hanover expanded its catalog offerings by entering into a
licensing agreement (the "Sears Agreement") with Sears, Roebuck and Co.
("Sears") in which Hanover mails several versions of its catalogs to the more
than 20 million mail order and credit card customers of Sears. In 1995, Hanover
generated revenues of $81 million and operating income of $3 million from this
venture. The Sears Agreement has an initial three-year term with automatic
renewals thereafter unless commencing December 31, 1996 either party gives at
least 12 months prior written notice that the agreement will terminate at the
end of the initial term or the extended term. The Company is obligated to meet
various operational performance standards under the Sears Agreement. If the
Company is unable to meet these standards (after written notice and a 30-day
cure period), Sears would be entitled to terminate the Sears Agreement. The
Company is also entitled to terminate the Sears Agreement in certain
circumstances, including if Sears fails to comply with any material provision of
the Sears Agreement. The Company is currently not meeting certain of the
operational standards, namely the customer service and in stock position
standards, and Sears has asked the Company for a plan to achieve the service
levels and fill rates mandated by the Sears Agreement before the end of 1996.
The Company has not yet finalized such plan but expects to finalize and submit
such plan to Sears for approval in the near future. The Company believes it can
achieve such levels and rates within such time period, although there can be no
assurance that the Company will achieve such levels and rates within such time
period.
During 1995, Hanover mailed approximately 370 million catalogs, a 2%
reduction from the prior year, and had total revenues of approximately $750
million and a net operating loss of approximately $30 million. Hanover maintains
a proprietary customer list currently containing approximately 18 million names
of customers who have made purchases from at least one of Hanover's catalogs
within the past 36 months (down from 19 million in 1994). Over 7 million of the
names on the list represent customers who have made purchases from at least one
of Hanover's catalogs within the last 12 months.
In 1995, Hanover 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 a controlling interest in Austad's(R), a direct marketer of golf
equipment and related apparel and accessories. In February 1996, the Company
acquired the remaining interest in Austad's(R) in an asset exchange.
NAR owns approximately 53% of the Common Stock of Hanover on a
fully-diluted basis. NAR, a British Virgin Islands corporation, is a joint
venture between the family of Alan G. Quasha, a director and the chairman of the
board of Hanover, and Compagnie Financiere Richemont A.G., a Swiss public
company engaged in luxury goods, tobacco and other businesses ("Richemont").
Hanover is successor in interest to The Horn & Hardart Company, a
restaurant company founded in 1911, and Hanover House Industries, Inc., founded
in 1934. Hanover's name was changed in 1993 to reflect its business focus on
specialty catalog marketing. The Company is incorporated in Delaware with its
principal
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executive office at 1500 Harbor Boulevard, Weehawken, New Jersey 07087. The
Company's telephone number is (201) 863-7300.
RECENT DEVELOPMENTS
CREDIT ARRANGEMENTS
In November 1995, the Company entered into a $75 million secured credit
facility (the "Credit Facility") with Congress Financial Corporation
("Congress") consisting of a three-year revolving line of credit of up to $65
million and two 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. At March 30, 1996, the Company had
approximately $57.1 million of outstanding borrowings under the revolving credit
facility (including documentary and standby letters of credit) and approximately
$9.7 million outstanding under the term loans. In April 1996, Congress provided
the Company with an additional $4 million over the borrowing base formula up to
the maximum $75 million limit of the Credit Facility until the closing of the
Rights Offering. Under the Credit Facility, the Company is required to comply
with certain restrictive debt covenants including maintaining minimum net worth
of $80 million and working capital of $26 million as of December 30, 1995. In
April 1996, these restrictive debt covenants were revised to $75 million and $21
million, respectively, in an amendment to the Credit Facility. In May 1996, the
definitions of consolidated net worth and consolidated working capital were
amended to take into account the $25 million advanced by NAR.
In November 1995, Intercontinental Mining & Resources Incorporated, an
affiliate of NAR ("IMR"), purchased the Company's 9.25% Senior Subordinated
Notes due August 1, 1998 (the "9.25% Notes") from a third party in connection
with the refinancing of the Company's indebtedness under the Credit Facility. In
April 1996, IMR and the Trustee for the 9.25% Notes reduced the working capital
requirements and net worth requirements contained in the Indenture relating to
the 9.25% Notes by $5 million until the closing of the Rights Offering. In May
1996, the definitions of consolidated net worth and consolidated working capital
were amended to take into account the $25 million advanced by NAR.
PRE-FUNDING BY NAR
The operating losses the Company experienced in the first quarter of 1996
continued in the second quarter of 1996. See "RISK FACTORS -- OPERATING LOSSES;
FUTURE OPERATING RESULTS." As a result of those losses as well as additional
capital requirements of up to $3.0 million for the Company's new fulfillment
facility in Roanoke, the Company increased the size of the Rights Offering from
$40 million to $50 million and the Company requested that NAR advance up to $25
million and NAR has advanced $25 million against the exercise of all the Rights
distributed to it and/or its commitment to purchase all of the Unsubscribed
Shares. The Company has executed a subordinated promissory note in the amount of
up to $25 million (the "NAR Promissory Note"). The Company will repay to NAR any
amounts outstanding under the NAR Promissory Note on the earlier of December 31,
1996 or the completion of the Rights Offering. The NAR Promissory Note is
subordinate to the Credit Facility.
ACQUISITIONS AND DISPOSITIONS
In May 1995, the Company acquired 67.5% of the outstanding shares of
Austad's Holdings, Inc. ("AHI"), which owned The Austad Company ("TAC"), the
publisher of the Austad's(R) catalog, featuring golf equipment, apparel and
gifts. The Company acquired the remaining interest in AHI in February 1996 by
virtue of the surrender by David Austad and certain family members (the "Austad
Family") to AHI of their AHI shares, amounting to 32.5% of the outstanding
shares, and the payment by the Austad Family of approximately $1.2 million
(subject to certain post-closing adjustments) to the Company. In return, the
Austad Family received 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(R) stores under license from AHI. The
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license grants Mr. Austad exclusive retail rights to the Austad's(R) name in 37
states and Canada. AHI retains all direct marketing and other rights.
In April 1996, the Company sold the assets of Leichtung Workshops(R), a
woodworking and hobby catalog, for approximately $900,000 in cash and short-term
notes.
RISK FACTORS
In addition to all the other information contained in this Prospectus and
the documents incorporated by reference, prospective purchasers should consider
the risk factors set forth below prior to deciding whether to exercise or sell
the Rights.
IMPORTANCE OF LIQUIDITY TO THE COMPANY'S EXISTENCE
As of March 30, 1996, the Company had borrowed approximately $66.8 million
of the $68.0 million available under the Credit Facility and had approximately
$3 million of cash on hand. In April 1996, Congress provided the Company with an
additional $4 million over the borrowing base formula up to the maximum $75
million limit of the Credit Facility until the closing of the Rights Offering.
In addition, Congress reduced the working capital and net worth requirements
contained in the Credit Facility by $5 million for the same period. In May 1996,
the definitions of consolidated net worth and consolidated working capital were
amended to take into account the $25 million advanced by NAR. Although the
Company believes that it will not sustain losses that must be funded with the
proceeds of the Rights Offering and that, accordingly, the Rights Offering
proceeds will be available to reduce the amounts outstanding under the Credit
Facility, there is no assurance that the proceeds of the Rights Offering will be
available for such purposes. See "THE COMPANY" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the
Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1996 and
in the Annual Report on Form 10-K for the fiscal year ended December 30, 1995,
each as amended. If the Company continues to sustain losses that must be funded
with the proceeds of the Rights Offering, the Company may be in default under
the Credit Facility and would accordingly be required to seek waivers therefrom
and amendments thereto. In addition, the Company may be required to borrow
additional funds from public or private sources on a long-term or short-term
basis or to sell assets. If it is not successful in any of these endeavors, the
Company may ultimately need to seek protection under applicable insolvency laws
affecting creditors' rights. However, the Company is not pursuing any of these
alternatives at this time.
ABILITY TO REPAY NAR PROMISSORY NOTE
The Company is relying on the proceeds from the Rights Offering as the
source of repayment of amounts outstanding under the NAR Promissory Note. In the
event that the Company is not able to repay in a timely fashion amounts
outstanding under the NAR Promissory Note from the proceeds of the Rights
Offering or from another source of funds, the Company would have to refinance
the Note on or before its due date. There can be no assurance that the Company
would be able to obtain refinancing. If the Company could not obtain such
refinancing, it would be in default under both the NAR Promissory Note and the
Credit Facility and would have to obtain from NAR and Congress waivers of such
defaults. There can be no assurance that the Company would be able to obtain
such waivers. If the Company could not obtain such waivers, it is possible that
the Company may need to seek protection under applicable insolvency laws.
POSSIBLE TERMINATION OF SEARS AGREEMENT; SUBSTANTIAL LOSS OF REVENUE
In January 1994, the Company entered into the Sears Agreement to produce
specialty catalogs for the more than 20 million mail order and credit card
customers of Sears. In 1994 and 1995, Hanover generated revenues of $71 million
and $81 million, respectively, and operating income of $2.9 million and $3
million, respectively, from this venture. The Sears Agreement contains
performance standards which must be met by the Company and which allow Sears to
terminate the Sears Agreement upon non-compliance. The Company is currently not
meeting certain of the operational standards, namely the customer service and in
stock position
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standards, and Sears has asked the Company for a plan to achieve the service
levels and fill rates mandated by the Sears Agreement before the end of 1996.
The Company has not yet finalized such plan but expects to finalize and submit
such plan to Sears for approval in the near future. There can be no assurance
that the Company will achieve the service levels and fill rates set forth in the
plan. If the Company is unable to achieve the service levels and fill rates set
forth in such plan within the time period indicated, Sears may have grounds to
terminate the Sears Agreement. If Sears terminates the Sears Agreement, the
Company will experience a loss of revenues related to the venture.
OPERATING LOSSES; FUTURE OPERATING RESULTS
The Company has recently experienced operating losses. The Company reported
a net loss of $9.5 million, or $(.10) per share, for the quarter ended March 30,
1996 compared to a net loss of $4.9 million, or $(.05) per share, in the same
period in the prior year. The Company reported a net loss of $30 million, or
$(.32) per share, for the year ended December 30, 1995 compared to net income of
$14.8 million, or $.16 per share, in the same period in the prior year. Revenues
decreased in the quarter ended March 30, 1996 to $166 million from $177 million
for the same period in 1995. Revenues decreased in 1995 to $750 million from
$769 million in 1994. The Company recorded a loss from operations of $7.7
million in the first quarter of 1996, or (4.7)% of revenues, compared to a loss
from operations of $4.1 million, or (2.4)% of revenues, for the same period in
1995. The Company recorded a loss from operations of $22.6 million in 1995, or
(3)% of revenues, compared to income from operations of $16 million, or 2.1% of
revenues, for the same period in the prior year. As a result of the operating
losses incurred in 1995, the Company's financial condition deteriorated. The
Company's working capital and long term debt changed from $58.5 million and
$35.9 million, respectively, at December 31, 1994 to $28.8 million and $57.3
million, respectively, at December 30, 1995. At March 30, 1996, working capital
and long term debt increased to $41.4 million and $79.2 million, respectively,
largely due to additional borrowings under the Credit Facility with Congress.
The net loss in the first quarter of 1996 was primarily a result of an
increase in paper costs, telemarketing and fulfillment costs due to weather
related issues and continued operating problems in the new Roanoke fulfillment
center and an increase in inventory write-downs while the net loss in 1995 was
primarily the result of the cumulative impact of the significant increases in
postage and paper prices and weak consumer demand. See "RISK
FACTORS -- INCREASES IN COSTS OF MAILING AND PAPER" and "-- CONSUMER SPENDING;
WEAKNESS IN CONSUMER DEMAND." In addition, the Company also incurred costs in
connection with the consolidation of facilities into its new Roanoke, Virginia
fulfillment center and the upgrade of its management information systems. See
"RISK FACTORS -- INEFFICIENCIES IN CONNECTION WITH NEW FULFILLMENT FACILITIES"
and "-- COSTS ASSOCIATED WITH COMPUTER SYSTEMS CONVERSION." The Company
anticipates that operating losses for the second quarter of 1996 will be in
excess of operating losses for the first quarter of 1996. Whether the Company is
able to return to positive net income will depend on its ability to increase
catalog sales and to effectively monitor and control costs. There can be no
assurance that the Company's future operations will generate net income.
Furthermore, future operating results depend upon many factors, the unfavorable
outcome of which would adversely affect the Company's results of operations.
These factors include general economic conditions, the ability of the Company to
continue to attract and retain customers successfully, the level of competition
and the Company's ability to successfully identify, forecast and respond to
customer preferences and fashion trends. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the
Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30,
1996, as amended, and in the Company's Annual Report on Form 10-K for the fiscal
year ended December 30, 1995, as amended.
TIGHTENING OF VENDOR CREDIT
As a result of the operating losses mentioned above (see "RISK
FACTORS -- OPERATING LOSSES; FUTURE OPERATING RESULTS") coupled with a very
difficult year for retailers with numerous Chapter 11 filings occurring, the
Company experienced a tightening of vendor credit in the fourth quarter of 1995
which impacted the Company's ability to obtain merchandise on a timely basis.
This resulted in higher back order levels (unfilled orders) and increased
fulfillment costs which negatively impacted the Company's operating
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results in that quarter. Accordingly, the Company's back order level increased
from $10.3 million to $14.6 million from December 31, 1994 to December 30, 1995
and from $10.0 million to $16.0 million from April 1, 1995 to March 30, 1996.
These back order levels have negatively affected initial order fulfillment rates
which has resulted in higher fulfillment expense due to increased split
shipments and warehouse handling costs experienced in 1996. Fulfillment costs
(telemarketing, distribution, outbound transportation and credit card commission
costs) increased from $81.9 million to $91.4 million and from $22.3 million to
$23.9 million for the same periods, respectively. Also, in March 1996, the
Company concluded that its recent operating results would have a further
negative impact on the Company's ability to conduct business on normal trade
terms. The Company believes that upon completion of the Rights Offering the
Company will return to normal trade terms with all suppliers and will have
adequate capital to support its operations. However, there can be no assurance
that upon the completion of the Rights Offering normal trade terms will resume
nor that the Company's capital will be adequate to support its operations. See
"RISK FACTORS -- DEPENDENCE ON SUPPLIERS."
CAPITAL INTENSITY OF MAIL ORDER CATALOG BUSINESS; NEED FOR SELF-FUNDING
As a general matter, the capital intensity of the mail order catalog
business has increased in recent months requiring companies to make a permanent
investment in working capital to fund systems to increase customer service,
warehousing to speed delivery time, inventory to increase fill rates and credit
to increase customer response rates in order to be competitive. The mail order
catalog industry's fixed costs have increased in recent years which has resulted
in higher break even rates than previously experienced. At the same time, the
sources of financing for mail order catalog companies have shrunk due to the
number of bankruptcies in the industry and the high percentage of intangible
assets owned by such companies to which traditional lenders frequently will not
ascribe value as collateral for purposes of establishing lending limits,
requiring such companies to self-fund growth. There is no assurance that the
Company will have the funds to invest in working capital or the resources to
fund self-growth or to take advantage of opportunities in the industry. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" in the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 30, 1996, as amended, and in the Company's Annual
Report on Form 10-K for the fiscal year ended December 30, 1995, as amended.
IMPORTANCE OF DOMESTICATIONS(R)
The Company's Domestications(R) catalog is one of the nation's leading
specialty home textile catalogs. It had revenues of approximately $311 million
in 1993, which constituted approximately 48% of the Company's revenues in 1993,
and revenues of approximately $361 million in 1994, which constituted
approximately 47% of the Company's revenues in 1994. Domestications'(R) revenues
were approximately $282 million in 1995, which constituted approximately 38% of
the Company's revenues in 1995. Domestications'(R) product margin, which
decreased 5 percentage points from December 31, 1995 to March 30, 1996, was
significantly impacted by the higher postage and paper costs experienced
industry-wide as well as by additional costs in connection with the move of its
fulfillment operations into the Company's new Roanoke, Virginia facility.
Additionally, Domestications'(R) product margin was adversely impacted by
product mix changes, increased promotional activities to maintain its
competitive position and higher inventory write-downs. A further decrease in
revenues or profitability of Domestications(R) would have a material adverse
effect upon the Company's financial position and results of operations.
INCREASES IN COSTS OF MAILING AND PAPER
The Company mails its catalogs and ships most of its merchandise through
the United States Postal Service. In 1995, catalog mailing and product shipment
expenses represented approximately 18% of revenues as compared to approximately
15% of revenues in 1994. In January 1995, the United States Postal Service
increased postage rates by approximately 14% to 18% which resulted in an
increase of the Company's average cost of mailing a catalog by 15% as compared
to 1994. The Company also experienced record price increases in 1995 for paper
that is used in the production of its catalogs as the paper industry announced a
series of
7
<PAGE> 8
significant price increases that increased the Company's average cost for paper
by 43% as compared to 1994. Paper costs represented approximately 8% of revenues
in 1995 as compared to 7% in 1994. These cost increases (which aggregated $18
million in 1995) adversely impacted the Company's margins and earnings in 1995.
Although it is generally the policy of the Company to recover the costs of
shipping and handling from its customers, in 1995 it was unable to fully recover
such costs. Other than an anticipated 2% to 3% reduction in postal rates on an
annualized basis as a result of a reclassification of postal rates that will
become effective on July 1, 1996, the Company does not expect a material
reduction in these cost levels. Further increases in postal rates or paper costs
would have a material negative impact on the Company's results of operations to
the extent that the Company is unable to offset such increase by raising selling
prices or by implementing more efficient mailing, delivery and order fulfillment
systems.
INEFFICIENCIES IN CONNECTION WITH NEW FULFILLMENT FACILITIES
In 1995, the Company completed construction of its 530,000 square foot
facility on a site in Roanoke, Virginia to handle all of Domestications'(R)
warehouse and fulfillment needs. The total cost of this 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.
As a result, all of Domestications'(R) warehouse and fulfillment operations were
consolidated from several locations into one facility. The Company also
completed the consolidation of its apparel catalogs into its Roanoke, Virginia
apparel facility in 1995. The consolidation of the fulfillment operations of
Gump's(R) from DeSoto, Texas and Improvements(R) from Cleveland, Ohio to other
Company facilities was also completed in 1995. The relocation of Austad's(R)
fulfillment operations from Sioux Falls, South Dakota to other Company
facilities was completed by mid-July 1996. The Company experienced operating
inefficiencies and down-time, costs and expenses related to maintaining
duplicate facilities, moving expenses, lease termination fees and severance
expenses and start-up problems in conjunction with bringing various warehouse
and distribution facilities into service in 1995 and incurred approximately $2.7
million in costs related thereto. The Company believes it will continue to
experience inefficiencies in 1996. Although the Company has taken and is taking
actions which it believes will lead to more efficient operations, there is no
assurance that the Company will be able to achieve any improvement in efficiency
or reduction in costs. In addition, although the Company maintains business
interruption insurance for its primary facilities and other insurance for its
business, a partial or total loss of one or more of these consolidated
facilities may have a material adverse effect upon the Company's financial
position and results of operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Quarterly
Report on Form 10-Q for the quarterly period ended March 30, 1996 and in the
Annual Report on Form 10-K for the fiscal year ended December 30, 1995, each as
amended.
COSTS ASSOCIATED WITH COMPUTER SYSTEMS CONVERSION
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. 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. The Company brought two catalogs on-line in 1994 and eleven
additional catalogs on-line in 1995 (during which time it maintained its
existing systems for its other catalogs). The Company plans to bring the balance
of its catalogs on-line in 1996. The Company will incur approximately $3 million
in additional MIS costs in 1996 due primarily to non-cash charges relating to
amortization of deferred software costs. The new management information systems
have been designed to meet the Company's requirements as a high volume publisher
of multiple catalogs and to permit the Company to achieve substantial economies
of scale and improvements in the way its financial, merchandising, inventory,
telemarketing, fulfillment and accounting functions are performed. Until the new
systems are installed Company-wide, the Company will not achieve the full
benefits of the new systems. There have been costs associated with maintaining
duplicate facilities and certain inefficiencies and difficulties, including
lower levels of customer service, in working with the new systems and
maintaining duplicate systems as the transition process continues. There is no
assurance that the Company will be able to overcome these difficulties and
inefficiencies without them having an adverse affect
8
<PAGE> 9
on operations or that the new systems will be implemented as currently scheduled
or that they will achieve the goals established by the Company.
CONSUMER SPENDING; WEAKNESS IN CONSUMER DEMAND
The Company's operations recently have been affected by the weak retail
environment in most of the Company's business segments. The Company's product
margin at March 30, 1996 was approximately 6.4% while at December 30, 1995 it
was approximately 6.7%. Product margins have decreased due to greater
promotional expenses as a result of generally weak consumer demand. The success
of the Company's operations depends upon a number of factors relating to
consumer spending, including future economic conditions affecting disposable
consumer income such as employment, business conditions, interest rates and
taxation. There can be no assurance that weak economic conditions or changes in
the retail environment or other economic factors that impact the level of
consumer spending would not have a material adverse impact on the Company.
CREDIT RISKS
Several of the Company's catalogs, including Domestications(R),
International Male(R) and Gump's(R), 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. In addition, the Company increasingly offers customers
deferred billing arrangements reflecting a trend in the mail order catalog
industry. The use of credit cards and deferred billing arrangements could be
costly to the Company since it may need to fund such charges under the Credit
Facility. The Company's bad debt expense at March 30, 1996 was approximately
$1.2 million while at December 30, 1995 it was approximately $4.7 million. There
is no assurance that the use of credit cards and deferred billing arrangements
will not lead to higher bad debt expenses.
COSTS ASSOCIATED WITH DISCONTINUED CATALOGS
The Company discontinued six catalogs in 1995 which generated revenues of
$87.8 million in 1995 and $117.9 million in 1994 as a result of operating losses
of $20 million in 1995 (including a provision for the costs associated with
discontinuing these catalogs of $8.6 million) and $4.7 million in 1994 and poor
future prospects for these catalogs. As a result of discontinuing catalogs, the
Company incurs costs related to write-downs of merchandise in the discontinued
catalogs to net realizable value at the time of discontinuance. Such costs are
estimated at the time of discontinuance based on factors known at the time. As
additional information becomes known, the Company adjusts such estimates. The
Company may discontinue additional catalogs although it currently has no plans
to do so.
CHALLENGES ASSOCIATED WITH RECENT ACQUISITIONS AND NEW BUSINESS DEVELOPMENTS
The Company acquired certain catalogs in 1995. See NOTE 2 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the Company's Annual Report on Form 10-K
for the fiscal year ended December 30, 1995, as amended. None of these catalogs
except Improvements(R) and Leichtung Workshops(R) was profitable at the time of
its acquisition by the Company. In addition, these acquisitions present
relatively new market niches for the Company and the Company must successfully
integrate and develop these newly acquired companies. There can be no assurance
that the Company will be able to successfully integrate these new businesses or
improve their profitability.
ADJUSTMENTS IN CARRYING VALUE AND USEFUL LIFE
The acquisitions of Improvements(R), Leichtung Workshops(R), The Safety
Zone(R) and Austad's(R) 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 value 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 Company assesses the carrying
value and the economic useful life of the goodwill on an ongoing basis based on
9
<PAGE> 10
such business' prior and future operating income and estimated net cash flows.
There can be no assurance that the Company will not adjust the carrying value
and the economic useful life of such goodwill in the future.
COMPETITION
The mail order catalog business is highly competitive. 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. A number of the Company's competitors have substantially greater
financial, distribution and marketing resources than the Company. In addition,
due to the increased fixed costs experienced by the mail order catalog industry
in recent years, the Company may be at a competitive disadvantage as compared to
companies with substantially greater financial resources which will have a
greater ability to meet these costs than the Company will have due to its
limited financial resources. See "RISK FACTORS -- IMPORTANCE OF LIQUIDITY TO THE
COMPANY'S EXISTENCE." The recent substantial sales growth in the direct
marketing industry has encouraged the entry of many new competitors and an
increase in competition from established companies.
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. As a result, the fourth quarter is
increasing in importance to the Company's results of operations. In the fourth
quarter of 1995, the Company observed that customers waited until later in the
quarter to order merchandise from the Company's catalogs in order to benefit
from promotions, following a trend which affected the retail industry as a
whole. In addition, many of such customers elected to take advantage of the
Company's deferred billing arrangements or to use the Company's credit cards.
Accordingly, and for other reasons that the Company is not able to foresee,
there can be no assurance that the Company's fourth quarter operations will be
successful.
DEPENDENCE ON SUPPLIERS
Although the Company as a whole is generally not dependent on any one or
small group of suppliers, several of its major catalogs are dependent on one or
a small group of suppliers. There is no assurance that such suppliers will
continue to provide the Company with the quantities of merchandise on the terms
currently offered to the Company or that the Company will be able to find
alternative suppliers on competitive terms.
In addition, the Company's profitability depends upon its obtaining
competitive terms from the merchandise vendors for its catalogs. In the fourth
quarter of 1995, due to concerns over continuing operating losses at the Company
and questions from vendors concerning the Company's continuing viability in
light of the very difficult year for retailers with numerous Chapter 11 filings
occurring, certain of such vendors tightened the terms available to the Company
which resulted in higher back order levels and increased fulfillment costs which
negatively impacted the Company's operating results in that quarter. This trend
continued in early 1996 after several additional retail companies filed Chapter
11. The Company believes that upon the completion of the Rights Offering, the
Company will return to normal trade terms with all suppliers; however, if the
Company continues to experience operating losses, the Company may not be able to
obtain such terms or sufficient quantities of merchandise on a cost-effective
and timely basis to satisfy customer demand.
FOREIGN SOURCING
Approximately 7% of the Company's merchandise is purchased directly from
foreign suppliers located principally in China, Hong Kong, India and Portugal.
Such suppliers require the Company to post letters of credit relating to the
merchandise purchased by the Company which increases the Company's cost of
capital. The Company's business is subject to the risks generally associated
with conducting business abroad, including adverse fluctuations in currency
exchange rates (particularly those of the U.S. dollar against certain foreign
currencies), changes in import duties or quotas, the imposition of taxes or
other charges on imports,
10
<PAGE> 11
disruptions or delays in shipments and transportation, labor disputes and
strikes. The Company minimizes such risks by making foreign purchases in U.S.
dollars and does not generally utilize hedging instruments. The occurrence of
any one or more of the foregoing could adversely affect the Company's financial
position or results of operations.
DEPENDENCE ON MANAGEMENT
The success of the Company's operations depends in part on its ability to
attract and retain skilled management personnel. The Company recently retained a
new President and Chief Executive Officer, Rakesh K. Kaul, who is building a
management team. As a result of the turmoil in the mail order catalog business
due to the operating difficulties encountered by catalog operators in 1995,
including record paper and postage price increases, management turnover at the
Company and within the entire industry has been high. The Executive Vice
President, Secretary and General Counsel has resigned and the Executive Vice
President and Chief Financial Officer has indicated his intention to resign for
personal reasons but has agreed to stay with the Company until his replacement
can be found. The Company has commenced a search for a new Chief Financial
Officer. In addition, the Company's Chief Information Officer has resigned. The
General Counsel and Chief Information Officer positions are currently being
filled on a part-time basis by individuals who have served as service providers
to the Company. The Company has adopted various retention programs and the
Company believes it will not have problems finding acceptable replacements.
TAX LOSS CARRYFORWARDS
Realization of certain future tax benefits of the Company (for example,
certain existing net operating loss carryforwards ("NOLs") and temporary timing
differences of the Company) 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. See NOTE 10 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in the Company's Annual Report on Form 10-K for the fiscal year ended December
30, 1995, as amended.
RESTRICTIONS ON DIVIDENDS
The Company is restricted from paying dividends on its Common Stock or from
acquiring any of its capital stock by certain debt covenants contained in
agreements to which the Company is a party. Cash dividends have not been paid on
the Common Stock since 1967.
RELATIONSHIP WITH NAR
NAR currently owns approximately 53% of the Company's outstanding Common
Stock on a fully diluted basis. Assuming that all of the holders of Rights
exercise such Rights and that NAR exercises the Rights distributed to it, NAR
would own approximately 52% of the Common Stock of the Company after the Rights
Offering on a fully-diluted basis. Assuming that no Rights are exercised by the
holders thereof but that all the conditions of the Standby Purchase Agreement
are satisfied or waived and that NAR exercises its Rights and purchases all of
the Unsubscribed Shares pursuant to the Standby Purchase Agreement, NAR would
own approximately 69% of the Common Stock after the Rights Offering on a
fully-diluted basis. NAR has the power to elect the entire Board of Directors
and, except as otherwise provided by law or the Company's Certificate of
Incorporation, to approve any action requiring shareholder approval without a
shareholders' meeting.
DEPENDENCE ON NAR
As the Company's financial performance has deteriorated, the Company has
become increasingly dependent on NAR and its affiliates for financial support.
In November 1995, IMR, an affiliate of NAR, purchased the 9.25% Notes from a
third party in connection with the refinancing of the Company's
11
<PAGE> 12
indebtedness under the Credit 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 extended by two years the terms of the warrants to
purchase 5,033,735 shares of Common Stock held by NAR and IMR to August 1, 1998.
The Company 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.
The Company and NAR have entered into the Standby Purchase Agreement,
pursuant to which NAR will be required, subject to the fulfillment of various
terms and conditions thereof, to purchase all Unsubscribed Shares in the Rights
Offering. NAR has agreed to exercise all of the Rights distributed to it but is
not irrevocably committed to do so. If all of the Rights are exercised, NAR will
not be required to purchase any of the Common Stock issuable upon the exercise
of the Rights. As compensation to NAR for its commitment under the Standby
Purchase Agreement, the Company has agreed to pay to NAR, on the Closing Date or
at such other time and date as NAR and the Company may agree in writing, certain
fees described more fully under the caption "THE RIGHTS OFFERING -- STANDBY
PURCHASE COMMITMENT." NAR has advanced $25 million against the exercise of all
of the Rights distributed to it and/or its commitment to purchase all of the
Unsubscribed Shares if all of the conditions of the Standby Purchase Agreement
are satisfied or waived. See "RECENT DEVELOPMENTS -- PRE-FUNDING BY NAR" and
"USE OF PROCEEDS."
There is no assurance that NAR or its affiliates will continue to support
the Company financially should the Company need such support since NAR and its
affiliates are under no obligation to do so. There is no assurance that should
NAR or its affiliates cease to provide such financial support, it would not have
a material adverse impact on the Company. Further, in the event that the
conditions contained in the Standby Purchase Agreement are not met by the
Company and are not waived by NAR, the obligation of NAR to purchase any
Unsubscribed Shares may be cancelled upon notice by NAR. In the event that the
conditions contained in the Standby Purchase Agreement are not met by the
Company and are not waived by NAR, the Subscription Price shall be returned to
the subscribers as soon as practicable after the Expiration Date and no
Underlying Shares will be sold by the Company. Although the Company believes
that NAR would waive the non-occurrence of any of the conditions, if NAR does
not do so the cancellation by NAR of its obligation to purchase any Unsubscribed
Shares would have an adverse effect on the Company's financial condition and, in
such event, it is possible that the Company may need to seek protection under
applicable insolvency laws. See "THE RIGHTS OFFERING -- STANDBY PURCHASE
COMMITMENT."
POTENTIAL CONFLICTS OF INTEREST
NAR is the beneficial owner of approximately 53% of the Common Stock of the
Company as of the date hereof on a fully-diluted basis. Alan G. Quasha, a
director and chairman of the Board of Directors of the Company, has been
designated by the Board of Directors of NAR to oversee NAR's investment in the
Company and may therefore be deemed to be an indirect beneficial owner of such
securities beneficially owned by NAR, although Mr. Quasha disclaims such
beneficial ownership. There can be no assurance that no conflicts of interest
will arise as a result of this affiliated relationship.
SHARES ELIGIBLE FOR FUTURE SALE
In the future, NAR will be able to sell shares of Common Stock owned by it
in the open market pursuant to an exemption from registration under the
Securities Act or by causing the Company to file a registration statement with
respect to such shares. NAR has "piggyback" and demand registration rights as
provided in a Registration Rights Agreement between it and the Company. Sales of
substantial amounts of Common Stock in the public market could adversely affect
the market price. NAR has advised the Company that it does not currently intend
to sell any shares of voting stock of the Company owned by it.
UNCERTAIN MARKET FOR RIGHTS; MARKET CONDITIONS; MARKET CONSIDERATIONS
Because the Rights are new securities, the trading market for the Rights
may be volatile. Moreover, there can be no assurance that a market for the
Rights will develop or as to the price at which the Rights will trade.
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<PAGE> 13
The Subscription Price of the Rights has been determined by the Board of
Directors of the Company and represents a discount to the market price of the
Common Stock at the date of this Prospectus. However, there can be no assurance
that the market price for the Common Stock will not decline during the
subscription period or that, following the Expiration Date, a subscribing Rights
holder will be able to sell shares of Common Stock purchased in the Rights
Offering at a price equal to or greater than the Subscription Price. When made,
the election of a Rights holder to exercise Rights in the Rights Offering is
irrevocable. Moreover, until certificates are delivered, subscribing Rights
holders may not be able to sell the Common Stock that they have purchased in the
Rights Offering. Certificates representing shares of Common Stock purchased
pursuant to the Subscription Privilege will be delivered to subscribers as soon
as practicable after the Expiration Date. No interest will be paid to Rights
holders on funds delivered to the Subscription Agent pursuant to the exercise of
Rights pending delivery of shares of Common Stock acquired upon exercise of
Rights.
IMPACT OF RIGHTS OFFERING ON HOLDERS OF COMMON STOCK; DILUTION
The Rights entitle the holders of shares of Common Stock and Convertible
Preferred Stock to purchase shares of Common Stock at a price below the
prevailing market price of the Common Stock immediately prior to the
commencement of the Rights Offering. Holders of shares of Common Stock and
Convertible Preferred Stock who exercise their Rights will preserve their
proportionate interest in their equity ownership and voting power of the Company
on a fully-diluted basis. Holders who do not exercise their Rights will
experience a decrease in their proportionate interest in the equity ownership
and voting power of the Company. The sale of the Rights may not compensate a
holder for all or any part of the reduction in the market value of such
stockholder's shares of Common Stock, if any, resulting from the Rights
Offering. Stockholders who do not exercise or sell their Rights will relinquish
any value inherent in the Rights.
Assuming all of the Rights are exercised and based on 93,295,707 shares of
Common Stock, 78,300 shares of Series A Preferred Stock and 634,900 shares of
Series B Preferred Stock outstanding on July 18, 1996, the consummation of the
Rights Offering would result (on a pro forma basis as of such date) in an
increase of approximately 48,544,000 shares of Common Stock. NAR owns
approximately 53% of the Common Stock as of such date on a fully diluted basis.
Assuming that all of the holders of the Rights exercise such Rights and that NAR
exercises the Rights distributed to it, NAR would own approximately 52% of the
Common Stock of the Company after the Rights Offering on a fully diluted basis.
Assuming that no Rights are exercised by the holders thereof but that all the
conditions of the Stand-by Purchase Agreement are satisfied or waived and that
NAR exercises its Rights and purchases all of the Unsubscribed Shares pursuant
to the Standby Purchase Agreement, NAR would own approximately 69% of the Common
Stock after the Rights Offering on a fully diluted basis.
CONSTRUCTIVE DISTRIBUTIONS UNDER THE FEDERAL TAX CODE
The distribution of Rights pursuant to the Rights Offering has been
designed so as not to result in a taxable distribution of property for federal
income tax purposes to the holders of shares of either Common Stock or
Convertible Preferred Stock. However, the provisions of the Internal Revenue
Code and the Treasury Regulations issued thereunder relating to the treatment of
distributions such as the Rights Offering are not clear as to certain aspects of
the analysis required to avoid such a taxable distribution, and the tax
consequences of the Rights Offering also may be affected by the occurrence of
future events. Accordingly, counsel to the Company is unable to render an
opinion as to the applicability of such provisions to the Rights Offering. See
"THE RIGHTS OFFERING -- CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS --
Constructive Distributions Under Section 305 of the Code."
USE OF PROCEEDS
The proceeds available to the Company from the Rights Offering, including
NAR's standby purchase commitment, after payment of approximately $2 million of
fees and expenses incurred in connection with the Rights Offering, will be
approximately $48 million. The Company intends to use such net proceeds as
follows: (i) to pay approximately $14 million of principal on the 9.25% Notes
outstanding and owned by IMR, an affiliate of NAR, the Company's majority
shareholder, (ii) to repay the $25 million principal amount outstanding under
the NAR Promissory Note and (iii) to use the balance of the net proceeds to
repay
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<PAGE> 14
amounts outstanding under the Credit Facility with Congress (approximately $18.4
million under the revolving line of credit as of June 29, 1996). It is possible
that if the Company continues to incur losses a portion of the net proceeds of
the Rights Offering may be used to support the Company's operations.
In November 1995, the Company entered into the Credit Facility with
Congress consisting of a three-year revolving line of credit of up to $65
million and two 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. At March 30, 1996, the Company had
approximately $57.1 million of outstanding borrowings under the revolving line
of credit (including documentary and standby letters of credit) and
approximately $9.7 million outstanding under the term loans. The rates of
interest related to the revolving line of credit and the term loans were 9.50%
and 9.75%, respectively, at March 30, 1996.
In November 1995, IMR, an affiliate of NAR, purchased the 9.25% Notes from
a third party in connection with the refinancing of the Company's indebtedness
under the Credit Facility. Interest on the 9.25% Notes is payable quarterly at a
rate of 9.25% per annum. At March 30, 1996, the Company had $14 million of 9.25%
Notes outstanding and owned by IMR.
On May 31, 1996, the Company executed and delivered the NAR Promissory
Note. As of June 29, 1996, the Company had drawn $25 million thereunder. The NAR
Promissory Note carries an interest rate of 1.5% above prime which is payable
either in cash or shares of Common Stock valued at the Subscription Price, at
NAR's option.
Pending any specific application, the net proceeds will be added to working
capital and invested in short-term interest-bearing obligations.
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<PAGE> 15
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 30, 1996 and as adjusted to reflect the net proceeds of
approximately $48 million from the sale of the approximately 48,544,000 shares
of the Common Stock offered by the Company at a Subscription Price of $1.03. See
"USE OF PROCEEDS."
<TABLE>
<CAPTION>
AT MARCH 30, 1996
-------------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE INFORMATION)
<S> <C> <C>
Total debt (includes the current portion of long-term debt of $3.6
million)(a):
Congress Revolving Credit Facility................................. $ 24,103 $ 15,103
Revolving Term Notes............................................... 20,000 20,000
Term Financing Facility............................................ 9,797 9,797
8.76% Mortgage Note Payable due 2003............................... 1,703 1,703
Industrial Revenue Bonds due 2003.................................. 8,000 8,000
6% Mortgage Notes Payable due 1998................................. 3,098 3,098
9.25% Senior Subordinated Notes due 1998........................... 14,000 --
7 1/2% Convertible Subordinated Debentures due 2007................ 751 751
Capital Leases..................................................... 2,761 2,761
Other.............................................................. 19 19
--------- ---------
Total debt................................................. 84,232 61,232
Shareholders' equity:
6% Series A Convertible Additional Preferred Stock, $10 stated
value, authorized 234,900 shares; issued 78,300 shares in 1996..... 806 806
Series B Convertible Additional Preferred Stock, $.01 par value,
authorized and issued 634,900 shares in 1996....................... 5,606 5,606
Common Stock, $.66 2/3 par value, authorized 150,000,000 shares;
issued 93,757,045 in 1995 and 93,516,651 shares outstanding;
142,301,045 shares issued and 141,839,707 outstanding, as
adjusted(b)(c)....................................................... 62,504 94,867
Capital in excess of par value..................................... 255,397 273,034
Accumulated deficit................................................ (240,868) (240,868)
Less:
Treasury stock, at cost (1,157,061 shares at March 30, 1996)....... (3,345) (3,345)
Notes receivable from sale of Common Stock......................... (1,962) (1,962)
Deferred compensation.............................................. (277) (277)
--------- ---------
Total shareholders' equity...................................... 77,861 127,861
--------- ---------
Total capitalization....................................... $ 162,093 $ 189,093
========= =========
</TABLE>
- ---------------
(a) The Company intends to repay approximately $9 million of borrowings under
the Credit Facility from Congress with any proceeds in excess of the
repayment of $14 million principal amount of 9.25% Notes and the NAR
Promissary Note in the principal amount of $25 million.
(b) Excludes 5,719,233 shares of Common Stock issuable upon exercise of
outstanding options and warrants exercisable within 60 days of July 18,
1996.
(c) The gross proceeds from the Rights Offering are $50 million and the Company
estimates incurring approximately $2 million in fees associated with the
filing, resulting in net proceeds of approximately $48 million.
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<PAGE> 16
DIVIDEND POLICY
The Company is restricted from paying dividends on its Common Stock or from
acquiring any of its capital stock by certain debt covenants contained in
agreements to which the Company is a party. Cash dividends have not been paid on
the Common Stock since 1967.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the AMEX under the symbol "HNV." The
following table sets forth the high and low sale prices of the Common Stock
reported on the AMEX Composite Tape for the periods shown.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
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
1996
First Quarter.............................................. 1 13/16 1 1/8
Second Quarter............................................. 2 1/16 1 1/8
</TABLE>
As of July 18, 1996, there were approximately 4,825 holders of record of
the Common Stock. On July 18, 1996, the closing price of the Common Stock on the
AMEX was $1.3125 per share.
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<PAGE> 17
THE RIGHTS OFFERING
THE RIGHTS
The Company is distributing transferable Rights, at no cost, to the record
holders ("Holders") of the Common Stock and Convertible Preferred Stock
outstanding as of the Record Date. The Company will distribute .51 Rights for
each share of Common Stock held of record on the Record Date, 3.72 Rights for
each share of Series A Preferred Stock held of record on the Record Date and .77
Rights for each share of Series B Preferred Stock held of record on the Record
Date. The number of Rights distributable for each share of Series A Preferred
Stock and Series B Preferred Stock held on the Record Date was calculated
assuming such shares had been converted into Common Stock on the Record Date in
accordance with the terms thereof. The Rights will be evidenced by transferable
Subscription Certificates. An aggregate of up to approximately 48,544,000
Underlying Shares will be sold upon exercise of the Rights or pursuant to the
Standby Purchase Agreement between the Company and NAR. On Friday, August 23,
1996 (the "Closing Date"), in addition to its exercise of the Rights distributed
to it, NAR shall purchase from the Company all Unsubscribed Shares pursuant to
its standby purchase commitment if the conditions of the Standby Purchase
Agreement are satisfied or waived by NAR. In the event that the conditions
precedent to NAR's obligation to exercise its standby purchase commitment are
not satisfied or otherwise waived by NAR, the Subscription Price shall be
returned to the subscribers as soon as practicable after the Expiration Date and
no Underlying Shares will be sold by the Company. Accordingly, until the
Expiration Date, the Subscription Price shall be held in escrow by the
Subscription Agent pending receipt of notice from the Company that NAR has
elected to purchase the Unsubscribed Shares. See "THE RIGHTS OFFERING -- STANDBY
PURCHASE COMMITMENT."
No fractional Rights or cash in lieu thereof will be issued or paid. The
number of Rights distributed to each Holder will be rounded up to the nearest
whole number. No Subscription Certificate may be divided in such a way as to
permit the holder to receive a greater number of Rights than the number to which
such Subscription Certificate entitles its holder, except that a depositary,
bank, trust company, and securities broker or dealer holding shares of Common
Stock on the Record Date for more than one beneficial owner may by delivering a
written request by 5:00 p.m., New York City time, on Thursday, August 1, 1996
and, upon proper showing to the Subscription Agent, exchange its Subscription
Certificate to obtain a Subscription Certificate for the number of Rights to
which all such beneficial owners in the aggregate would have been entitled had
each been a Holder on the Record Date. The Company reserves the right to refuse
to issue any such Subscription Certificate if such issuance would be
inconsistent with the principle that each beneficial owner's holders will be
rounded up to the nearest whole Right.
Because the number of the Rights distributed to each Holder will be rounded
up to the nearest whole number, beneficial owners of Common Stock who are also
the record holders of such shares will receive more Rights under certain
circumstances than beneficial owners of Common Stock who are not the record
holders of their shares and who do not obtain (or cause the record owner of
their shares of Common Stock to obtain) a separate Subscription Certificate with
respect to the shares beneficially owned by them, including shares held in an
investment advisory or similar account. To the extent that record holders of
Common Stock or beneficial owners of Common Stock who obtain a separate
Subscription Certificate receive more Rights, they will be able to subscribe for
more shares pursuant to the Subscription Privilege.
EXPIRATION DATE
The Rights will expire at 5:00 p.m., New York City time, on the Expiration
Date. After the Expiration Date, unexercised Rights will be null and void. The
Company will not be obligated to honor any purported exercise of Rights received
by the Subscription Agent after the Expiration Date, regardless of when the
documents relating to such exercise were sent, except pursuant to the Guaranteed
Delivery Procedures described below.
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<PAGE> 18
SUBSCRIPTION PRIVILEGE
Pursuant to the Subscription Privilege, each Right will entitle the holder
thereof to receive, upon payment of the Subscription Price, one share of Common
Stock. Certificates representing shares of Common Stock purchased pursuant to
the Subscription Privilege will be delivered to subscribers as soon as
practicable after the Expiration Date. In the event that the conditions
precedent to NAR's obligation to exercise its standby purchase commitment are
not satisfied or otherwise waived by NAR, the Subscription Price shall be
returned to the subscribers as soon as practicable after the Expiration Date and
no Underlying Shares will be sold by the Company. Accordingly, until the
Expiration Date, the Subscription Price shall be held in escrow by the
Subscription Agent pending receipt of notice from NAR that it has elected to
purchase the Unsubscribed Shares. However, in the event that NAR waives the
conditions precedent that are not satisfied, it will have a purchase commitment
for all of the Unsubscribed Shares. See "THE RIGHTS OFFERING -- STANDBY PURCHASE
COMMITMENT."
EXERCISE OF RIGHTS
Rights may be exercised by delivering to American Stock Transfer & Trust
Company, as the Subscription Agent, on or prior to 5:00 p.m., New York City
time, on the Expiration Date, the properly completed and executed Subscription
Certificate evidencing such Rights with any required signatures guaranteed,
together with payment in full of the Subscription Price for each Underlying
Share subscribed for pursuant to the Subscription Privilege. Such payment in
full must be by (a) check or bank draft drawn upon a U.S. bank or postal,
telegraphic or express money order payable to American Stock Transfer & Trust
Company, as Subscription Agent, or (b) wire transfer of funds to the account
maintained by the Subscription Agent for such purpose at the Chase Manhattan
Bank, Account No. 323053807; ABA No. 021000021. The Subscription Price will be
deemed to have been received by the Subscription Agent only upon (i) clearance
of any uncertified check, (ii) receipt by the Subscription Agent of any
certified check or bank draft drawn upon a U.S. bank or any postal, telegraphic
or express money order or (iii) receipt of good funds in the Subscription
Agent's account designated above. If paying by uncertified personal check,
please note that the funds paid thereby may take at least five business days to
clear. Accordingly, holders of Rights who wish to pay the Subscription Price by
means of uncertified personal check are urged to make payment sufficiently in
advance of the Expiration Date to ensure that such payment is received and
clears by such date and are urged to consider payment by means of certified or
cashier's check, money order or wire transfer of funds.
In the event that the conditions precedent to NAR's obligation to exercise
its standby purchase commitment are not satisfied or otherwise waived by NAR,
the Subscription Price shall be returned to the subscribers as soon as
practicable after the Expiration Date and no Underlying Shares will be sold by
the Company. Accordingly, until the Expiration Date, the Subscription Price
shall be held in escrow by the Subscription Agent pending receipt of notice from
the Company that NAR has elected to purchase the Unsubscribed Shares.
The address to which the Subscription Certificates and payment of the
Subscription Price should be delivered is:
AMERICAN STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C> <C>
By Mail: By Facsimile By Hand:
American Stock Transfer & Trust Transmission: American Stock Transfer & Trust
Company (718) 234-5001 Company
40 Wall Street, 46th Floor 40 Wall Street, 46th Floor
New York, New York 10005 New York, New York 10005
</TABLE>
To Confirm Receipt and
For General Information:
(Call Collect)
(212) 936-5100
(718) 921-8200
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<PAGE> 19
If a Rights holder wishes to exercise Rights, but time will not permit such
holder to cause the Subscription Certificate or Subscription Certificates
evidencing such Rights to reach the Subscription Agent on or prior to the
Expiration Date, such Rights may nevertheless be exercised if all of the
following conditions (the "Guaranteed Delivery Procedures") are met:
(i) such holder has caused payment in full of the Subscription Price
for each Underlying Share being subscribed for pursuant to the Subscription
Privilege to be received (in the manner set forth above) by the
Subscription Agent on or prior to the Expiration Date;
(ii) the Subscription Agent receives, on or prior to the Expiration
Date, a guarantee notice (a "Notice of Guaranteed Delivery"), substantially
in the form provided with the Instruction as to Use of Hanover Direct, Inc.
Subscription Certificates (the "Instructions") distributed with the
Subscription Certificates, from a member firm of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. (the "NASD"), or from a commercial bank or trust company
having an office or correspondent in the United States (each, an "Eligible
Institution"), stating the name of the exercising Rights holder, the number
of Rights represented by the Subscription Certificate or Subscription
Certificates held by such exercising Rights holder, the number of
Underlying Shares being subscribed for pursuant to the Subscription
Privilege, and guaranteeing the delivery to the Subscription Agent of any
Subscription Certificate evidencing such Rights within three American Stock
Exchange trading days following the date of the Notice of Guaranteed
Delivery; and
(iii) the properly completed Subscription Certificate or Subscription
Certificates evidencing the Rights being exercised, with any required
signatures guaranteed, is received by the Subscription Agent within three
American Stock Exchange trading days following the date of the Notice of
Guaranteed Delivery relating thereto. The Notice of Guaranteed Delivery may
be delivered to the Subscription Agent in the same manner as Subscription
Certificates at the addresses set forth above, or may be transmitted to the
Subscription Agent by telegram or facsimile transmission (telecopy no.
(718) 236-4588 or (718) 234-5001). Additional copies of the form of Notice
of Guaranteed Delivery are available upon request from the Information
Agent, whose address and telephone numbers are set forth under "INFORMATION
AGENT."
Unless a Subscription Certificate (i) provides that the shares of Common
Stock to be issued pursuant to the exercise of Rights represented thereby are to
be delivered to the holder of such Rights or (ii) is submitted for the account
of an Eligible Institution, signatures on such Subscription Certificate must be
guaranteed by an Eligible Institution.
Holders who hold shares of Common Stock for the account of others, such as
brokers, trustees or depositaries for securities, should notify the respective
beneficial owners of such shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the record holder of such Right
should complete Subscription Certificates and submit them to the Subscription
Agent with the proper payment. In addition, beneficial owners of Common Stock or
Rights held through such a holder should contact the holder and request the
holder to effect transactions in accordance with the beneficial owner's
instructions.
The instructions accompanying the Subscription Certificates should be read
carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE
COMPANY.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF
THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES
AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., NEW YORK
CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE
AT LEAST FIVE BUSINESS DAYS
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<PAGE> 20
TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF
CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Company, whose determinations
will be final and binding. The Company in its sole discretion may waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine, or reject the purported exercise of any
Right. Subscriptions will not be deemed to have been received or accepted until
all irregularities have been waived or cured within such time as the Company
determines in its sole discretion. Neither the Company nor the Subscription
Agent will be under any duty to give notification of any defect or irregularity
in connection with the submission of Subscription Certificates or incur any
liability for failure to give such notification.
Any questions or requests for assistance concerning the method of
exercising Rights or requests for additional copies of this Prospectus, the
Instructions or the Notice of Guaranteed Delivery should be directed to the
Information Agent, Morrow & Co., Inc. at its address set forth under
"Information Agent" (telephone (800) 533-7254).
NO REVOCATION
ONCE A HOLDER OF RIGHTS HAS EXERCISED THE SUBSCRIPTION PRIVILEGE, SUCH
EXERCISE MAY NOT BE REVOKED.
METHOD OF TRANSFERRING RIGHTS
Rights may be purchased or sold through usual investment channels,
including banks and brokers. The Rights may be traded on the AMEX and in the
over-the-counter market. It is anticipated that the Rights will trade on a "when
issued" basis up to and including the AMEX trading day immediately following the
Record Date.
The Rights evidenced by a single Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying Instructions. A portion of the Rights evidenced
by a single Subscription Certificate (but not fractional Rights) may be
transferred by delivering to the Subscription Agent a Subscription Certificate
properly endorsed for transfer, with instructions to register such portion of
the Rights evidenced thereby in the name of the transferee (and to issue a new
Subscription Certificate to the transferee evidencing such transferred Rights).
In such event, a new Subscription Certificate evidencing the balance of the
Rights will be issued to the Rights holder or, if the Rights holder so
instructs, to an additional transferee.
The Rights evidenced by a Subscription Certificate also may be sold, in
whole or in part, through the Subscription Agent by delivering to the
Subscription Agent such Subscription Certificate properly executed for sale by
the Subscription Agent. If only a portion of the Rights evidenced by a single
Subscription Certificate are to be sold by the Subscription Agent, such
Subscription Certificate must be accompanied by instructions setting forth the
action to be taken with respect to the Rights that are not to be sold. Promptly
following the Expiration Date, the Subscription Agent will send the Rights
holder a check for the net proceeds from the sale of any Rights sold. If the
Rights can be sold, sales of such Rights will be deemed to have been effected at
the weighted average price received by the Subscription Agent for the sale of
all Rights through the Subscription Agent, less any applicable brokerage
commissions, taxes and other direct expenses of sale. The Company will pay the
fees charged by the Subscription Agent for effecting such sales. Orders to sell
Rights must be received by the Subscription Agent prior to 11:00 a.m., New York
City time, on Tuesday, August 13, 1996 and the Subscription Agent's obligation
to execute orders is subject to its ability to find buyers.
Holders wishing to transfer all or a portion of their Rights (but not
fractional Rights) should allow a sufficient amount of time prior to the
Expiration Date for (i) the transfer instructions to be received and processed
by the Subscription Agent, (ii) a new Subscription Certificate to be issued and
transmitted to the transferee or transferees with respect to transferred Rights,
and to the transferor with respect to retained Rights, if any, and (iii) the
Rights evidenced by such new Subscription Certificates to be exercised or sold
by
20
<PAGE> 21
the recipients thereof. Neither the Company nor the Subscription Agent shall
have any liability to a transferee or transferor of Rights if Subscription
Certificates are not received in time for exercise or sale prior to the
Expiration Date.
Except for the fees charged by the Subscription Agent (which will be paid
by the Company as described above), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred in connection with
the purchase, sale or exercise of Rights will be for the account of the
transferor of the Rights, and none of such commissions, fees or expenses will be
paid by the Company or the Subscription Agent.
The Company anticipates that the Rights will be eligible for transfer
through, and that the exercise of the Subscription Privilege may be effected
through, the facilities of the Depository Trust Company.
LISTING AND TRADING
The outstanding shares of Common Stock are listed and traded on the AMEX.
It is anticipated that the Rights will trade on the AMEX and in the
over-the-counter market. There can be no assurance, however, that a market for
the Rights will develop or as to the price at which the Rights will trade. The
Company has applied for the listing of the Underlying Shares on the AMEX.
FOREIGN AND CERTAIN OTHER SHAREHOLDERS
Subscription Certificates will not be mailed to Holders whose addresses are
outside the United States but will be held by the Subscription Agent for their
account. To exercise such Rights, such Holders must notify the Subscription
Agent on or prior to 11:00 a.m., New York City time, on Tuesday, August 13,
1996, at which time (if no instructions have been received) the Rights
represented thereby will be sold, if feasible, and the net proceeds, if any,
remitted to such Holders. If the Rights can be sold, sales of such Rights will
be deemed to have been effected at the weighted average price received by the
Subscription Agent for the sale of all Rights through the Subscription Agent,
less any applicable brokerage commissions, taxes and other expenses.
STANDBY PURCHASE COMMITMENT
The Company and NAR have entered into the Standby Purchase Agreement,
pursuant to which NAR will be required, subject to the fulfillment of various
terms and conditions thereof, to purchase all Unsubscribed Shares. In the event
that the conditions contained in the Standby Purchase Agreement are not met by
the Company and are not waived by NAR, the obligation of NAR to purchase any
Unsubscribed Shares may be cancelled upon notice by NAR. In the event that the
conditions contained in the Standby Purchase Agreement are not met by the
Company and are not waived by NAR, the Subscription Price shall be returned to
the subscribers as soon as practicable after the Expiration Date and no
Underlying Shares will be sold by the Company. Although the Company believes
that NAR would waive the non-occurrence of any of the conditions, if NAR does
not do so the cancellation by NAR of its obligation to purchase any Unsubscribed
Shares would have an adverse effect on the Company's financial condition and, in
such event, it is possible that the Company may need to seek protection under
applicable insolvency laws. If all of the Rights are exercised, NAR will not be
required to purchase any of the Common Stock issuable upon the exercise of the
Rights. The summary of the Standby Purchase Agreement contained herein discusses
all the material terms of such agreement, but is qualified in its entirety by
reference to the specific provisions of the Standby Purchase Agreement, a copy
of which is on file with the Commission. See "AVAILABLE INFORMATION."
As compensation to NAR for its commitment under the Standby Purchase
Agreement, the Company has agreed to pay to NAR, on the Closing Date or at such
other time and date as NAR and the Company may agree in writing, an amount equal
to 1% (the "Standby Fee") in respect of the aggregate offering price of the
aggregate number of shares of Common Stock issuable upon exercise of the Rights
granted to holders of Common Stock and Convertible Preferred Stock plus an
additional amount equal to 4% of the aggregate offering price (the "Take-Up
Fee") in respect of all shares of Common Stock, if any, purchased by NAR
pursuant to its commitment thereunder; provided, however, that the Company shall
pay to NAR, on the Closing Date, the Standby Fee and, if any, the Take-Up Fee in
cash or shares of Common Stock (with each
21
<PAGE> 22
such share being attributed a value equal to the Subscription Price by the
parties thereto), or any combination of cash and shares of Common Stock as NAR
shall decide in its sole discretion. NAR has not yet decided how it will take
such fees. NAR shall communicate its election to receive the Standby Fee and, if
any, the Take-Up Fee in cash or shares of Common Stock or combinations of both
by delivering a signed writing evidencing such election to the Company on the
Closing Date. Notwithstanding the foregoing, NAR shall not be entitled to a
Standby Fee with respect to the shares of Common Stock issuable upon exercise of
the Rights with respect to the shares of Common Stock owned beneficially by
Theodore H. Kruttschnitt as of July 18, 1996 if (i) at the time of the execution
of the Standby Purchase Agreement, he has furnished to NAR an undertaking to
exercise the Rights distributed to him with respect to such shares of Common
Stock and (ii) upon the closing of the Rights Offering, Mr. Kruttschnitt
purchases the shares of Common Stock which he undertakes to purchase. Mr.
Kruttschnitt furnished such an undertaking on July 18, 1996. As additional
compensation to NAR for its commitment under the Standby Purchase Agreement, the
Company has agreed to amend all warrants to purchase shares of Common Stock held
by NAR and its affiliate to permit a "net-issue" exercise. As of March 30, 1996,
NAR and its affiliates owned warrants to purchase an aggregate of 5,033,735
shares of Common Stock at exercise prices ranging from $2.19 to $2.91 per share
expiring on August 1, 1998. The number of shares for which the warrants may be
exercised and the exercise prices thereof will be adjusted as a result of the
Rights Offering pursuant to the anti-dilution provisions of such warrants.
The Company has agreed that except as otherwise contemplated in this
Prospectus, it will not, prior to October 17, 1996, sell or otherwise dispose of
any shares of Common Stock or securities convertible into or exchangeable or
exercisable for shares of Common Stock pursuant to a registration statement
filed after the date hereof with the Commission pursuant to the Securities Act
without the prior written consent of NAR.
The Standby Purchase Agreement provides that the Company will indemnify NAR
against certain liabilities incurred in connection with the Rights Offering,
including liabilities under the Securities Act, or contribute to payments NAR
may be required to make in respect thereof.
The obligation of NAR under the Standby Purchase Agreement to purchase
Unsubscribed Shares is subject to the following conditions, among others: that
the Registration Statement of which this Prospectus is a part shall have been
declared effective, and that no stop order with respect thereto shall have been
issued; that the Company shall have commenced mailing the Subscription
Certificates to record holders of the Common Stock and Convertible Preferred
Stock not later than the day following the Record Date and shall have completed
such mailing expeditiously, and shall have offered the Common Stock for
subscription in accordance with the terms and under the conditions set forth in
this Prospectus; that the Company shall have advised NAR daily during the period
when the Rights are exercisable of the number of shares of Common Stock
subscribed for, and prior to 12:00 Noon, New York City time, on the business day
following the Expiration Date, shall have advised NAR of the number of the
shares of Common Stock subscribed for and of the number of Unsubscribed Shares;
that the Company shall not have experienced any material adverse change in its
business (including the results of operations or management) or properties and
that the Company affirm as correct certain representations and warranties made
to NAR. In addition, NAR in its absolute discretion may elect to terminate its
obligations under the Standby Purchase Agreement if trading in the Common Stock
has been suspended by the Commission or the AMEX or trading in securities
generally on the AMEX has been suspended, limited or subject to the
establishment of minimum prices.
The issuance of Common Stock upon the exercise of Rights to holders of
shares of Common Stock and Convertible Preferred Stock to which Rights have been
granted is contingent upon the consummation of the purchase by NAR of the
Unsubscribed Shares. In the event that the conditions precedent to NAR's
obligations to exercise its standby purchase commitment are not satisfied or
otherwise waived by NAR, all amounts paid by subscribers upon exercise of Rights
shall be returned to such subscribers as soon as practicable after the
Expiration Date and no Underlying Shares will be sold by the Company.
Accordingly, until the Expiration Date, the Subscription Price shall be held in
escrow by the Subscription Agent pending receipt of notice from the Company that
NAR has elected to purchase the Unsubscribed Shares. However, in the event that
NAR waives the conditions precedent that are not satisfied, it will have a
purchase commitment for all of the Unsubscribed Shares.
22
<PAGE> 23
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS
Whitman Breed Abbott & Morgan, counsel to the Company, has advised the
Company that the following summary reflects their opinion as to the material
United States federal income tax considerations applicable to Holders upon the
distribution of the Rights, and to holders of Rights upon their exercise and
disposition. Holders should be aware that certain of the federal income tax
consequences relevant to the Holders are unclear under existing law or are
dependent on factual considerations that cannot currently be determined and
counsel have not rendered an opinion with respect to such consequences. An
opinion of counsel represents the legal judgment of such counsel and is not
binding on the Internal Revenue Service. There can be no assurance that the
Internal Revenue Service will take a similar view as to any of the tax
consequences described below. No ruling has been or will be requested from the
Internal Revenue Service on any tax matters relating to the Rights Offering or
the ownership or disposition of the Common Stock.
This summary is based upon the provisions of the Code, the regulations,
administrative rulings and judicial decisions now in effect, all of which are
subject to change (possibly with retroactive effect) or different
interpretations. This summary does not purport to deal with all aspects of
federal income taxation that may be relevant to a particular Holder or to
certain types of Holders subject to special treatment under the federal income
tax laws (for example, banks, dealers in securities, life insurance companies,
tax exempt organizations and foreign taxpayers) or to Holders who receive Rights
with respect to nonvested Common Stock received as compensation. This summary
also does not discuss any aspect of state, local or foreign tax laws. Foreign
persons should see "THE RIGHTS OFFERING -- CERTAIN UNITED STATES TAX
CONSEQUENCES TO NON-UNITED STATES HOLDERS" below. Furthermore, this summary is
limited to persons that have held the Common Stock or Convertible Preferred
Stock, as applicable, as capital assets (generally, property held for
investment) within the meaning of Section 1221 of the Code. This discussion is
not intended as tax advice to the Holders. Holders are advised to consult their
own tax advisors with respect to the consequences to them of the Rights Offering
to their own particular tax situations.
Distribution of the Rights. Subject to the discussions in "Constructive
Distributions Under Section 305 of the Code," below, Holders will not recognize
taxable income, for federal income tax purposes, in connection with the
distribution of the Rights.
Basis and Holding Period of the Rights. Except as provided in the
following sentence, the basis of the Rights received by a Holder as a
distribution with respect to such Holder's Common Stock or Convertible Preferred
Stock, as applicable, will be zero. If either (i) the fair market value of the
Rights on the date of issuance is 15% or more of the fair market value (on the
date of issuance) of the Common Stock or Convertible Preferred Stock, as
applicable, with respect to which they are received or (ii) the Holder elects,
in such Holder's federal income tax return for the taxable year in which the
Rights are received, to allocate part of the basis of such Common Stock or
Convertible Preferred Stock, as applicable, to the Rights, then upon exercise or
transfer of the Rights, the Holder's basis in such Common Stock or Convertible
Preferred Stock, as applicable, will be allocated between the Common Stock or
Convertible Preferred Stock, as applicable, and the Rights in proportion to the
fair market values of each on the date of distribution. The holding period of a
Holder with respect to the Rights received as a distribution on such Holder's
Common Stock or Convertible Preferred Stock, as applicable, will include the
Holder's holding period for the Common Stock or Convertible Preferred Stock, as
applicable, with respect to which the Rights were distributed. In the case of a
purchaser of Rights, the tax basis of such Rights will be equal to the purchase
price paid therefor and the holding period for such Rights will commence on the
day following the date of the purchase.
Transfer of the Rights. A Holder who sells the Rights received in the
distribution prior to exercise will recognize gain or loss equal to the
difference between the sale proceeds and such Holder's basis (if any) in the
Rights sold. Such gain or loss will be capital gain or loss if gain or loss from
a sale of Common Stock or Convertible Preferred Stock, as applicable, held by
such Holder would be characterized as capital gain or loss at the time of such
sale, and will be long term capital gain or loss if the holding period for the
Rights disposed of is more than one year and short term capital gain or loss if
such holding period is one year or less. Any gain or loss recognized on a sale
of Rights acquired by purchase will be short term capital gain or loss if Common
Stock acquired through exercise of such Rights would be a capital asset in the
hands of the seller (if acquired by him).
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<PAGE> 24
Lapse of the Rights. Holders who allow the Rights distributed to them to
lapse will not recognize any gain or loss, and no adjustment will be made to the
basis of the Common Stock owned by such Holders. Purchasers of the Rights will
be entitled to a loss equal to their tax basis in the Rights if such Rights
expire unexercised. Any loss recognized on the expiration of Rights acquired by
purchase will be a short term capital loss if Common Stock acquired through
exercise of such Rights would be a capital asset in the hands of the seller (if
acquired by him).
Exercise of the Rights; Basis and Holding Period of Common Stock. Holders
of Rights will not recognize gain or loss upon the exercise of such Rights. The
basis of the Common Stock acquired through exercise of the Rights will be equal
to the sum of the Subscription Price therefor and the Rights holder's basis in
such Rights (if any). The holding period for the Common Stock acquired through
exercise of the Rights will begin on the date the Rights are exercised.
Constructive Distributions Under Section 305 of the Code. Section 305 of
the Code provides, as a general rule, that a distribution of rights to acquire
stock of a corporation made by such corporation to its shareholders with respect
to its stock is not a taxable event. However, there are a number of exceptions
to this general rule, and a distribution of rights that falls within any one of
such exceptions is treated as "a distribution of property to which section 301
applies."
Under one of the relevant exceptions, a distribution of stock or stock
rights will be treated as a distribution of property to which section 301
applies if it constitutes a "disproportionate distribution" with respect to any
class or classes of stock or convertible debt of the corporation. A distribution
of stock or stock rights constitutes a "disproportionate distribution" if it is
a part of a distribution or a series of distributions (including deemed
distributions) that has the effect of (i) the receipt of property (including
cash) by some shareholders and (ii) an increase in the proportionate interests
of other shareholders in the assets or earnings and profits of the distributing
corporation. For this purpose, cash dividends paid with respect to stock and
debt service payments made with respect to convertible securities (which are
treated for this purpose as outstanding stock) may constitute the requisite
"receipt of property" by some shareholders irrespective of whether such
dividends or payments are related to the distribution of stock or stock rights.
Further, a distribution of stock or stock rights that does not maintain the
proportionate interests of the various classes of stock and securities
(including any conversion rights relating thereto) of the distributing company
may constitute the requisite increase in the proportionate interests in the
assets or earnings and profits of the shareholders receiving the distribution of
stock or stock rights.
Under a second relevant exception, a distribution of stock or stock rights
by a corporation with respect to its preferred stock generally will be treated
as a distribution of property to which section 301 applies unless the
distribution is made with respect to convertible preferred stock to take into
account a stock dividend, stock split or any similar event (including the sale
of stock at less than fair market value pursuant to a rights offering) that
would otherwise result in the dilution of the conversion right.
The Company has represented that the number and proportion of Rights to be
distributed to the holders of Common and Convertible Preferred Stock have been
calculated in a manner designed to maintain the relative interests of such
Holders in the assets and earnings and profits of the Company. The Company has
further represented that the number of Rights to be distributed to the holders
of Convertible Preferred Stock (which Convertible Preferred Stock currently does
not contain anti-dilution provisions) has been calculated in a manner designed
solely to prevent the dilution of the conversion rights of such holders.
Accordingly, the distribution of Rights pursuant to the Rights Offering has been
designed so as not to be subject to tax pursuant to section 305. However,
section 305 and the Treasury Regulations thereunder are not clear as to the
methodology to be used in calculating the number of proportion of rights to be
issued with respect to convertible stock or securities in order to protect the
holders thereof from dilution in the event of a rights offering, and the
Internal Revenue Service could take the position that the number of Rights
distributed to the holders of Convertible Preferred Stock is more or less than
is required merely to protect such Holders from dilution.
If the number of Rights distributed to the Holders of Convertible Preferred
Stock ultimately is determined to have been more than is required to protect
such Holders from dilution, all or a portion of such
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distribution could be treated as a distribution of property to such Holders to
which section 301 applies. If the number of Rights distributed to the holders of
Convertible Preferred Stock ultimately is determined to have been less than is
required to protect such Holders from dilution, there could be a deemed
"disproportionate distribution" to the holders of Common Stock to the extend of
such shortfall. Furthermore, future events, such as distributions of stock,
stock rights or property (including cash), by the Company, which cannot now be
determined, could affect the tax consequences of the Rights Offering. Because
the law is unclear in this area and because future events, which cannot now be
determined, could affect the tax consequences of the Rights Offering under
section 305, counsel is unable to render an opinion as to the applicability of
section 305 to the Rights Offering.
If the Rights Offering were to result in a distribution of property to
which section 301 applies under one of the above-described exceptions, such
distribution would be treated as a dividend to the extent of the Company's
current or accumulated earnings and profits. Any excess of the distributed
amount over such current and accumulated earnings and profits would be treated
as a tax-free return of capital to the extent of the recipient's basis in the
stock to which such distribution is attributable, and then as an amount received
in exchange for such stock.
The Company believes that it had a deficit in both current and accumulated
earnings and profits as of the close of its taxable year ended December 30, 1995
and for the first quarter of 1996. The amount of earnings and profits, if any,
that the Company will earn during 1996 will depend on its future actions and
financial performance and cannot currently be determined. However, based upon
the Company's current projections, it is not anticipated that the Company will
have any current or accumulated earnings and profits for its 1996 tax year. In
such case the Rights Offering would not result in any dividend income to the
holders of Common or Convertible Preferred Stock even if the Rights Offering
ultimately is determined to have resulted in a distribution of property to which
section 301 applies.
If the Company were to generate current earnings and profits for 1996 and
the Rights Offering were treated as a distribution of property to which section
301 applies under one of the above-described exceptions, a Holder might
ultimately be treated as having received a constructive dividend pursuant to
section 305 of the Code as a result of the Rights Offering equal to the lesser
of the value of the distribution and such Holder's share of the current and
accumulated earnings and profits of the Company. Subject to certain holding
period and taxable income requirements imposed by the Code, an actual or
constructive distribution to a corporate Holder resulting from the Rights
Offering that is treated as a dividend may qualify for the dividends received
deduction available under section 246 of the Code. Corporate Holders claiming
such a dividends received deduction are advised to consult with their tax
advisors as to the potential applicability of Section 1059 to such deduction.
Whether or not the Company has current or accumulated earnings and profits,
in the event that the Rights Offering is treated as a distribution to which
section 301 applies, Holders would receive a basis in the Rights received or
other property deemed distributed equal to the amount of such distribution.
EACH HOLDER IS URGED TO CONSULT WITH SUCH HOLDER'S OWN TAX ADVISOR WITH
RESPECT TO THE TAX CONSEQUENCES OF THE RIGHTS OFFERING TO SUCH HOLDER'S OWN
PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF STATE AND
LOCAL INCOME AND OTHER TAX LAWS.
FEDERAL INCOME TAX CONSEQUENCES OF RIGHTS OFFERING TO THE COMPANY
The Company will not recognize gain or loss on either the distribution or
the exercise or lapse of the Rights.
CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following summary describes the material United States federal tax
consequences of the distribution, exercise and disposition of the Rights, and
the ownership and disposition of Common Stock acquired upon exercise thereof, by
a person (a "non-U.S. holder") who, for United States federal income tax
purposes, is a
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<PAGE> 26
nonresident alien individual, a foreign corporation, foreign partnership, or
foreign estate or trust, as such terms are defined in the Code. This summary
does not discuss all aspects of federal taxation that may be relevant to a
particular non-U.S. holder, nor does it consider specific facts and
circumstances that may be relevant to a particular non-U.S. holder's tax
position.
Issuance or Exercise of the Rights. Subject to the possible application of
Section 305 of the Code (see "THE RIGHTS OFFERING -- CERTAIN FEDERAL INCOME TAX
CONSEQUENCES TO HOLDERS -- Constructive Distributions Under Section 305 of the
Code," above), which could cause the Rights Offering to result in the
constructive receipt of dividends (which would be taxable as described in
"Dividends on Common Stock," below) or of an amount received in exchange for the
Common Stock (which would be taxable as described in "Disposition of Rights or
Common Stock," below), non-U.S. holders of Common Stock will not recognize
taxable income, for United States federal income tax purposes, and will not be
subject to withholding of United States federal income tax, in connection with
the receipt or exercise of the Rights.
Disposition of Rights or Common Stock. A non-U.S. Holder generally will
not be subject to United States federal income tax with respect to gain
recognized on the disposition of the Rights or Common Stock acquired upon
exercise thereof unless (i) the gain is effectively connected with a trade or
business of the non-U.S. Holder in the United States, (ii) in the case of a
non-U.S. Holder who is a nonresident alien individual and holds either the
Rights or such Common Stock as a capital asset, such Holder is present in the
United States for 183 or more days in the taxable year of sale, (iii) the
non-U.S. Holder has owned, directly or by attribution, more than 5% of the
Rights or the Common Stock at any time during the five-year period ending on the
date of disposition of such interest and the Rights or such Common Stock, as the
case may be, is, at the time of disposition, a United States real property
interest within the meaning of Section 897(c)(1) of the Code or (iv) a non-U.S.
Holder is subject to tax pursuant to certain provisions of the Code applicable
to expatriates.
Dividends on Common Stock. Dividends paid to a non-U.S. Holder of Common
Stock will be subject to withholding of United States federal income tax at a
30% rate or such lower rate as may be specified by an applicable income tax
treaty, unless the dividends are effectively connected with the conduct of a
trade or business of the non-U.S. Holder within the United States. In order to
claim the benefit of an applicable tax treaty rate, a non-U.S. Holder may have
to file with the Company or its dividend paying agent an exemption or reduced
treaty rate certificate or letter in accordance with the terms of such treaty.
Dividends received by a non-U.S. Holder that are effectively connected with
the conduct of a trade or business of the non-U.S. holder within the United
States are exempt from the withholding tax described above. A non-U.S. holder
may claim this exemption by filing Form 4224 (Exemption from Withholding of Tax
on Income Effectively Connected with the Conduct of Trade or Business in the
United States) with the Company or its dividend paying agent. Dividends that are
effectively connected with the conduct of a trade or business within the United
States (after reduction by certain deductions) are generally taxed at the
regular United States federal income tax rate and, in the case of foreign
corporations, may also be subject to an additional U.S. branch profits tax of
30% (or lower applicable treaty rate).
Federal Estate Taxes. Common Stock held by an individual non-U.S. Holder
at the time of death will be included in such Holder's gross estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise.
U.S. Information Reporting Requirements and Backup Withholding. Under
temporary United States Treasury Regulations, United States information
reporting requirements and backup withholding tax will not apply to dividends
paid on Common Stock to a non-U.S. holder at an address outside the United
States. Payment by a United States office of a broker of the proceeds of a sale
of the Rights or Common Stock acquired through exercise thereof is subject to
both information reporting and backup withholding at a rate of 31% unless the
Holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. Information reporting requirements (but not backup
withholding) will also apply to a payment of the proceeds of a sale of the
Rights or such Common Stock by a foreign office of a United States broker, or
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<PAGE> 27
certain foreign brokers, unless the broker has documentary evidence in its
records that the Holder is a non-U.S. holder and certain other conditions are
met, or the Holder otherwise establishes an exemption.
The Internal Revenue Service has issued proposed regulations which, if they
become final, would impose new information reporting and certification
requirements and possible backup withholding on payments of dividends to
non-U.S. Holders. The new rules would be applicable to payments of dividends
made after 1997 and current law would remain in effect until then. Non-U.S.
holders should consult with their tax advisers as to compliance with the new
rules so as to avoid possible information reporting and backup withholding on
dividend payments after 1997.
A non-U.S. Holder may obtain a refund of any amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the
United States Revenue Service.
EACH NON-U.S. HOLDER IS URGED TO CONSULT WITH SUCH NON-U.S. HOLDER'S OWN
TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE RIGHTS OFFERING TO SUCH
NON-U.S. HOLDER'S OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND
EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
DESCRIPTION OF COMMON STOCK
For a description of the Common Stock, see "DESCRIPTION OF CAPITAL STOCK."
SUBSCRIPTION AGENT
The Company has appointed American Stock Transfer & Trust Company as
Subscription Agent for the Rights Offering. The Subscription Agent's address,
which is the address to which the Subscription Certificates and payment of the
Subscription Price should be delivered, as well as the address to which the
Notice of Guaranteed Delivery must be delivered, is:
AMERICAN STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C> <C>
By Mail: By Facsimile Transmission: By Hand:
American Stock Transfer & Trust (718) 234-5001 American Stock Transfer & Trust
Company Company
40 Wall Street, 46th Floor 40 Wall Street, 46th Floor
New York, New York 10005 New York, New York 10005
To Confirm Receipt and
For General Information:
(212) 936-5100
(718) 921-8200
</TABLE>
The Company will pay the fees and expenses of the Subscription Agent, and has
also agreed to indemnify the Subscription Agent from any liability which it may
incur in connection with the Rights Offering. The Company has been informed by
the Subscription Agent that it is a bank within the meaning of Section 3(a)(6)
of the Exchange Act.
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INFORMATION AGENT
The Company has appointed Morrow & Co., Inc. as Information Agent for the
Rights Offering. Any questions or requests for additional copies of this
Prospectus, the Instructions or the Rights Offering Notice of Guaranteed
Delivery may be directed to the Information Agent at the telephone numbers and
address below.
MORROW & CO., INC.
909 Third Avenue
20th Floor
New York, NY 10022
(212) 754-8000
TOLL-FREE 1-800-566-9061
Banks and brokerage firms please call 1-800-662-5200
The Company will pay the fees and expenses of the Information Agent and has also
agreed to indemnify the Information Agent from certain liabilities which it may
incur in connection with the Rights Offering.
DESCRIPTION OF CAPITAL STOCK
The following general summary of the material terms of the capital stock of
the Company does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the pertinent portions of the Company's
Certificate of Incorporation.
GENERAL
The authorized capital stock of the Company consists of 150,000,000 shares
of Common Stock, 12,270,503 shares of Class B Common Stock, par value $.01 per
share (the "Class B Common Stock"), 40,000 shares of Class B 8% Cumulative
Preferred Stock, par value $.01 and stated value $1,000 per share (the "Class B
Preferred"), 861,900 shares of 7.5% Cumulative Convertible Preferred Stock, par
value $.01 and stated value $20 per share (the "7.5% Preferred"), 234,900 shares
of Series A Preferred Stock, 634,900 shares of Series B Preferred Stock and
5,000,000 shares of Additional Preferred Stock, par value $.01 per share (the
"Additional Preferred"). As of July 18, 1996, there were 93,295,707 shares of
Common Stock, 78,300 shares of Series A Preferred Stock and 634,900 shares of
Series B Preferred Stock outstanding.
COMMON STOCK
General. There are no redemption or sinking fund provisions applicable to
the shares of Common Stock and such shares are not entitled to any preemptive
rights.
Voting. Each holder of Common Stock is entitled to one vote for each share
registered in the holder's name on the books of the Company. Since none of the
shares of Common Stock has cumulative voting rights, the holders of more than
50% of the shares can elect all the Directors of the Company in each class of
Directors, if they so choose, and, in that event, the holders of the remaining
shares will not be able to elect any of the Directors. See "RISK
FACTORS -- RELATIONSHIP WITH NAR."
Dividends. Subject to the prior rights of holders of any then issued and
outstanding preferred stock, the holders of Common Stock are entitled to receive
such dividends as may be declared from time to time by the Board of Directors of
the Company from the assets of the Company which are legally available therefor.
The Company is restricted from paying dividends on its Common Stock by certain
debt covenants contained in agreements to which the Company is a party. See
"DIVIDEND POLICY."
Liquidation. Upon the liquidation, dissolution or winding-up of the
Company, holders of Common Stock are entitled to receive, pro rata, after the
prior rights of creditors and holders of any preferred stock have been
satisfied, all the remaining assets of the Company available for distribution.
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Transfer Agent and Registrar. American Stock Transfer & Trust Company is
the Transfer Agent and Registrar for the Common Stock.
ADDITIONAL PREFERRED
Additional Preferred may be issued at such times, to such persons and for
such consideration as the Board of Directors may determine to be in the
Company's best interest without (except as otherwise required by law) further
authority from the shareholders. Such shares of authorized and unissued
Additional Preferred may be issued with such designations, voting powers,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations and restrictions of such rights, as the Company's
Board of Directors may authorize, including but not limited to: (i) the
distinctive designation of each series and the number of shares that will
constitute such series; (ii) the voting rights, if any, of shares of such
series; (iii) the dividend rate on the shares of such series, any restriction,
limitation or condition upon the payment of such dividends, whether dividends
shall be cumulative and the dates on which dividends are payable; (iv) the
prices at which, and the terms and conditions on which, the shares of such
series may be redeemed, if such shares are redeemable; (v) the purchase or
sinking fund provisions, if any, for the purchase or redemption of shares of
such series; (vi) any preferential amount payable upon shares of such series in
the event of the liquidation, dissolution or winding-up of the Company or the
distribution of its assets; and (vii) the prices or rates of conversion at
which, and the terms and conditions on which, the shares of such series may be
converted into other securities, if such shares are convertible.
SERIES A PREFERRED STOCK
Dividends. The holders of record of shares of Series A Preferred Stock are
entitled to receive preferential cumulative dividends, when and as declared by
the Board of Directors of the Company out of funds legally available therefor,
at a rate of 6% of the stated value per annum. Dividends on the Series A
Preferred Stock commenced to accrue on September 30, 1993.
Liquidation Preference. In the event of any distribution of assets upon
any liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Company, the holder of each share of the then outstanding
Series A Preferred Stock shall be entitled to receive out of the assets of the
Company, whether such assets are capital, surplus or earnings, an amount equal
to the then stated value of each share of Series A Preferred Stock, before any
payments or distributions are made to, or set aside for, any other equity
security of the Company other than any other series of preferred stock. If the
assets of the Company are insufficient to pay such amounts in full, then the
entire assets of the Company shall be distributed pro rata to the holders of
shares of preferred stock after the holders of the Class B Preferred and the
7.5% Preferred have been paid in full. Neither a consolidation, merger or other
business combination of the Company with or into another corporation or other
entity nor a sale or transfer of all or part of the Company assets for cash,
securities or other property shall be considered a liquidation, dissolution or
winding up of the Company.
Conversion. On September 30, 1994, each holder of the Series A Preferred
Stock automatically, without any action on the part of such holder, had
one-third of each such holders' holdings of Series A Preferred Stock converted
into a number of shares of Common Stock of the Company determined by dividing
the then stated value of the shares by the Conversion Price (as defined) for
such date. On September 30, 1995, each holder of the Series A Preferred Stock
automatically, without any action on the part of such holder, had one-third of
each such holders' holdings of Series A Preferred Stock converted into a number
of shares of Common Stock of the Company determined by dividing the then stated
value of the shares by the Conversion Price for such date. On September 30, 1996
(the "Conversion Date"), all shares of the Series A Preferred Stock that remain
outstanding (the "Final Conversion Allotment") shall automatically, without any
action being required on the part of the holders thereof, be converted into a
number of shares of Common Stock determined by dividing the then stated value of
the shares by the Conversion Price. The "Conversion Price" shall be an amount
equal to the average of the per-share closing prices (regular way) for a round
lot of the Common Stock on the AMEX (or, if the Common Stock is then not listed
for trading on the AMEX,
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<PAGE> 30
such other exchange or system on which the Common Stock shall from time to time
be traded) on each of the five trading days immediately preceding the Conversion
Date.
No fractional shares or scrip representing fractional shares of Common
Stock shall be issued upon conversion of Series A Preferred Stock. Instead of
any fractional share of Common Stock that would otherwise be issuable upon
conversion of any shares of Series A Preferred Stock, the Company will pay a
cash adjustment in respect of such fractional interest in an amount equal to the
same fraction of the Conversion Price per share of Common Stock.
Redemption. The Company shall have the right to redeem the Final
Conversion Allotment at any time prior to September 20, 1996 at the liquidation
value (initial stated value plus accrued but unpaid dividends) of such shares
payable in cash.
Voting Rights. The holders of the Series A Preferred Stock shall not have
any voting rights except as may be required by law.
Preemptive Rights. The Series A Preferred Stock is not entitled to any
preemptive or subscription rights in respect of any securities of the Company.
SERIES B PREFERRED STOCK
Dividends. The holders of record of shares of Series A Preferred Stock are
entitled to receive dividends, when and as declared by the Board of Directors of
the Company out of funds legally available therefor, at a rate of 5% of the
stated value per annum from February 15, 1995 through February 15, 1998
provided, however, that Aegis Safety Holdings, Inc. shall have achieved at least
One Million Dollars ($1,000,000) of earnings (as computed in accordance with
generally accepted accounting principles consistently applied) ("EBIT") during
the fiscal year (or portion thereof) in question for which the dividend
computation is being made, and 7% of the state value per annum from February 16,
1998 through February 15, 2000 regardless of the EBIT of Aegis Safety Holdings,
Inc., each payable in cash in arrears.
Liquidation Preference. In the event of any distribution of assets upon
any liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Company, the holder of each share of the then outstanding
Series B Preferred Stock shall be entitled to receive out of the assets of the
Company, whether such assets are capital, surplus or earnings, an amount equal
to the then stated value of each share of Series B Preferred Stock, before any
payments or distributions are made to, or set aside for, any other equity
security of the Company other than the holders of the 7.5% Preferred, the Class
B Preferred, the Series A Preferred Stock and then, pro rata, to the holders of
shares of any other series of Additional Preferred. Neither a consolidation,
merger or other business combination of the Company with or into another
corporation or other entity nor a sale or transfer of all or part of the Company
assets for cash, securities or other property shall be considered a liquidation,
dissolution or winding up of the Company.
Conversion. Each holder of the Series B Preferred Stock shall be entitled
at any time and from time to time to convert any or all of his outstanding
shares of Series B Preferred Stock into such number of shares of Common Stock
determined by dividing the then stated value of the shares by the Series B
Conversion Price. The "Series B Conversion Price" shall be $6.66 (subject to
adjustment upon the occurrence of a stock split or other subdivision or a
combination of outstanding shares of Common Stock, or the reclassification of
the Company's capital stock or any other similar event with respect to the
Common Stock) ("Adjustment Events").
At any time subsequent to the date upon which the per-share closing price
(regular way) for a round lot of the Common Stock on the AMEX (or such other
exchange or system on which the Common Stock shall from time to time be traded)
has been greater than $6.66 for 20 trading days in a 30 consecutive trading day
period, the Company has the right to require the conversion of all of the
outstanding shares of Series B Preferred Stock at the Series B Conversion Price.
The Series B Conversion Price will be adjusted upon the occurrence of an
Adjustment Event. The Company will provide the holders of shares of Series B
Preferred
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<PAGE> 31
Stock which are to be converted with at least 30 days written notice of the date
upon which conversion of the Series B Preferred Stock is required.
Redemption. The Company shall redeem all of the outstanding shares of
Series B Preferred Stock on February 15, 2000 in cash or in Common Stock at the
option of the Company in either case together with any accrued but unpaid
dividends through the February 15, 2000. If the shares Series B Preferred Stock
to be redeemed are to be paid in cash, the redemption price per share shall be
equal to the Series B Conversion Price on February 15, 2000. If the shares of
Series B Preferred Stock to be redeemed are to be paid in Common Stock, the
number of shares of Common Stock to be paid upon redemption of each share of
Series B Preferred Stock (the "Redemption Shares") shall be determined by
dividing the stated value of the shares by the Series B Conversion Price on
February 15, 2000. In addition, if the shares of Series B Preferred Stock to be
redeemed are to be paid in Common Stock and if the per-share closing price
(regular way) on the American Stock Exchange for a round lot of the Common Stock
on February 15, 2000 (the "Redemption Date Closing Price") is less than 95% of
the Series B Conversion Price on February 15, 2000, each holder of Series B
Preferred Stock shall be entitled to receive on February 15, 2000 such
additional shares of Common Stock determined by multiplying (x) the difference
between 95% of the Series B Conversion Price on February 15, 2000 and the
Redemption Date Closing Price and (y) the aggregate number of Redemption Shares
to which such holder is entitled, and dividing the product thereof by the
Redemption Date Closing Price. No fractional shares shall be issued, but a cash
payment in an amount equal to the value of such fractional share shall be made
in lieu thereof.
Voting Rights. Each share of Series B Preferred Stock shall be entitled to
a number of votes equal to the number of shares of Common Stock that such share
of Series B Preferred Stock is convertible into based on the then existing
Series B Conversion Price. Except as provided by law, the holders of the Series
B Preferred Stock shall vote together with the holders of the Common Stock (and
any other class or series which may be similarly entitled to vote with the
shares of Common Stock) as one class on all matters submitted to a vote of
stockholders of the Company.
Preemptive Rights. The Series B Preferred Stock is not entitled to any
preemptive or subscription rights in respect of any securities of the Company.
PLAN OF DISTRIBUTION
The Company is distributing transferable Rights, at no cost, to the Holders
of the Common Stock and Convertible Preferred Stock outstanding as of the Record
Date. See "THE RIGHTS OFFERING -- THE RIGHTS." Each Right will entitle the
holder thereof to receive, upon payment of the Subscription Price, one share of
Common Stock. See "THE RIGHTS OFFERING -- SUBSCRIPTION PRIVILEGE."
NAR has agreed to purchase from the Company all Unsubscribed Shares
pursuant to its standby purchase commitment. See "THE RIGHTS OFFERING -- STANDBY
PURCHASE COMMITMENT." No underwriters, brokers or dealers have been retained by
the Company in connection with the Rights Offering.
The Company anticipates receiving approximately $48 million in proceeds
from the Rights Offering including NAR's standby purchase commitment, after
payment of approximately $2 million of fees and expenses incurred in connection
with the Rights Offering. See "USE OF PROCEEDS."
EXPERTS
The consolidated balance sheets of the Company 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 and schedules incorporated by
reference in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
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<PAGE> 32
The balance sheets of The Austad Company as of December 31, 1993 and 1994,
and the related statements of operations, shareholders' equity and cash flows
for each of the two years in the period ended December 31, 1994 incorporated by
reference in this Prospectus and elsewhere in the Registration Statement, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for the
Company by Whitman Breed Abbott & Morgan, New York, New York.
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