<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997
REGISTRATION NO. 333-25141
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HANOVER DIRECT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-0853260
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
1500 HARBOR BOULEVARD
WEEHAWKEN, NEW JERSEY 07087
(201) 863-7300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
<TABLE>
<S> <C>
Rakesh K. Kaul COPY TO:
Hanover Direct, Inc.
1500 Harbor Boulevard Monte E. Wetzler, Esq.
Weehawken, New Jersey 07087 Brown Raysman Millstein Felder
(201) 863-7300 & Steiner LLP
(NAME, ADDRESS, INCLUDING ZIP CODE, 120 West 45th Street
AND TELEPHONE NUMBER, INCLUDING AREA New York, New York 10036
CODE, OF AGENT FOR SERVICE) (212) 944-1515
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effective date of this Registration Statement and the
effective date of the Rights Offering described herein.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE
AMOUNT TO BE AGGREGATE PRICE OFFERING AMOUNT OF
TITLE OF SHARES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.66- 2/3
per share......................... 55,595,556 Shares(2) $.90 $50,036,000 $15,163(3)
- -----------------------------------------------------------------------------------------------------------------
Rights to Purchase Shares of Common
Stock............................. 55,595,556 Rights(4) -- -- --
=================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 of the Securities Act of 1933, as amended.
(2) Represents the maximum number of shares of Common Stock, par value $.66- 2/3
per share, issuable upon the exercise of the Rights to purchase shares of
Common Stock to be distributed in connection with the Rights Offering
described in this Registration Statement.
(3) Of this amount, $15,152 was paid with the Registration Statement filed with
the Securities and Exchange Commission on April 14, 1997.
(4) Represents the maximum number of Rights which may be issued in connection
with the Rights Offering described in this Registration Statement.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS, DATED APRIL 28, 1997
PROSPECTUS
55,555,556 SHARES
[HANOVER DIRECT LOGO]
COMMON STOCK
------------------------
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"), and its Series B Convertible Additional Preferred
Stock, par value $.01 and stated value $10.00 per share (the "Series B Preferred
Stock"), outstanding as of Monday, April 28, 1997 (the "Record Date")
transferable subscription rights (the "Rights") to subscribe for and purchase
additional shares of Common Stock for a price of $.90 per share (the
"Subscription Price").
Each shareholder will receive .38 transferable Rights for each share of
Common Stock held of record on the Record Date and .57 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
Series B 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. Record Date stockholders who fully exercise all Rights distributed to them
will also be entitled to subscribe at the Subscription Price for shares of
Common Stock that are not otherwise purchased pursuant to the exercise of
Rights, subject to proration by the Company under certain circumstances. Once a
holder of Rights has exercised such Rights pursuant to either subscription
privilege, such exercise may not be revoked. The Rights will be evidenced by
transferable subscription certificates ("Subscription Certificates"). An
aggregate of up to approximately 55,555,556 shares of Common Stock (the
"Underlying Shares") will be sold upon exercise of the Rights or pursuant to the
Standby Purchase Agreement, dated as of March 26, 1997 (the "Standby Purchase
Agreement"), between the Company and Richemont S.A., a Luxembourg public company
which is an affiliate of Hanover's majority shareholder (together with its
wholly-owned subsidiary Richemont Finance S.A., "Richemont"). 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, May 30,
1997 (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."
Richemont 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 privileges ("Unsubscribed Shares"). NAR Group Limited, a private
holding company (together with its affiliates, "NAR") which is the beneficial
owner of approximately 55.7% of the Common Stock of the Company as of the date
hereof, on a fully-diluted basis, has irrevocably agreed with the Company,
subject to and upon the consummation of the Rights Offering, to exercise at the
Subscription Price that number of Rights distributed to it for the purchase of
shares of Common Stock having an aggregate purchase price of at least $10
million, the purchase price for such shares to be paid by NAR by the surrender
and cancellation of the principal amount of a $10 million promissory note held
by one of its affiliates. See "THE RIGHTS OFFERING -- Standby Purchase
Commitment."
REFERENCE IS MADE TO "RISK FACTORS" BEGINNING ON PAGE 10 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 last reported sales price of the Common Stock on the American Stock Exchange
on April 24, 1997 was $.75 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 April 29, 1997.
<PAGE> 3
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.
------------------------
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 Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants,
such as the Company, that file electronically with the Commission. The address
of the Web site is http://www.sec.gov.
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 28, 1996, as amended by Amendment Nos. 1 and 2
thereto filed April 14, 1997 and April 28, 1997, respectively; and (b) 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 suspended 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 Edward J.
O'Brien, Secretary, Hanover Direct, Inc. at 1500 Harbor Boulevard, Weehawken,
New Jersey 07087 or telephone number (201) 863-7300.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus or incorporated by reference herein.
THE COMPANY
The Company is a leading direct specialty retailer that markets, via a
portfolio of branded specialty catalogs, home fashions, general merchandise,
men's and women's apparel and gifts. The Company's catalogs include
Domestications(R), a leading specialty home textile catalog, The Company
Store(R), an upscale direct marketer of down comforters and other down and
related products for the home, Kitchen & Home(R), an upscale kitchen and home
product catalog, Improvements(R), a do-it-yourself home improvements catalog,
The Safety Zone(R), a direct marketer of safety, prevention and protection
products, Colonial Garden Kitchens(R), featuring work saving and lifestyle
enhancing items for the kitchen and home, Silhouettes(R), featuring everyday,
workout, special occasion and career fashions for larger sized women, Tweeds(R),
the European inspired women's fashion catalog, International Male(R), offering
unique men's fashions with an international flair, Austad's(R), a direct
marketer of golf equipment, apparel and accessories, Undergear(R), a leader in
activewear, workout wear and fashion underwear for men, and Gump's By Mail(R), a
leading upscale catalog of luxury gifts. During 1996, the Company mailed
approximately 332 million catalogs and had total revenues of approximately $700
million. The Company maintains a proprietary customer list currently containing
approximately 14 million names of customers who have made purchases from at
least one of the Company's catalogs within the past 36 months. Over 6 million of
the names on the list represent customers who have made purchases from at least
one of the Company's catalogs within the last 12 months.
The Company is incorporated in Delaware with its principal executive office
at 1500 Harbor Boulevard, Weehawken, New Jersey 07087. The Company's telephone
number is (201) 863-7300.
RELATIONSHIP WITH NAR AND RICHEMONT
NAR is the beneficial owner of approximately 55.7% of the Company's Common
Stock on a fully-diluted basis as of the date hereof. NAR, a private investment
holding company, is a joint venture between the family of Alan G. Quasha, a
Director and the Chairman of the Board of the Company, and Compagnie Financiere
Richemont A.G., a Swiss public company with interests primarily in the fields of
luxury goods and tobacco and the sole voting shareholder of Richemont ("CFR").
In its latest financial year ending March 31, 1996, CFR reported a consolidated
operating profit of $1.246 billion on consolidated sales of $6.7 billion. CFR
has a current market capitalization of $7.7 billion, making it the tenth largest
company quoted on the Swiss stock exchange. CFR's tobacco interests are held
through Rothmans International. Its interests in the luxury goods industry are
held through the Vendome Luxury Group, which owns a portfolio of well-known
international brands, including Cartier, Piaget, Baume & Mercier, Alfred Dunhill
and Montblanc. See "RISK FACTORS -- Relationship with NAR" and "-- Dependence on
NAR and Richemont."
THE RIGHTS OFFERING
Rights.......................... Each shareholder will receive .38
transferable Rights for each share of Common
Stock held of record on Monday, April 28,
1997, the Record Date, and .57 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 Series B
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. The Underlying Shares
will be sold upon exercise of the Rights or
pursuant to the Standby Purchase Agreement
between the
3
<PAGE> 5
Company and Richemont. 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."
Basic Subscription Privilege.... Each Right will be exercisable for one share
of Common Stock (the "Basic Subscription
Privilege"). The number of Rights distributed
by the Company to each holder of Common Stock
and Series B Preferred Stock will be rounded
up to the nearest whole number. No fractional
Rights or cash in lieu thereof will be issued
or paid. See "THE RIGHTS
OFFERING -- Subscription Privileges -- Basic
Subscription Privilege."
Oversubscription Privilege...... Record Date stockholders who fully exercise
all Rights distributed to them will also be
entitled to subscribe at the Subscription
Price for shares of Common Stock that are not
otherwise purchased pursuant to the exercise
of Rights, subject to proration by the
Company under certain circumstances (the
"Oversubscription Privilege"). If the
Underlying Shares not subscribed for through
the Basic Subscription Privilege ("Excess
Shares") are not sufficient to satisfy all
subscriptions pursuant to the
Oversubscription Privilege, the Excess Shares
will be allocated pro rata (subject to the
elimination of fractional shares) among those
holders of Rights exercising the
Oversubscription Privilege, in proportion to
the number of shares requested by them
pursuant to the Oversubscription Privilege.
See "THE RIGHTS OFFERING -- Subscription
Privileges -- Oversubscription Privilege."
Subscription Price.............. $.90 in cash per share of Common Stock
subscribed for pursuant to the Basic
Subscription Privilege or the
Oversubscription Privilege. The Subscription
Price of the Rights represents a premium to
the market price of the Common Stock at the
date of this Prospectus. See "THE RIGHTS
OFFERING -- Subscription Price."
Transferability of Rights....... The Rights are transferable, and it is
anticipated that they will trade on the AMEX
and in the over-the-counter market until the
close of business on the last trading day
prior to the Expiration Date. 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. See "THE RIGHTS
OFFERING -- Listing and Trading."
The Subscription Agent will endeavor to sell
Rights for holders who have so requested by
delivering Subscription Certificates with the
instruction for sale properly executed to the
Subscription Agent by 11:00 a.m., New York
City time, on Tuesday, May 27, 1997. Any
brokerage commission, taxes and other direct
expenses of sale will be paid by the holder.
There can be no assurance that the
Subscription Agent will be able to sell any
Rights or as to the prices the Subscription
Agent may be able to
4
<PAGE> 6
obtain in such sales. See "THE RIGHTS
OFFERING -- Method of Transferring Rights."
The right to subscribe for additional shares
of Common Stock pursuant to the
Oversubscription Privilege is not
transferable.
Rights Ticker Symbol............ HNVRT
Record Date..................... Monday, April 28, 1997
Expiration Date................. Friday, May 30, 1997, at 5:00 p.m., New York
City time
Procedure for Exercising
Rights.......................... Basic Subscription Privileges and
Oversubscription Privileges may be exercised
by properly completing the Subscription
Certificate and forwarding such Subscription
Certificate (or following the Guaranteed
Delivery Procedures described herein), with
payment of the Subscription Price for each
Underlying Share subscribed for pursuant to
the Basic Subscription Privilege and the
Oversubscription Privilege, to the
Subscription Agent on or prior to the
Expiration Date. If the mail is used to
forward Subscription Certificates, it is
recommended that insured, registered mail be
used. See "THE RIGHTS OFFERING -- Exercise of
Rights."
ONCE A HOLDER OF RIGHTS HAS EXERCISED THE
BASIC SUBSCRIPTION PRIVILEGE AND, IF
APPLICABLE, THE OVERSUBSCRIPTION PRIVILEGE,
SUCH EXERCISE MAY NOT BE REVOKED. See "THE
RIGHTS OFFERING -- No Revocation."
Procedure for Exercising Rights
by Foreign Stockholders......... Subscription Certificates will not be mailed
to record holders of the Common Stock and
Series B Preferred Stock outstanding as of
the Record Date 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,
May 27, 1997, 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. See "THE RIGHTS
OFFERING -- Foreign and Certain Other
Shareholders."
Persons Holding Shares, or
Wishing to Exercise Rights,
Through Others................ Persons holding shares of Common Stock and
receiving the Rights distributable with
respect thereto through a broker, dealer,
commercial bank, trust company or other
nominee, as well as persons holding
certificates representing shares of Common
Stock personally who would prefer to have
such institutions effect transactions
relating to the Rights on their behalf,
should contact the appropriate institution or
nominee and request it to effect the
transaction for them. See "THE RIGHTS
OFFERING -- Exercise of Rights."
5
<PAGE> 7
Issuance of Common Stock........ Certificates representing shares of Common
Stock purchased pursuant to the Basic
Subscription Privilege will be delivered to
subscribers as soon as practicable after the
Expiration Date. Certificates representing
shares of Common Stock purchased pursuant to
the Oversubscription Privilege will be
delivered to subscribers as soon as
practicable after the Expiration Date and
after all prorations have been effected. See
"THE RIGHTS OFFERING -- Subscription
Privileges."
Pre-Funding by Richemont........ In order to facilitate vendor shipments and
to permit the commencement of the Company's
plan to consolidate certain of its
warehousing facilities, Richemont has
advanced $30 million as of the date of this
Prospectus against its commitment to purchase
all of the Unsubscribed Shares pursuant to
the Standby Purchase Agreement. The Company
has executed a subordinated promissory note
in the amount of $30 million to evidence this
indebtedness (the "Richemont Promissory
Note"). See "RECENT
DEVELOPMENTS -- Pre-Funding by Richemont" and
"USE OF PROCEEDS."
Use of Proceeds................. The gross cash proceeds from the Rights
Offering of $40 million (after giving effect
to the acquisition and exercise by NAR of
Rights having an aggregate purchase price of
$10 million to be paid for by surrender and
cancellation of the $10 million promissory
note held by one of its affiliates (the "IMR
Promissory Note")) will be used to repay the
$30 million principal amount outstanding
under the Richemont Promissory Note and the
balance of the proceeds will be used for
working capital and general corporate
purposes, including to repay amounts, if any,
outstanding under the Credit Facility with
Congress. See "USE OF PROCEEDS."
Subscription Agent.............. American Stock Transfer & Trust Company (the
"Subscription Agent"). The Subscription
Agent's telephone number is (212) 936-5100 or
(718) 921-8200.
Information Agent............... Morrow & Co., Inc. (the "Information Agent").
The Information Agent's telephone number is
1-800-566-9061. Banks and brokerage firms
should call 1-800-662-5200.
Standby Commitment.............. Pursuant to the Standby Purchase Agreement,
Richemont has agreed to purchase, at the
Subscription Price, any of the Unsubscribed
Shares. NAR has irrevocably agreed with the
Company, subject to and upon the consummation
of the Rights Offering, to exercise at the
Subscription Price that number of Rights
distributed to it for the purchase of shares
of Common Stock having an aggregate purchase
price of $10 million, the purchase price for
such shares to be paid by NAR by the
surrender and cancellation of the IMR
Promissory Note. See "THE RIGHTS
OFFERING -- Standby Purchase Commitment."
6
<PAGE> 8
Federal Income Tax
Considerations.................. See "THE RIGHTS OFFERING -- Certain Federal
Income Tax Consequences to Holders" and "THE RIGHTS OFFERING -- Certain United
States Tax Consequences to Non-United States
Holders."
Shares of Common Stock
Outstanding after Rights
Offering...................... Approximately 199,960,253 shares of Common
Stock will be outstanding after the Rights
Offering, based on the number of shares
outstanding on the Record Date.
Risk Factors.................... In addition to the other information
contained in this Prospectus and the
documents incorporated by reference herein,
prospective purchasers should consider the
risk factors set forth elsewhere herein prior
to deciding whether to exercise or sell their
Rights.
7
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data for the fiscal years 1992 through
1996 have been derived from the consolidated financial statements of the Company
(successor to The Horn & Hardart Company or "H&H") and its subsidiaries, which
statements have been audited by Arthur Andersen LLP, independent public
accountants, whose report on certain of such financial statements is included
elsewhere and incorporated by reference in this Prospectus. Certain
reclassifications have been made to the financial data for the fiscal years
prior to 1993 in order to conform with the fiscal 1993 presentation.
In September 1993, the Company was formed in connection with the mergers
involving the Company, H&H and The Hanover Companies ("THC"), a wholly owned
subsidiary of H&H. The mergers were accounted for similarly to a
pooling-of-interests, and, accordingly, the Company's summary consolidated
financial data include the results of H&H and THC for all applicable periods
presented.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues....................... $ 586,562 $ 642,511 $ 768,884 $ 749,767 $ 700,314
Depreciation and
amortization................. 2,681 3,279 6,157 9,020 12,192
Operating (loss) income........ 14,402 19,076 15,975 (22,619) (94,497)
Interest expense, net.......... 13,135 2,757 2,813 4,531 8,398
Income (loss) before
extraordinary items and
cumulative effect of
accounting change for income
taxes........................ 1,048 17,337 14,838 (28,153) (103,895)
Extraordinary items............ 9,201 -- -- (1,837) (1,134)
Cumulative effect of accounting
change for income taxes...... 10,000 -- -- -- --
----------- ----------- ----------- ----------- ------------
Net income (loss).............. $ 20,249 17,337 14,838 (29,990) (105,029)
Preferred stock dividends...... (3,197) (4,093) (135) (240) (225)
----------- ----------- ----------- ----------- ------------
Net income (loss) applicable to
common stockholders.......... $ 17,052 $ 13,244 $ 14,703 $ (30,230) $ (105,254)
=========== =========== =========== =========== ============
Per Share:
Income (loss) before
extraordinary items and
cumulative effect of
accounting change for income
taxes........................ $ (.06) $ 0.17 $ 0.16 $ (.30) $ (.93)
Extraordinary items............ .24 -- -- (.02) (.01)
Cumulative effect of accounting
change for income taxes...... .26 -- -- -- --
----------- ----------- ----------- ----------- ------------
Net income (loss).............. $ .44 $ .17 $ .16 $ (.32) $ (.94)
=========== =========== =========== =========== ============
Weighted average number of
shares outstanding:
Primary........................ 38,467,015 75,625,330 93,285,190 93,029,816 111,441,247
=========== =========== =========== =========== ============
Fully diluted.................. 38,467,015 77,064,131 93,235,190 93,029,816 111,441,247
=========== =========== =========== =========== ============
BALANCE SHEET DATA (END OF
PERIOD):
Working capital (deficit)...... $ 31,566 $ 25,180 $ 58,501 $ 28,774 $ (1,507)
Total assets................... 134,352 188,838 262,246 279,009 220,827
Total debt..................... 43,362 36,160 37,915 62,802 65,189
Preferred stock of
subsidiary................... 32,842 -- -- -- --
Shareholders' (deficit)
equity....................... (19,758) 45,868 109,725 87,210 31,740
</TABLE>
There were no cash dividends declared on the Common Stock in any of the
periods.
See Notes to Consolidated Financial Statements.
8
<PAGE> 10
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.
OPERATING LOSSES; FUTURE OPERATING RESULTS
The Company has recently experienced significant operating losses. The
Company reported a net loss of $105 million, or $(.94) per share, for the year
ended December 28, 1996 compared to a net loss of $30 million, or $(.32) per
share, for the year ended December 30, 1995. For the year ended December 31,
1994, the Company reported net income of $14.8 million, or $.16 per share.
Revenues decreased in the year ended December 28, 1996 to $700 million from $750
million in 1995 and $769 million in 1994. Revenues continued to decline in the
first quarter of 1997 and are expected to be less than revenues in the first
quarter of 1996 primarily due to a decrease in revenues related to discontinued
catalogs. The Company recorded a loss from operations of $94.5 million in 1996,
or (13.5)% of revenues, compared to a loss from operations of $22.6 million in
1995, or (3.0)% of revenues, and income from operations of $16.0 million, or
2.1% of revenues, for the same period in the prior year. The Company also will
record a loss for the first quarter of 1997. As a result of the operating losses
incurred in 1995 and 1996, the Company's financial condition deteriorated. The
Company's working capital decreased from $58.5 million at December 31, 1994 to
$28.8 million at December 30, 1995 and $(1.5) million at December 28, 1996. The
Company's total debt increased from $37.9 million at December 31, 1994 to $62.8
million at December 30, 1995 and $65.2 million at December 28, 1996.
The Company recorded special charges in 1996 of $36.7 million consisting of
severance expenses, facility exit/relocation costs and fixed asset write-offs
related to the previously announced downsizing of the Company as well as the
write-off of certain long-lived assets. The net loss in 1996, without giving
effect to such charges, was primarily a result of (i) increased inventory
write-downs, (ii) lower response rates and (iii) increased order cancellations
due to the Company's inability to properly sustain its inventory in-stock
position. The Company's fixed cost infrastructure, which its continuing catalogs
could not fully absorb, also contributed to the loss. 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. 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 in 1995. See "RISK FACTORS -- Inefficiencies in Connection
with New Fulfillment Facilities" and "-- Costs Associated with Computer Systems
Conversion."
Whether the Company is able to return to positive net income will depend on
its ability to increase catalog product contribution margin and to effectively
monitor and control costs. In December 1996, the Company announced a plan to
reduce its annual operating costs on continuing catalogs by approximately $50
million starting January 1, 1997. See "THE COMPANY." The Company's ability to
sufficiently improve upon its prior year's performance and implement its
business strategy, including realignment of business units and expense
reductions, is critical to maintaining adequate liquidity. There can be no
assurance that the Company's future operations will generate net income. The
generation of net income will depend on 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, the level of competition, the ability of the
Company to implement improved inventory procedures to more effectively control
its business 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 Annual Report on Form 10-K for the fiscal year ended December 28,
1996. In addition, to the extent the Company's revenues continue to decline, the
Company may lose the critical mass it needs to cover fixed overhead costs.
9
<PAGE> 11
IMPORTANCE OF LIQUIDITY TO THE COMPANY'S EXISTENCE
As of December 28, 1996, the Company had borrowed approximately $27.2
million of the $53.2 million available under its $75 million secured credit
facility (the "Credit Facility") with Congress Financial Corporation
("Congress") and had approximately $5 million of cash on hand. Remaining
availability under the Credit Facility was approximately $26.0 million at
December 28, 1996. At April 22, 1997, the Company had approximately $27.4
million of borrowings under the revolving credit facility (including documentary
and standby letters of credit) and approximately $8.6 million outstanding under
term loans, which are due in November 1997, as well as approximately $1.7
million of cash on hand. Remaining availability under the Credit Facility was
approximately $6.6 million at April 22, 1997. See "THE COMPANY -- Financing --
Credit Facility." On April 23, 1997, Richemont advanced $30 million against its
commitment to purchase all of the Unsubscribed Shares pursuant to the Standby
Purchase Agreement. 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, which requires the Company to maintain certain
specified levels of working capital and net worth, and would accordingly be
required to seek waivers therefrom and amendments thereto. The Company has been
successful to date in obtaining waivers with respect to prior defaults including
defaults for the 1996 fiscal year but there can be no assurance that the Company
will be able to do so in the future. If the Company suffers a default in the
future and is not able to obtain waivers and does not have availability under
the Credit Facility, 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.
The Company has substantial indebtedness which will become due in the next
twelve months. As of December 28, 1996, the Company had approximately $8.9
million of revolving term loans under the Credit Facility outstanding which are
due in November 1997. In addition, the Company had approximately $27.9 million
of letters of credit available under the letter of credit facility provided by
Richemont. The letters of credit will expire on February 18, 1998 and must be
replaced by the Company.
TIGHTENING OF VENDOR CREDIT
As a result of the operating losses mentioned above (see "RISK
FACTORS -- Operating Losses; Future Operating Results") and the Company's
increased lack of liquidity, the Company experienced a tightening of vendor
credit which has impacted the Company's ability to obtain merchandise on a
timely basis. This has resulted in higher back order levels (unfilled orders)
and increased cancellation and fulfillment costs which negatively impacted the
Company's operating results in 1996. During 1996, the Company's back order level
increased from $14.6 million at December 30, 1995 to $21.3 million at December
28, 1996. These back order levels have negatively affected initial order
fulfillment rates which resulted in higher fulfillment expense due to increased
split shipments and higher warehouse handling costs. Fulfillment costs
(telemarketing, distribution, outbound transportation and credit card commission
costs) increased from $91.4 million in 1995 (or 13% of sales) to $97.9 million
in 1996 (or 14% of sales). Due to continued operating losses, the Company was
required to use the proceeds from the $50 million rights offering conducted by
the Company in the third quarter of 1996 (the "1996 Rights Offering") to fund
such losses and the Company's working capital requirements. The Company believes
that upon completion of the Rights Offering, the Company will return to more
favorable trade terms with its 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. See "RISK FACTORS -- Dependence on Suppliers."
The Company has also experienced a general tightening of credit available
to it as a result of its poor financial performance. For example, the Company
has had difficulty concluding arrangements with equipment lessors in connection
with certain equipment leasing transactions. If the Company's financial
performance does not improve, to the extent the Company will be able to
consummate any such or similar transactions, it will do so at a higher cost than
would otherwise be available to it.
10
<PAGE> 12
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 recently, requiring companies to make a greater
investment in working capital and systems which increase customer service
(including improved delivery time and increased fill rates) in order to be
competitive. The mail order catalog industry's fixed costs have also 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 systems 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
Annual Report on Form 10-K for the fiscal year ended December 28, 1996.
REDUCTION IN CUSTOMER LISTS
During 1996, the Company mailed approximately 332 million catalogs. The
Company maintains a proprietary customer list currently containing approximately
14 million names of customers who have made purchases from at least one of the
Company's catalogs within the past 36 months. This number is down from 18
million names in 1995 and 19 million names in 1994. Over 6 million of the names
on the current list represent customers who have made purchases from at least
one of the Company's catalogs within the last 12 months. This number is down
from 7 million names in each of 1995 and 1994. To the extent the Company's
customer list continues to decline, it may have a material adverse impact on the
Company's future revenues and growth potential.
IMPORTANCE OF DOMESTICATIONS(R)
The Company's Domestications(R) catalog is one of the nation's leading
specialty home textile catalogs. Domestications'(R) revenues decreased from
approximately $311 million in 1993 to revenues of approximately $202 million in
1996. Domestications'(R) 1993 revenues constituted approximately 48% of the
Company's 1993 revenues while its 1996 revenues constituted approximately 34% of
the Company's 1996 revenues from continuing catalogs. Domestications'(R)
revenues continued to decline in the first quarter of 1997 and are expected to
be less than such revenues in the first quarter of 1996. Domestications'(R)
product contribution margin, which decreased 7 percentage points to (4)% from
December 30, 1995 to December 28, 1996, was significantly impacted by additional
costs in connection with its fulfillment operations at its home fashions
distribution center in Roanoke, Virginia and by the lower recovery rates
experienced from accelerated disposition of inventory as a result of poor
in-stock positions resulting from liquidity problems. The Company's failure to
increase the product contribution margins of Domestications(R) would have a
material adverse effect upon its financial condition and results of operations.
IMPORTANCE OF THE COMPANY STORE(R) AND IMPROVEMENTS(R)
The Company acquired the assets of The Company Store(R) in August 1993 and
Improvements(R) in January 1995. The Company Stores'(R) revenues have increased
from $53.3 million in 1994 to $81.2 million in 1996 while Improvements'(R)
revenues have increased from $33.7 million in 1995 to $42.9 million in 1996. The
Company does not anticipate a decline in the performance of these businesses,
but if one should occur it could have a material adverse effect on the Company's
financial condition 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 1996, catalog mailing and product shipment
expenses represented approximately 18% of revenues. Despite the reclassification
of postal rates that became effective on July 1, 1996 which resulted in a
decrease in such rates, the Company's mailing expenses did not change from 1995
to 1996 due principally to the
11
<PAGE> 13
inefficiencies in its Roanoke, Virginia fulfillment center and the tightening of
vendor credit which resulted in a number of split shipments. See "RISK
FACTORS -- Tightening of Vendor Credit." Although it is generally the policy of
the Company to recover the costs of shipping and handling from its customers, in
1996 it was unable to fully recover such costs. Paper costs represented
approximately 8% of revenues in 1996. The Company does not expect a material
reduction in these cost levels in 1997. In fact, the Company anticipates that
paper prices will increase in the second half of 1997. The Company also
anticipates an increase in postal rates in 1998. Significant increases in postal
rates or paper costs would have a material adverse impact on the Company's
results of operations to the extent that the Company is unable to offset such
increases by raising selling prices or by implementing more efficient mailing,
delivery and order fulfillment systems.
PAPER SHORTAGE
From time to time, direct mail marketers have experienced a shortage of
paper supply. Although the Company has in the past been able generally to
satisfy its paper requirements, should another paper shortage arise, the Company
may be unable to obtain paper in adequate quantities to produce its catalogs.
INEFFICIENCIES IN CONNECTION WITH NEW FULFILLMENT FACILITIES
The Company consolidated certain warehouse and fulfillment operations in
1995 and 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 in connection therewith. As part
of its plan to reduce annual operating costs, the Company intends to consolidate
its Roanoke, Virginia and its Hanover, Pennsylvania fulfillment operations into
its home fashions distribution center in Roanoke, Virginia. These moves are
expected to be completed in the second half of 1997 and are expected to improve
throughput and productivity at the facility while reducing the Company's
operating costs. However, there is no assurance that the Company will be able to
complete such moves on a timely basis, or that they will be executed without
disruption to the business of one or more of the Company's catalogs or that
additional costs will not be incurred in connection therewith. Although the
Company believes its actions 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 operations at 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
Company's Annual Report on Form 10-K for the fiscal year ended December 28,
1996.
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 28, 1996, the Company had invested
approximately $17.9 million of capitalized costs in such systems and anticipates
capital expenditures of approximately $1 million to complete the conversion. The
Company brought two catalogs on-line in 1994, eight catalogs on-line in 1995 and
one catalog on-line in 1996 (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 1997. 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 a material adverse effect on the results of
operations or that the new
12
<PAGE> 14
systems will be implemented as currently scheduled or that they will achieve the
goals established by the Company.
CALL CENTER SERVICES AGREEMENT
In the first quarter of 1997, the Company entered into a three-year call
center services agreement with MCI Communications Corp. In connection therewith,
the Company agreed to guarantee certain levels of call volume with certain
exceptions which will create a liability in the event such levels of call volume
are not achieved for whatever reason. In the event such levels of call volume
are not achieved, the Company's results of operations may be materially
adversely effected. See "THE COMPANY -- Telemarketing."
IMPLEMENTATION OF IMPROVED INVENTORY PROCEDURES
The Company maintained a higher level of inventory than is consistent with
satisfactory product contribution margins. In the latter part of 1996, the
Company began implementing a plan to reduce the amount of such inventory.
Inventories amounted to $67.6 million at December 28, 1996 as compared to $79.3
million at December 30, 1995, which represents approximately 38 days of sales
and inventory at December 28, 1996 as compared to approximately 40 days at
December 30, 1995. The Company has initiated additional procedures such as "open
to buy" limitations to reduce its inventory position. There is no assurance that
the Company will be able to implement these new procedures, particularly in a
new decentralized environment. In the event the Company cannot implement these
procedures successfully, there may be an adverse effect on the Company's results
of operations.
DECREASE IN PRODUCT CONTRIBUTION MARGINS
The Company's product contribution margin, after distribution costs, for
the year ended December 28, 1996 was approximately (1.7)% while for the year
ended December 30, 1995 it was approximately 6.7%. Product contribution margins
have decreased due to additional costs in connection with its fulfillment
operations at the Company's home fashions distribution center in Roanoke,
Virginia and the lower recovery rates experienced from accelerated disposition
of inventory as a result of poor in-stock positions resulting from liquidity
problems. If the Company is unable to reverse such product contribution margin
declines, its results of operations will be materially adversely effected.
CONSUMER SPENDING; WEAKNESS IN CONSUMER RESPONSE
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's financial condition or results of operations. In addition, due to
reduced customer satisfaction arising from low fill rates and poor customer
service, future response rates to the Company's product offerings could be
significantly below past performance.
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, charges under which it finances through its facility with
General Electric Credit Corporation. The Company has also utilized deferred
billing arrangements for some of its catalogs from time to time but has
decreased such use recently due to liquidity issues. The use of credit cards and
deferred billing arrangements could be costly to the Company since it may need
to fund such charges under available credit facilities. The Company's bad debt
expense for the year ended December 28, 1996 was approximately $6.8 million
while its bad debt expense for the year ended December 30, 1995 was
approximately $4.5 million. There is no assurance that the use of credit cards
and deferred billing arrangements will not lead to higher bad debt expenses,
which would have a material adverse effect on the Company's results of
operations.
13
<PAGE> 15
REVENUES ASSOCIATED WITH DISCONTINUED CATALOGS
The Company's revenues in 1996 were reduced by approximately $63 million
from $166 million to $103 million related to discontinued catalogs. Revenues
related to discontinued catalogs decreased in the first quarter of 1997. 1997
revenues may continue to be adversely impacted as a result of such
discontinuance.
ADJUSTMENTS IN CARRYING VALUE AND USEFUL LIFE
The Company assesses the carrying value and the economic useful life of its
long-lived assets on an ongoing basis based on the estimated future net cash
flows from such assets. The Company adjusted the carrying value of certain of
its assets and took charges in 1996 of approximately $22 million relating
thereto. There can be no assurance that the Company will not adjust the carrying
value and the economic useful life of such long-lived assets further in the
future which could have a material adverse effect on the Company's financial
condition and results of operations.
COMPETITION
The mail order catalog business is highly competitive. Sales growth in the
direct marketing industry has encouraged the entry of many new competitors and
an increase in competition from established companies. The Company's catalogs
compete with other mail order catalogs, both specialty and general, and retail
stores, including department stores, specialty stores and discount stores. In
addition, new methods of competition, such as the internet, are posing new
opportunities and threats to the Company's business. 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."
SEASONALITY
The Company has experienced substantially increased sales in the fourth
quarter of each year as compared to the first three quarters, due primarily to
the Company mailing more catalogs in the second part of the year. As a result,
the fourth quarter is increasingly important to the Company's results of
operations. However, in 1995 and 1996, the Company sustained net losses in such
quarter. Accordingly, there can be no assurance that the Company's fourth
quarter operations will continue to be more successful than the first three
quarters.
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 respective catalogs with the quantities of merchandise
on the terms currently offered to the respective catalogs or that the respective
catalogs 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 1996, due to
concerns over continuing operating losses at the Company and issues concerning
the Company's continuing viability in light of the very difficult year for the
Company, certain vendors tightened the terms available to the Company which
resulted in higher back order levels and increased fulfillment costs which, in
turn, negatively impacted the Company's operating results for the year. In
addition, in recent weeks, certain factors have refused to extend credit against
Company purchases. As a result, the Company has elected to deal directly with
certain vendors. However, some of the Company's vendors have refused to ship to
the Company on any terms. The Company believes that upon the completion of the
Rights Offering, the Company will return to more favorable trade terms with its
suppliers; however, if the Company continues to experience operating losses, the
Company may not be able to obtain
14
<PAGE> 16
such terms or sufficient quantities of merchandise on a cost-effective and
timely basis to satisfy customer demand.
FOREIGN SOURCING
Approximately 12% 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, disruptions or delays in shipments and transportation,
labor disputes and strikes. The Company minimizes currency risks by making most
foreign purchases in U.S. dollars and does not generally utilize hedging
instruments. The occurrence of any one or more of the other risks of doing
business overseas could materially adversely effect the Company's financial
position and its 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. As a result of the Company's
losses, management turnover at the Company has been high. The Executive Vice
President, Secretary and General Counsel and the Executive Vice President and
Chief Financial Officer resigned in 1996. In addition, the Company's Chief
Information Officer resigned but has been replaced. The Company recently
retained a new President and Chief Executive Officer, Rakesh K. Kaul, who is
building a management team, as well as a new Chief Financial Officer, Larry J.
Svoboda. The General Counsel position is currently being filled on a part-time
basis by an individual who has served as an outside provider of legal services
to the Company. The Company does not currently have a retention program for its
personnel. The loss of the services of the Company's management personnel could
adversely effect the Company's results of operations.
TAX LOSS CARRYFORWARDS
Realization of certain future tax benefits (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 among other things 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 13 of Notes to Consolidated
Financial Statements included elsewhere in this Prospectus.
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 is the beneficial owner of approximately 55.7% of the Company's Common
Stock on a fully-diluted basis as of the date hereof. Assuming that all of the
holders of Rights other than NAR exercise their Rights and that NAR exercises
only the Rights distributed to it to purchase shares of Common Stock having an
aggregate purchase price of $10 million and Richemont acquires the balance of
NAR's shares, NAR would own approximately 46.1% of the Common Stock of the
Company after the Rights Offering on a fully-diluted basis and Richemont would
own approximately 9.3% of the Common Stock after the Rights Offering on a
fully-diluted basis. Assuming that no Rights are exercised by the holders
thereof other than NAR but that all
15
<PAGE> 17
the conditions of the Standby Purchase Agreement are satisfied or waived and
that NAR exercises the Rights only to purchase shares of Common Stock having an
aggregate purchase price of $10 million and Richemont purchases all of the
Unsubscribed Shares pursuant to the Standby Purchase Agreement, NAR would own
approximately 46.1% of the Common Stock after the Rights Offering on a
fully-diluted basis and Richemont would own approximately 22.2% of the Common
Stock after the Rights Offering on a fully-diluted basis. Currently, 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 AND RICHEMONT
As the Company's financial performance has deteriorated, the Company has
become increasingly dependent on NAR and its affiliates, including Richemont,
for financial support. 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 from a third party in connection with the
refinancing of the Company's indebtedness under the Credit Facility. In
connection with the 1996 Rights Offering, NAR advanced $25 million to the
Company which was repaid out of the proceeds of the 1996 Rights Offering. In
addition, in connection with the 1996 Rights Offering, NAR agreed pursuant to a
standby purchase agreement between it and the Company to exercise all rights
distributed to it and to purchase all unsubscribed shares in the 1996 Rights
Offering. As a result of its commitment, NAR acquired an aggregate of 30,914,830
shares of the Company's Common Stock at an aggregate cost to it of approximately
$31,842,275. In September 1996, IMR loaned the Company $10 million as evidenced
by the IMR Promissory Note in the principal amount of $10 million which became
due in November 1996. NAR and the Company have agreed that such note will be
used to satisfy NAR's agreement to acquire shares of Common Stock having an
aggregate purchase price of at least $10 million in the Rights Offering. In
December 1996, Richemont provided the Company with a facility for issuing up to
approximately $28 million of letters of credit.
The Company and Richemont have entered into the Standby Purchase Agreement
pursuant to which Richemont will be required, subject to the fulfillment of
various terms and conditions thereof, to purchase all Unsubscribed Shares in the
Rights Offering. NAR has irrevocably agreed with the Company, subject to and
upon the consummation of the Rights Offering, to exercise that number of Rights
distributed to it for the purchase of shares of Common Stock having an aggregate
purchase price of at least $10 million, the purchase price for such shares to be
paid by NAR by the surrender and cancellation of the principal amount of the IMR
Promissory Note. NAR has also advised the Company that it currently does not
intend to exercise any additional Rights which it receives but may attempt to
dispose of such Rights in the open market. If all of the Rights are exercised,
Richemont will not be required to purchase any of the Common Stock issuable upon
the exercise of the Rights. As compensation to Richemont for its commitment
under the Standby Purchase Agreement, the Company has agreed to pay to
Richemont, on the Closing Date or at such other time and date as Richemont and
the Company may agree in writing, certain fees described more fully under the
caption "THE RIGHTS OFFERING -- Standby Purchase Commitment." Richemont has
advanced $30 million against 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 Richemont" and "USE OF
PROCEEDS."
There is no assurance that NAR, Richemont or their affiliates will continue
to support the Company financially should the Company need such support since
NAR, Richemont and their affiliates are under no obligation to do so. There is
no assurance that should NAR, Richemont or their 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 Richemont,
the obligation of Richemont to purchase any Unsubscribed Shares may be cancelled
upon notice by Richemont. In the event that the conditions contained in the
Standby Purchase Agreement are not met by the Company and are not waived by
Richemont, 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 Richemont would waive the
non-occurrence of any of the conditions, if
16
<PAGE> 18
Richemont does not do so, the cancellation by Richemont of its obligation to
purchase any Unsubscribed Shares would have a material 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 55.7% of the Company's Common
Stock on a fully-diluted basis as of the date hereof. Alan G. Quasha, a director
and chairman of the Board of Directors of the Company, may be deemed to be an
indirect beneficial owner of the securities beneficially owned by NAR, although
Mr. Quasha disclaims such beneficial ownership. Conflicts of interest may arise
as a result of this affiliated relationship. Similarly, Howard M. S. Tanner and
Jan P. du Plessis, directors of the Company, may be deemed to be indirect
beneficial owners of the Common Stock owned indirectly by Richemont, although
they disclaim such beneficial ownership, and to have similar conflicts.
SHARES ELIGIBLE FOR FUTURE SALE
In the future, Richemont, to the extent it acquires shares pursuant to the
Standby Purchase Agreement, and NAR will be able to sell shares of Common Stock
owned by them 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.
The Subscription Price of the Rights has been determined by the Company and
represents a premium to the market price of the Common Stock at the date of this
Prospectus. There can be no assurance that 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 Basic Subscription Privilege will be delivered to subscribers as soon as
practicable after the Expiration Date. Certificates representing shares of
Common Stock purchased pursuant to the Oversubscription Privilege will be
delivered to subscribers as soon as practicable after the Expiration Date and
after all prorations have been effected. 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 Series B
Preferred Stock to purchase shares of Common Stock at a price above the
prevailing market price of the Common Stock immediately prior to the
commencement of the Rights Offering. Holders of shares of Common Stock and
Series B Preferred Stock who exercise their Rights will preserve, and through
the Oversubscription Privilege may increase, 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.
17
<PAGE> 19
Assuming all of the Rights are exercised and based on 144,404,697 shares of
Common Stock and 634,900 shares of Series B Preferred Stock outstanding on April
24, 1997, the consummation of the Rights Offering would result (on a pro forma
basis as of such date) in an increase of approximately 55,555,556 shares of
Common Stock. NAR is the beneficial owner of approximately 55.7% of the Common
Stock on a fully-diluted basis as of such date. Assuming that all of the holders
of the Rights other than NAR exercise such Rights and that NAR exercises the
Rights distributed to it with respect to shares of Common Stock having an
aggregate purchase price of $10 million and all the conditions of the Standby
Purchase Agreement are satisfied or waived and that Richemont purchases all of
the Unsubscribed Shares pursuant to the Standby Purchase Agreement, NAR would
own approximately 46.1% of the Common Stock of the Company after the Rights
Offering on a fully-diluted basis and Richemont would own approximately 9.3% of
the Common Stock after the Rights Offering on a fully-diluted basis. Assuming
that no Rights are exercised by the holders thereof other than NAR, but that NAR
exercises the Rights distributed to it with respect to shares of Common Stock
having an aggregate purchase price of $10 million and all the conditions of the
Standby Purchase Agreement are satisfied or waived and that Richemont purchases
all of the Unsubscribed Shares pursuant to the Standby Purchase Agreement, NAR
would own approximately 46.1% of the Common Stock after the Rights Offering on a
fully-diluted basis and Richemont would own approximately 22.2% 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 should not
result in a taxable distribution of property for federal income tax purposes to
the holders of shares of Common Stock. The distribution of Rights pursuant to
the Rights Offering to holders of Series B Preferred Stock will be treated as a
distribution of property to which section 301 of the Internal Revenue Code of
1986, as amended (the "Code"), applies with the amount of such distribution
measured by the fair market value of the Rights on the date of distribution.
However, the provisions of the 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
Richemont's standby purchase commitment, after payment of approximately $3.0
million of fees and expenses incurred in connection with the Rights Offering and
after giving effect to the surrender and cancellation by NAR of the principal
amount of the IMR Promissory Note to pay for shares acquired by it pursuant to
the Rights Offering, will be approximately $37.0 million. The Company intends to
use such net proceeds to repay the Richemont Promissory Note and to use the
balance of the net proceeds for working capital and general corporate purposes,
including to repay amounts, if any, outstanding under the Credit Facility with
Congress (approximately $2.6 million under the revolving line of credit
(including documentary and standby letters of credit) as of April 24, 1997).
On April 23, 1997, the Company executed and delivered the Richemont
Promissory Note. As of April 24, the Company has drawn $30 million thereunder.
The Richemont Promissory Note carries an interest rate of 1.5% above prime which
is payable in cash at maturity. See "RECENT DEVELOPMENTS -- Pre-Funding by
Richemont."
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 April 24, 1997, the Company had
approximately $2.6 million of outstanding borrowings under the revolving line of
credit (including documentary and standby letters of credit) and approximately
$8.6 million outstanding under the term loans. The rates of interest related to
the revolving line of credit and the term loans were 9.75% and 10.00%,
respectively, at April 24, 1996.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 28, 1996 and as adjusted to reflect the net proceeds of
approximately $47.0 million from the sale of the 55,555,556 shares of the Common
Stock offered by the Company at a subscription price of $.90 and the repayment
of the principal amount of the IMR Promissory Note. See "USE OF PROCEEDS."
<TABLE>
<CAPTION>
AT DECEMBER 28, 1996
-----------------------
AS
ACTUAL ADJUSTED
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
<S> <C> <C>
Total debt (includes the current portion of long-term debt of $11.5
million)(a):
Congress Facility.................................................. $ 22,627 $ 8,917
Term Financing Facility............................................ 19,000 19,000
IMR Promissory Note................................................ 10,000 --
Industrial Revenue Bonds due 2003.................................. 8,000 8,000
6% Mortgage Notes Payable due 1998................................. 2,969 2,969
7 1/2% Convertible Subordinated Debentures due 2007................ 751 751
Capital Leases..................................................... 1,826 1,826
Other.............................................................. 16 16
--------- ---------
Total debt................................................. 65,189 41,479
Shareholders' equity:
Series B Convertible Additional Preferred Stock, $.01 par value,
authorized and issued 634,900 shares in 1996.................... 5,748 5,748
Common Stock, $.66 2/3 par value, authorized 225,000,000 shares;
issued 145,039,915 in 1996 and outstanding shares issued and
199,960,253 outstanding, as adjusted(b)(c)...................... 96,693 133,730
Capital in excess of par value..................................... 270,097 280,060
Accumulated deficit................................................ (336,586) (336,586)
Less:
Treasury stock, at cost (392,017 shares at December 28, 1996)...... (813) (813)
Notes receivable from sale of Common Stock......................... (3,399) (3,399)
--------- ---------
Total shareholders' equity................................. 31,740 78,740
--------- ---------
Total capitalization....................................... $ 96,929 $ 120,219
========= =========
</TABLE>
- ---------------
(a) The Company intends to repay borrowings outstanding under the Credit
Facility, if any, with any proceeds from the Rights Offering in excess of
the Richemont Promissory Note. NAR has agreed that the principal amount of
the IMR Promissory Note will be used to satisfy NAR's obligation to acquire
shares of Common Stock having an aggregate purchase price of at least $10
million.
(b) Excludes 6,093,655 shares of Common Stock issuable upon exercise of
outstanding options and warrants exercisable within 60 days of April 28,
1997.
(c) The gross proceeds of the Rights Offering are $50 million and the Company
estimates incurring approximately $3.0 million in fees and expenses
associated with the filing, resulting in net proceeds of approximately $47.0
million. After giving effect to the use by NAR of the principal amount of
the IMR Promissory Note to satisfy NAR's obligation to acquire shares of
Common Stock having an aggregate purchase price of at least $10 million, the
net cash proceeds of the Rights Offering to the Company will be
approximately $37.0 million.
19
<PAGE> 21
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. See "RISK FACTORS -- Restrictions on Dividends."
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>
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 3/4 1 1/8
Second Quarter............................................ 2 1 1/8
Third Quarter............................................. 1 5/8 7/8
Fourth Quarter............................................ 1 5/8
1997
First Quarter............................................. 1 1/8 5/8
Second Quarter (through April 24, 1997)................... 3/4 5/8
</TABLE>
As of April 28, 1997, there were approximately 4,715 holders of record of
the Common Stock. On April 24, 1997, the closing price of the Common Stock on
the AMEX was $.75 per share.
RECENT DEVELOPMENTS
PRE-FUNDING BY RICHEMONT
In order to facilitate improved vendor shipments and to permit the
commencement of the Company's plan to consolidate certain of its warehousing
facilities, the Company requested that Richemont advance up to $30 million from
time to time upon the Company's request. As of the date of this Prospectus,
Richemont has advanced $30 million against its commitment to purchase all of the
Unsubscribed Shares. In connection therewith, the Company has executed the
Richemont Promissory Note. The Company will repay to Richemont any amounts
outstanding under the Richemont Promissory Note on the earlier of August 30,
1997 or the completion of the Rights Offering. The Richemont Promissory Note is
subordinate to the Credit Facility. See "RISK FACTORS -- Dependence on NAR and
Richemont."
CREDIT ARRANGEMENTS
In September 1996, IMR loaned the Company $10 million as evidenced by a
subordinated promissory note in the principal amount of $10 million (the IMR
Promissory Note). Such loan bears interest at 1.5% above the prime rate, and was
due on November 14, 1996. If it is not repaid before May 15, 1997 and if the
Rights Offering is not consummated, the IMR Promissory Note is convertible at
the option of NAR into shares of Common Stock at the lower of the fair market
value thereof on the date of execution or the then current fair market value
thereof. The IMR Promissory Note is subordinate to the Credit Facility and
excluded from the working capital covenant calculation. By agreement dated March
26, 1997, NAR
20
<PAGE> 22
irrevocably agreed with the Company, subject to and upon the consummation of the
Rights Offering, to exercise at the Subscription Price that number of Rights
distributed to it for the purchase of shares of Common Stock having an aggregate
purchase price of at least $10 million. NAR agreed to pay for and the Company
agreed to accept as payment for the aggregate purchase price of such shares at
the closing of the Rights Offering the surrender by NAR of the IMR Promissory
Note and the cancellation of the principal amount thereof.
On December 19, 1996, the Company finalized its agreement (the
"Reimbursement Agreement") with Richemont that provided the Company with up to
approximately $28 million of letters of credit which were previously issued
under the Credit Facility. The Company paid a facility fee equal to 5% of the
principal amount of the letters of credit as well as all other fees incurred in
connection with providing the facility. The letters of credit will expire on
February 18, 1998 and carry an interest rate (currently 11.75%), which is 3.5%
above the prime rate, payable only on amounts drawn under the letters of credit.
In the event that the Company has not paid in full, by the expiration date, any
outstanding balances under the letters of credit, Richemont shall have the
option, exercisable at any time prior to payment in full of all amounts
outstanding under the letters of credit, to convert such amount into Common
Stock of the Company at the mean of the bid and ask prices of the Company's
Common Stock on November 8, 1996, or the mean of the bid and ask prices of the
Company's Common Stock on each of the thirty days immediately prior to the date
of exercise of the conversion privilege. The Reimbursement Agreement is
subordinate to the Credit Facility. On December 5, 1996, Richemont advanced the
Company $10 million against the anticipated $28 million line of credit. The
Company repaid the $10 million loan after the letter of credit agreement was
completed on December 19, 1996. See "RISK FACTORS -- Dependence on NAR and
Richemont."
SEARS
In January 1994, the Company entered into a licensing agreement (the "Sears
Agreement") with the direct marketing subsidiary of Sears, Roebuck and Co.
("Sears") to produce specialty catalogs for the more than 20 million mail order
and credit card customers of Sears. The catalogs mailed under the program were
based on existing Company catalogs and contained a title page with the Sears
name and logo. The specialty catalogs included: Show Place, based on the
Domestications(R) catalog, Great Kitchens, based on the Colonial Garden
Kitchens(R) catalog, and Sears Improvements, based on the
Improvements(R)catalog. Show Place and Great Kitchens are trademarks of Sears.
The Sears Agreement had an initial three-year term with automatic renewals
thereafter unless, commencing December 31, 1996, either party gave at least 12
months prior written notice that the agreement would terminate at the end of the
initial term or any extended term. The Company was obligated to meet various
operational performance standards under the Sears Agreement. If the Company was
unable to meet these standards (after written notice and a 30-day cure period),
Sears would be entitled to terminate the Sears Agreement. Sears exercised its
right to terminate the venture in December 1996, since the Company was not
meeting certain of the operational standards, namely the order fulfillment and
reporting standards, but the Company and Sears each retain the right to mail
catalogs to customers of the venture. The last catalogs were mailed in the first
quarter of 1997. The Company estimates that the termination of the venture will
not have a material impact on the Company's earnings for 1997.
BOARD OF DIRECTORS
In conjunction with the Standby Purchase Agreement, the Company named two
officers of Richemont, Jan P. du Plessis and Howard M. S. Tanner, to its Board
of Directors and Executive Committee, and may nominate a third Richemont
representative to the Board at the next annual meeting of shareholders scheduled
for June 12, 1997. The new Board members fill positions vacated by the recent
resignations of Geraldine Stutz and Jeffrey R. Laikind. In addition, Mr. du
Plessis has been named to the Audit Committee of the Board.
21
<PAGE> 23
THE COMPANY
The Company is a leading direct specialty retailer that markets, via a
portfolio of branded specialty catalogs, home fashions, general merchandise,
men's and women's apparel and gifts. In December 1996, the Company regrouped its
catalog titles so that all significant decisions, including those regarding
market positioning and strategy, merchandising, circulation levels, catalog
design, inventory management and cash management, are now made by six
newly-created strategic business units -- Home Fashions-Mid-Market, Home
Fashions-Upscale, General Merchandise, Women's Apparel, Men's Apparel and
Gifts -- each consisting of one or more catalog operations. All of these
business units will continue to utilize the Company's central purchasing,
telemarketing, fulfillment, distribution and administrative functions.
The Company's home fashions-mid-market strategic business unit includes
Domestications(R), a leading specialty home textile catalog. The home
fashions-upscale group includes The Company Store(R), an upscale direct marketer
of down comforters and other down and related products for the home, and Kitchen
& Home(R), an upscale kitchen and home product catalog. The general merchandise
group includes Improvements(R), a do-it-yourself home improvements catalog, The
Safety Zone(R), a direct marketer of safety, prevention and protection products,
and Colonial Garden Kitchens(R), featuring work saving and lifestyle enhancing
items for the kitchen and home. The women's apparel group includes
Silhouettes(R), featuring everyday, workout, special occasion and career
fashions for larger sized women, and Tweeds(R), the European inspired women's
fashion catalog. The men's apparel group includes International Male(R),
offering unique men's fashions with an international flair, Austad's(R), a
direct marketer of golf equipment, apparel and accessories, and Undergear(R), a
leader in activewear, workout wear and fashion underwear for men. The gifts
group includes Gump's By Mail(R), a leading upscale catalog of luxury gifts, and
Gump's, a leading retail store based in San Francisco.
During 1996, the Company mailed approximately 332 million catalogs. The
Company maintains a proprietary customer list currently containing approximately
14 million names of customers who have made purchases from at least one of the
Company's catalogs within the past 36 months. Over 6 million of the names on the
list represent customers who have made purchases from at least one of the
Company's catalogs within the last 12 months.
In December 1996, the Company announced a plan to reduce its annual
operating costs with respect to continuing catalogs by approximately $50 million
starting January 1, 1997. Under the plan, the Company's fixed overhead is to be
reduced by approximately $16 million, its marketing expenditures are to be
reduced by approximately $21 million and other operating costs are to be reduced
by approximately $13 million. The planned fixed overhead reductions will result
primarily from the shutdown of excess telemarketing capacity in the Company's
Roanoke, Virginia facility and the consolidation of the Company's apparel
distribution facility in Roanoke, Virginia and its warehouse operations in
Hanover, Pennsylvania with and into its home fashions distribution center in
Roanoke, Virginia. The Company also announced a reduction in the number of
full-time employees of approximately 550. The marketing expenditures reduction
is primarily driven by elimination of unprofitable circulation and improved
customer retention and target segmentation, but does not contemplate the
discontinuance of any of the current core catalogs. See "RISK
FACTORS -- Operating Losses; Future Operating Results."
THE COMPANY'S CATALOGS
Each of the Company's specialty catalogs targets distinct market segments
offering a focused assortment of merchandise designed to meet the needs and
preferences of its target customers. Through market research and ongoing testing
of new products and concepts, each strategic business unit determines each
catalog's own merchandise strategy, including the appropriate price points,
mailing plans and presentation of its products. The Company is continuing its
development of exclusive or private label products for a number of its catalogs,
including Domestications(R), Tweeds(R), Austad's(R) and The Company Store(R), to
further enhance the brand identity of the catalogs.
The Company's specialty catalogs typically range in size from 32 to 96
pages with four to twelve new editions per year depending on the seasonality and
fashion content of the products offered. Each edition may be mailed several
times each season with variations in format and content. Each catalog employs
the services
22
<PAGE> 24
of an outside creative agency or has its own creative staff which is responsible
for the design, layout, copy, feel and theme of the book. Generally, the initial
sourcing of new merchandise for a catalog begins two to six months before the
catalog is mailed.
The Company reviews its portfolio of catalogs as well as new opportunities
to acquire or develop catalogs from time to time. 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). No catalogs were
discontinued during the 1996 fiscal year. See "RISK FACTORS -- Revenues
Associated with Discontinued Catalogs."
In December 1996, the Company's operations were divided into six strategic
business units -- Home Fashions-Mid-Market, Home Fashions-Upscale, General
Merchandise, Women's Apparel, Men's Apparel and Gifts -- so that all significant
decisions, including those regarding market positioning and strategy,
merchandising, circulation levels, catalog design, inventory management and cash
management, would be made by the newly-created units in order to create
efficiency and bottom-line accountability. Revenues and the percent of total
revenues for 1996 and 1995 for each of the Company's six business units are set
forth below; all revenues are net of returns:
<TABLE>
<CAPTION>
1996 1995
1996 PERCENT OF 1995 PERCENT OF
REVENUES TOTAL REVENUES REVENUES TOTAL REVENUES
-------- -------------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Home Fashions
Mid-Market.................... $202.2 28.9% $223.7 29.8%
Upscale....................... 97.2 13.9 81.8 10.9
General Merchandise............. 79.3 11.3 73.5 9.8
Women's Apparel................. 82.7 11.8 76.7 10.2
Men's Apparel................... 78.4 11.2 77.9 10.4
Gifts........................... 57.7 8.2 50.7 6.8
------ ----- ------ -----
Total Continuing................ 597.5 85.3 584.3 77.9
Discontinued.................... 102.8 14.7 165.5 22.1
------ ----- ------ -----
Total Company................... $700.3 100.0% $749.8 100.0%
====== ===== ====== =====
</TABLE>
The following is a description of the Company's core catalogs in each of
the Company's six strategic business units:
Home Fashions-Mid-Market
Domestications(R) is a leading specialty home textile catalog and a fashion
decorating source book for today's value-oriented and style-conscious consumer.
Domestications(R) features sheets, towels, comforters, tablecloths, draperies
and other items for the home. Many of its products are coordinated with matching
accessories. See "RISK FACTORS -- Importance of Domestications(R)."
Home Fashions-Upscale
The Company Store(R) is a leading upscale home furnishings catalog
featuring private label down comforters and related down and feather products.
The Company Store(R) also features high quality private label, brand name and
custom bed and bath products. See "RISK FACTORS -- Importance of The Company
Store(R) and Improvements(R)."
Kitchen & Home(R) features upscale, distinctive, functional and fashionable
kitchen and home products for entertaining and decorating.
General Merchandise
Improvements(R) is a leading do-it-yourself home improvement catalog
featuring home improvement accessories. See "RISK FACTORS -- Importance of The
Company Store(R) and Improvements(R)."
The Safety Zone(R) is a direct marketer of safety, protection and
prevention products.
Colonial Garden Kitchens(R) features work saving and lifestyle enhancing
items for the kitchen and home.
23
<PAGE> 25
The Company is developing a new version of the Hanover House(R) catalog
which will be test mailed in 1997.
Women's Apparel
Silhouettes(R) is a women's specialty fashion catalog featuring casual,
career and special occasion apparel for larger sized women.
Tweeds(R) is a European inspired young women's fashion catalog featuring
relaxed, contemporary fashions uniquely designed for the consumer.
Men's Apparel
International Male(R) offers both trendsetting, high profile urban men's
fashions as well as classic American sportswear and European inspired design and
casual wear for men, all at reasonable prices.
Undergear(R) is aimed at the fitness-oriented customer, offering the
largest underwear selection available to men, along with gym-inspired fashions,
swimwear, workout clothes and accessories.
Austad's(R) is a leading direct marketer of fine pro-line golf equipment,
practice aids, accessories and a wide selection of golf apparel.
Gifts
Gump's By Mail(R) is a leading upscale catalog marketer of luxury gifts,
specialized housewares and other unique items.
Gump's is the well-known San Francisco retailer which opened its new store
in March 1995.
MARKETING AND DATABASE MANAGEMENT
The Company maintains a proprietary customer list currently containing
approximately 14 million names of customers who have purchased from one of the
Company's catalogs within the past 36 months. The list contains name, gender,
residence and historical transaction data. This database is selectively enhanced
with demographic, socioeconomic, lifestyle and purchase behavior overlays from
other sources. See "RISK FACTORS -- Reduction in Customer Lists."
The Company utilizes modeling and segmentation analysis, on a catalog by
catalog basis, to devise catalog marketing and circulation strategies that are
intended to maximize customer contribution by catalog. This analysis is the
basis for the Company's determination of which of the Company's catalogs will be
mailed and how frequently to a particular customer, as well as the promotional
incentive content of the catalog(s) such customer receives. As part of its plan
to reduce annual operating costs, the Company intends to reduce catalog
circulation and improve customer retention and target segmentation.
The primary source of new customers for the Company's catalogs is lists
rented from other mailers and compilers. Prior to mailing these non-proprietary
lists, the lists are edited using statistical segmentation tools to enhance
their probable performance. Other sources of new customers include space
advertisements and promotional inserts in outbound merchandise packages. See
"RISK FACTORS -- Consumer Spending; Weakness in Consumer Response."
TELEMARKETING
The Company receives approximately 80% of its orders through its toll-free
telephone service which offers customer access seven days per week, 24 hours per
day. The Company has created a telephone network to link its primary
telemarketing facilities in Hanover, Pennsylvania and LaCrosse, Wisconsin. The
Company's telemarketing facilities utilize state-of-the-art telephone switching
equipment which enables the Company to route calls between telemarketing centers
and thus provide prompt customer service. A satellite telemarketing center is
also located in San Diego, California. The Company handled approximately 7
million telephone order calls in 1996. As part of its December 1996 plan to
reduce operating costs, in February 1997, the Company shut down its
telemarketing capacity in its Roanoke, Virginia facility. In the first quarter
of 1997, the Company entered into a three-year call center services agreement
with MCI Communications Corp. under which it will obtain a material reduction in
the rate which it has been paying pursuant to the
24
<PAGE> 26
telecommunications contract now in effect and savings with respect to certain
database services to be provided to it, which savings are expected to aggregate
approximately $3 million over the term of the contract. In that connection, the
Company agreed to guarantee certain levels of call volume with certain
exceptions which will create a liability in the event such levels of call volume
are not achieved for whatever reason. See "RISK FACTORS -- Call Center Services
Agreement."
The Company trains its telemarketing service representatives to be
courteous, efficient and knowledgeable about the Company's products.
Telemarketing service representatives generally receive 40 hours of training in
selling products, services, systems and communication skills through simulated
as well as actual phone calls. A substantial portion of the evaluation of
telemarketing service representatives' performance is based on how well the
representative meets customer service standards. While primarily trained with
product knowledge to serve customers of one or more specific catalogs,
telemarketing service representatives also receive cross-training that enables
them to take overflow calls from other catalogs. The Company utilizes customer
surveys as an important measure of customer satisfaction.
DISTRIBUTION
The Company presently operates four distribution centers in three principal
locations: two in Roanoke, Virginia for home fashions and apparel, one in
Hanover, Pennsylvania for general merchandise including giftware and other
hardgoods, and one in LaCrosse, Wisconsin for home fashions. The Company's
facilities processed approximately 12.7 million packages in 1996.
As part of its plan to reduce annual operating costs, the Company intends
to consolidate its Roanoke, Virginia and its Hanover, Pennsylvania fulfillment
operations into its home fashions distribution center in Roanoke, Virginia.
These moves are expected to be completed in the second half of 1997 and are
expected to improve throughput and productivity at the facility while reducing
the Company's operating costs. However, there is no assurance that the Company
will be able to complete such moves on a timely basis, or that they will be
executed without disruption to the business of one or more of the Company's
catalogs. See "RISK FACTORS -- Inefficiencies in Connection with New Fulfillment
Facilities" and "-- Decrease in Product Contribution Margins."
The Company mails its catalogs through the United States Postal Service
("USPS") utilizing pre-sort, bulk mail and other discounts. Most of the
Company's packages are shipped through the USPS. Overall, catalog mailing and
package shipping costs approximated 18% of the Company's net revenues in 1996.
The Company obtains rate discounts from the USPS by automatically weighing each
parcel and sorting and trucking packages to a number of USPS drop points
throughout the country. Some packages are shipped using a consolidator for less
frequently used drop points. The Company also utilizes the United Parcel
Service, Federal Express and other delivery services. See "RISK
FACTORS -- Increases in Costs of Mailing and Paper."
PURCHASING
The Company's large sales volume permits it to achieve a variety of
purchasing efficiencies, including the ability to obtain prices and terms that
are more favorable than those available to smaller companies or than would be
available to the Company's individual catalogs were they to operate as
independent companies. Major goods and services used by the Company are
purchased or leased from selected suppliers by its central buying staff. These
goods and services include: paper, catalog printing and printing related
services such as order forms and color separations, communication systems
including telephone time and switching devices, packaging materials, expedited
delivery services, computers and associated network software and hardware. See
"RISK FACTORS -- Dependence on Suppliers."
The Company's telephone telemarketing costs (both inbound and outbound
calls) are typically contracted for a three-year period. In the first quarter of
1997, the Company entered into a three-year call center services agreement with
MCI Communications Corp. See "THE COMPANY -- Telemarketing" and "RISK
FACTORS -- Call Center Services Agreement."
The Company generally enters into annual arrangements for paper and
printing with a limited number of suppliers. These arrangements permit periodic
price increases or decreases based on prevailing market
25
<PAGE> 27
conditions, changes in supplier costs and continuous productivity improvements.
For 1996, paper costs approximated 8% of the Company's net revenues. The Company
anticipates that paper prices will increase in the second half of 1997. The
Company hopes to mitigate the effects of these anticipated price increases by
utilizing a portion of the proceeds of the Rights Offering to purchase paper in
quantity prior to such price increases. However, the Company may not be able to
effectuate the planned purchases on terms satisfactory to it or at all. See
"RISK FACTORS -- Increases in Costs of Mailing and Paper" and "-- Paper
Shortage."
MANAGEMENT INFORMATION SYSTEMS
The Company is continuing to upgrade its management information systems by
implementing new integrated software and migrating from a centralized mainframe
to mid-range mini-computers. The migration of the Company's business
applications to mid-range mini-computers is an important part of the Company's
overall systems plan which defines the mid and long-term systems and computing
strategy for the Company. The Company is continuing to modify and install, on a
catalog by catalog basis, these new integrated systems for use in managing all
phases of the Company's operations. These systems have been designed to meet the
Company's requirements as a high volume publisher of multiple catalogs.
The new software system is an on-line, real-time system which includes
order processing, fulfillment, inventory management, list management and
reporting. The software, where implemented, provides the Company with a flexible
system that offers data manipulation and in-depth reporting capabilities. The
new management information systems are designed to permit the Company to achieve
substantial improvements in the way its financial, merchandising, inventory,
telemarketing, fulfillment and accounting functions are performed. Until the new
system is installed Company-wide, the Company will not achieve the full benefits
of the new system. Two catalogs were brought on-line in 1994. The Company
brought eight additional catalogs on-line in 1995 and one in 1996. The balance
of its catalogs are scheduled to be brought on-line in 1997. As of December 28,
1996, the Company had invested approximately $17.9 million of capitalized costs
in such systems and anticipates capital expenditures of approximately $1 million
to complete the conversion. The Company experienced various problems with the
conversions which have adversely affected its results of operations and although
it believes that it has now identified the source of many of these problems,
future conversions may encounter similar difficulties. See "RISK
FACTORS -- Costs Associated with Computer Systems Conversion."
CREDIT MANAGEMENT
Several of the Company's catalogs, including Domestications(R),
International Male(R) and Gump's By Mail(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. The Company has a five year $75 million credit
facility with General Electric Credit Corporation ("GECC") expiring in the year
2000, which provides for the sale and servicing of accounts receivable
originating from the Company's revolving credit cards. GECC's servicing
responsibilities include credit processing, collections, billing/payment
processing, reporting and credit card issuance. See "RISK FACTORS -- Credit
Risks."
INVENTORY MANAGEMENT
The Company acquires products for resale in its catalogs from numerous
domestic and foreign vendors. No single source supplied more than 5% of the
Company's products in 1996. The Company's vendors are selected based on their
ability to reliably meet the Company's production and quality requirements, as
well as their financial strength and willingness to meet the Company's needs on
an ongoing basis. See "RISK FACTORS -- Foreign Sourcing," "-- Dependence on
Suppliers" and "-- Tightening of Vendor Credit."
Although the Company's inventory management strategy is designed to
maintain inventory levels that provide optimum in-stock positions while
maximizing inventory turnover rates and minimizing the amount of unsold
merchandise at the end of each season, the Company's inventory levels at the end
of 1996 were in excess of planned amounts. The Company has initiated additional
procedures to reduce its inventory position. The Company manages inventory
levels by monitoring sales and fashion trends, making purchasing adjustments as
necessary and by promotional sales. Additionally, the Company sells excess
inventory in its special sale catalogs, its outlet stores and to jobbers. Due in
part to the transition to new management
26
<PAGE> 28
information systems, the Company is currently operating with different systems
which increases the difficulty of optimizing inventory levels. See "RISK
FACTORS -- Implementation of Improved Inventory Procedures" and "-- Decrease in
Product Contribution Margins."
FINANCING
Credit Facility. 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. The Credit Facility is
secured by all assets of the Company. At December 28, 1996, the Company had
approximately $18.3 million of outstanding borrowings under the revolving credit
facility (including documentary and standby letters of credit) and approximately
$8.9 million outstanding under the term loans, which are due in November 1997.
Remaining availability under the Credit Facility was $26.0 million at December
28, 1996. At April 22, 1997, the Company had approximately $27.4 million of
borrowings under the revolving credit facility (including documentary and
standby letters of credit) and approximately $8.6 million outstanding under term
loans, which are due in November 1997. Remaining availability under the Credit
Facility was approximately $6.6 million at April 22, 1997. On April 23, 1997,
Richemont advanced $30 million against its commitment to purchase all of the
Unsubscribed Shares pursuant to the Standby Purchase Agreement. Under the Credit
Facility, the Company was 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 and, upon the closing of the 1996 Rights
Offering, returned to their previous levels. In December 1996, the minimum net
worth covenant was lowered to $70 million and Congress also agreed to address
the 1997 net worth covenant level after a review of the Company's business plan.
Congress began lowering the advance rate for inventories in November 1996 and
continued to reduce it monthly until a new appraisal was completed in March
1997. The current advance rate for inventories is 52%. On March 26, 1997, the
Company reached an agreement with Congress under which Congress waived certain
defaults and amended the Credit Facility to (i) reduce the aggregate amount of
required net worth and working capital to be maintained by the Company to a
range of $14.0 million to $11.5 million and $(5.0) million to $(20.0) million,
respectively, and (ii) amend the covenant relating to material adverse changes
so that measurement thereunder will commence from December 28, 1996. See "RISK
FACTORS -- Importance of Liquidity to the Company's Existence" and "-- Capital
Intensity of Mail Order Catalog Business; Need for Self-Funding" and "USE OF
PROCEEDS."
1996 Rights Offering. The Company commenced the 1996 Rights Offering on
July 19, 1996. Holders of record of the Company's Common Stock, 6% Series A
Convertible Additional Preferred Stock and Series B Preferred Stock as of July
18, 1996, the record date, were eligible to participate in the 1996 Rights
Offering. The rights were exercisable at a price of $1.03 per share.
Shareholders received .51 rights for each share of Common Stock held, 3.72
rights for each share of Series A Convertible Additional Preferred Stock held
and .77 rights for each share of Series B Preferred Stock held as of the record
date. The 1996 Rights Offering closed on August 23, 1996.
Due to the Company's continued operating losses, the Company requested that
NAR advance up to $25 million against all the rights distributed to it and/or
its commitment to purchase all of the unsubscribed shares. In May 1996, NAR
advanced the Company $25 million under a promissory note. Under the provisions
of such promissory note, the Company repaid NAR the $25 million advance plus
accrued interest upon the closing of the 1996 Rights Offering.
The Company issued 48,748,785 shares as a result of the 1996 Rights
Offering which generated proceeds of approximately $48 million, net of expenses.
NAR received rights entitling it to purchase 24,015,964 shares in the 1996
Rights Offering and exercised such rights. In addition, the Company and NAR
entered into a standby purchase agreement, pursuant to which NAR purchased
6,898,866 shares not subscribed by shareholders and received approximately $.5
million as a fee. The proceeds of the 1996 Rights Offering were used by the
Company: (i) to repay the $14 million principal amount of 9.25% Senior
Subordinated Notes ("9.25% Notes") due on August 1, 1998 held by an affiliate of
NAR plus accrued interest, (ii) to repay the $25 million principal amount
advanced by NAR under the promissory note plus accrued interest and (iii) to
27
<PAGE> 29
repay approximately $9 million under the Credit Facility with Congress. The
Company recorded an extraordinary expense related to the early extinguishment of
the 9.25% Notes, representing a write-off of the unamortized debt issuance costs
of approximately $1.1 million. See "RISK FACTORS -- Importance of Liquidity to
the Company's Existence."
EMPLOYEES
The Company currently employs approximately 2,800 persons on a full time
basis and approximately 900 persons on a part time basis. Approximately 160
employees at one of the Company's subsidiaries are represented by a union. The
Company believes its relations with its employees are good. As part of its plan
to reduce annual operating costs, the Company intends to reduce the number of
full-time employees by approximately 550.
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. See "RISK FACTORS -- Seasonality."
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. Competitors also exist in each of the Company's catalog specialty areas
of home fashions, general merchandise, women's apparel, men's apparel and gifts.
In addition, new methods of competition, such as the internet, are posing new
opportunities and threats to the Company's business. A number of the Company's
competitors have substantially greater financial, distribution and marketing
resources than the Company. The recent substantial sales growth in the direct
marketing industry has encouraged the entry of many new competitors and an
increase in competition from established companies. The Company believes that
the principal basis upon which it competes are quality, value, service, product
offerings, catalog design, convenience and efficiency. See "RISK
FACTORS -- Competition."
TRADEMARKS
Each of the Company's catalogs has its own federally registered trademark.
The Company also owns numerous trademarks, copyrights and service marks on its
logos, products and catalog offerings. The Company has also protected various
trademarks internationally. The Company vigorously protects such marks and
believes there is substantial goodwill associated with them.
GOVERNMENT REGULATION
The Company is subject to Federal Trade Commission regulations governing
its advertising and trade practices, Consumer Product Safety Commission and Food
and Drug Administration regulations governing the safety of the products it
sells in its catalogs and other regulations relating to the sale of merchandise
to its customers. The Company is also subject to the Department of
Treasury-Customs regulations with respect to any goods it directly imports.
The imposition of a sales and use tax collection obligation on out-of-state
catalog companies in states to which they ship products was the subject of a
case decided in 1994 by the United States Supreme Court. While the Court
reaffirmed an earlier decision that allowed direct marketers to make sales into
states where they do not have a physical presence without collecting sales taxes
with respect to such sales, the Court further noted that Congress has the power
to change this law. The Company believes that it collects sales tax in all
jurisdictions where it is currently required to do so.
28
<PAGE> 30
THE RIGHTS OFFERING
THE RIGHTS
The Company is distributing transferable Rights, at no cost, to the record
holders ("Holders") of the Common Stock and Series B Preferred Stock outstanding
as of the Record Date. The Company will distribute .38 Rights for each share of
Common Stock held of record on the Record Date and .57 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 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
55,555,556 Underlying Shares will be sold upon exercise of the Rights or
pursuant to the Standby Purchase Agreement between the Company and Richemont. On
Friday, June 6, 1997 (the "Closing Date"), Richemont 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
Richemont. In the event that the conditions precedent to Richemont's obligation
to exercise its standby purchase commitment are not satisfied or otherwise
waived by Richemont, 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 Richemont 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, May 15, 1997 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 Basic Subscription Privilege.
SUBSCRIPTION PRICE
The Subscription Price is $.90 per Underlying Share subscribed for pursuant
to the Basic Subscription Privilege or the Oversubscription Privilege. The
Subscription Price of the Rights represents a premium to the market price of the
Common Stock at the date of this Prospectus. See "RISK FACTORS -- Uncertain
Market for Rights; Market Conditions; Market Considerations."
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.
29
<PAGE> 31
SUBSCRIPTION PRIVILEGES
Basic Subscription Privilege. Pursuant to the Basic 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 Basic Subscription Privilege will be
delivered to subscribers as soon as practicable after the Expiration Date.
Oversubscription Privilege. Subject to the allocation described below, each
Right also carries the right to subscribe pursuant to the Oversubscription
Privilege at the Subscription Price for a number of additional shares of Common
Stock available after satisfaction of all subscriptions pursuant to the Basic
Subscription Privilege, subject to proration by the Company under certain
circumstances. The right to subscribe for additional shares of Common Stock
pursuant to the Oversubscription Privilege is not transferable.
Underlying Shares will be available for purchase pursuant to the
Oversubscription Privilege only to the extent that any Underlying Shares are not
subscribed for through the Basic Subscription Privilege. If the Underlying
Shares not subscribed for through the Basic Subscription Privilege ("Excess
Shares") are not sufficient to satisfy all subscriptions pursuant to the
Oversubscription Privilege, the Excess Shares will be allocated pro rata
(subject to the elimination of fractional shares) among those holders of Rights
exercising the Oversubscription Privilege, in proportion to the number of shares
requested by them pursuant to the Oversubscription Privilege. Only Record Date
stockholders who exercise the Basic Subscription Privilege in full will be
entitled to exercise the Oversubscription Privilege. Transferees of Rights may
not exercise the Oversubscription Privilege with respect to such Rights.
Certificates representing shares of Common Stock purchased pursuant to the
Oversubscription Privilege will be delivered to subscribers as soon as
practicable after the Expiration Date and after all prorations have been
effected. See "RISK FACTORS -- Impact of Rights Offering on Holders of Common
Stock; Dilution."
Banks, brokers and other nominee holders of Rights who exercise the Basic
Subscription Privilege and the Oversubscription Privilege on behalf of
beneficial owners of Rights will be required to certify to the Subscription
Agent and the Company, in connection with the exercise of the Oversubscription
Privilege, as to the aggregate number of Rights that have been exercised and the
number of Underlying Shares that are being subscribed for pursuant to the
Oversubscription Privilege by each beneficial owner of Rights on whose behalf
such nominee holder is acting and that such person was a beneficial owner on the
Record Date.
In the event that the conditions precedent to Richemont's obligation to
exercise its standby purchase commitment are not satisfied or otherwise waived
by Richemont, 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 Richemont that it has elected to purchase the Unsubscribed Shares.
However, in the event that Richemont 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 signature guarantees,
together with payment in full of the Subscription Price for each Underlying
Share subscribed for pursuant to the Basic Subscription Privilege and the
Oversubscription 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. 323053785; 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.
30
<PAGE> 32
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 Richemont's obligation to
exercise its standby purchase commitment are not satisfied or otherwise waived
by Richemont, 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 Richemont 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 Transmission: By Hand:
American Stock Transfer & (718) 234-5001 American Stock Transfer &
Trust Company Trust 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>
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 Basic
Subscription Privilege and the Oversubscription 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 Instructions 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 Basic Subscription
Privilege and the number of Underlying Shares, if any, being subscribed for
pursuant to the Oversubscription 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 "THE RIGHTS
OFFERING -- Information Agent."
31
<PAGE> 33
Funds received in payment of the Subscription Price for Excess Shares
subscribed for pursuant to the Oversubscription Privilege will be held in a
segregated account pending issuance of such Excess Shares. If a Rights holder
exercising the Oversubscription Privilege is allocated less than all of the
shares of Common Stock that such holder wished to subscribe for pursuant to the
Oversubscription Privilege, the excess funds paid by such holder in respect of
the Subscription Price for shares not issued shall be returned by mail without
interest or deduction as soon as practicable after the Expiration Date.
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 Rights
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 owners'
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 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 "THE
RIGHTS OFFERING -- Information Agent" (telephone (800) 533-7254).
NO REVOCATION
ONCE A HOLDER OF RIGHTS HAS EXERCISED THE BASIC SUBSCRIPTION PRIVILEGE AND,
IF APPLICABLE, THE OVERSUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED.
32
<PAGE> 34
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. See "THE RIGHTS OFFERING -- Listing and Trading."
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, May 27, 1997 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 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 Basic Subscription Privilege (but not the
Oversubscription Privilege) may be effected through, the facilities of the
Depository Trust Company ("DTC"; Rights exercised through DTC are referred to as
"DTC Exercised Rights"). The holder of a DTC Exercised Right may exercise the
Oversubscription Privilege in respect of such DTC Exercised Right by properly
executing and delivering to the Subscription Agent, at or prior to 5:00 p.m.,
New York City time, on the Expiration Date, a DTC Participant Oversubscription
Exercise Form, together with payment of the appropriate Subscription Price for
the number of Underlying Shares for which the Oversubscription Privilege is to
be exercised. Copies of the DTC Participant Oversubscription Exercise Form may
be obtained from the Information Agent.
33
<PAGE> 35
LISTING AND TRADING
The outstanding shares of Common Stock are listed 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. See "RISK
FACTORS -- Uncertain Market for Rights; Market Conditions; Market
Considerations."
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, May 27, 1997,
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 Richemont have entered into the Standby Purchase Agreement,
pursuant to which Richemont 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 and are not waived by Richemont, the obligation of Richemont to purchase
any Unsubscribed Shares may be cancelled upon notice by Richemont and 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 Richemont would waive the non-occurrence of
any of the conditions, if Richemont does not do so, the cancellation by
Richemont 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 "RISK FACTORS -- Importance of Liquidity to the Company's
Existence." If all of the Rights are exercised, Richemont 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 Richemont for its commitment under the Standby Purchase
Agreement, the Company has agreed to pay to Richemont, on the Closing Date, an
amount equal to 1% 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 Series B Preferred Stock other than with respect to
the shares of Common Stock held by NAR or its affiliates plus an amount equal to
one-half of 1% in respect of the aggregate offering price of the aggregate
number of shares of Common Stock issuable upon exercise of the Rights granted to
NAR or its affiliates less 11,111,111 shares of Common Stock or such greater
number of shares of Common Stock as NAR or its affiliates shall acquire upon
exercise of their Rights (collectively, the "Standby Fee") plus an additional
amount equal to 4% of the aggregate offering price (the "Take-Up Fee") in
respect of all Unsubscribed Shares, if any, purchased by Richemont pursuant to
its commitment thereunder, each payable in cash. Notwithstanding the foregoing,
Richemont 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 March 26, 1997
if (i) by April 24, 1997, he has furnished to Richemont 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 did not furnish such an undertaking by Thursday, April 24, 1997.
34
<PAGE> 36
The Company has agreed that except as otherwise contemplated in this
Prospectus, it will not prior to Tuesday, July 29, 1997, 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 Richemont.
The Standby Purchase Agreement provides that the Company will indemnify
Richemont and each person who controls, or is in common control with, Richemont
against certain liabilities incurred in connection with the Rights Offering,
including liabilities under the Securities Act, or contribute to payments
Richemont may be required to make in respect thereof.
The obligation of Richemont 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 Holders of the Common Stock and Series B Preferred Stock not
later than three days following the date hereof 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, prior to 12:00 Noon, New York City time, on the
business day following the Expiration Date, shall have advised Richemont of the
number of the shares of Common Stock subscribed for and of the number of
Unsubscribed Shares; that the Company affirm as correct certain representations
and warranties made to Richemont, and that NAR shall have exercised its Rights
for that number of shares of Common Stock having an aggregate purchase price of
at least $10 million, such purchase price to be paid by NAR by the surrender and
cancellation of the principal amount of the IMR Promissory Note. In addition,
Richemont 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 Series B Preferred Stock to which Rights have been
granted is contingent upon the consummation of the purchase by Richemont of the
Unsubscribed Shares. In the event that the conditions precedent to Richemont's
obligations to exercise its standby purchase commitment are not satisfied or
otherwise waived by Richemont, 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
Richemont has elected to purchase the Unsubscribed Shares. However, in the event
that Richemont waives the conditions precedent that are not satisfied, it will
have a purchase commitment for all of the Unsubscribed Shares.
By agreement, dated March 26, 1997, NAR irrevocably agreed with the
Company, subject to and upon the consummation of the Rights Offering, to
exercise at the Subscription Price that number of Rights distributed to it for
the purchase of shares of Common Stock having an aggregate purchase price of at
least $10 million. NAR agreed to pay for and the Company agreed to accept as
payment for the aggregate purchase price of such shares at the closing of the
Rights Offering the surrender by NAR of the principal amount of the IMR
Promissory Note and the cancellation thereof. NAR has advised the Company that
it currently does not intend to exercise any additional Rights which it receives
but may attempt to dispose of such Rights in the open market.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS
Brown Raysman Millstein Felder & Steiner LLP, 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
35
<PAGE> 37
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), nor does it 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 Series B 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 of Common Stock will
not recognize taxable income, for federal income tax purposes, in connection
with the distribution of the Rights. Holders of Series B Preferred Stock will
recognize taxable income, for federal income tax purposes, in connection with
the distribution of Rights measured by the fair market value of the Rights
distributed to such Holders.
Basis and Holding Period of the Rights. The basis of the Rights received by
a Holder as a distribution with respect to such Holder's Series B Preferred
Stock will be the fair market value of the Rights distributed to such Holder.
The basis of the Rights received by a Holder as a distribution with respect to
such Holder's Common Stock 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 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 to the Rights, the Holder's basis in such Common
Stock will be allocated between the Common Stock 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 will include the Holder's holding period for the Common
Stock with respect to which the Rights were distributed. The holding period of a
Holder with respect to Rights received as a distribution on such Holder's Series
B Preferred Stock will commence on the day of distribution of such Rights. In
the case of a purchaser of the 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. Gain or loss recognized by a holder of Rights received as a
distribution with respect to such holder's Common Stock will be capital gain or
loss if gain or loss from a sale of Common Stock 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 or received by a Holder of Series B Preferred Stock will be short term
capital gain or loss if Common Stock would be a capital asset in the hands of
the seller (if acquired by him).
Lapse of the Rights. Holders who received the Rights in respect of Common
Stock 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 Holder. Purchasers of the Rights and Holders who received the
Rights in respect of Series B Preferred Stock 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 or in respect of
36
<PAGE> 38
Series B Preferred Stock 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 will be treated as a
distribution of property to which section 301 applies unless the distribution is
in the form of an increase in the conversion ratio of the convertible preferred
stock made solely to take account of a stock dividend or stock split with
respect to the stock into which such convertible preferred stock is convertible.
Thus, the distribution of Rights to the Holders of Series B Preferred Stock will
be a taxable distribution to such Holders.
The Company has represented that the number and proportion of Rights to be
distributed to the Holders of Common and Series B 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 Series B Preferred Stock (which Series B 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 to Holders of Common Stock 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 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 Series B 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 Series B Preferred
Stock ultimately is determined to have been other than is required to protect
such Holders from dilution, there could be deemed "disproportionate
distribution" to the Holders of Common Stock to the extent 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
37
<PAGE> 39
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 (measured by the fair market value of the Rights distributed) would
be treated as a dividend to the extent of the Company's current or 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 any excess over the amounts treated as a dividend and a return
of basis would be treated 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 28, 1996
and for the first quarter of 1997. The amount of earnings and profits, if any,
that the Company will earn during 1997 will depend on its future actions and
financial performance and cannot currently be determined. However, it is not
anticipated that the Company will have any current or accumulated earnings and
profits for its 1997 tax year. In such case, the Rights Offering would not
result in any dividend income to the Holders of Common or Series B 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 1997 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 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
38
<PAGE> 40
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. On the other hand, non-U.S. holders of
Series B Preferred Stock may recognize taxable income, for United States federal
income tax purposes, and may be subject to withholding of United States federal
income tax, in connection with the receipt (but not the 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 unless (i) the gain is
effectively connected with the conduct of 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 who 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 a 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. Generally,
United States information reporting requirements and backup withholding tax with
respect to dividends paid on Common Stock do not apply to a non-U.S. holder.
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 Common Stock by a foreign office of a United States broker, or 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 advisors as
39
<PAGE> 41
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 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:
(212) 936-5100
(718) 921-8200
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.
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.
40
<PAGE> 42
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 225,000,000 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"), 5,000,000
shares of Additional Preferred Stock, par value $.01 per share (the "Additional
Preferred"), of which 234,900 shares have been designated as 6% Series A
Convertible Additional Preferred Stock, par value $.01 and stated value $10 per
share (the "Series A Preferred Stock"), and 634,900 shares have been designated
as Series B Preferred Stock. As of April 24, 1997, there were 144,404,697 shares
of Common 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 have cumulative voting rights, the holders of more than
50% of the shares can elect all the Directors of the Company, 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.
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
41
<PAGE> 43
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 holder's 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 holder's 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, each holder of the Series A Preferred Stock automatically, without any
action on the part of such holder, had the shares of Series A Preferred Stock
that remained outstanding converted into a number of shares of Common Stock
determined by dividing the then stated value of the shares by the Conversion
Price (as defined) for such date. The "Conversion Price" was 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 on each of the five trading days immediately preceding
the Conversion Date.
No fractional shares or scrip representing fractional shares of Common
Stock were issued upon conversion of Series A Preferred Stock. Instead of any
fractional share of Common Stock that would otherwise have been issuable upon
conversion of any shares of Series A Preferred Stock, the Company paid 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 had 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 B 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
42
<PAGE> 44
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 stated 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
Company's 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 Conversion Price. The
Series B Conversion Price will be adjusted upon the occurrence of an Adjustment
Event. The Company will provide the holders of the Series B Preferred 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 the
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 February 15, 2000. If the shares of 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 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 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.
43
<PAGE> 45
Voting Rights. Each share of the 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 Series B 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. Record Date stockholders who fully exercise all Rights distributed
to them will also be entitled to subscribe at the Subscription Price for shares
of Common Stock that are not otherwise purchased pursuant to the exercise of
Rights, subject to proration by the Company under certain circumstances. See
"THE RIGHTS OFFERING -- Subscription Privileges."
Richemont 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 $37.0 million in net cash
proceeds from the Rights Offering (after giving effect to the acquisition and
exercise by NAR of Rights having an aggregate purchase price of at least $10
million to be paid for by surrender and cancellation of the IMR Promissory Note)
including Richemont's standby purchase commitment, and after payment of
approximately $3.0 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 28, 1996 and December 30, 1995, 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 28, 1996 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.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for the
Company by Brown Raysman Millstein Felder & Steiner LLP, New York, New York.
44
<PAGE> 46
HANOVER DIRECT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets as of December 30, 1995 and December 28, 1996............. F-3
Consolidated Statements of Income (Loss) for the three years ended December 28,
1996................................................................................ F-4
Consolidated Statements of Shareholders' (Deficit) Equity for the three years ended
December 28, 1996................................................................... F-5
Consolidated Statements of Cash Flows for the three years ended December 28, 1996..... F-7
Notes to Consolidated Financial Statements............................................ F-8
Supplementary Data:
Valuation and Qualifying Accounts for the three years ended December 28, 1996......... F-37
</TABLE>
F-1
<PAGE> 47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Hanover Direct, Inc.:
We have audited the accompanying consolidated balance sheets of Hanover
Direct, Inc. (a Delaware corporation) and subsidiaries as of December 28, 1996
and December 30, 1995, and the related consolidated statements of income (loss),
shareholders' (deficit) equity and cash flows for each of the three fiscal years
in the period ended December 28, 1996. These consolidated financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hanover Direct, Inc. and
subsidiaries as of December 28, 1996 and December 30, 1995, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 28, 1996 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statement schedule is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
March 26, 1997
F-2
<PAGE> 48
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 30, 1995 AND DECEMBER 28, 1996
ASSETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................................... $ 2,682 $ 5,173
Accounts receivable, net of allowance for doubtful accounts of $2,597 in 1995 and
$5,030 in 1996.................................................................... 30,176 29,399
Inventories......................................................................... 79,281 67,610
Prepaid catalog costs............................................................... 37,118 23,401
Deferred tax asset, net............................................................. 3,300 3,300
Other current assets................................................................ 6,170 3,148
-------- --------
Total Current Assets......................................................... 158,727 132,031
-------- --------
Property and Equipment, at cost:
Land................................................................................ 4,811 4,797
Buildings and building improvements................................................. 19,353 16,554
Leasehold improvements.............................................................. 14,001 9,956
Furniture, fixtures and equipment................................................... 39,508 31,510
Construction in progress............................................................ 5,479 8,315
-------- --------
83,152 71,132
Accumulated depreciation and amortization........................................... (26,090) (22,523)
-------- --------
Property and Equipment, net.................................................. 57,062 48,609
-------- --------
Goodwill.............................................................................. 36,586 17,901
Deferred tax asset, net............................................................... 11,700 11,700
Other assets.......................................................................... 14,934 10,586
-------- --------
Total Assets................................................................. $279,009 $220,827
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital lease obligations..................... $ 3,546 $ 11,452
Accounts payable.................................................................... 93,291 79,587
Accrued liabilities................................................................. 25,969 37,782
Customer prepayments and credits.................................................... 7,147 4,717
-------- --------
Total Current Liabilities.................................................... 129,953 133,538
-------- --------
Noncurrent Liabilities:
Long-term debt...................................................................... 57,283 53,255
Capital lease obligations........................................................... 1,973 482
Other............................................................................... 2,590 1,812
-------- --------
Total Noncurrent Liabilities................................................. 61,846 55,549
-------- --------
Total Liabilities............................................................ 191,799 189,087
Commitments and Contingencies (Note 17) Shareholders' Equity Preferred Stock:
6% Series A Convertible Additional Preferred Stock, $10 stated value, authorized
5,000,000 shares; issued and outstanding 78,300 shares in 1995.................... 795 --
Series B Convertible Additional Preferred Stock, $.01 par value, authorized, issued
and outstanding 634,900 shares in 1995 and 1996................................... 5,558 5,748
Common Stock, $.66 2/3 par value, authorized 225,000,000 shares; issued 93,693,162
shares in 1995 and 145,039,915 shares in 1996..................................... 62,461 96,693
Capital in excess of par value...................................................... 255,390 270,097
Accumulated deficit................................................................. (231,332) (336,586)
-------- --------
92,872 35,952
Less:
Treasury stock, at cost (1,157,061 shares in 1995 and 392,017 shares in 1996)....... (3,345) (813)
Notes receivable from sale of Common Stock.......................................... (2,023) (3,399)
Deferred compensation............................................................... (294) --
-------- --------
Total Shareholders' Equity................................................... 87,210 31,740
-------- --------
Total Liabilities and Shareholders' Equity................................... $279,009 $220,827
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 49
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenues.................................................. $768,884 $749,767 $ 700,314
Operating costs and expenses:
Cost of sales and operating expenses.................... 484,059 483,493 479,155
Write-down of inventory of discontinued catalogs........ -- 8,580 1,100
Special charges......................................... -- 1,563 36,724
Selling expenses........................................ 197,436 205,618 195,032
General and administrative expenses..................... 65,257 64,112 70,608
Depreciation and amortization........................... 6,157 9,020 12,192
-------- -------- ---------
752,909 772,386 794,811
-------- -------- ---------
INCOME (LOSS) FROM OPERATIONS............................. 15,975 (22,619) (94,497)
Interest expense........................................ (3,544) (5,050) (8,858)
Interest income......................................... 731 519 460
Other income (expense).................................. (1,833) -- --
-------- -------- ---------
Income (loss) before income taxes......................... 11,329 (27,150) (102,895)
Income tax provision (benefit).......................... (3,509) 1,003 1,000
-------- -------- ---------
Income (loss) before extraordinary item................... 14,838 (28,153) (103,895)
Extraordinary item (Note 8)............................. -- (1,837) (1,134)
-------- -------- ---------
NET INCOME (LOSS)......................................... 14,838 (29,990) (105,029)
Preferred stock dividends................................. (135) (240) (225)
-------- -------- ---------
Net income (loss) applicable to Common Shareholders..... $ 14,703 $(30,230) $(105,254)
======== ======== =========
Net income (loss) per share:
Income (loss) before extraordinary item................. $ .16 $ (.30) $ (.93)
Extraordinary item........................................ -- (.02) (.01)
-------- -------- ---------
NET INCOME (LOSS) PER SHARE............................... $ .16 $ (.32) $ (.94)
======== ======== =========
Weighted average common shares outstanding................ 93,285 93,030 111,441
======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 50
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK
SERIES B, PREFERRED STOCK COMMON STOCK
CUMULATIVE SERIES A, 6.0% $.66 2/3 PAR VALUE
------------------ ------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------ ------- ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994........................ 0 $ 0 234,900 $2,378 83,136,542 $55,423
Net income applicable to common shareholders....
Exercise of warrants............................ 1,309,207 873
Shares issued in Stock Offering................. 8,045,296 5,364
Preferred stock dividends....................... (6)
Conversion of one-third of the 6% Preferred
Stock......................................... (78,300) (783) 189,818 126
Conversion of note payable...................... 13,945 9
Issuance of Common Stock for Employee Benefit
Plans, net.................................... 283,426 190
------- ------ ------- ------ ----------- -------
BALANCE AT DECEMBER 31, 1994...................... 0 $ 0 156,600 $1,589 92,978,234 $61,985
Net income/(loss) applicable to common
shareholders..................................
Issuance of Preferred Stock..................... 634,900 5,400
Fair market value of warrant extensions.........
Preferred stock dividends and accretion......... 158 83
Conversion of one-third of the 6% Preferred
Stock......................................... (78,300) (877) 427,785 285
Issuance of Common Stock for Employee Benefit
Plans, net.................................... 287,143 191
------- ------ ------- ------ ----------- -------
BALANCE AT DECEMBER 30, 1995...................... 634,900 $5,558 78,300 $ 795 93,693,162 $62,461
Net income/(loss) applicable to common
shareholders..................................
Shares issued in Rights Offering................ 48,748,785 32,499
Preferred stock dividends and accretion......... 190 35
Conversion of the 6% Preferred Stock............ (78,300) (830) 819,733 546
Purchase of treasury stock......................
Transfer of treasury stock related to employment
agreement.....................................
Sale of treasury stock..........................
Issuance of Common Stock for Employee Benefit
Plans, net.................................... 1,778,235 1,187
------- ------ ------- ------ ----------- -------
BALANCE AT DECEMBER 28, 1996...................... 634,900 $5,748 0 $ 0 145,039,915 $96,693
======= ====== ======= ====== =========== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 51
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
CAPITAL RECEIVABLE
IN EXCESS TREASURY STOCK FROM SALE
OF PAR ACCUM. -------------------- OF COMMON DEFERRED
VALUE (DEFICIT) SHARES AMOUNT STOCK COMP. TOTAL
--------- --------- ---------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994................. $ 209,834 $(215,805) (1,120,032) $(3,130) $(1,774) $(1,058) $ 45,868
Net income applicable to common
shareholders........................... 14,703 14,703
Exercise of warrants..................... (873) 0
Shares issued in Stock Offering.......... 42,136 47,500
Preferred stock dividends................ (6)
Conversion of one-third of the 6%
Preferred Stock........................ 657 0
Conversion of note payable............... 162 171
Issuance of Common Stock for Employee
Benefit Plans, net..................... 1,294 (37,029) (215) (138) 358 1,489
--------- --------- ---------- ------- ------- ------- ---------
BALANCE AT DECEMBER 31, 1994............... $ 253,210 $(201,102) (1,157,061) $(3,345) $(1,912) $ (700) $ 109,725
Net income/(loss) applicable to common
shareholders........................... (30,230) (30,230)
Issuance of Preferred Stock.............. 5,400
Fair market value of warrant
extensions............................. 1,200 1,200
Preferred stock dividends and
accretion.............................. 241
Conversion of one-third of the 6%
Preferred Stock........................ 592 (0)
Issuance of Common Stock for Employee
Benefit Plans, net..................... 388 (111) 406 874
--------- --------- ---------- ------- ------- ------- ---------
BALANCE AT DECEMBER 30, 1995............... $ 255,390 $(231,332) (1,157,061) $(3,345) $(2,023) $ (294) $ 87,210
Net income/(loss) applicable to common
shareholders........................... (105,254) (105,254)
Shares issued in Rights Offering......... 16,467 48,966
Preferred stock dividends and
accretion.............................. 225
Conversion of the 6% Preferred Stock..... 284 0
Purchase of treasury stock............... (301,623) (396) (396)
Transfer of treasury stock related to
employment agreement................... (2,750) 916,667 2,750 0
Sale of treasury stock................... 28 150,000 178 206
Issuance of Common Stock for Employee
Benefit Plans, net..................... 678 (1,376) 294 783
--------- --------- ---------- ------- ------- ------- ---------
BALANCE AT DECEMBER 28, 1996............... $ 270,097 $(336,586) (392,017) $ (813) $(3,399) $ 0 $ 31,740
========= ========= ========== ======= ======= ======= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 52
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995, AND DECEMBER 28, 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................... $ 14,838 $(29,990) $(105,029)
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization including deferred fees............. 6,499 9,419 13,277
Provision for doubtful accounts................................... 3,697 4,448 6,805
Provision for catalog and facility closings....................... -- 10,143 14,720
Write-off of long-lived assets.................................... -- 500 22,000
Extraordinary item -- early extinguishment of debt................ -- 1,837 1,134
Provision for losses on notes receivable and marketable
securities...................................................... 2,121 -- 888
Deferred transaction costs........................................ (837) -- (1,211)
Deferred taxes.................................................... (4,369) -- --
Other, net........................................................ 43 76 94
Changes in assets and liabilities, net of effects of acquired
businesses and dispositions of assets:
Accounts receivable, net.......................................... (9,901) (6,161) (7,863)
Inventories....................................................... (3,424) 8,679 11,671
Prepaid catalog costs............................................. (8,154) 206 13,717
Other current assets.............................................. (1,220) (3,131) 1,332
Accounts payable.................................................. 10,518 (8,671) (13,704)
Accrued liabilities............................................... 185 (1,583) 1,219
Customer prepayments and credits.................................. (1,389) 3,134 (2,430)
-------- -------- ---------
Net cash provided (used) by operating activities.................... 8,607 (11,094) (43,380)
-------- -------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment.............................. (23,856) (13,686) (8,862)
Purchase of businesses.............................................. -- (13,008) --
Proceeds from sales of businesses................................... -- -- 1,980
Proceeds from investment............................................ -- -- 794
Purchase of convertible debt securities............................. (2,693) -- --
Investments in affiliates........................................... (3,183) -- --
Advances............................................................ (2,300) -- --
Other, net.......................................................... (3,293) (1,387) --
-------- -------- ---------
Net cash (used by) investing activities............................. (35,325) (28,081) (6,088)
-------- -------- ---------
Cash flows from financing activities:
Net proceeds (payments) under revolving credit facility........... $ (230) $ -- $ 11,699
Proceeds from issuance of debt.................................... 10,000 20,685 10,000
Payments of long-term debt and capital lease obligations.......... (8,015) (1,419) (17,625)
Cash dividends paid............................................... (1,027) -- --
Payment of debt issuance costs.................................... (1,458) (2,202) (1,990)
Repurchase of Common Stock........................................ (215) -- --
Proceeds from issuance of Common Stock............................ 49,305 400 50,653
Other, net........................................................ (172) 340 (778)
-------- -------- ---------
Net cash provided by financing activities........................... 48,188 17,804 51,959
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents................ 21,470 (21,371) 2,491
Cash and cash equivalents, beginning of year........................ 2,583 24,053 2,682
-------- -------- ---------
Cash and cash equivalents, end of year.............................. $ 24,053 $ 2,682 $ 5,173
======== ======== =========
Supplemental cash flow disclosure:
Interest paid..................................................... $ 2,923 $ 4,586 $ 6,224
Income taxes paid................................................. $ 701 $ 1,318 $ 1,096
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 53
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
1. BACKGROUND OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Hanover Direct, Inc., a Delaware company, ("HDI")
is a direct specialty retailer in the United States that publishes a portfolio
of branded specialty catalogs offering home fashions, general merchandise, men's
and women's apparel and gifts. HDI also operates several retail operations in
the United States which comprised approximately 4% of HDI's net revenues for the
year ended December 28, 1996.
The Company has experienced significant operating losses during 1995 and
1996 which resulted in numerous issues, including liquidity and vendor concern.
The Company completed a Rights Offering in August 1996 (Note 9) which helped to
alleviate these issues and concerns, however, continued operating losses through
the remainder of fiscal 1996 has resulted in the Company proceeding with a 1997
Rights Offering and a modification of the Congress Facility financial covenants
to less restrictive terms (Note 18). The Company's ability to significantly
improve upon its prior year's performance and implement its business strategy,
including realignment of business units and expense reductions, is critical to
maintaining adequate liquidity.
Principles of Consolidation -- The Consolidated Financial Statements
include the accounts of HDI and all subsidiaries (the "Company"). Intercompany
transactions and balances have been eliminated. Certain prior year amounts have
been reclassified to conform to the current year presentation.
Fiscal Year -- The Company operates on a 52 or 53 week fiscal year. The
years ended December 28, 1996, December 30, 1995 and December 31, 1994 were 52
week years.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Inventories -- Inventories consist principally of merchandise held for
resale and are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method. The Company considers slow moving
inventory to be surplus and calculates a loss on the impairment as the
difference between an individual item's cost and the net proceeds anticipated to
be received upon disposal. Such inventory is written down to its net realizable
value. The costs capitalized by the Company are the costs of the product and
freight-in charges.
Prepaid Catalog Costs -- Costs related to mail order catalogs and
promotional material are capitalized and amortized over their estimated
productive lives, generally not exceeding six months. Total catalog expense was
$193.5 million, $197.3 million and $191.8 million, respectively, in 1996, 1995
and 1994.
Depreciation and Amortization -- Depreciation and amortization of property
and equipment is provided on the straight-line method over the following lives:
buildings and building improvements, 30-40 years; furniture, fixtures and
equipment, 3-10 years; and leasehold improvements, over the shorter of the
estimated useful lives or the terms of the related leases. Expenditures for
maintenance and repairs are charged to operations as incurred.
Capitalized development costs for the Company's new management information
systems aggregated $6.4 million at December 30, 1995. Such costs are included in
Other assets and are being amortized over a five year period commencing July
1995. No such costs were capitalized during 1996.
Goodwill -- Excess of cost over the net assets of acquired businesses is
amortized on a straight-line basis over periods of up to forty years.
Accumulated amortization was $3.0 million and $5.6 million at December 28, 1996
and December 30, 1995, respectively.
F-8
<PAGE> 54
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
Mailing Lists -- The costs of acquired mailing lists are amortized over a
five year period. Mailing lists, included in Other assets, amounted to $1.2
million and $3.5 million at December 28, 1996 and December 30, 1995,
respectively, and are carried net of accumulated amortization of $1.5 million
and $1.6 million, respectively.
Accounting for the Impairment of Long-Lived Assets -- Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" was issued by the
Financial Accounting Standards Board in March 1995. This Statement establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. The Company reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of assets may not be
recoverable. Based upon the assessment of cash flows for certain underperforming
catalogs, the Company recorded a charge related to impaired assets of $22.0
million for the fiscal year ended December 28, 1996 (Note 3).
Accounting for Stock Based Compensation -- In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective in 1996. The Statement encourages entities to
adopt the fair value-based method of accounting for employee stock option plans,
as opposed to the method which measures compensation cost for those plans using
the intrinsic value-based accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." In accordance with the provisions of
SFAS No. 123, the Company recorded a compensation charge of $.5 million in
fiscal 1996.
Accounting for Income Taxes -- The Company accounts for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." This pronouncement
established financial accounting and reporting standards for the effects of
income taxes that result from the Company's activities during the current and
preceding years. It requires an asset and liability approach for financial
accounting and reporting for income taxes. The provision for income taxes is
based upon income after adjustment for those temporary and permanent items which
are not considered in the determination of taxable income. Deferred taxes result
when the Company recognizes revenue or expenses for income tax purposes in a
different year than for financial reporting purposes.
Cash and Cash Equivalents -- Cash and cash equivalents include cash and all
highly liquid investments with original maturities of ninety days or less.
Net Income Per Share -- Net income per share is computed using the weighted
average number of common shares outstanding. The weighted average number of
shares used in the calculation for both primary and fully diluted net income per
share in 1996, 1995 and 1994 was 111,441,247, 93,029,816 and 93,285,190, shares,
respectively. Common share equivalents for purposes of net income per share
consist of stock options and warrants.
Recently Issued Accounting Standard -- Subsequent to December 28, 1996, the
Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share."
This statement establishes standards for computing and presenting earnings per
share ("EPS"), replacing the presentation of currently required primary EPS with
a presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS on
the face of the statement of operations. Under this new standard, Basic EPS is
computed based on weighted average shares outstanding and excludes any potential
dilution. Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock and is similar to the currently required fully diluted EPS. SFAS
No. 128 is effective for financial statements issued for periods ending after
December 15,
F-9
<PAGE> 55
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
1997, including interim periods, and earlier application is not permitted. When
adopted, the Company will be required to restate its EPS data for all periods
presented. The Company does not expect the impact of the adoption of this
statement to be material to previously reported EPS amounts.
Revenues -- The Company recognizes revenue at the time the merchandise is
shipped to the customer. Amounts billed to customers for postage and handling
charges are recognized as revenue at the time that the revenues on the product
shipment are recognized. The Company provides a reserve for expected future
returns at the time the sale is recorded based upon historical experience.
Fair Value of Financial Instruments -- The fair value of financial
instruments does not materially differ from their carrying values.
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
<TABLE>
<CAPTION>
1994 1995 1996
------ -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligations...................... $ -- $ 1,155 $ --
====== ======= ======
Other equity issuances and exchanges........... $1,823 $ 1,456 $2,855
====== ======= ======
Acquisition of businesses:
Fair value of assets acquired................ $ -- $ 45,165 $ --
Fair value of liabilities assumed............ -- (26,757) --
Preferred stock issued....................... -- (5,400) --
------ ------- ------
Net cash paid................................ $ -- $ 13,008 $ --
====== ======= ======
</TABLE>
2. ACQUISITIONS AND INVESTMENTS
ACQUISITIONS -- During fiscal 1995, the Company acquired the entities
described below, which were accounted for by the purchase method of accounting.
The operating results of these acquired businesses have been included in the
consolidated statements of income from the date of acquisition:
Improvements -- In January 1995, the Company acquired substantially all of
the assets of Leichtung, Inc., a direct marketer of wood-working and home
improvement tools and related products sold under the Improvements and Leichtung
Workshops names, for a purchase price of approximately $12.8 million in cash and
the assumption of certain liabilities. The excess purchase price over the fair
values of the net assets acquired (goodwill) was $7.3 million. Approximately
$1.4 million of customer mailing list intangible assets were also purchased in
this transaction.
In the first quarter of 1996, the Company sold the assets of the Leichtung
Workshops catalog for $.9 million in cash and short-term notes and relocated all
Improvements' telemarketing and fulfillment operations to the Company's Hanover,
PA facility. There was no gain or loss recognized on the sale of the assets of
the Leichtung Workshops catalog. The distribution facility in Ohio, which is
being held for sale, was written down to its estimated net realizable value of
$.1 million, as of December 28, 1996. In 1996, the Company provided $.7 million,
included as a component of special charges, to write-down this facility (Note
3).
The Safety Zone -- In February 1995, the Company acquired the remaining 80%
of the outstanding common stock it did not already own of Aegis Safety Holdings,
Inc. ("Aegis"), publisher of The Safety Zone catalog, through the issuance of
634,900 shares of a newly-created Series B Convertible Additional Preferred
Stock ("Series B Stock") of the Company with a stated value of $10 per share.
Dividends are payable on the Series B Stock at various rates and times and are
contingent on specific earnings targets. The Series B Stock is also convertible,
subject to antidilution, as discussed in Note 10. The excess purchase price over
the fair values
F-10
<PAGE> 56
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
of the net assets acquired (goodwill) was $7.1 million. In December 1996, the
Company wrote-off the goodwill related to this acquisition in accordance with
SFAS No. 121 (Note 3).
Austad's -- In May 1995, the Company acquired 67.5% of the outstanding
shares of Austad's Holdings, Inc. ("Austad's"), which owned The Austad Company
("TAC"), the publisher of the Austad's catalog featuring golf equipment, apparel
and gifts, for a purchase price of $1.8 million in cash. The Company also lent
TAC, on a subordinated basis, $2.2 million which bears interest at the rate of
10% per annum and is due by May 2000. The Company also provided a $.4 million
loan to TAC which bears interest at a fluctuating rate (8.75% at December 28,
1996 and December 30, 1995) and is secured by a second mortgage on TAC's office
and warehouse. The excess purchase price over the fair values of the net assets
acquired (goodwill) was $4.5 million. Approximately $1.2 million of customer
mailing list intangible assets were also acquired in this transaction. In
December 1996, the Company wrote-off the goodwill and mailing lists in
accordance with SFAS No. 121 (Note 3).
On February 16, 1996, former minority shareholders surrendered to Austad's
their Austad's shares, amounting to 32.5% of the outstanding shares, and paid
approximately $1.1 million in exchange for all the outstanding shares of AGS,
Inc. ("AGS"), a South Dakota corporation formed by TAC to hold the existing
retail assets and liabilities of TAC. The transaction assumed a value for
Austad's and TAC based on the Company's purchase price in the May 1995
acquisition, as adjusted by adding the net income of Austad's and TAC from May
25, 1995 through February 16, 1996.
As a result of the reorganization, Austad's became a wholly owned
subsidiary of the Company. In connection with the reorganization, TAC was
released from all future obligations under all store leases. AGS will operate
the four existing retail stores acquired from TAC as Austad's stores under
license from Austad's. The customer service and fulfillment operations of
Austad's were transferred to other Company facilities in the first quarter of
1996, and the Company sold the Austad's South Dakota warehouse and distribution
facility in July 1996 for $2.1 million which approximated its book value. The
net proceeds were used to pay the outstanding mortgage on the property (Note 8).
TAC had a revolving credit facility that was secured by substantially all
of TAC's assets that expired on February 26, 1996. Such facility was paid off at
the February 16th closing with the proceeds from the sale of the retail
operations and from the Company's revolving credit facility (Note 8).
The following represents the unaudited pro forma results of operations for
the years ended December 31, 1994 and December 30, 1995 as if these acquisitions
had occurred at the beginning of fiscal year 1994.
<TABLE>
<CAPTION>
1994 1995
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Revenues............................................... $840,295 $763,786
======== ========
Income (loss) before extraordinary item................ $ 14,305 $(28,083)
======== ========
Net income (loss)...................................... $ 14,170 $(30,160)
======== ========
Per Share:
Income (loss) before extraordinary item................ $ .15 $ (.30)
Extraordinary item..................................... -- (.02)
-------- --------
Net income (loss)...................................... $ .15 $ (.32)
======== ========
</TABLE>
The pro forma information does not purport to be indicative of the results
that actually would have been obtained if the operations were combined during
the periods presented and is not intended to be a projection of
F-11
<PAGE> 57
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
future results or trends. Per share amounts are expressed after deducting
preferred stock dividends of $.1 and $.2 million in 1994 and 1995, respectively.
OTHER INVESTMENTS -- Other investments, which are recorded in Other assets
in the accompanying consolidated balance sheets, include the following:
Blue Ridge Associates -- In January 1994, the Company purchased for $1.1
million, a 50% interest in Blue Ridge Associates ("Blue Ridge"), a partnership
which owns the apparel distribution center in Roanoke, Virginia. The remaining
50% interest is held by an unrelated third party. This investment is accounted
for by the equity method of accounting. The Company made annual rent payments to
the partnership of approximately $.7 million in both 1996 and 1995 as part of a
15 year lease through 2008. The Company also recorded $.1 million in income for
its portion of the partnership income in both 1996 and 1995. The Company's
investment in Blue Ridge was approximately $.9 million and $1 million at
December 28, 1996 and December 30, 1995, respectively. In December 1996, the
Company decided to consolidate this facility into its new Roanoke, Virginia
distribution facility.
Regal Communications, Inc. -- During 1994, the Company invested
approximately $2.7 million in convertible debt securities of Regal
Communications, Inc. ("Regal"). In September 1994, Regal filed for protection
under Chapter 11 of the United States Code. As a result, during 1994, the
Company wrote-down the convertible debentures to the estimated fair value of
$1.7 million. The $1 million decline in fair value of the investment was
considered an other-than-temporary impairment and included in the income
statement in 1994. The convertible debt matures on June 15, 2008. In December
1995, a plan of reorganization was confirmed by the Bankruptcy Court and the
Company expected to recover the $1.7 million carrying value of its investment,
however, only $.8 million of distributions were received through 1996. During
1996, a federal income tax refund due to Regal was reviewed by the Internal
Revenue Service (the "IRS"), and the results of this review have been submitted
to the Joint Committee of the IRS for approval. Due to the uncertainty that
recoverability of substantially all of the remaining investment balance is
subject to a favorable outcome, in December 1996, the Company wrote-off the
remaining $.9 million balance as the decline in fair value was considered an
other than temporary impairment.
Tiger Direct -- In February 1995, the Company entered into an agreement to
acquire certain securities of Tiger Direct, Inc. ("Tiger"), a direct marketer of
computer software, peripherals and CD-ROM hardware and software. In February
1995, the Company entered into a loan and security agreement with Tiger pursuant
to which the Company provided a secured working capital line of credit to Tiger,
up to a maximum of $3.0 million, which was loaned under such agreement. In
September 1995, due to the continued deterioration of Tiger's financial
condition, the Company terminated the securities purchase agreement and sold the
loan to a third party and received payment in full for the principal of the loan
and interest to the date of sale.
During the period from February 1995 to September 1995, the Company
provided certain services to Tiger and also incurred certain costs related to
entering into the loan and security agreements aggregating $.5 million. Under
the terms of the agreement, Tiger is required to reimburse the Company for such
costs and services rendered. Tiger refused to reimburse the Company for these
costs causing the Company to institute an action to recover such costs, which
were carried at their estimated realizable value. In February 1997, the Company
recovered $.2 million in settlement of such action.
Boston Publishing Company -- In February 1994, the Company acquired a 20%
equity interest in Boston Publishing Company ("BPC") and provided secured and
unsecured loans to BPC. In August 1994, BPC filed for protection under Chapter
11 of the United States Code. In 1995, the Company received inventory and the
customer mailing list of BPC in payment of its $1.2 million loan and
subsequently realized $.3 million upon disposition of these assets and wrote-off
the remaining assets.
F-12
<PAGE> 58
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
3. SPECIAL CHARGES
In December 1996, the Company recorded special charges aggregating
approximately $36.7 million. These charges consist of severance ($3.2 million)
and facility exit/relocation costs and fixed asset write-offs ($11.5 million)
related to the previously announced downsizing of the Company, as discussed in
its December 1996 press release. In addition, the Company's review of the
impairment of its long-lived assets of certain under-performing catalogs led to
a write-off of $22.0 million.
Severance -- The cost of employee severance includes termination benefits
for line and supervisory personnel in fulfillment, telemarketing, MIS,
merchandising, and various levels of corporate and catalog management. These
costs are recorded in Accrued liabilities in the accompanying consolidated
balance sheet at December 28, 1996.
Facility Exit/Relocation Costs and Fixed Asset Write-Offs -- These costs
are primarily composed of the Company's decision to relocate from its Weehawken,
NJ corporate facility, and consolidate its Roanoke, VA apparel distribution
center and Hanover, PA distribution center into its Roanoke home fashion
distribution center. The consolidation of these distribution centers and the
relocation of the corporate operations is expected to be completed by the end of
fiscal 1997. Approximately $6.3 million of these costs are recorded in Accrued
liabilities in the accompanying consolidated balance sheet at December 28, 1996.
In 1995, the Company incurred costs, aggregating approximately $1.5
million, in connection with the consolidation of its fulfillment facilities.
These costs include moving expenses, lease termination fees and severance
expenses, substantially all of which were paid in 1995. There were no such
charges incurred by the Company in 1994.
Impairment of Long-Lived Assets -- The Company considers a history of
catalog operating losses to be its primary indicator of potential impairment.
Assets are grouped and evaluated for impairment at the lowest level for which
there are identifiable cash flows that are independent of the cash flows of
other groups of assets. The Company has identified the appropriate grouping of
assets to be individual catalogs, except where certain catalogs are a part of a
group that, together, generate joint cash flows. The assets are deemed to be
impaired if a forecast of undiscounted future operating cash flows is less than
the carrying amounts. The loss is measured as the amount by which the carrying
amount of the assets exceeds its fair value. The Company generally measures fair
value by discounting estimated future cash flows. Considerable management
judgment is necessary to estimate discounted future cash flows and, accordingly,
actual results could vary significantly from such estimates. The impairment loss
was approximately $22.0 million and is primarily composed of the write-off of
goodwill and mailing lists associated with Tweeds, Austad's and The Safety Zone
(Note 2). No such charges were recorded by the Company in 1995 and 1994.
4. WRITE-DOWN OF INVENTORY OF DISCONTINUED CATALOGS
In 1995, the Company made a decision to discontinue six catalogs. The six
discontinued catalogs generated revenues of $20 million, $88 million and $118
million and losses of $5.1 million, $20 million and $4.7 million in 1996, 1995
and 1994, respectively. These losses are attributable to falling revenues due to
poor sales on the discontinued catalogs, increasing operating costs and expenses
and increasing selling expenses predominantly incurred to create liquidation
catalogs. The losses in 1996 and 1995 include provisions of approximately $1.1
million and $8.6 million, respectively, primarily related to the write-down of
inventory associated with these catalogs to their net realizable value based on
the planned liquidation of such inventory. The $8.6 million write-down in 1995
occurred because the Company anticipated mailing fewer catalogs than originally
planned for 1996, which resulted in significantly more merchandise on-hand that
needed to be moved through non-catalog channels. The inventory write-down of
$1.1 million in 1996 was required due to lower than anticipated recovery rates
on liquidation of such inventory. The Company utilizes various methods
F-13
<PAGE> 59
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
to dispose of the inventory related to discontinued catalogs, including special
sale catalogs, sales sections in other catalogs and liquidations of remaining
inventory through off-price merchants. This liquidation process typically takes
from six to nine months. These losses represent an incremental provision in
excess of the original provision included in cost of sales expense. There were
no such charges incurred by the Company in 1994. Fixed overhead expenses,
primarily telemarketing and fulfillment costs, that were allocated to the six
discontinued catalogs have been absorbed by the operations of the 1995
acquisitions and through cost containment measures instituted by the Company.
5. SEARS LICENSING AGREEMENT
In January 1994, the Company entered into a licensing agreement (the "Sears
Agreement") with the direct marketing subsidiary of Sears Roebuck and Co.
("Sears") to produce specialty catalogs for customers of the discontinued Sears
catalog. The specialty catalogs included: Show Place, based on the
Domestications catalog, Great Kitchens, based on the Colonial Garden Kitchens
catalog, and Sears Improvements, based on the Improvements catalog. The Sears
Agreement had an initial three-year term and was to continue thereafter unless
terminated. In December 1996, the Sears Agreement was terminated by Sears with
the last catalogs to be mailed in the first quarter of 1997. Sears terminated
the agreement based on the Company's non-compliance with certain operating
standards in order fulfillment and certain reporting standards.
Profits and losses from the venture are shared between the parties on an
equal basis until the venture is completed in the first quarter of 1997. In
accordance with the Sears Agreement, earnings before interest and taxes ("EBIT")
generated by the Sears catalogs is the basis for dividing these profits. The
Sears specialty catalogs generated revenues of $82 million, $81 million and $71
million and EBIT of $.3 million, $3.0 million and $2.9 million in 1996, 1995 and
1994, respectively.
The Company also issued to Sears a performance warrant to purchase 3.5
million shares of Common Stock in 1999 if the licensed business with Sears had
revenues of at least $250 million and EBIT of at least $30 million in 1998.
Alternately, Sears would have been entitled to purchase 7 million shares of
Common Stock in 1999 if the licensed business with Sears had revenues of at
least $500 million and EBIT of at least $60 million in 1998. The warrant
exercise price was $10.57 per share. Through 1996, no charges have been recorded
in connection with the warrants. Due to the termination of the Sears Agreement,
the Company believes that the venture wind-up activities will not generate
sufficient financial performance to enable Sears to exercise these warrants. The
Company believes that the termination of this venture will not have a material
impact on the Company's 1997 operating results.
6. ACCOUNTS RECEIVABLE, NET
The Company currently maintains an agreement with an unrelated third party
which provides for the sale and servicing of accounts receivable originating
from the Company's revolving credit cards. The agreement expires in December
2000. The Company remains obligated to repurchase uncollectible accounts
pursuant to the recourse provisions of the agreement and is required to maintain
a specified percentage of all outstanding receivables sold under the program as
a deposit with the third party to secure its obligations under the agreement.
The Company is required to maintain certain financial covenants related to this
agreement and has received a waiver for the events of default at December 28,
1996.
The proceeds to the Company relating to the sale of receivables for 1996,
1995 and 1994 were $39.2 million, $46.2 million and $56.1 million, respectively.
At December 28, 1996 and December 30, 1995, the uncollected balances under this
program were $33.5 million and $38.6 million, respectively, of which $4.8
million, and $5.5 million respectively, represent deposits under the agreement
which are included in Accounts receivable, net. The total reserve balance
maintained for the repurchase of uncollectible accounts was $2.5 million and
$2.4 million at December 28, 1996 and December 30, 1995, respectively, of which
F-14
<PAGE> 60
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
$1.4 million in both years is included in Accrued liabilities and the remaining
balance is included in the allowance for doubtful accounts.
Receivables sold under this agreement are considered financial instruments
with off-balance sheet risk as defined in Statement of Financial Accounting
Standards No. 105. Because the Company's sales are primarily made to individual
customers located throughout the United States, the Company believes there are
no concentrations of credit risks.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
<S> <C> <C>
Restructuring...................................... $ -- $ 9,504
Reserve for future sales returns................... 5,535 9,036
Compensation....................................... 5,795 3,968
Taxes.............................................. 3,007 2,696
Reserve for repurchase of accounts receivable sold
with recourse.................................... 1,391 1,389
Other.............................................. 10,241 11,189
-------- --------
Total.................................... $ 25,969 $ 37,782
======== ========
</TABLE>
8. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
<S> <C> <C>
Congress Facility.................................. $ 9,931 $ 22,627
Term Financing Facility............................ 20,000 19,000
TAC Revolving Credit Facility...................... 2,011 --
NAR Promissory Note................................ -- 10,000
6% Mortgage Notes Payable due 1998................. 3,139 2,969
Industrial Revenue Bonds with variable interest
rates averaging 4.1% in 1995 and 3.6% in 1996 due
2003............................................. 8,000 8,000
7.5% Convertible Subordinate Debentures due 2007... 751 751
8.75% Mortgage Note Payable due 2003............... 1,718 --
9.25% Senior Subordinated Notes due 1998........... 14,000 --
Other.............................................. 19 16
------- -------
59,569 63,363
Less current portion............................... 2,286 10,108
------- -------
$ 57,283 $ 53,255
======= =======
</TABLE>
In November 1995, the Company replaced their previous $80 million unsecured
revolving credit facility (the "Revolver") with a new $75 million secured credit
facility (the "Congress Facility") with Congress Financial Corporation
("Congress"), and repaid all amounts outstanding under the Revolver. In
addition, all standby letters of credit issued under the previous arrangement
were replaced with letters of credit issued by Congress under the Congress
Facility.
F-15
<PAGE> 61
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
Congress Facility -- The Congress Facility is comprised of a revolving line
of credit of up to $65 million with a three year term ("Congress Revolving
Credit Facility") and two year term loans aggregating $10 million ("Revolving
Term Notes"). The amount that can be borrowed under the Congress Facility is
based on percentages of eligible inventory and accounts receivable from time to
time. Beginning in November 1996, Congress lowered the advance rate by which the
available inventory is calculated by $4.4 million. This calculation was further
reduced by $2.0 million, pending completion of a new inventory appraisal which
was completed in March 1997. The Congress Revolving Credit Facility bears
interest at 1.25% above CoreStates' prime rate and the Revolving Term Notes
bears interest at 1.5% above CoreStates' prime rate. The Congress Facility is
secured by all assets of the Company, and the Company was required to maintain a
minimum net worth of $80 million, and working capital of $26 million. In
addition, the Congress Facility places limitations on the incurrence of
additional indebtedness. The rates of interest related to the Congress Revolving
Credit Facility and Revolving Term Notes at such dates were 9.50% and 9.75%,
respectively. At December 28, 1996 and December 30, 1995, the Company had $13.7
million and no outstanding borrowings under the Congress Revolving Credit
Facility and $8.9 million and $9.9 million outstanding under the Revolving Term
Notes, respectively. The face amount of unexpired documentary letters of credit
at December 28, 1996 and December 30, 1995, were $4.5 million and $4.2 million,
respectively. At December 28, 1996 unused borrowing capacity under the Congress
Facility was $26.0 million. In 1995, the Company issued under the Congress
Facility, $31.2 million of standby letters of credit which included $8.6 million
related to the Industrial Revenue Bonds due 2003, and $20.3 million related to
the Term Financing Facility.
The Congress Facility was amended in February 1996 to permit the
reorganization of Austad's (Note 2) and was further amended in April 1996 to
permit borrowings of an additional $4 million over the borrowing base formula
until the closing of the Company's $50 million rights offering (the "Rights
Offering") in August 1996 (Note 9), subject to the $75 million limit of the
Congress Facility. Also in April 1996, the minimum working capital and net worth
requirements contained in the Congress Facility and in the indenture relating to
the 9.25% Senior Subordinated Notes due 1998 ("9.25% Notes") were reduced by $5
million to $21 million and $75 million, respectively. In May 1996, the net worth
and working capital covenants were further amended to take into account a $25
million advance by NAR Group Limited ("NAR") until its repayment with the
proceeds of the Rights Offering in August 1996 (Note 9). In September 1996,
working capital was amended again to take into account the $10 million advance
by Intercontinental Mining & Resources Incorporated, an affiliate of NAR
("IMR"). The net worth covenant was further amended to $70 million in December
1996 and Congress agreed to address the 1997 net worth covenant level after a
review of the Company's business plan. As a result of the operating losses
incurred in 1996, the Company was not in compliance with the working capital and
net worth covenants for which the Company received waivers from Congress (Note
18).
Term Financing Facility -- The Company borrowed $10 million in each of 1994
and 1995 under a Term Financing Facility. The interest rate on the Term
Financing Facility is based on the equivalent rate of A-1 commercial paper
existing at the time of each borrowing. The face rate ranged from 5.47% to
5.73%, and 5.73% to 6.02% at December 28, 1996 and December 30, 1995,
respectively. The Term Financing Facility was reduced by an annual sinking fund
payment of $1.0 million in October 1996 and requires annual sinking fund
payments of $1.0 million from October 1997 though October 1999 with this amount
increasing to $1.6 million for each of the ten years thereafter. The Term
Financing Facility continues to be outstanding and in effect under its original
terms.
In December 1996, the Company finalized its agreement (the "Reimbursement
Agreement") with Richemont Finance S.A. ("Richemont"), who along with the family
of Alan G. Quasha, Chairman of the Board of the Company, jointly own NAR, that
provided the Company with approximately $27.9 million of letters of credit
through Swiss Bank Corporation New York Branch, to replace letters of credit
which were
F-16
<PAGE> 62
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
issued under the Congress Facility. These letters of credit were issued for $8.6
million related to the Industrial Revenue Bonds due 2003 and $19.3 million
related to the Term Financing Facility. The letters of credit will expire on
February 18, 1998 and carry an interest rate of 3.5% above the prime rate,
currently 11.75%, payable to Richemont quarterly on amounts drawn under the
letters of credit. The Company paid a facility fee of $1.4 million which was
equal to 5% of the principle amount of the letters of credit as well as other
fees incurred in connection with providing the facility as of December 28, 1996.
In the event that the Company has not paid in full, by the expiration date, any
outstanding balances under the letters of credit, Richemont shall have the
option, exercisable at any time prior to payment in full of all amounts
outstanding under the letters of credit, to convert such amount into common
stock of the Company at the mean of the bid and ask prices of the Company's
Common Stock on November 8, 1996, or the mean of the bid and ask prices of the
Company's Common Stock on each of the thirty days immediately prior to the date
of exercise of the conversion privilege. The Reimbursement Agreement is
subordinate to the Congress Facility. On December 5, 1996, Richemont advanced
the Company $10 million against the anticipated $27.9 million line of credit.
The Company repaid the $10 million loan after the letter of credit agreement was
in place on December 19, 1996.
The TAC Revolving Credit Facility -- The TAC Revolving Credit Facility was
paid off with the proceeds from the Congress Facility and with the proceeds from
the sale of the retail operations, on February 16, 1996 (Note 2), and was
classified as a long-term obligation at December 30, 1995.
NAR Promissory Note -- In September 1996, IMR loaned the Company $10
million as evidenced by a subordinated promissory note (the "NAR Promissory
Note"). This loan bears interest at prime plus 1.5%, was due on November 14,
1996 and, if it is not repaid before May 15, 1997, is convertible at the option
of NAR into shares of Common Stock at the lower of the fair market value thereof
on the date of execution or the then current fair market value thereof. The NAR
Promissory Note is subordinate to the Congress Facility and is excluded from the
working capital covenant calculation. NAR has agreed to apply $10 million of the
Company's indebtedness to acquire $10 million of the Company's Common Stock
pursuant to the 1997 Rights Offering (Note 18). As a result, the classification
of this debt remains long-term.
6% Mortgage Notes Payable due 1998 -- In connection with The Company
Store(R) acquisition, subsidiaries of the Company executed and delivered two
secured notes in the aggregate amount of $3.5 million with interest at 6% per
annum with principal and interest payments payable monthly on a fifteen-year
amortization schedule with the remaining balance due in August 1998. The
mortgage notes payable are non-recourse notes and are not guaranteed by the
Company. The mortgage notes payable are secured by the manufacturing and office
facilities of The Company Store(R). The amounts outstanding were $3.0 million
and $3.1 million at December 28, 1996 and December 30, 1995, respectively.
Industrial Revenue Bonds due 2003 -- The Industrial Revenue Bonds are due
on December 1, 2003 and are secured by the related assets purchased from the
proceeds of the bonds and by an irrevocable letter of credit in the amount of
$8.6 million. The obligations are guaranteed by the Company.
8.75% Mortgage Note Payable due 2003 -- TAC's 8.75% Mortgage Note Payable
is reflected as an obligation of the Company at December 30, 1995 in consequence
of the corporate reorganization, completed in February 1996 (Note 2). Pursuant
to the reorganization, TAC's retail business was split off to Mr. David Austad
and certain of his family members, in exchange for their 32.5% interest in
Austad's (and a cash payment of $1.1 million) and the Company became the owner
of all the outstanding capital shares of TAC. The 8.75% Mortgage Note Payable
was secured by the TAC warehouse and distribution facility in South Dakota. That
facility's operations were largely transferred to other Company facilities. This
note was paid in July 1996 from the proceeds of the sale of the facility.
F-17
<PAGE> 63
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
9.25% Senior Subordinated Notes due 1998 -- At December 28, 1996 and
December 30, 1995, the Company had $0 and $14.0 million of 9.25% Notes
outstanding, respectively. In August 1996, the principal amount due under the
9.25% Notes was repaid from the proceeds of the Rights Offering (Note 9).
In November 1995, IMR purchased the 9.25% Notes from a third party in
connection with the refinancing of the indebtedness under the Congress Facility.
The Company paid NAR a commitment fee of $105,000 upon the signing of a
repurchase and option agreement and a fee of $210,000 (1.5% of the outstanding
principal amount of the 9.25% Notes acquired by IMR) upon the funding, as well
as all expenses incurred by NAR in performing its obligation. The Company also
extended by two years the terms of the warrants to purchase 5,033,735 shares
held by NAR and IMR to August 1, 1998. The Company recorded as debt issuance
costs approximately $1.2 million, representing the fair value of the warrant
extensions as determined using the Black Scholes model. Such costs were being
amortized over the life of the 9.25% Notes. The Company has also agreed to
indemnify NAR against any and all claims or losses asserted against it or
incurred by it relating to the transactions contemplated by the repurchase and
option agreement.
Extraordinary Items -- As a result of the replacement of the Revolver, the
purchase by IMR of the 9.25% Notes and early repayment of 9.25% Notes from the
proceeds of the Rights Offering, the Company wrote-off approximately $1.8
million and $1.1 million of unamortized debt issuance costs as extraordinary
items due to the early extinguishment of debt for 1995 and 1996, respectively.
General -- At December 28, 1996, the aggregate annual principal and sinking
fund payments required on all long-term debt instruments are as follows (in
thousands): 1997 -- $10,102; 1998 -- $27,497; 1999 -- $1,000; 2000 -- $1,600;
2001 -- $1,600 and thereafter -- $21,551.
9. RIGHTS OFFERING
The Company commenced its $50 million Rights Offering on July 19, 1996.
Holders of record of the Company's Common Stock, 6% Series A Convertible
Additional Preferred Stock and Series B Convertible Additional Preferred Stock
as of July 18, 1996, were eligible to participate in the Rights Offering. The
Rights were exercisable at a price of $1.03 per share. Shareholders received
0.51 Rights for each share of Common Stock held, 3.72 rights for each share of
Series A Convertible Additional Preferred Stock held and 0.77 rights for each
share of Series B Convertible Additional Preferred Stock held as of the record
date. The Rights Offering closed on August 23, 1996.
Due to the Company's continued operating losses, the Company requested that
NAR advance up to $25 million against all the Rights distributed to it and/or
its commitment to purchase all of the unsubscribed shares. In May 1996, NAR
advanced the Company $25 million under a promissory note (Note 8). Under the
provisions of the promissory note, the Company repaid NAR the $25 million
advance plus accrued interest upon the closing of the Rights Offering.
The Company issued 48,748,785 shares pursuant to the Rights Offering which
generated proceeds of approximately $48 million, net of expenses. NAR received
rights entitling it to purchase 24,015,964 shares in the Rights Offering and
exercised such rights. In addition, the Company and NAR entered into a Standby
Purchase Agreement, pursuant to which NAR purchased 6,898,866 shares not
subscribed by shareholders and received approximately $.5 million as a fee. The
proceeds of the Rights Offering were used by the Company: (i) to repay the $14
million principal amount of 9.25% Notes held by an affiliate of NAR plus accrued
interest, (ii) to repay the $25 million principal amount advanced under the
promissory note plus accrued interest and (iii) to repay approximately $9
million under the Congress Facility. The Company recorded an extraordinary
expense related to the early extinguishment of the 9.25% Notes, representing a
write-off of the unamortized debt issuance costs of approximately $1.1 million.
F-18
<PAGE> 64
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
10. CAPITAL STOCK
6% Series A Convertible Additional Preferred Stock -- In December 1993, in
connection with the Company's acquisition of Tweeds, Inc. ("Tweeds"), the
Company entered into an exchange agreement with a major vendor of Tweeds. Under
the exchange agreement, the Company issued 234,900 shares of its 6% Series A
Convertible Additional Preferred Stock ("6% Preferred Stock") for an installment
note, dated March 29, 1993, as amended, in the amount of approximately $2.4
million previously issued by Tweeds. Dividends began accruing on September 30,
1993.
The 6% Preferred Stock was convertible into Common Stock of the Company
over a three year period in equal amounts on September 30, 1994, 1995 and 1996.
The conversion price was an amount equal to the average of the per share closing
prices for the five trading days preceding the conversion dates. The Company
converted each of the one third equal portions of the 234,900 issued shares of
the 6% Preferred Stock into 819,733, 427,785 and 189,818 shares of Common Stock
plus accrued dividends on September 30, 1996, 1995 and 1994, respectively. The
Company elected to pay cash dividends of $.1 million related to the September
1994 conversion.
Series B Convertible Additional Preferred Stock -- In February 1995, the
Company issued 634,900 shares of its Class B Convertible Additional Preferred
Stock ("Series B Stock") to acquire the remaining 80% of the outstanding common
stock of Aegis Safety Holdings, Inc. ("Aegis"), publisher of The Safety Zone
catalog. The Series B Stock has a stated value of $10 per share. Non-cumulative
dividends will accrue and be paid at 5% per annum during each of the first three
years if Aegis attains at least $1 million in earnings before interest and taxes
each year. In years four and five, dividends are cumulative and will accrue and
be paid at 7% per annum and are not contingent on the achievement of any
earnings target. Dividends were not paid in 1996 and 1995 based on The Safety
Zone catalog's operating results in each respective year.
The Series B Stock is convertible at any time, at $6.66 per share, subject
to antidilution, at the option of the holder and is convertible at the Company's
option if the market value of the Company's Common Stock is greater than $6.66
per share, subject to antidilution, for 20 trading days in any consecutive 30
day trading period or at the holder's option from time to time. If, after five
years, the Series B Stock is not converted, it is mandatorily redeemable, at the
Company's option, in cash or for 952,352 shares of the Company's Common Stock
provided the market value of the stock is at least $6.33 per share, subject to
antidilution. If the market value of the Company's Common Stock does not meet
this minimum, the redemption rate is subject to adjustment which would increase
the number of shares for which the Series B Stock is redeemed. In December 1996,
the Company filed a registration statement on form S-3 with the Securities and
Exchange Commission registering 952,352 shares of the Company's Common Stock
related to the future conversion of the Series B Stock.
The fair value of the Series B Stock, which is based on an independent
appraisal, was $.9 million less than the stated value at February 1995. This
discount is being amortized over a five year period and resulted in a charge of
$.2 million to preferred stock dividends in the statement of income in 1996 and
1995.
Warrants -- The warrants outstanding at December 28, 1996 are as follows:
<TABLE>
<CAPTION>
WARRANTS EXERCISE EXPIRATION
ISSUED PRICE DATE
- ---------- -------- ----------
<S> <C> <C>
1,728,923 $2.16 8/01/98
3,542,292 2.59 8/01/98
375,275 1.95 8/01/98
---------
5,646,490
=========
</TABLE>
F-19
<PAGE> 65
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
All of the above issued warrants are held by NAR and its affiliates. The
Company agreed to extend the terms of the warrants held by NAR and its
affiliates by two years in consideration of IMR's purchase of the 9.25% Notes
from a third party in November of 1995 (Note 8). The original terms of these
warrant agreements contain certain antidilution provisions which increased, in
aggregate, the warrants by 612,755 from 5,033,735 to 5,646,490 due to the Rights
Offering (Note 9). The antidilution provisions resulted in an adjustment to the
previous exercise prices of $2.42, $2.91 and $2.49, respectively.
General -- At December 28, 1996, there were 144,647,898 shares of Common
Stock and 634,900 shares of Series B Stock outstanding. Additionally, an
aggregate of 18,810,956 shares of Common Stock were reserved for issuance
pursuant to (i) the exercise of outstanding options 11,045,000, (ii) the
exercise of outstanding warrants 5,646,490, (iii) the Executive Equity Incentive
Plan 640,498, and (iv) the All Employee Equity Investment Plan 1,478,968.
Dividend Restrictions -- The Company is restricted from paying dividends on
its Common Stock or from acquiring its capital stock by certain debt covenants
contained in agreements to which the Company is a party.
11. STOCK BASED COMPENSATION PLANS
At December 28, 1996, the Company has thirteen stock based compensation
plans. In accordance with the provisions of SFAS No.123, the Company has
recorded a compensation charge of $.5 million. The effects of applying SFAS No.
123 for recognizing compensation costs are not indicative of future amounts.
SFAS No. 123 does not apply to awards prior to 1996 and additional awards in the
future are anticipated. The information below details each of the respective
plans, including the changes during the years presented.
1978 Stock Option Plan -- Pursuant to the Company's Stock Option Plan (the
"1978 Plan"), an aggregate of 2,830,519 shares were approved for issuance to
employees and consultants of the Company. The option price and the periods over
which an option is exercisable are specified by the Compensation Committee of
the Board of Directors.
Options expire five years from the date of grant and generally vest over
three to four years. Payment for shares purchased upon the exercise of an option
shall be in cash or stock of the Company. If paid in cash, a partial payment may
be made with the remainder in installments evidenced by promissory notes at the
discretion of the Compensation Committee. Changes in options outstanding,
expressed in numbers of shares, are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
WEIGHTED WEIGHTED WEIGHTED
1994 AVERAGE 1995 AVERAGE 1996 AVERAGE
------- EXERCISE -------- EXERCISE ------- EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
period................................ 365,250 $ 3.95 496,050 $ 3.60 90,000 $ 2.42
Granted................................. 162,000 $ 3.50 70,000 $ 2.11 -- --
Exercised............................... (1,000) $ 5.00 -- -- -- --
Forfeited............................... (9,500) $ 5.00 (142,000) $ 3.50 -- --
Expired................................. (20,700) $ 8.29 (334,050) $ 3.65 (20,000) $ 3.50
------- -------- -------
Options outstanding, end of period...... 496,050 $ 3.60 90,000 $ 2.42 70,000 $ 2.11
======= ======== =======
Options exercisable, end of period...... 334,050 $ 3.65 20,000 $ 3.50 23,333 $ 2.11
======= ======== =======
</TABLE>
The options outstanding at December 28, 1996 have exercise prices between
$1.75 and $2.25 with a weighted average contractual life of 3.8 years.
F-20
<PAGE> 66
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
In June 1994, one director was granted non-qualified options to purchase
shares at an exercise price of $6.125 per share, of which 50,000 shares will
expire in March 2000. In September 1992, six directors were granted options to
purchase 20,000 shares each, at the market price, which at the time was $1.75
per share. These option grants were approved at the 1993 Annual Meeting of
Shareholders and the options expire in 1997.
Executive Equity Incentive Plan -- In December 1992, the Board of Directors
adopted the 1993 Executive Equity Incentive Plan (the "Incentive Plan"). The
Incentive Plan was approved by shareholders at the 1993 Annual Meeting. Pursuant
to the Incentive Plan, options to purchase shares of the Company's Common Stock
will be granted from time to time by the Compensation Committee of the Board of
Directors to selected executives of the Company or its affiliates. For each such
option granted up to a maximum of 250,000, the selected executive will receive
the right to purchase on a specified date (the "Tandem Investment Date") a
number of shares of the Company's Common Stock ("Tandem Shares") equal to
one-half the maximum number of shares of the Company's Common Stock covered by
such option. An aggregate of 2,400,000 shares of the Company's Common Stock have
been reserved for issuance under the Incentive Plan. Company financing is
available under the Incentive Plan to pay for the purchase price of the Tandem
Shares. Changes in shares and options outstanding, expressed in numbers of
shares, for the Incentive Plan are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
WEIGHTED WEIGHTED WEIGHTED
1994 AVERAGE 1995 AVERAGE 1996 AVERAGE
--------- EXERCISE --------- EXERCISE --------- EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares outstanding, beginning of
period............................ 663,830 753,830 877,163
Shares purchased.................... 90,000 143,333 200,000
Shares forfeited.................... -- (20,000) (16,667)
--------- --------- ---------
Shares outstanding, end of period... 753,830 877,163 1,060,496
========= ========= =========
Options outstanding, beginning of
period............................ 1,101,000 $ 2.69 1,073,836 $ 2.98 1,021,170 $ 2.66
Granted............................. 180,000 $ 4.56 286,666 $ 2.53 350,000 $ 1.00
Forfeited........................... (207,164) $ 2.70 (339,332) $ 3.59 (730,672) $ 2.68
--------- --------- ---------
Options outstanding, end of
period............................ 1,073,836 $ 2.98 1,021,170 $ 2.66 640,498 $ 1.73
========= ========= =========
Options exercisable, end of
period............................ -- -- -- -- 173,832 $ 2.56
========= ========= =========
Weighted average fair value of
options granted during the year... $ .67 --
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: risk free interest rate of 6.06% - 6.37%,
expected lives of 6 years, expected volatility of 39.07% - 40.81%, expected
dividends of $0.
The following table summarizes information about stock options outstanding
at December 28, 1996:
<TABLE>
<CAPTION>
OPTIONS OPTIONS EXERCISABLE
OUTSTANDING --------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/28/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/28/96 EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 350,000 5.5 $ 1.00 0 $ 1.00
2.50 to $3.00 290,498 3.1 $ 2.61 173,832 $ 2.56
1.00 to $3.00 640,498 4.4 $ 1.73 173,832 $ 2.56
</TABLE>
F-21
<PAGE> 67
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
Options granted under the Incentive Plan become exercisable three years
after the dates of grant and expire six years from the dates of grant. The
purchase price shall be paid in full at the time of purchase in cash or shares
of the Company's Common Stock valued at their fair market value or in a
combination thereof. The amount of amortization charged to expense was
approximately $(.3) million, $.1 million and $.1 million for 1996, 1995 and
1994, respectively, net of forfeitures.
Changes to the notes receivable related to the Incentive Plan are as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Notes receivable balance beginning of
period................................... $1,424,000 $1,522,000 $1,651,000
Additions.................................. 328,000 229,000 200,000
Payments................................... (230,000) (100,000) (111,000)
---------- ---------- ----------
Notes receivable end of period............. $1,522,000 $1,651,000 $1,740,000
========== ========== ==========
</TABLE>
Under the terms of the Incentive Plan, the purchase price for shares is
based upon the market price at the date of purchase, and payment is made in the
form of a 20% cash down payment and a six year note that bears interest at the
mid-term applicable federal rate, as determined by the Internal Revenue Service,
as of the month of grant of such shares. The Incentive Plan participants
purchased shares at prices ranging from $1.00 to $4.94 with the Company
accepting notes bearing interest at rates ranging from 5.00% to 7.75%.
All Employee Equity Investment Plan -- In December 1992, the Board of
Directors adopted the 1993 All Employee Equity Investment Plan (the "Investment
Plan"). Such plan was approved by the shareholders at the 1993 Annual Meeting.
Each full-time or permanent part-time employee of the Company or its affiliates
who has attained the age of 18, has met certain standards of continuous service
with the Company or an affiliate of the Company and is not covered by a
collective bargaining agreement may participate in the Investment Plan.
An eligible employee will be granted a right to purchase a specific number
of shares of the Company's Common Stock by the Compensation Committee, based on
the eligible employee's salary level. The purchase price of the Company's Common
Stock in the Investment Plan shall be the average market value of a share of the
Company's Common Stock during the 20 days prior to the first day of the
subscription period, less a 40% discount. The shares received by such
participants are not transferable (other than by will or the laws of descent and
distribution) until the vesting date or when such participant attains the age of
65, dies or becomes permanently disabled, and are subject to forfeiture in the
event the participant ceases to be an employee prior to that date. The employees
who choose to participate in the Investment Plan vest in their shares equally
over a three-year period beginning with the first anniversary of the day
subsequent to the final day of the subscription period or when they reach the
age of 65, die or become permanently disabled. An aggregate of 2,000,000 shares
of the Company's Common Stock have been reserved for issuance under the
Investment Plan.
Changes in shares outstanding and available for grant, expressed in numbers
of shares for the Investment Plan are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Shares outstanding, beginning of period... 211,883 380,563 508,134
Shares purchased.......................... 260,124 216,931 80,550
Shares forfeited.......................... (91,444) (89,360) (67,652)
--------- --------- ---------
Shares outstanding end of period.......... 380,563 508,134 521,032
========= ========= =========
Shares available for grant, end of
period.................................. 1,619,437 1,491,866 1,478,968
========= ========= =========
</TABLE>
F-22
<PAGE> 68
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
The difference between the market price and the discounted price aggregated
approximately $0, $.2 million and $.4 million in 1996, 1995 and 1994,
respectively. These amounts have been reduced by approximately $.3 million in
1996 and $.2 million in 1995 and have been charged to amortization expense.
Restricted Stock Award Plan -- In December 1992, the Board of Directors
adopted the 1993 Restricted Stock Award Plan (the "Restricted Stock Plan"). An
aggregate of 500,000 shares of the Company's Common Stock have been reserved for
issuance under the Restricted Stock Plan. During 1993, 224,300 shares were
awarded to participants aggregating $.8 million. Such amount has been amortized
over a three-year vesting period. The amount of amortization charged to expense
was approximately $.2 million in 1995, net of forfeitures.
Incentive Compensation Plan -- Bonus arrangements with certain executives
and key employees generally provide for additional compensation based upon the
attainment of certain profit levels, as well as other performance measures.
These bonuses approximated an aggregate of $.5 million, $1.5 million and $1.1
million in 1996, 1995 and 1994, respectively. Under the bonus plan, 25% of the
bonus is deferred and payable in cash or restricted stock that vests over a
three year period.
The Chief Executive Officer (the "CEO") Tandem Plan -- Pursuant to the
Company's Tandem Plan (the "Tandem Plan") the right to purchase an aggregate of
1,000,000 shares of Common Stock and an option to purchase 2,000,000 shares of
Common Stock was approved for issuance to the CEO. The option price represents
the average of the low and high fair market value of the common stock on August
23, 1996, the date of the closing of the 1996 Rights Offering. The option is
subject to antidilution provisions and due to the Company's 1996 Rights Offering
were adjusted to 1,510,000 shares of Common Stock and 3,020,000 options.
The options expire 10 years from the date of grant and vest over four
years. Payment for shares purchased upon the exercise of the option shall be in
cash or stock of the Company.
Options outstanding, granted and the weighted average exercise prices are
as follows:
<TABLE>
<CAPTION>
1996
--------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Options outstanding, beginning of period.............. -- --
Granted............................................... 3,020,000 1.16
Forfeited............................................. -- --
Expired............................................... -- --
----------
Options outstanding, end of period.................... 3,020,000 1.16
==========
Options exercisable, end of period.................... -- --
Weighted average fair value of options, granted during
year................................................ $ .77 --
</TABLE>
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 9.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: risk free interest rate of 6.79%, expected lives
of 9.85 years, expected volatility of 45.02% and expected dividends of $0.
The CEO Performance Year Plan -- Pursuant to the Company's Performance Year
Plan (the "Performance Plan") an option to purchase an aggregate of 1,000,000
shares of Common Stock was approved for issuance to the CEO. The option price
represents the average of the low and high fair market value of the Common Stock
on August 23, 1996, the date of the closing of the 1996 Rights Offering.
F-23
<PAGE> 69
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
The options expire 10 years from the date of grant and vest over four
years. The options are based upon performance as defined by the Compensation
Committee of the Board of Directors. Should a performance target not be
attained, the option is carried over to the succeeding year in conjunction with
that year's option until the expiration date. Payment for shares purchased upon
the exercise of the options shall be in cash or stock of the Company.
Options outstanding, granted and the weighted average exercise prices are
as follows:
<TABLE>
<CAPTION>
1996
--------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding, beginning of period............... -- --
Granted................................................ 1,000,000 $ 1.16
Forfeited.............................................. -- --
Expired................................................ -- --
---------
Options outstanding, end of period..................... 1,000,000 $ 1.16
=========
Options exercisable, end of period..................... -- --
Weighted average fair value of options granted during
the year............................................. $ .77 --
</TABLE>
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 9.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-price model with the following weighted average
assumptions or grants in 1996: risk free interest rate of 6.79%, expected lives
of 9.85 years, expected volatility of 45.02% and expected dividends of $0.
The CEO Closing Price Option Plan -- Pursuant to the Company's Closing
Price Option Plan (the "Closing Price Plan") an option to purchase an aggregate
of 2,000,000 shares of Common Stock was approved for issuance to the CEO. The
option price represents the average of the low and high fair market value of the
Common Stock on August 23, 1996, the date of the closing of the 1996 Rights
Offering.
The options expire 10 years from the date of grant and vest based upon the
performance of the Company's stock price over a consecutive 91 calendar day
period as defined by the Compensation Committee of the Board of Directors. The
performance period has a range of 6 years beginning August 23, 1996, the date of
the closing of the 1996 Rights Offering. Payment for shares purchased upon the
exercise of the options shall be in cash or stock of the Company.
Options outstanding, granted and the weighted average exercise prices are
as follows:
<TABLE>
<CAPTION>
1996
--------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Options outstanding, beginning of period................ -- --
Granted................................................. 2,000,000 $ 1.16
Cancelled............................................... -- --
Expired................................................. -- --
---------- ------
Options outstanding, end of period...................... 2,000,000 $ 1.16
========== ======
Options exercisable, end of period...................... -- --
Weighted average fair value of options granted during
the year.............................................. $ .17 --
</TABLE>
F-24
<PAGE> 70
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 9.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-price model utilizing a Monte Carlo simulation
with the following weighted average assumptions for grants in 1996: risk free
interest rate of 6.79%, expected lives of 9.85 years, expected volatility of
45.02% and expected dividends of $0.
The CEO Six Year Stock Option Plan -- Pursuant to the Company's Six Year
Stock Option Plan (the "Six Year Plan") an option to purchase an aggregate of
250,000 shares of Common Stock was approved for issuance to the CEO from NAR.
The option price represents the average of the low and high fair market value of
the Common Stock on August 23, 1996, the date of the closing of the 1996 Rights
Offering. The option is subject to antidilution provisions and due to the
Company's 1996 Rights Offering was adjusted to 377,500 options.
The options expire 6 years from the date of grant and vest after one year.
Payment for shares purchased upon the exercise of the options shall be in cash
or stock of the Company.
Options outstanding, granted and the weighted average exercise prices are
as follows:
<TABLE>
<CAPTION>
1996
--------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
<S> <C> <C>
Options outstanding, beginning of period................ -- --
Granted................................................. 377,500 $ 1.16
Forfeited............................................... -- --
Expired................................................. -- --
-------- ------
Options outstanding, end of period...................... 377,500 $ 1.16
======== ======
Options exercisable, end of period...................... -- --
Weighted average fair value of options granted during
the year.............................................. $ .60 --
</TABLE>
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 5.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: risk free interest rate of 6.42%, expected lives
of 5.85 years, expected volatility of 45.02% and expected dividends of $0.
The CEO Seven Year Stock Option Plan -- Pursuant to the Company's Seven
Year Stock Option Plan (the "Seven Year Plan") an option to purchase an
aggregate of 250,000 shares of Common Stock was approved for issuance to the CEO
from NAR. The option price represents the average of the low and high fair
market value of the Common Stock on August 23, 1996, the date of the closing of
the 1996 Rights Offering. The option is subject to antidilution provisions and
due to the Company's 1996 Rights Offering was adjusted to 377,500 options.
The options expire 7 years from the date of grant and vest after two years.
Payment for shares purchased upon the exercise of the options shall be in cash
or stock of the Company.
F-25
<PAGE> 71
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
Options outstanding, granted and the weighted average exercise prices are
as follows:
<TABLE>
<CAPTION>
1996
--------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
<S> <C> <C>
Options outstanding, beginning of period................ -- --
Granted................................................. 377,500 $ 1.16
Forfeited............................................... -- --
Expired................................................. -- --
-------- -----
Options outstanding, end of period...................... 377,500 $ 1.16
======== =====
Options exercisable, end of period...................... -- --
Weighted average fair value of options granted during
the year.............................................. $ .65 --
</TABLE>
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 6.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: risk free interest rate of 6.53%, expected lives
of 6.85 years, expected volatility of 45.02% and expected dividends of $0.
The CEO Eight Year Stock Option Plan -- Pursuant to the Company's Eight
Year Stock Option Plan (the "Eight Year Plan") an option to purchase an
aggregate of 250,000 shares of Common Stock was approved for issuance to the CEO
from NAR. The option price represents the average of the low and high fair
market value of the Common Stock on August 23, 1996, the date of the closing of
the 1996 Rights Offering. The option is subject to antidilution provisions and
due to the Company's 1996 Rights Offering was adjusted to 377,500 options.
The options expire 8 years from the date of grant and vest after three
years. Payment for shares purchased upon the exercise of the options shall be in
cash or stock of the Company.
Options outstanding, granted and the weighted average exercise prices are
as follows:
<TABLE>
<CAPTION>
1996
--------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
<S> <C> <C>
Options outstanding, beginning of period.................. -- --
Granted................................................... 377,500 $ 1.16
Forfeited................................................. --
Expired................................................... -- --
-------- -----
Options outstanding, end of period........................ 377,500 $ 1.16
======== =====
Options exercisable, end of period........................ -- --
Weighted average fair value of options granted during the
year.................................................... $ .69 --
</TABLE>
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 7.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: risk free interest rate of 6.62%, expected lives
of 7.85 years, expected volatility of 45.02% and expected dividends of $0.
F-26
<PAGE> 72
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
The CEO Nine Year Stock Option Plan -- Pursuant to the Company's Nine Year
Stock Option Plan (the "Nine Year Plan") an option to purchase an aggregate of
250,000 shares of Common Stock was approved for issuance to the CEO from NAR.
The option price represents the average of the low and high fair market value of
the common stock on August 23, 1996, the date of the closing of the 1996 Rights
Offering. The option is subject to antidilution provisions and due to the
Company's 1996 Rights Offering was adjusted to 377,500 options.
The options expire 9 years from the date of grant and vest after four
years. Payment for shares purchased upon the exercise of the options shall be in
cash or stock of the Company.
Options outstanding, granted and the weighted average exercise prices are
as follows:
<TABLE>
<CAPTION>
1996
--------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
<S> <C> <C>
Options outstanding, beginning of period.................. -- --
Granted................................................... 377,500 $ 1.16
Forfeited................................................. -- --
Expired................................................... --
-------- ------
Options outstanding, end of period........................ 377,500 $ 1.16
======== ======
Options exercisable, end of period........................ -- --
Weighted average fair value of options granted during the
year.................................................... $ .74 --
</TABLE>
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 8.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: risk free interest of 6.73%, expected lives of
8.85 years, expected volatility of 45.02% and expected dividends of $0.
1996 Stock Option Plan -- Pursuant to the Company's 1996 Stock Option Plan
(the "1996 Plan"), an aggregate of 3,445,000 shares were approved for issuance
to employees of the Company. The option exercise price shall be the fair market
value as of the date of grant. The total options granted to an employee is one
half performance based. The changes for each type of option (performance based
and non-performance based) are presented in separate tables that follow.
Options expire after 10 years, unless an employee owns stock possessing
more than 10% of the total combined voting power of all classes of stock, in
which case the option would expire after 5 years. Payment for shares purchased
upon the exercise of an option shall be in cash or stock of the Company.
F-27
<PAGE> 73
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
NON-PERFORMANCE BASED
<TABLE>
<CAPTION>
1996
--------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Options outstanding, beginning of period.............. -- --
Options granted....................................... 1,722,500 $.98
Options forfeited..................................... -- --
Options expired....................................... -- --
----------
Options outstanding, end of period.................... 1,722,500 $.98
==========
Options exercisable, end of period.................... -- --
Weighted average fair value of options granted during
the year............................................ $ .67 --
</TABLE>
The options outstanding at December 28, 1996 have exercise prices between
$.69 and $1.00 with a weighted average contractual life of 9.9 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: risk free interest rate of 6.80%, expected lives
of 7 years, expected volatility of 45.35% and expected dividends of $0.
PERFORMANCE BASED
<TABLE>
<CAPTION>
1996
--------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding, beginning of period............... -- --
Options granted........................................ 1,722,500 $.98
Options forfeited...................................... -- --
Options expired........................................ -- --
---------
Options outstanding, end of period..................... 1,722,500 $.98
=========
Options exercisable, end of period..................... -- --
Weighted average fair value of options granted during
the year............................................. $ .67 --
</TABLE>
The options outstanding at December 28, 1996 have exercise prices between
$.69 and $1.00 with a weighted average contractual life of 9.9 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: risk free interest rate of 6.80%, expected lives
of 7 years, expected volatility of 45.35% and expected dividends of $0.
12. EMPLOYEE BENEFIT PLANS
Hanover Direct, Inc. Savings Plan -- The 401(k) Savings and Retirement Plan
(the "401(k) Plan") allows eligible employees to contribute a percentage of
their annual compensation to the 401(k) Plan. The Company makes matching
contributions of one-third of the employees' pre-tax contributions up to a
maximum of 6%. Participants may invest contributions in various investment funds
or in the Company's Common Stock.
F-28
<PAGE> 74
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
The Company's contributions charged to expense for 1996, 1995 and 1994 were
approximately $.4 million, $.6 million and $.6 million, respectively.
Supplemental Retirement Plan -- The Supplemental Retirement Plan (the
"Retirement Plan") allows eligible employees to make contributions to a trust
where the contributions are invested by the trust for each participant in a tax
free money market fund. The Company makes matching contributions. Company
contributions charged to expense in 1996, 1995 and 1994 amounted to
approximately $.1 million, $.2 million and $.2 million, respectively.
The Retirement Plan permits eligible employees to contribute up to 4% of
their salary. The Company matches all participant contributions, up to 50% of
their contributions, with a cap of 2%. The Retirement Plan is not tax-qualified
under the applicable provisions of the Internal Revenue Code of 1986, as
amended.
13. INCOME TAXES
At December 28, 1996, the Company had net operating loss carryforwards
("NOLs") totalling $241.2 million, which expire as follows: In the year
2001 -- $17.3 million, 2003 -- $14.6 million, 2004 -- $14.3 million,
2005 -- $20.6 million, 2006 -- $46.9 million, 2007 -- $27.7 million,
2010 -- $22.7 million and 2011 -- $77.1 million. The Company also has $1 million
of general business tax credit carryforwards that expire in 2000 through 2009.
The Company's available NOLs for tax purposes consists of $91.4 million of NOLs
subject to a $4 million annual limitation under Section 382 of the Internal
Revenue Code of 1986 and $149.8 million of NOLs not subject to a limitation. The
unused portion of the $4 million annual limitation for any year may be carried
forward to succeeding years to increase the annual limitation for those
succeeding years.
SFAS No. 109 requires that the future tax benefit of such NOLs be recorded
as an asset to the extent that management assesses the utilization of such NOLs
to be "more likely than not." Despite incurring additional NOLs of $22.7 million
in 1995 and $77.1 million in 1996, management believes that the Company will be
able to utilize up to $43 million of NOLs based upon the Company's assessment of
numerous factors, including its planned restructuring and future operating
plans.
For the years ended December 30, 1995 and December 28, 1996, the Company
maintained its deferred tax asset of $15 million (net of a valuation allowance
of $48.5 million in 1995 and $82.6 million in 1996). Management believes that
the $15 million net deferred tax asset still represents a reasonable,
conservative estimate of the future utilization of the NOLs and the reversal of
timing items and will continue to routinely evaluate the likelihood of future
profits and the necessity of future adjustments to the deferred tax asset
valuation allowance.
Realization of the future tax benefits is dependent on the Company's
ability to generate taxable income within the carryforward period and the
periods in which net temporary differences reverse. Future levels of operating
income and taxable income are dependent upon general economic conditions,
competitive pressures on sales and margins, postal and other delivery rates, and
other factors beyond the Company's control. Accordingly, no assurance can be
given that sufficient taxable income will be generated for utilization of NOLs
and reversals of temporary differences.
The Company's Federal income tax provision was $4.2 million in 1994 and
zero in 1995 and 1996. The 1994 provision was offset by utilization of the NOLs.
The Company's provision for state income taxes was $.9 million in 1994, $1.0
million in 1995 and $1.0 million in 1996.
F-29
<PAGE> 75
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
A reconciliation of the Company's net income for financial statement
purposes to taxable income (loss) for the years ended January 1, 1994, December
31, 1994 and December 30, 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Net income (loss)............................. $ 14,838 $(30,230) $(105,254)
Income tax provision (benefit)................ (3,509) 1,003 1,000
Income (loss) before income taxes............. 11,329 (29,227) (104,254)
Differences between income before taxes for
financial statement purposes and taxable
income:
State income taxes.......................... (860) (1,003) (1,000)
Utilization of carryovers................... (12,652) -- --
Differences attributable to subsidiary not
included in Company's tax return......... -- (313) --
Permanent differences....................... 717 1,011 7,630
Net change in temporary differences......... 1,466 6,881 20,484
-------- -------- ---------
(11,329) 6,576 27,114
-------- -------- ---------
Taxable income (loss)......................... $ -- $(22,651) $ (77,140)
-------- -------- ---------
</TABLE>
The components of the net deferred tax asset at December 28, 1996 are as
follows (in millions):
<TABLE>
<CAPTION>
NON-
CURRENT CURRENT TOTAL
------- ------- ------
<S> <C> <C> <C>
Federal tax NOL and business tax credit
carryforwards...................................... $ -- $ 85.5 $ 85.5
Allowance for doubtful accounts...................... 1.6 -- 1.6
Inventories.......................................... 1.9 -- 1.9
Prepaid catalog costs................................ (3.1) -- (3.1)
Property and equipment............................... -- (1.2) (1.2)
Excess of net assets of acquired business............ -- (2.9) (2.9)
Accrued liabilities.................................. 11.3 -- 11.3
Customer prepayments and credits..................... 3.0 -- 3.0
Tax basis in net assets of discontinued operations in
excess of financial statement amount............... 0.8 -- 0.8
Other................................................ -- 0.7 0.7
------ ------ ------
Deferred Tax Asset................................... 15.5 82.1 97.6
Valuation allowance................................ (12.2) (70.4) (82.6)
------ ------ ------
Deferred Tax Asset, net.............................. 3.3 $ 11.7 $ 15.0
====== ====== ======
</TABLE>
The Company has established a valuation allowance for a portion of the
deferred tax asset, due to the limitation on the utilization of the NOLs and its
estimate of the future utilization of the NOLs.
The Company's tax returns for years subsequent to 1984 have not been
examined by the Internal Revenue Service ("IRS"). Availability of the NOLs might
be challenged by the IRS upon examination of such returns which could affect the
availability of NOLs. The Company believes, however, that IRS challenges that
would limit the utilization of NOLs will not have a material adverse effect on
the Company's financial position.
F-30
<PAGE> 76
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
Total tax expense for each of the three fiscal years presented differ from
the amount computed by applying the Federal statutory tax rate due to the
following:
<TABLE>
<CAPTION>
1994 1995 1996
PERCENT OF PERCENT OF PERCENT OF
PRE-TAX INCOME PRE-TAX LOSS PRE-TAX LOSS
-------------- ------------ ------------
<S> <C> <C> <C>
Tax (benefit) at Federal statutory
rate.............................. 35.0% (35.0)% (35.0)%
State and local taxes............... 4.9 2.2 0.6
Reversal of valuation allowance..... (38.5) -- --
Net increase in (reversal of)
temporary differences:
Depreciation and amortization..... 3.5 (5.4) 0.3
Deferred compensation............. 11.4 -- (0.2)
Restructuring reserves............ -- -- 8.7
Other............................. (10.4) 15.1 (2.0)
Utilization of contribution and NOL
carryover......................... (39.1) -- --
Tax NOLs for which no benefit could
be recognized..................... -- 25.3 25.9
Other............................... 2.2 1.2 2.7
----- ----- -----
(31.0)% 3.4% 1.0%
===== ===== =====
</TABLE>
14. LEASES
Certain leases to which the Company is a party, provide for payment of real
estate taxes and other expenses. Most leases are operating leases and include
various renewal options with specified minimum rentals. Rental expense for
operating leases related to continuing operations were as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Minimum rentals............................... $13,572 $13,070 $12,931
======= ======= =======
</TABLE>
Future minimum lease payments under noncancellable operating and capital
leases relating to continuing operations that have initial or remaining terms in
excess of one year, together with the present value of the net minimum lease
payments as of December 28, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING LEASES LEASES
--------------------------------------------------------- --------- -------
<S> <C> <C>
1997..................................................... $10,646 $ 1,438
1998..................................................... 7,493 482
1999..................................................... 6,257 21
2000..................................................... 5,129 --
2001..................................................... 4,817 --
Thereafter............................................... 33,792 --
------- -------
Total minimum lease payments............................. $68,134 1,941
======= =======
Less amount representing interest(a)..................... 115
-------
Present value of minimum lease payments(b)............... $ 1,826
=======
</TABLE>
- ---------------
(a) Amount necessary to reduce net minimum lease payments to present value
calculated at the Company's incremental borrowing rate at the inception of
the leases.
(b) Reflected in the balance sheet as current and noncurrent capital lease
obligations of $1,260,000 and $1,973,000 at December 30, 1995 and $1,344,000
and $482,000 at December 28, 1996, respectively.
F-31
<PAGE> 77
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
The future minimum lease payments under noncancellable leases that remain
from the discontinued restaurant operations as of December 28, 1996 are as
follows: 1997 -- $.9 million; 1998 -- $.8 million; 1999 -- $.8 million;
2000 -- $.8 million; 2001 -- $.8 million; and thereafter $2.5 million. The above
amounts exclude annual sublease income of $1.0 million from subleases which have
the same expiration as the underlying leases.
In connection with the Company's investment in Blue Ridge, a subsidiary of
the Company is contingently liable with respect to the lease obligation related
to the apparel distribution center in Roanoke, Virginia. The Company does not
guarantee the indebtedness associated with the Roanoke apparel center held by
Blue Ridge Associates.
15. CHANGES IN MANAGEMENT AND EMPLOYMENT AGREEMENTS
Jack E. Rosenfeld resigned as President and Chief Executive Officer and as
a Director of the Company effective December 30, 1995. In connection with such
resignation, the Company and Mr. Rosenfeld entered into a Termination of
Employment Agreement, dated December 30, 1995 (the "Termination Agreement"),
providing for the termination of (i) the Employment Agreement, dated as of
October 25, 1991, between the Company and Mr. Rosenfeld, and (ii) all benefits,
salary and perquisites provided for therein except for (a) benefits, salary and
perquisites earned and accrued up to December 30, 1995, (b) salary of $500,000
through December 31, 1996, and (c) benefits including (I) continued disability
and term life insurance in amounts not less than the amounts in force on the
date of the Termination Agreement for a three-year period and (II) the right to
continue to participate in the Company's medical plans to the extent he is
eligible for up to three years from the date of the Termination Agreement. The
Termination Agreement calls for Mr. Rosenfeld to serve as a Director Emeritus of
the Company and will allow Mr. Rosenfeld to attend meetings of the Board of
Directors and participate in Board discussions for a one-year period, but Mr.
Rosenfeld has no right to vote on any matters that come before the Board of
Directors. The Termination Agreement will preclude Mr. Rosenfeld for a one-year
period from competing with the Company under certain circumstances.
On March 7, 1996, Rakesh K. Kaul was named President and Chief Executive
Officer and elected to the Board of Directors of the Company. Effective that
date, Mr. Kaul entered into an Executive Employment Agreement (the "Employment
Agreement") which provides for an "at will" term commencing on March 7, 1996 at
a base salary of $525,000 per year. The Employment Agreement also provides for
Mr. Kaul's participation in the Short-Term Incentive Plan for Rakesh K. Kaul.
That plan, which was approved by the shareholders at the June 20, 1996
shareholders meeting, provides for an annual bonus of between 0% and 125% of Mr.
Kaul's base salary, depending on the attainment of various performance
objectives as determined in accordance with the objective formula or standard to
be adopted by the Compensation Committee as part of the performance goals for
each such year. The Employment Agreement also provides for Mr. Kaul's
participation in the Long-Term Incentive Plan for Rakesh K. Kaul. That plan,
which was approved by the shareholders at the June 20, 1996 shareholders
meeting, provides for the purchase by Mr. Kaul of 1,000,000 shares of Common
Stock at their fair market value; an option expiring March 7, 2006 for the
purchase of 2,000,000 shares of (the "Tandem Stock Purchase Right") Common
Stock; an option expiring March 7, 2006 to purchase 2,000,000 shares of Common
Stock (the "Tandem Option") exercisable only upon satisfaction of the condition
that the closing price of the Common Stock has attained an average of $7.00 per
share during a 91-day period ending on or before March 7, 2002; an option
expiring March 7, 2006 to purchase 1,000,000 shares of Common Stock at their
fair market value, subject to the attainment of certain objective performance
goals to be set by the Compensation Committee; and four options expiring March
7, 2002, and the first three anniversaries thereof, respectively, for the
purchase of 250,000 shares of Common Stock each, to be granted by NAR, the
Company's majority shareholder ("the NAR Options"). As a result of the Rights
Offering, Mr. Kaul was granted an additional .51 shares for each share of Common
Stock he was granted under the
F-32
<PAGE> 78
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
Tandem Stock Purchase Right, the Tandem Option, and the NAR Options
(collectively, the "Award Shares") which resulted in his being granted 1,510,000
shares, 3,020,000 options and 1,510,000 options, respectively. The Employment
Agreement also provides for the grant of registration rights under the
Securities Act of 1993, as amended (the "Securities Act"), for shares of Common
Stock owned by Mr. Kaul. Pursuant to the Employment Agreement, the Company will
make Mr. Kaul whole, on an after-tax basis, for various relocation and temporary
living expenses related to his employment with the Company. In the event that
Mr. Kaul's employment is actually or constructively terminated by the Company,
other than for cause, he will be entitled for a 12-month period commencing on
the date of his termination to (i) a continuation of his base salary, (ii)
continued participation in the Company's medical, dental, life insurance and
retirement plans offered to senior executives of the Company, and (iii) a bonus,
payable in 12 equal installments, equal to 100% of his base salary (at the rate
in effect immediately prior to such termination). In addition, Mr. Kaul will be
entitled to receive (i) to the extent not previously paid, the short-term bonus
payable to Mr. Kaul for the year preceding the year of termination and (ii) for
the year in which Mr. Kaul's employment is terminated, an additional bonus equal
to his annual base salary for such year, pro-rated to reflect the portion of
such year during which Mr. Kaul is employed. Mr. Kaul's employment will be
deemed to be constructively terminated by the Company in the event of a change
in control (as defined in the Employment Agreement), the Company's bankruptcy, a
material diminution of his responsibilities, or a relocation of the Company's
headquarters outside the New York metropolitan area without his prior written
consent. In the event that Mr. Kaul's employment terminates other than as a
result of a termination by the Company, Mr. Kaul will not be entitled to any
payment or bonus, other than any short-term bonus he is entitled to receive from
the year prior to termination.
In April 1996, the Executive Vice President, Secretary and General Counsel
resigned. Also, in April 1996, the Executive Vice President and Chief Financial
Officer indicated his intention to resign his position in order to pursue other
interests. He remained with the Company until the closing of the Rights
Offering. In connection therewith, the Company entered into a settlement of his
employment agreement. The Chief Information Officer resigned in June 1996. The
General Counsel position is currently being filled on a part-time basis by an
individual who has served as a service provider to the Company. The Company has
hired a new Chief Financial Officer and promoted an executive to the position of
Chief Information Officer.
16. RELATED PARTY TRANSACTIONS
At December 28, 1996, current and former officers and executives of the
Company owed the Company approximately $3.1 million of which approximately $1.7
million relates to receivables under the Executive Equity Incentive Plan. These
amounts due to the Company bear interest at rates ranging from 5.00% to 7.75%
and are due from 1999 to 2002. The remaining $1.4 million relates to a
receivable under the Long Term Incentive Plan for Rakesh K. Kaul.
In May 1996, NAR advanced the Company $25 million under a promissory note
against all the Rights distributed to it or its commitment to purchase all
unsubscribed shares in the Rights Offering (Notes 8 and 9). NAR purchased
24,015,964 shares available to it pursuant to the terms of the Rights Offering
and received a fee of $.5 million for purchasing an additional 6,898,866 shares
not subscribed to by other shareholders. On August 23, 1996, the Rights Offering
closing date, the Company paid the principal and interest amounts outstanding
under the $25 million promissory note and the $14 million of 9.25% Notes held by
IMR (Notes 8 and 9).
In September 1996, IMR loaned the Company $10 million as evidenced by a
subordinated promissory note which is subordinate to the Credit Facility. Such
loan bears interest at prime plus 1.5%, was due on November 14, 1996, and, if it
is not repaid before May 15,1997, is convertible at the option of IMR into
shares
F-33
<PAGE> 79
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
of Common Stock (Note 8). NAR has agreed to apply $10 million of the Company's
indebtedness to acquire $10 million of the Company's Common Stock pursuant to
the 1997 Rights Offering (Note 18).
In December 1996, Richemont finalized its agreement with the Company that
will provide approximately $27.9 million of letters of credit to replace letters
of credit which were issued under the Congress Facility. The Company paid a
facility fee of $1.4 million to Richemont in connection with providing the
facility. On December 5, 1996, Richemont advanced the Company $10 million
against the anticipated $27.9 million line of credit which was repaid after the
letter of credit facility was in place on December 19, 1996 (Note 8).
Since January 1993, pursuant to a consulting arrangement, a subsidiary of
NAR renders management consulting, business advisory and investment banking
services to the Company for an annual fee of $750,000. NAR did not collect such
a fee in 1996 as no such services were performed and will not collect such a fee
in 1997.
At December 28, 1996, NAR owned approximately 54% of the Company's
outstanding Common Stock and would own 56% upon exercising all of their
outstanding warrants.
17. COMMITMENTS AND CONTINGENCIES
On or about September 2, 1994, a complaint was filed in the United States
District Court for the District of New Jersey by Veronica Zucker, an individual
who allegedly purchased shares of Common Stock of the Company in the public
offering completed on April 7, 1994, against the Company, all of its directors,
certain of its officers, Sun Life Insurance Company of America, Merrill Lynch,
Pierce Fenner & Smith Incorporated and Alex. Brown & Sons, Incorporated. The
complaint, which was purportedly filed on behalf of a class of all persons who
purchased the Common Stock of the Company in the public offering or thereafter
through and including August 14, 1994, sought to recover monetary damages the
class had allegedly suffered as a result of certain alleged false and materially
misleading statements contained in the Company's public offering prospectus
dated March 30, 1994. In lieu of an answer, defendants filed a motion to dismiss
the complaint in its entirety for failure to state a claim upon which relief can
be granted. On May 23, 1995, the United States District Court for District of
New Jersey dismissed the plaintiff's claim, with prejudice, for failure to state
a claim upon which relief could be granted. On June 22, 1995, plaintiff filed a
notice of appeal of the May 23, 1995 decision to the United States Court of
Appeals for the Third Circuit. On March 26, 1996, the Court of Appeals rendered
its decision affirming the District Court's decision. On or about June 24, 1996,
a petition for certiorari was filed by plaintiff with the United States Supreme
Court. The Company filed a brief in opposition to the petition on August 12,
1996. In October 7, 1996, the United States Supreme Court denied the plaintiff's
petition.
The Company is involved in other various routine lawsuits of a nature which
are deemed customary and incidental to its business. In the opinion of
management, the ultimate disposition of such actions will not have a material
adverse effect on the Company's financial position or results of operations.
The imposition of a sales and use tax collection obligation on out-of-state
catalog companies in states to which they ship products was the subject of a
case decided in 1994 by the United States Supreme Court. While the Court
reaffirmed an earlier decision that allowed direct marketers to make sales into
states where they do not have a physical presence without collecting sales taxes
with respect to such sales, the Court further noted that Congress has the power
to change this law. The Company believes that it collects sales tax in all
jurisdictions where it is currently required to do so.
In connection with certain discontinued restaurant transactions, the
Company remains contingently liable with respect to lease obligations for 6
restaurant properties, should the buyers fail to perform under the agreements.
The future minimum lease payments as of December 28, 1996 are as follows (in
thousands): 1997 -- $375; 1998 -- $375; 1999 -- $375; 2000 -- $375;
2001 -- $365; and thereafter $1,185.
F-34
<PAGE> 80
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
18. SUBSEQUENT EVENTS
1997 Rights Offering -- On March 26, 1997, the Company announced that it
intends to distribute transferable subscription rights to subscribe for and
purchase additional shares of Common Stock to the holders of record of the
Company's Common Stock and Series B Convertible Additional Preferred Stock (the
"1997 Rights Offering") as soon as it has filed with and has declared effective
by the SEC a registration statement with respect thereto. The Rights will be
exercisable at a price of $.90 per share. NAR has agreed to apply $10 million of
the Company's indebtedness to acquire $10 million of the Company's Common Stock
pursuant to the 1997 Rights Offering (Note 18). Richemont has agreed to purchase
all shares of Common Stock which have not been subscribed for and purchased by
shareholders in the 1997 Rights Offering. Due to the Company's liquidity issues
and to alleviate vendor concerns, Richemont has agreed to advance $30 million
against its commitment to purchase all of the unsubscribed shares. In connection
with the agreement, the Company named two Richemont representatives, Messrs. Jan
du Plessis and Howard Tanner, to its Board of Directors (the "Board") and
Executive Committee, and may nominate a third Richemont representative to the
Board at the next annual meeting. The new Board members fill positions vacated
by the recent resignations of Geraldine Stutz and Jeffery R. Laikind. In
addition, Mr. du Plessis has been named to the Audit Committee of the Board.
Waiver and Amendment to the Congress Facility -- The Company has received
waivers for the December 1996 events of default under the Congress Facility
related to the working capital and net worth covenants as of and through
December 28, 1996. In addition, the Company received a waiver for any event of
default relating to the material adverse change provision that was in effect
through and including December 28, 1996. The calculation of the working capital
covenant excludes the Congress Revolving Term Notes. The working capital and net
worth covenants for fiscal 1997 are as follows (in 000's):
<TABLE>
<CAPTION>
WORKING CAPITAL AMOUNT
---------------------------------------------------------- --------
<S> <C>
January through May 1997.................................. $ (5,000)
June through November 1997................................ $(10,000)
December 1997 thereafter.................................. $(20,000)
</TABLE>
<TABLE>
<CAPTION>
NET WORTH AMOUNT
----------------------------------------------------------- -------
<S> <C>
January through May 1997................................... $14,000
June 1997 thereafter....................................... $11,500
</TABLE>
F-35
<PAGE> 81
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1995
Revenues........................................ $176,592 $182,774 $169,175 $221,227
Gross profit.................................... 62,905 63,003 54,285 79,565
Loss from operations............................ (4,147) (5,988) (6,042) (6,442)
-------- -------- -------- --------
Net loss........................................ (4,903) (7,490) (9,586) (8,011)
Preferred stock dividends....................... (45) (59) (66) (70)
-------- -------- -------- --------
Net loss applicable to Common Shareholders...... $ (4,948) $ (7,549) $ (9,652) $ (8,081)
======== ======== ======== ========
Net loss per share.............................. $ (.05) $ (.08) $ (.10) $ (.09)
======== ======== ======== ========
1996
Revenues........................................ $165,527 $180,195 $156,732 $197,860
Gross profit.................................... 55,989 59,912 41,152 63,006
Loss from operations............................ (7,733) (9,896) (25,621) (51,247)
-------- -------- -------- --------
Net loss........................................ (9,477) (12,520) (29,565) (53,467)
Preferred stock dividends....................... (59) (59) (59) (48)
-------- -------- -------- --------
Net loss applicable to Common Shareholders...... $ (9,536) $(12,579) $(29,624) $(53,515)
======== ======== ======== ========
Net loss per share.............................. $ (.10) $ (.13) $ (.26) $ (.37)
======== ======== ======== ========
</TABLE>
F-36
<PAGE> 82
HANOVER DIRECT, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
COLUMN C
-------------------------------
COLUMN B ADDITIONS
----------- ------------------------------- COLUMN D COLUMN E
COLUMN A BALANCE AT CHARGED TO CHARGED TO ------------ -------------
- ----------------------------- BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- ----------------------------- ----------- ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1996:
- -----------------------------
Allowance for doubtful
accounts receivable,
current.................... $ 3,988,000 $ 2,431,000 $ $ $ 6,419,000
Reserves for discontinued
operations................. 1,639,000 (2) 83,000 1,722,000
Restructuring reserve........ 9,504,000 9,504,000
Reserves for sales returns... 5,535,000 106,836,000 (2) 103,335,000 9,036,000
Deferred tax asset valuation
allowance.................. 48,500,000 (5) 34,100,000 82,600,000
Allowance for net unrealized
losses on convertible debt
securities................. 1,000,000 888,000 1,888,000
1995:
- -----------------------------
Allowance for doubtful
accounts receivable,
current.................... $ 3,912,000 $ 4,796,000(3) $ 42,000(1) $ 4,762,000 $ 3,988,000
Reserves for discontinued
operations................. 1,668,000 (2) 29,000 1,639,000
Reserves for sales returns... 6,023,000 103,602,000 (2) 104,090,000 5,535,000
Deferred tax asset valuation
allowance.................. 38,600,000 (5) 9,900,000 48,500,000
Allowance for net unrealized
losses on convertible debt
securities................. 1,000,000 1,000,000
1994:
- -----------------------------
Allowance for doubtful
accounts receivable,
current.................... $ 4,244,000 $ 3,931,000 $ (1) $ 4,263,000 $ 3,912,000
Reserves for discontinued
operations................. 2,558,000 (2) 890,000 1,668,000
Reserves for sales returns... 4,911,000 114,665,000 (2) 113,553,000 6,023,000
Deferred tax asset valuation
allowance.................. 49,700,000 (4) 11,100,000 38,600,000
Allowance for net unrealized
losses on convertible debt
securities................. 1,000,000 1,000,000
</TABLE>
- ---------------
(1) Accounts written off.
(2) Utilization/increase of reserves.
(3) Represents acquired allowance for doubtful accounts receivable.
(4) Represents decrease due to: utilization of valuation allowance and
recognition of NOL's estimated to be utilized by future operating results.
(5) Represents the increase in the valuation allowance offset by an increase in
the gross tax asset.
F-37
<PAGE> 83
[HANOVER DIRECT LOGO]
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Rights Offering are as
follows:
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 15,163.00
AMEX listing fees and expenses................................ 17,500.00*
Printing and engraving expenses............................... 60,000.00*
Legal fees and expenses....................................... 200,000.00*
Accounting fees and expenses.................................. 150,000.00*
Consulting fees and expenses.................................. 500,000.00*
Blue Sky fees and expenses (including counsel fees)........... 20,000.00*
Standby Purchaser's fees...................................... 1,916,000.00*
Subscription Agent's fees and expenses........................ 55,000.00*
Information Agent's fees and expenses......................... 7,500.00*
Miscellaneous expenses........................................ 58,837.00*
-------------
Total............................................... $3,000,000.00
=============
</TABLE>
- ---------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Hanover is incorporated under the laws of the State of Delaware. Section
145 of the Delaware General Corporation Law generally provides that a
corporation is empowered to indemnify any person who is made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he is or was a director, officer, employee or agent of Hanover or is
or was serving, at the request of Hanover, in any of such capacities of another
corporation or other enterprise, if such director, officer, employee or agent
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of Hanover, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. This statute describes in detail the right of Hanover to indemnify any
such person.
Article FIFTH of the Restated Certificate of Incorporation of Hanover
(referred to therein as the "Corporation") provides, in pertinent part, as
follows:
Indemnification. Except as prohibited by section 145 of the Delaware
General Corporation Law, every director and officer of the Corporation
shall be entitled as a matter of right to be indemnified by the Corporation
against reasonable expense and any liability paid or incurred by such
person in connection with any actual or threatened claim, action, suit or
proceeding, civil, criminal, administrative, investigative or other,
whether brought by or in the right of the Corporation or otherwise, in
which he or she may be involved, as a party or otherwise, by reason of such
person being or having been a director or officer of the Corporation or by
reason of the fact that such person is or was serving at the request of the
Corporation as a director, officer, employee, fiduciary or other
representative of the Corporation or another corporation, partnership,
joint venture, trust, employee benefit plan or other entity (such claim,
action, suit or proceeding hereinafter being referred to as an "action");
provided, however, that no such right of indemnification shall exist with
respect to an action brought by a director or officer against the
Corporation other than in a suit for indemnification as provided hereunder.
Such indemnification shall include the right to have expenses incurred by
such person in connection with an action paid in advance by the Corporation
prior to final disposition of such action, subject to such conditions as
may be prescribed by law. As used herein, "expense" shall include, among
other things, fees and expenses of counsel selected by such person, and
"liability" shall include amounts of judgments, excise taxes, fines and
penalties, and amounts paid in settlement.
II-1
<PAGE> 85
Insurance; Other Funding. The Corporation may purchase and maintain
insurance to protect itself and any person eligible to be indemnified
hereunder against any liability or expense asserted or incurred by such
person in connection with any action, whether or not the Corporation would
have the power to indemnify such person against such liability or expense
by law or under the provisions of this Article FIFTH. The Corporation may
make other financial arrangements, which may include, among other things, a
trust fund, program of self-insurance, grant of a security interest or
other lien on any assets of the Corporation, or establishment of a letter
of credit, guaranty or surety, to ensure the payment of such sums as may
become necessary to effect indemnification as provided herein.
Non-Exclusive; Nature and Extent of Rights. The right of
indemnification provided for herein (i) shall not be deemed exclusive of
any other rights, whether now existing or hereafter created, to which those
seeking indemnification hereunder may be entitled under any agreement,
by-law or article provision, vote of the stockholders or directors or
otherwise, (ii) shall be deemed to create contractual rights in favor of
persons entitled to indemnification hereunder, (iii) shall continue as to
persons who have ceased to have the status pursuant to which they were
entitled or were designated as entitled to indemnification hereunder and
shall inure to the benefit of the heirs and legal representatives of
persons entitled to indemnification hereunder and (iv) shall be applicable
to actions, suits or proceedings commenced after the adoption of this
Article FIFTH, whether arising from acts or omissions occurring before or
after the adoption hereof. The right of indemnification provided for herein
may not be amended, modified or repealed so as to limit in any way the
indemnification provided for herein with respect to any acts or omissions
occurring prior to the adoption of any such amendment or repeal.
Article IV of the Bylaws of Hanover also contains the same provisions
relating to the indemnification of directors and officers which are set forth in
Article FIFTH of the Restated Certificate of Incorporation of Hanover.
Hanover has agreed to purchase insurance to indemnify its directors and
officers against liabilities incurred as a result of serving in such capacity
and has agreed to enter into indemnification agreements with its directors.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ---------------------------------------------------------------------------------
<S> <C>
1.1 Standby Purchase Agreement, dated March 26, 1997, between Hanover Direct, Inc.
and Richemont S.A.*
4 Form of Subscription Certificate*
5 Opinion of Brown Raysman Millstein Felder & Steiner LLP as to the legality of the
securities being registered*
8 Opinion of Brown Raysman Millstein Felder & Steiner LLP as to the tax
consequences to holders*
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Brown Raysman Millstein Felder & Steiner LLP (included in the opinion
set forth as Exhibit 5 to this Registration Statement)
24 Powers of Attorney of certain directors and officers of Hanover (included on page
II-5 of the Registration Statement (Registration No. 333-25141) on Form S-3 filed
on April 14, 1997)
99.1 Form of Instructions to Shareholders as to use of Subscription Certificates*
99.2 Form of Notice of Guaranteed Delivery for Subscription Certificates and Important
Tax Information (See exhibit 99.1)
99.3 Form of Subscription Agency Agreement*
99.4 Form of Information Agent Agreement*
99.5 Form of Letter to Common Stockholders who are record holders*
99.6 Form of Letter to Common Stockholders whose addresses are outside the U.S.*
99.7 Form of Letter to Common Stockholders who are beneficial holders*
99.8 Form of Letter to Clients of Common Stockholders who are beneficial holders
</TABLE>
II-2
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ---------------------------------------------------------------------------------
<S> <C>
99.9 Form of Letter to Series B Preferred Stockholders*
99.10 Form of Certification and Request for Additional Rights*
99.11 Form of Letter to Participants in the 1994 Bonus Plan*
99.12 Form of Letter to Participants in the 1995 Bonus Plan*
99.13 Form of Letter to Participants in the All-Employee Equity Investment Plan*
</TABLE>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Hanover pursuant to the provisions described under Item 20 above, or otherwise,
Hanover has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than payment by
Hanover of expenses incurred or paid by a director, officer or controlling
person of Hanover in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, Hanover will, unless in the opinion of their
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) (Section 230.424(b) of this
chapter) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8 and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
II-3
<PAGE> 87
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(d) The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer, the transactions by the underwriters during
the subscription period, the amount of unsubscribed securities to be purchased
by the underwriters, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriters is to be made on terms differing from those
set forth on the cover page of the prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
II-4
<PAGE> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Weehawken, State of New Jersey, on the 25th day
of April, 1997.
HANOVER DIRECT, INC.
(Registrant)
By: /s/ RAKESH K. KAUL
------------------------------------
Rakesh K. Kaul,
President and Chief Executive
Officer
Pursuant to the requirement of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons, in the capacities indicated on April 25, 1997.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------------- --------------------------------------------------
<C> <S>
/s/ ALAN G. QUASHA* Chairman of the Board and Director
- -------------------------------------------------
Alan G. Quasha
/s/ RAKESH K. KAUL Director, President and Chief Executive Officer
- ------------------------------------------------- (principal executive officer)
Rakesh K. Kaul
/s/ LARRY J. SVOBODA Senior Vice President and Chief Financial Officer
- ------------------------------------------------- (principal financial officer)
Larry J. Svoboda
Director
- -------------------------------------------------
Ralph Destino
/s/ J. DAVID HAKMAN* Director
- -------------------------------------------------
J. David Hakman
Director
- -------------------------------------------------
S. Lee Kling
Director
- -------------------------------------------------
Theodore H. Kruttschnitt
/s/ ELIZABETH VALK LONG* Director
- -------------------------------------------------
Elizabeth Valk Long
Director
- -------------------------------------------------
Edmund R. Manwell
/s/ JAN DU PLESSIS* Director
- -------------------------------------------------
Jan du Plessis
Director
- -------------------------------------------------
Howard M. S. Tanner
/s/ ROBERT F. WRIGHT* Director
- -------------------------------------------------
Robert F. Wright
</TABLE>
- ---------------
* Larry J. Svoboda, pursuant to a Power of Attorney executed by each of the
directors and officers noted above and filed with the Securities and Exchange
Commission, by signing his name hereto, does hereby sign and execute this
Amendment No. 1 to Registration Statement on Form S-3 on behalf of each of the
persons noted above, in the capacities indicated.
/s/ LARRY J. SVOBODA
--------------------------------------
Larry J. Svoboda
II-5
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
1.1 Standby Purchase Agreement, dated March 26, 1997, between Hanover Direct, Inc.
and Richemont S.A.*
4 Form of Subscription Certificate*
5 Opinion of Brown Raysman Millstein Felder & Steiner LLP as to the legality of the
securities being registered*
8 Opinion of Brown Raysman Millstein Felder & Steiner LLP as to the tax
consequences to holders*
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Brown Raysman Millstein Felder & Steiner LLP (included in the opinion
set forth as Exhibit 5 to this Registration Statement)
24 Powers of Attorney of certain directors and officers of Hanover (included on page
II-5 of the Registration Statement (Registration No. 333-25141) on Form S-3 filed
on April 14, 1997)
99.1 Form of Instructions to Shareholders as to use of Subscription Certificates*
99.2 Form of Notice of Guaranteed Delivery for Subscription Certificates and Important
Tax Information (See exhibit 99.1)
99.3 Form of Subscription Agency Agreement*
99.4 Form of Information Agent Agreement*
99.5 Form of Letter to Common Stockholders who are record holders*
99.6 Form of Letter to Common Stockholders whose addresses are outside the U.S.*
99.7 Form of Letter to Common Stockholders who are beneficial holders*
99.8 Form of Letter to Clients of Common Stockholders who are beneficial holders
99.9 Form of Letter to Series B Preferred Stockholders*
99.10 Form of Certification and Request for Additional Rights*
99.11 Form of Letter to Participants in the 1994 Bonus Plan*
99.12 Form of Letter to Participants in the 1995 Bonus Plan*
99.13 Form of Letter to Participants in the All-Employee Equity Investment Plan*
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
New York, New York
April 25, 1997
<PAGE> 1
RIGHTS OFFERING Exhibit 99.8
55,555,556 Shares
HANOVER DIRECT, INC.
Common Stock
($.66 2/3 par value)
THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
FRIDAY, MAY 30, 1997.
ONCE A HOLDER HAS PROPERLY EXERCISED A RIGHT,
SUCH EXERCISE MAY NOT BE REVOKED.
To our Clients:
Enclosed for your consideration is a prospectus dated April 29, 1997
(the "Prospectus") relating to the offering (the "Rights Offering") of Hanover
Direct, Inc. (the "Company"), pursuant to which holders of the Company's Common
Stock, par value $.66 2/3 per share (the "Common Stock"), as of the close of
business on Monday, April 28, 1997, are being issued, at no cost to such
holders, transferable subscription rights (the "Rights") to subscribe for and
purchase, for a limited period of time, shares of the Company's Common Stock at
a price of $.90 per share (the "Subscription Price"). Each Right also carries
the right, exercisable only by the stockholder to whom such Right was initially
distributed, to subscribe at the Subscription Price for shares of Common Stock
that are not otherwise purchased pursuant to the exercise of Rights. The number
of Rights distributed to each holder of Common Stock will be rounded up to the
nearest whole number and no fractional Rights or cash in lieu thereof will be
issued or paid. The terms and conditions of the Rights Offering are set forth in
the Prospectus, to which reference is made for a complete description of the
Rights Offering.
The Prospectus is being forwarded to you as the beneficial owner of the
Subscription Certificate carried by us in your account but not registered in
your name. An exercise or transfer of such Subscription Certificate may only be
made by us as the holder of record and pursuant to your instructions.
Accordingly, we request instruction as to whether you wish us to: (a)
exercise any or all of the Rights held by us in your account, and any Rights
not exercised by others, pursuant to the terms and conditions set forth in the
enclosed Prospectus; (b) transfer all or any of such Rights to another party;
or (c) attempt to sell such Rights for your account. WE URGE YOU TO READ THE
PROSPECTUS CAREFULLY BEFORE INSTRUCTING US AS TO WHETHER OR NOT TO EXERCISE,
TRANSFER OR SELL ANY RIGHTS.
Your instructions to us should be forwarded as promptly as
<PAGE> 2
possible in order to permit us to exercise the Rights, and complete and deliver
the Subscription Certificate on your behalf in accordance with the provisions
of the Rights Offering. The Rights Offering will expire at 5:00 p.m., New York
City time, on Friday, May 30, 1997 (the "Expiration Time"). Further, if you
direct us to sell or transfer your Rights, you must so instruct us sufficiently
in advance to permit such sale to be made or such transfer to be effected and a
new Subscription Certificate to be issued to the recipient prior to the
Expiration Time.
If you wish to have us exercise, transfer or sell any or all of your
Rights, please so instruct us by completing, executing and returning to us the
instruction form on the REVERSE SIDE hereof. If you exercise Rights, you must
contact us in order to arrange for your payment of the Subscription Price.
If we do not receive complete written instructions in accordance with
the procedures outlined in the Prospectus, we will not exercise, transfer or
sell your Rights.
If you have arranged for payment of the Subscription Price but have not
indicated the number of Rights being exercised, or if you have not arranged for
full payment of the Subscription Price for the number of Rights that you have
indicated are being exercised, you will be deemed to have exercised the
Subscription Privilege with respect to the maximum number of Rights which may
be exercised for the Subscription Price payment arranged for by you. To the
extent that the Subscription Price payment arranged for by you exceeds the
product of the Subscription Price multiplied by the number of Rights attendant
to your Basic Subscription Privilege (such excess being the "Subscription
Excess"), you will be deemed to have exercised the Oversubscription Privilege
to purchase, to the extent available, the number of whole shares of Common
Stock equal to the quotient obtained by dividing the Subscription Excess by
$.90. Any amount remaining after such division will be returned to you or
credited to your account from which payment was made.
If you merely sign the instruction form without completing it and
arranging for any Subscription Price payment, we will deem it to mean that you
do not want us to exercise your Rights, but want us to attempt to sell all of
your Rights.
INSTRUCTIONS AS TO RIGHTS
The undersigned acknowledge(s) receipt of your letter and the
Prospectus relating to the Rights Offering of Hanover Direct, Inc. and hereby
instructs you as follows:
/ / 1. EXERCISE OF RIGHTS.
Please exercise my rights to subscribe for shares of Common Stock as indicated
below:
<PAGE> 3
(a) Number of shares subscribed for pursuant to the Basic
Subscription Privilege*: ____________________________
(b) Number of shares subscribed for pursuant to the
Oversubscription Privilege*: ________________________
(c) Total Subscription Price (total number of shares subscribed for
pursuant to both the Basic Subscription Privilege and the
Oversubscription Privilege multiplied by the Subscription Price
of $.90): $__________________________________________
YOU MUST CONTACT US TO ARRANGE YOUR METHOD OF PAYMENT OF THE SUBSCRIPTION
PRICE.
/ / 2. TRANSFER OF RIGHTS.
For value received, __________________ of my unexercised Rights are
hereby transferred to:
Name: __________________________________________________________________________
Address: _______________________________________________________________________
________________________________________________________________________________
(Including Zip Code)
Tax Identification or Social Security Number of recipient:
________________________________________________________________________________
/ / 3. SALE OF RIGHTS
Please attempt to sell ____________________ of my unexercised Rights.
SIGN AND DATE HERE:
Dated: ________________, 1997 ___________________________________________
Signature
___________________________________________
Please print name(s) and address(es) below:
___________________________________________
