HANOVER DIRECT INC
S-3, 1997-04-14
CATALOG & MAIL-ORDER HOUSES
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<PAGE>   1
     As filed with the Securities and Exchange Commission on April 14, 1997
                                                     Registration No. 333-______
================================================================================
BRMF&S Draft 4/10/97
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                ----------------

                                    FORM S-3
                             REGISTRATION STATEMENT
                                      UNDER
                           THE SECURITIES ACT OF 1933

                                ----------------

                              HANOVER DIRECT, INC.
             (Exact Name of Registrant as Specified in Its Charter)


           Delaware                                        13-0853260
(State or Other Jurisdiction of                  (I.R.S. Employer Identification
Incorporation or Organization)                               Number)

                              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)

                                ----------------

              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

         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         AGGREGATE         AMOUNT OF
                                                      AMOUNT TO BE            PRICE           OFFERING        REGISTRATION
       Title of Shares to be Registered                REGISTERED         PER SHARE(1)        PRICE(1)             FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                 <C>                <C>              <C>             
                                                       55,555,556
Common Stock, par value $.66-2/3 per share.....        SHARES(2)              $.90           $50,000,000         $15,152
- ------------------------------------------------------------------------------------------------------------------------------
Rights to Purchase Shares of Common Stock......        55,555,556               --                    --              --
                                                       RIGHTS(3)
==============================================================================================================================
</TABLE>


<PAGE>   2
(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)      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.

================================================================================

                           Exhibit Index on Page II-2


<PAGE>   3
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

                              SUBJECT TO COMPLETION
                   PRELIMINARY PROSPECTUS DATED APRIL 14, 1997
PROSPECTUS
                                55,555,556 SHARES

                              HANOVER DIRECT, INC.

                                  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 _____ __, 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 .3824 transferable Rights for
each share of Common Stock held of record on the Record Date and .5742
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
[day] ______ __, 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 owns
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 8 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 10, 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 _____ __, 1997.
<PAGE>   4
                  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 No. 1
thereto filed April [14], 1997; 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>   5
                               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 owns approximately 55.7% of the Company's common stock on a fully
diluted basis. 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."


                               THE RIGHTS OFFERING

Rights                             Each shareholder will receive .3824
                                   transferable Rights for each share of Common
                                   Stock held of record on [day], _____ __,
                                   1997, the Record Date, and .5742 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 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


                                       -3-

<PAGE>   6
                                   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 [day], _____ __, 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 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               HNVR

Record Date                        [day], _____ __, 1997

Expiration Date                    [day], _____ __, 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."


                                       -4-

<PAGE>   7
                                            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
                                            [day], _______ __, 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."

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 $_____ as of the
                                            effective date of the Registration
                                            Statement of which this Prospectus
                                            is a part 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 up to $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 $__ million principal
                                            amount outstanding under the
                                            Richemont Promissory Note and 
                                            the balance of the proceeds will be
                                            used to repay amounts 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.


                                       -5-

<PAGE>   8
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 at least
                                            $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."

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 200,595,471 shares of
                                            Common Stock will be outstanding
                                            after the Rights Offering, based on
                                            the number of shares outstanding on
                                            the Record Date.


                                       -6-

<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
  oustanding:
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          35,160          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.



                                       -7-

<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. In 1995, 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. 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)% of revenues, and income from operations of $16.0 million, or 2.1%
of revenues, for the same period in the prior year. 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 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 in 1996. 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. 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.

IMPORTANCE OF LIQUIDITY TO THE COMPANY'S EXISTENCE

         As of December 28, 1996, the Company had borrowed approximately $27.2
million of the $55.1 million available under the its credit facility (the
"Credit Facility") with Congress Financial Corp. ("Congress") and had
approximately $5 million of cash on hand. Remaining availability under the
Credit Facility was $26.0 million at December 28, 1996 after deducting certain
reserves. As of March 28, 1997, the Company had borrowed approximately $33.5
million of the $44.2 million available under the Credit Facility and had
approximately $3 million of cash on hand. Remaining availability under the
Credit Facility was $9.1 million at March 28, 1997 after deducting certain
reserves. 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,


                                       -8-

<PAGE>   11
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 has resulted in higher fulfillment expense due to increased split
shipments and warehouse handling costs experienced in 1996. Fulfillment costs
(telemarketing, distribution, outbound transportation and credit card commission
costs) increased from $91.4 million or 13% of sales to $97.9 million or 14% of
sales for the same periods, respectively. 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 transactions, it will do so at a higher cost than would
otherwise be available to it.

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 each of 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


                                       -9-

<PAGE>   12
while its 1996 revenues constituted approximately 34% of the Company's 1996
revenues from continuing catalogs. 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 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 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 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 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.


                                      -10-

<PAGE>   13
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 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 the end of 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, there may be an adverse effect on the Company's results of
operations.

DECREASE IN PRODUCT CONTRIBUTION MARGINS

         The Company's product contribution margin 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 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.


                                      -11-

<PAGE>   14
REVENUES ASSOCIATED WITH DISCONTINUED CATALOGS

         The Company's revenues in 1996 were reduced by approximately $63
million from $166 million related to discontinued catalogs. 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 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


                                      -12-

<PAGE>   15
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 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 give 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 in the
Company's Annual Report on Form 10-K for the fiscal year ended December 28,
1996.

RESTRICTIONS ON DIVIDENDS

         The Company is restricted from paying dividends on its Common Stock or
from acquiring any of its capital stock by certain debt covenants contained in
agreements to which the Company is a party. Cash dividends have not been paid on
the Common Stock since 1967.

RELATIONSHIP WITH NAR

         NAR currently owns approximately 55.7% of the Company's outstanding
Common Stock on a fully diluted basis. 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% 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
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% 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 is due in November 1997. 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


                                      -13-

<PAGE>   16
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. 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 $__ 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 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 Common Stock
of the Company as of the date hereof on a fully-diluted basis. Alan G. Quasha, a
director and chairman of the Board of Directors of the Company, may be deemed to
be an indirect beneficial owner of the securities beneficially owned by NAR,
although Mr. Quasha disclaims such beneficial ownership. There can be no
assurance that no conflicts of interest will arise as a result of this
affiliated relationship. 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. However, 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


                                      -14-

<PAGE>   17
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.

         Assuming all of the Rights are exercised and based on 145,039,915
shares of Common Stock and 634,900 shares of Series B Preferred Stock
outstanding on April 8, 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 owns approximately 55.7% of the Common
Stock as of such date on a fully diluted basis. 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 $___________ 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 $______________. The
Company intends to use such net proceeds to repay the Richemont Promissory Note
and to use the balance of the net proceeds to repay amounts outstanding under
the Credit Facility with Congress (approximately $__ million under the revolving
line of credit as of ___________ __, 1997). 

         On April __, 1997, the Company executed and delivered the Richemont
Promissory Note. As of April __, the Company has drawn $__ million thereunder.
The Richemont Promissory Note carries an interest rate of 1.5% above prime which
is payable in cash. 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 December 28, 1996, the
Company had approximately $27.2 million of outstanding borrowings under the
revolving line of credit (including documentary and standby letters of credit)
and approximately $8.9 million outstanding under the term loans. The rates of
interest related to the revolving line of credit and the term loans were 9.50%
and 9.75%, respectively, at December 28, 1996.


                                      -15-

<PAGE>   18
                                 CAPITALIZATION

         The following table sets forth the consolidated capitalization of the
Company at December 28, 1996 and as adjusted to reflect the gross proceeds of
approximately $50 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)
Total debt (includes the current portion of long-term debt of $11.5 million) (a):
<S>                                                                                   <C>              <C>      
    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 200,595,471
    outstanding, as adjusted (b)(c) ...........................................          96,693          133,730
    Capital in excess of par value ............................................         270,097          283,060
    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           81,740
                                                                                      ---------        ---------
         Total capitalization .................................................          96,929          123,219
                                                                                      =========        =========
</TABLE>


- -------------------------------

(a)      The Company intends to repay approximately $13.7 million of borrowings
         under the Credit Facility 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
         __, 1997.

(c)      The gross proceeds of the Rights Offering are $50 million and the
         Company estimates incurring approximately $        in fees associated
         with the filing, resulting in net cash proceeds of approximately 
         $      . 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 $       .


                                      -16-

<PAGE>   19
                                 DIVIDEND POLICY

         The Company is restricted from paying dividends on its Common Stock or
from acquiring any of its capital stock by certain debt covenants contained in
agreements to which the Company is a party. Cash dividends have not been paid on
the Common Stock since 1967.


                          PRICE RANGE OF COMMON STOCK

         The Common Stock is traded on the AMEX under the symbol "HNV." The
following table sets forth the high and low sale prices of the Common Stock
reported on the AMEX Composite Tape for the periods shown.

<TABLE>
<CAPTION>
                                                              HIGH                LOW
                                                              ----                ---
<S>                                                         <C>                <C> 
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 10, 1997)..............           3/4                11/16
</TABLE>


      As of April 8, 1997, there were approximately 4,715 holders of record of
the Common Stock. On April 10, 1997, the closing price of the Common Stock on
the AMEX was $.75 per share.


                                      -17-

<PAGE>   20
                               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 and Richemont has advanced as of the
effective date of the Registration Statement of which this Prospectus is a part
$__ 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.

CREDIT ARRANGEMENTS

      In September 1996, IMR loaned the Company $10 million as evidenced by a
subordinated promissory note in the 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
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
principle 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.

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.


                                      -18-

<PAGE>   21



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 Directions and Executive Committee, and will 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.


                                      -19-

<PAGE>   22
                                   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 332.0 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 on 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 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.

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 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.


                                      -20-

<PAGE>   23
      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 -- DEPENDENCE ON 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 -- DEPENDENCE ON 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.

      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.


                                      -21-

<PAGE>   24
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 May 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 proprietary modeling and sophisticated segmentation
analysis, on a catalog by catalog basis, to devise catalog marketing and
circulation strategies that are intended to maximize customer contribution by
catalog. This analysis is the basis for the Company's determination of which of
the Company's catalogs will be mailed and how frequently to a particular
customer, as well as the promotional incentive content of the catalog(s) such
customer receives. 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.

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 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.


                                      -22-

<PAGE>   25
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."

      The Company mails it 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 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. See "RISK FACTORS -- INCREASES IN COSTS OF MAILING AND
PAPER."

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


                                      -23-

<PAGE>   26
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" and "-- DEPENDENCE ON
SUPPLIERS."

      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 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."

FINANCING

      Credit Facility. In November 1995, the Company entered into a $75 million
secured credit facility (the "Credit Facility") with Congress Financial
Corporation ("Congress") consisting of a three-year revolving line of credit of
up to $65 million and two two-year term loans aggregating $10 million. The
revolving facility carries an interest rate of 1.25% above prime and the term
loan carries an interest rate of 1.5% above prime. 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 Congress facility was $26.0 million at December
28, 1996. At March 28, 1996, the amount of such availability was approximately
$9.1 million. 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 (a)
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 (b) amend the covenant
relating to material adverse changes so that measurement thereunder will
commence from December 28, 1996.

      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 Convertible Additional
Preferred Stock as of July 18, 1996, the record date, were eligible to
participate in the 1996


                                      -24-

<PAGE>   27
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 Convertible Additional 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 under the promissory note plus accrued interest and (iii) to 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.


                                      -25-
<PAGE>   28

         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.


                                      -26-
<PAGE>   29

                               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 .3824 Rights for
each share of Common Stock held of record on the Record Date and .5742 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 [day], __, 1997 (the "Closing Date"), in addition to its
exercise of the Rights distributed to it, 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 [day], _______
__, 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.

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.

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.


                                      -27-
<PAGE>   30

         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.

         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 [Chase Manhattan Bank, Account No. 323053807; ABA No.
021000021]. The Subscription Price will be deemed to have been received by the
Subscription Agent only upon (i) clearance of any uncertified check, (ii)
receipt by the Subscription Agent of any certified check or bank draft drawn
upon a U.S. bank or any postal, telegraphic or express money order or (iii)
receipt of good funds in the Subscription Agent's account designated above. If
paying by uncertified personal check, please note that the funds paid thereby
may take at least five business days to clear. Accordingly, holders of Rights
who wish to pay the Subscription Price by means of uncertified personal check
are urged to make payment sufficiently in advance of the Expiration Date to
ensure that such payment is received and clears by such date and are urged to
consider payment by means of certified or cashier's check, money order or wire
transfer of funds.

         In the event that the conditions precedent to 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:


                                      -28-
<PAGE>   31

                     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

                                        To Confirm Receipt and
                                       For General Information:
                                            (Call Collect)
                                            (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 Instruction as to Use of Hanover Direct, Inc.
    Subscription Certificates (the "Instructions") distributed with the
    Subscription Certificates, from a member firm of a registered national
    securities exchange or a member of the National Association of Securities
    Dealers, Inc. (the "NASD"), or from a commercial bank or trust company
    having an office or correspondent in the United States (each, an "Eligible
    Institution"), stating the name of the exercising Rights holder, the number
    of Rights represented by the Subscription Certificate or Subscription
    Certificates held by such exercising Rights holder, the number of Underlying
    Shares being subscribed for pursuant to the 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."

         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
Right should complete Subscription Certificates and submit them to the
Subscription Agent with the proper payment. In addition, beneficial owners of
Common Stock or Rights held through such a holder should contact the holder and
request the holder to effect transactions in accordance with the beneficial
owner's instructions.


                                      -29-
<PAGE>   32

         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
"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.

METHOD OF TRANSFERRING RIGHTS

         Rights may be purchased or sold through usual investment channels,
including banks and brokers. The Rights may be traded on the AMEX and in the
over-the-counter market. It is anticipated that the Rights will trade on a "when
issued" basis up to and including the AMEX trading day immediately following the
Record Date.

         The Rights evidenced by a single Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying Instructions. A portion of the Rights evidenced
by a single Subscription Certificate (but not fractional Rights) may be
transferred by delivering to the Subscription Agent a Subscription Certificate
properly endorsed for transfer, with instructions to register such portion of
the Rights evidenced thereby in the name of the transferee (and to issue a new
Subscription Certificate to the transferee evidencing such transferred Rights).
In such event, a new Subscription Certificate evidencing the balance of the
Rights will be issued to the Rights holder or, if the Rights holder so
instructs, to an additional transferee.

         The Rights evidenced by a Subscription Certificate also may be sold, in
whole or in part, through the Subscription Agent by delivering to the
Subscription Agent such Subscription Certificate properly executed for sale by
the Subscription Agent. If only a portion of the Rights evidenced by a single
Subscription Certificate are to be sold by the Subscription Agent, such
Subscription Certificate must be accompanied by instructions setting forth the
action to be taken with respect to the Rights that are not to be sold. Promptly
following the Expiration Date, the Subscription Agent will send the Rights
holder a check for the net proceeds from the sale of any Rights sold. If the
Rights can be sold, sales of such Rights will be deemed to have been effected at
the weighted average price received by the Subscription Agent for the sale of
all Rights through the Subscription Agent, less any applicable brokerage
commissions, taxes and other direct expenses of sale. The Company will pay the
fees charged by the Subscription Agent for effecting such sales. Orders to sell
Rights must be received by the Subscription Agent prior to 11:00 a.m., New York
City time, on [day], __________ __, 1997 and the Subscription Agent's 
obligation to execute orders is subject to its ability to find buyers.


                                      -30-
<PAGE>   33

         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.

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.

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 [day], 
________ ___, 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. 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


                                      -31-
<PAGE>   34

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) [at least
five days prior to the Effective Date,] 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 [furnished][did not furnish] such an undertaking [on
[day], _________, 1997].

         The Company has agreed that except as otherwise contemplated in this
Prospectus, it will not prior to [day], ________, 1997 [90 days after the date
hereof], 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 record 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.

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 be determined
and counsel have not rendered an opinion with respect to such consequences. An
opinion of counsel represents the legal


                                      -32-
<PAGE>   35

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. Except as provided in the following sentence, the basis of the Rights
received by a Holder as a distribution with respect to such Holder's Common
Stock, 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, then upon exercise or transfer of the Rights, the
Holder's basis in such Common Stock or Series B Preferred Stock, as applicable,
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 therefore and the holding period for such Rights will
commence on the day following the date of the purchase.

         Transfer of the Rights. A Holder who sells the Rights received in the
distribution prior to exercise will recognize gain or loss equal to the
difference between the sale proceeds and such Holder's basis (if any) in the
Rights sold. Such gain or loss will be capital gain or loss if gain or loss from
a sale of Common Stock 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 Holders or in respect of Series B Preferred Stock.
Purchasers of the Rights will be entitled to a loss equal to their tax basis in
the Rights if such Rights expire unexercised. Any loss recognized on the
expiration of Rights acquired by purchase or in respect of 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.


                                      -33-
<PAGE>   36

         Constructive Distributions Under Section 305 of the Code. Section 305
of the Code provides, as a general rule that a distribution of rights to acquire
stock of a corporation made by such corporation to its shareholders with respect
to its stock is not a taxable event. However, there are a number of exceptions
to this general rule, and a distribution of rights that falls within any one of
such exceptions is treated as "a distribution of property to which section 301
applies."

         Under one of the relevant exceptions, a distribution of stock or stock
rights will be treated as a distribution of property to which section 301
applies if it constitutes a "disproportionate distribution" with respect to any
class or classes of stock or convertible debt of the corporation. A distribution
of stock or stock rights constitutes a "disproportionate distribution" if it is
a part of a distribution or a series of distributions (including deemed
distributions) that has the effect of (i) the receipt of property (including
cash) by some shareholders and (ii) an increase in the proportionate interests
of other shareholders in the assets or earnings and profits of the distributing
corporation. For this purpose, cash dividends paid with respect to stock and
debt service payments made with respect to convertible securities (which are
treated for this purpose as outstanding stock) may constitute the requisite
"receipt of property" by some shareholders irrespective of whether such
dividends or payments are related to the distribution of stock or stock rights.
Further, a distribution of stock or stock rights that does not maintain the
proportionate interests of the various classes of stock and securities
(including any conversion rights relating thereto) of the distributing company
may constitute the requisite increase in the proportionate interests in the
assets or earnings and profits of the shareholders receiving the distribution of
stock or stock rights.

         Under a second relevant exception, a distribution of stock or stock
rights by a corporation with respect to its preferred stock generally will be
treated as a distribution of property to which section 301 applies unless the
distribution is made with respect to convertible preferred stock to take into
account a stock dividend, stock split or any similar event (including the sale
of stock at less than fair market value pursuant to a rights offering) that
would otherwise result in the dilution of the conversion right.

         The Company has represented that the number and proportion of Rights to
be distributed to the holders of Common and 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
proportion of rights to be issued with respect to convertible stock or
securities in order to protect the holders thereof from dilution in the event of
a rights offering, and the Internal Revenue Service could take the position that
the number of Rights distributed to the holders of 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 less 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 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 then as an amount received in exchange for such stock.

         The Company believes that it had a deficit in both current and
accumulated earnings and profits as of the close of its taxable year ended
December 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


                                      -34-
<PAGE>   37

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
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 a trade or business of the non-U.S. Holder in the
United States, (ii) in the case of a non-U.S. Holder who is a nonresident alien
individual and holds either the Rights or such Common Stock as a capital asset,
such Holder is present in the United States for 183 or more days in the taxable
year of sale, (iii) the non-U.S. Holder has owned, directly or by attribution,
more than 5% of the Rights or the Common Stock at any time during the five-year
period ending on the date of disposition of such interest and the Rights or such
Common Stock, as the case may be, is, at the time of disposition, a United
States real property interest within the meaning of section 897(c)(1) of the
Code or (iv) a non-U.S. Holder is subject to tax pursuant to certain provisions
of the Code applicable to expatriates.

         Dividends on Common Stock. Dividends paid to a non-U.S. Holder of
Common Stock will be subject to withholding of United States federal income tax
at a 30% rate or such lower rate as may be specified by an applicable income tax
treaty, unless the dividends are effectively connected with the conduct of a
trade or business of the non-U.S. holder within the United States. In order to
claim the benefit of an applicable tax treaty rate, a non-U.S. holder may have
to file with the Company or its dividend paying agent an exemption or reduced
treaty rate certificate or letter in accordance with the terms of such treaty.

         Dividends received by a non-U.S. holder that are effectively connected
with the conduct of a trade or business of 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


                                      -35-
<PAGE>   38

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 advisers as to compliance with the new
rules so as to avoid possible information reporting and backup withholding on
dividend payments after 1997.

         A non-U.S. holder may obtain a refund of any amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the
United States Revenue Service.

         EACH NON-U.S. HOLDER IS URGED TO CONSULT WITH SUCH NON-U.S. HOLDER'S
OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE RIGHTS OFFERING TO
SUCH NON-U.S. HOLDER'S OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.

DESCRIPTION OF COMMON STOCK

         For a description of the Common Stock, see "DESCRIPTION OF CAPITAL
STOCK."

SUBSCRIPTION AGENT

         The Company has appointed American Stock Transfer & Trust Company as
Subscription Agent for the Rights Offering. The Subscription Agent's address,
which is the address to which the Subscription Certificates and payment of the
Subscription Price should be delivered, as well as the address to which the
Notice of Guaranteed Delivery must be delivered, is:


                                      -36-
<PAGE>   39

                     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

                                       To Confirm Receipt and
                                      For General Information:
                                           (Call Collect)
                                           (212) 936-5100
                                           (718) 921-8200
</TABLE>

The Company will pay the fees and expenses of the Subscription Agent, and has
also agreed to indemnify the Subscription Agent from any liability which it may
incur in connection with the Rights Offering. The Company has been informed by
the Subscription Agent that it is a bank within the meaning of Section 3(a)(6)
of the Exchange Act.

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.


                                      -37-
<PAGE>   40

                          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 8, 1997, there were
144,405,347 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 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


                                      -38-
<PAGE>   41

therefor, at a rate of 6% of the stated value per annum. Dividends on the Series
A Preferred Stock commenced to accrue on September 30, 1993.

         Liquidation Preference. In the event of any distribution of assets upon
any liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Company, the holder of each share of the then outstanding
Series A Preferred Stock shall be entitled to receive out of the assets of the
Company, whether such assets are capital, surplus or earnings, an amount equal
to the then stated value of each share of Series A Preferred Stock, before any
payments or distributions are made to, or set aside for, any other equity
security of the Company other than any other series of preferred stock. If the
assets of the Company are insufficient to pay such amounts in full, then the
entire assets of the Company shall be distributed pro rata to the holders of
shares of preferred stock after the holders of the Class B Preferred and the
7.5% Preferred have been paid in full. Neither a consolidation, merger or other
business combination of the Company with or into another corporation or other
entity nor a sale or transfer of all or part of the Company assets for cash,
securities or other property shall be considered a liquidation, dissolution or
winding up of the Company.

         Conversion. On September 30, 1994, each holder of the Series A
Preferred Stock automatically, without any action on the part of such holder,
had one-third of each such holders' holdings of Series A Preferred Stock
converted into a number of shares of Common Stock of the Company determined by
dividing the then stated value of the shares by the Conversion Price (as
defined) for such date. On September 30, 1995, each holder of the Series A
Preferred Stock automatically, without any action on the part of such holder,
had one-third of each such holders' holdings of Series A Preferred Stock
converted into a number of shares of Common Stock of the Company determined by
dividing the then stated value of the shares by the Conversion Price for such
date. On September 30, 1996, 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 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


                                      -39-
<PAGE>   42

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 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.

         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.


                                      -40-
<PAGE>   43

                              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 $       in proceeds 
from the Rights Offering (after giving effect to the application by NAR of the 
IMR Promissory Note to the payment of $10,000,000 for the 11,111,111 shares of
Common Stock which NAR shall acquire upon exercise of its Rights) including
Richemont's standby purchase commitment, after payment of approximately $     
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.


                                      -41-
<PAGE>   44

                      HANOVER DIRECT, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                      PAGE NO.
                                                                                      --------
<S>                                                                                   <C>
Index to Financial Statements

Report of Independent Public Accountants Hanover Direct, Inc.
and Subsidiaries Financial Statements                                                   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-5

Consolidated Statements of Shareholders' (Deficit) Equity for
the three years ended December 28, 1996                                                 F-6

Consolidated Statements of Cash Flows for the three years
ended December 28, 1996                                                                 F-7

Notes to Consolidated Financial Statements                                              F-9

Supplementary Data:

Selected quarterly financial information (unaudited) for the
two fiscal years ended December 28, 1996                                                F-46
</TABLE>








                                       F-1
<PAGE>   45

                    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

March 26, 1997




                                       F-2


<PAGE>   46
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 30, 1995 and December 28, 1996

<TABLE>
<CAPTION>
                                               December 30,    December 28,
                                                  1995             1996
                                                 --------        --------
                                                      (in thousands)
<S>                                            <C>             <C>
ASSETS

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
                                                 ========        ========
</TABLE>


See Notes to Consolidated Financial Statements.



                                      F-3

<PAGE>   47
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
As of December 30, 1995 and December 28, 1996

<TABLE>
<CAPTION>
                                                                 DECEMBER 30,     DECEMBER 28,
                                                                     1995             1996
                                                                 ------------     ------------
                                                      (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S>                                                            <C>                <C>
 LIABILITIES AND SHAREHOLDERS' EQUITY

 Current Liabilities:
  Current portion of long-term debt and capital
    lease obligations                                              $  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-4
<PAGE>   48
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-5

<PAGE>   49
                     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           Preferred Stock
                                                                       Series B, Cumulative          Series A, 6.0%
                                                                         Shares    Amount          Shares     Amount
                                                                       ----------------------------------------------
<S>                                                                    <C>        <C>             <C>         <C>
Balance at January 1, 1994                                                   0     $    0         234,900      $2,378
Net income applicable to common shareholders
Exercise of warrants
Shares issued in Stock Offering
Preferred stock dividends                                                                                          (6)
Conversion of one-third of the 6% Preferred Stock                                                 (78,300)       (783)
Conversion of note payable
Issuance of  Common Stock for Employee Benefit Plans, net
                                                                       ----------------------------------------------
Balance at December 31, 1994                                                 0     $    0         156,600      $1,589
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)
Issuance of  Common Stock for Employee Benefit Plans, net
                                                                       ----------------------------------------------
Balance at December 30, 1995                                           634,900     $5,558          78,300      $  795
Net income/(loss) applicable to common shareholders
Shares issued in Rights Offering
Preferred stock dividends and accretion                                               190                          35
Conversion of the 6% Preferred Stock                                                              (78,300)       (830)
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
                                                                       ----------------------------------------------
Balance at December 28, 1996                                           634,900     $5,748               0      $    0
                                                                       ==============================================
</TABLE>

<TABLE>
<CAPTION>

                                                                                                       Capital
                                                                              Common Stock             in Excess
                                                                           $.66 2/3 par value            of Par         Accum.
                                                                          Shares           Amount        Value        (Deficit)
                                                                       --------------------------------------------------------
<S>                                                                    <C>                <C>         <C>             <C>
Balance at January 1, 1994                                              83,136,542        $55,423      $209,834       $(215,805)
Net income applicable to common shareholders                                                                             14,703
Exercise of warrants                                                     1,309,207            873          (873)
Shares issued in Stock Offering                                          8,045,296          5,364        42,136
Preferred stock dividends
Conversion of one-third of the 6% Preferred Stock                          189,818            126           657
Conversion of note payable                                                  13,945              9           162
Issuance of  Common Stock for Employee Benefit Plans, net                  283,426            190         1,294
                                                                       --------------------------------------------------------
Balance at December 31, 1994                                            92,978,234        $61,985      $253,210       $(201,102)
Net income/(loss) applicable to common shareholders                                                                     (30,230)
Issuance of Preferred Stock
Fair market value of warrant extensions                                                                   1,200
Preferred stock dividends and accretion
Conversion of one-third of the 6% Preferred Stock                          427,785            285           592
Issuance of  Common Stock for Employee Benefit Plans, net                  287,143            191           388
                                                                       --------------------------------------------------------
Balance at December 30, 1995                                            93,693,162        $62,461      $255,390       $(231,332)
Net income/(loss) applicable to common shareholders                                                                    (105,254)
Shares issued in Rights Offering                                        48,748,785         32,499        16,467
Preferred stock dividends and accretion
Conversion of the 6% Preferred Stock                                       819,733            546           284
Purchase of treasury stock
Transfer of treasury stock related to employment agreement                                               (2,750)
Sale of treasury stock                                                                                       28
Issuance of  Common Stock for Employee Benefit Plans, net                1,778,235          1,187           678
                                                                       --------------------------------------------------------
Balance at December 28, 1996                                           145,039,915        $96,693      $270,097       $(336,586)
                                                                       ========================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                                    Notes
                                                                                                 Receivable
                                                                                                  From Sale
                                                                            Treasury Stock        of Common  Deferred
                                                                         Shares      Amount         Stock       Comp.      Total
                                                                       ----------------------------------------------------------
<S>                                                                    <C>            <C>        <C>         <C>        <C>
Balance at January 1, 1994                                             (1,120,032)    $(3,130)    $(1,774)   $(1,058)   $  45,868
Net income applicable to common shareholders                                                                               14,703
Exercise of warrants                                                                                                            0
Shares issued in Stock Offering                                                                                            47,500
Preferred stock dividends                                                                                                      (6)
Conversion of one-third of the 6% Preferred Stock                                                                               0
Conversion of note payable                                                                                                    171
Issuance of  Common Stock for Employee Benefit Plans, net                 (37,029)       (215)       (138)       358        1,489
                                                                       ----------------------------------------------------------
Balance at December 31, 1994                                           (1,157,061)    $(3,345)    $(1,912)   $  (700)   $ 109,725
Net income/(loss) applicable to common shareholders                                                                       (30,230)
Issuance of Preferred Stock                                                                                                 5,400
Fair market value of warrant extensions                                                                                     1,200
Preferred stock dividends and accretion                                                                                       241
Conversion of one-third of the 6% Preferred Stock                                                                              (0)
Issuance of  Common Stock for Employee Benefit Plans, net                                            (111)       406          874
                                                                       ----------------------------------------------------------
Balance at December 30, 1995                                           (1,157,061)    $(3,345)    $(2,023)   $  (294)   $  87,210
Net income/(loss) applicable to common shareholders                                                                      (105,254)
Shares issued in Rights Offering                                                                                           48,966
Preferred stock dividends and accretion                                                                                       225
Conversion of the 6% Preferred Stock                                                                                            0
Purchase of treasury stock                                               (301,623)       (396)                               (396)
Transfer of treasury stock related to employment agreement                916,667       2,750                                   0
Sale of treasury stock                                                    150,000         178                                 206
Issuance of  Common Stock for Employee Benefit Plans, net                                          (1,376)       294          783
                                                                       ----------------------------------------------------------
Balance at December 28, 1996                                             (392,017)    $ (813)     $(3,399)   $     0    $  31,740
                                                                       ==========================================================
</TABLE>



See Notes to Consolidated Financial Statements.




                                      F-6



<PAGE>   50
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)
                                                           --------        --------        ---------
</TABLE>


See Notes to Consolidated Financial Statements.



                                      F-7

<PAGE>   51
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
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 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-8

<PAGE>   52
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.



                                      F-9

<PAGE>   53
       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.

       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.



                                      F-10

<PAGE>   54
       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, 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>



                                      F-11



<PAGE>   55
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 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).



                                      F-12

<PAGE>   56
       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>
                                             (In thousands, except per share amounts)
                                                          (Unaudited)
                                                      1994           1995
                                                    --------       --------
<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 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:



                                      F-13

<PAGE>   57
       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.



                                      F-14

<PAGE>   58
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.

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.



                                      F-15


<PAGE>   59
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 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



                                      F-16

<PAGE>   60
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
$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.



                                      F-17

<PAGE>   61
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-18

<PAGE>   62
         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.



                                      F-19

<PAGE>   63
         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's, New York Branch, to replace letters
of credit which were 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 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. 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



                                      F-20

<PAGE>   64
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.

         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.


                                      F-21

<PAGE>   65
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.

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



                                      F-22

<PAGE>   66
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>

         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.



                                      F-23

<PAGE>   67
         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            1994       1995            1995        1996         1996
                                  ----            ----       ----            ----        ----         ----
                                                WEIGHTED                    WEIGHTED                WEIGHTED
                                                 AVERAGE                     AVERAGE                 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>



                                      F-24

<PAGE>   68
         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.

         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



                                      F-25

<PAGE>   69
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           1994            1995           1995           1996             1996
                                           ----           ----            ----           ----           ----             ----
                                                        WEIGHTED                       WEIGHTED                        WEIGHTED
                                                        AVERAGE                         AVERAGE                         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.




                                      F-26


<PAGE>   70
  The following table summarizes information about stock options outstanding at
December 28, 1996:

<TABLE>
<CAPTION>
                                       Options Outstanding                             Options Exercisable
                                         Weighted Average
Range of           Number Outstanding      Remaining       Weighted Average    Number 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>


         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



                                      F-27


<PAGE>   71
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>


         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.



                                      F-28

<PAGE>   72
         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 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 Rights Offering.



                                      F-29

<PAGE>   73
         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 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 Rights Offering. Payment for shares purchased upon the exercise of
the options shall be in cash or stock of the Company.



                                      F-30

<PAGE>   74
         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>


         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 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.



                                      F-31

<PAGE>   75
         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 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-32

<PAGE>   76
         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 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.



                                      F-33

<PAGE>   77
         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.

         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 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.



                                      F-34


<PAGE>   78
         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-35


<PAGE>   79
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.



                                      F-36


<PAGE>   80
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.

         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.



                                      F-37


<PAGE>   81
         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-38


<PAGE>   82
         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.



                                      F-39

<PAGE>   83
         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.

         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     PERCENT       PERCENT
                                                         OF PRE-TAX  OF PRE-TAX   OF PRE-TAX
                                                           INCOME       LOSS         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>




                                      F-40


<PAGE>   84
         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.

         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 prerequisites provided for therein except for (a) benefits, salary
and prerequisites earned and accrued up to December 30, 1995, (b) salary of
$500,000 through December 31, 1996, and (c) benefits including (I) continued
disability and term life insurance in amounts not less than the amounts in force



                                      F-41


<PAGE>   85
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 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



                                      F-42


<PAGE>   86
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 in 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 principle 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 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



                                      F-43


<PAGE>   87
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.



                                      F-44


<PAGE>   88
         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.

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 will 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)

        Net Worth                         Amount
        ---------                         ------

  January through May 1997               $14,000
  June 1997 thereafter                   $11,500
</TABLE>



                                      F-45


<PAGE>   89
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)
                                ========        ========        ========        ========
</TABLE>



<TABLE>
<CAPTION>
                                 First           Second           Third           Fourth
                                Quarter          Quarter         Quarter          Quarter
                                -------          -------         -------          -------
                                           (in thousands, except per share amounts)
<S>                            <C>              <C>            <C>              <C>
  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-46


<PAGE>   90

                                     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                                              $   15,152.00

AMEX listing fees and expenses                                        17,500.00*

Printing and engraving expenses                                       60,000.00*

Legal fees and expenses                                               75,000.00*

Accounting fees and expenses                                         200,000.00*

Blue Sky fees and expenses (including counsel fees)                   20,000.00*

Standby Purchaser's fees                                           1,000,000.00

Subscription Agent's fees and expenses                                55,000.00*

Information Agent's fees and expenses                                  7,500.00*

Miscellaneous expenses                                                 4,848.00
                                                                  -------------
      Total                                                       $1,455,000.00
                                                                  =============
</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


                                      II-1
<PAGE>   91

         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.

                  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.

         Exhibit
         Number            Description of Exhibit                    Page Number

         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 this
                           Registration Statement)


                                      II-2
<PAGE>   92

         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


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;


                                      II-3
<PAGE>   93

         (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 (e & 1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 (Section 239.13 of this
chapter) or Form S-8 (Section 239.16b of this chapter), and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed 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.

         (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-effect 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 offering 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>   94

                                   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 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 11th day of
April, 1997.


                                        HANOVER DIRECT, INC.
                                        (Registrant)


                                        By:/s/Rakesh K. Kaul
                                           -------------------------------------
                                           Rakesh K. Kaul,
                                           President and Chief Executive Officer


                                POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Rakesh K. Kaul, Larry J. Svoboda
and Edward J. O'Brien, and each of them, his true and lawful attorneys-in-fact
and agents with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
such attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as they might or could do in
person, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or any of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.

         Pursuant to the requirement of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons, in
the capacities indicated on April 11, 1997.

      Name                    Title
      ----                    -----

/s/ Alan G. Quasha            Chairman of the Board and Director
- -------------------------
Alan G. Quasha


/s/Rakesh K. Kaul             Director, President and Chief Executive Officer
- -------------------------
Rakesh K. Kaul                (principal executive officer)


/s/Larry J. Svoboda           Senior Vice President and Chief Financial Officer
- -------------------------
Larry J. Svoboda              (principal financial officer)


                              Director
- -------------------------
Ralph Destino


/s/J. David Hakman            Director
- -------------------------
J. David Hakman


                              Director
- -------------------------
S. Lee Kling


                                      II-5
<PAGE>   95

                              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


                                      II-6
<PAGE>   96

                                 EXHIBIT INDEX



         Exhibit
         Number            Description of Exhibit                    Page Number

         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 this
                           Registration Statement)

         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


<PAGE>   1
                                                                     Exhibit 1.1

                           Standby Purchase Agreement

                              Hanover Direct, Inc.

                                55,555,555 Shares
                                  Common Stock
                              ($.66 2/3 par value)

                           Standby Purchase Agreement



                                                New York, New York
                                                March 26, 1997


Richemont S.A.
35 Boulevard Prince Henri
L 1724 Luxembourg
Attention:  Mr. Kurt Nauer

Ladies and Gentlemen:

            Hanover Direct, Inc., a Delaware corporation (the "Company"),
proposes to offer approximately 55,555,555 shares (the "Shares") of Common
Stock, par value $.66 2/3 per share (the "Common Stock"), of the Company,
initially for subscription upon the exercise of rights (the "Rights") evidenced
by transferable subscription certificates (the "Subscription Certificates") to
be issued by the Company to holders of shares of Common Stock, the 6% Series A
Convertible Additional Preferred Stock, par value $.01 and stated value $10.00
per share (the "Series A Preferred Stock"), and the Series B Convertible
Preferred Stock, par value $.01 and stated value $10.00 per share (the "Series B
Preferred Stock"), of the Company of record at the close of business on a day
which shall not be less than three nor more than 30 days prior to the Effective
Date, as hereinafter defined (the "Record Date") (all shares issuable upon the
exercise of Rights by holders of Common Stock, Series A Preferred Stock and
Series B Preferred Stock shall be referred to as the "Securities") for a price
of $.90 per share. The number of Rights distributable for each share of Series A
Preferred Stock and Series B Preferred Stock held on the Record Date will be
calculated assuming such shares have been converted into Common Stock on the
Record Date in accordance with the terms thereof. Record Date stockholders who
fully exercise all Rights distributed to them will also be

<PAGE>   2
entitled to subscribe 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 Rights will expire at 5:00 P.M., New
York City time, on a date to be determined by the Company, but which shall not
be less than 20 nor more than 40 days following the Effective Date (such date
and time, the "Expiration Date"). The Company proposes to sell to Richemont
S.A., a Luxembourg corporation ("Richemont"), an aggregate of 100% of such
number of Shares which, as of the Expiration Date, have not been subscribed for
by the holders of Common Stock, Series A Preferred Stock or Series B Preferred
Stock other than the 11,111,111 shares of Common Stock to be subscribed for by
NAR Group Limited, a British Virgin Islands corporation ("NAR"), or its
affiliates (other than the Company) by the exercise of Rights either through the
basic subscription privilege or the oversubscription privilege (the
"Unsubscribed Shares"). The Company's obligation to sell and deliver the
Securities to Richemont shall be contingent on Richemont's performance of its
obligations under this Agreement. The issuance of the Rights, the offering of
the Common Stock to be issued by the Company upon exercise of the Rights either
through the basic subscription privilege or the oversubscription privilege and
the subscription and purchase of Common Stock upon the terms described in the
Prospectus (as hereinafter defined), including the purchase by Richemont of the
Securities pursuant to this Agreement, are herein collectively referred to as
the "Rights Offering."

            1. Representations and Warranties. (a) The Company represents and
warrants to, and agrees with, Richemont as set forth below in this Section 1(a).
Certain terms used in Section 1 are defined in paragraphs (i) and (xix) of this
Section 1(a).

            (i) The Company meets the requirements for use of Form S-3 under the
Securities Act of 1933, as amended (the "Act"), and will file with the
Securities and Exchange Commission (the "Commission") as soon as practicable a
registration statement on such Form for the registration under the Act of the
offering of the Rights and the offering and sale of the Securities. The Company
will file with the Commission either (A) prior to effectiveness of such
registration statement, an amendment to such registration statement (including
the form of a final prospectus) or (B) after effectiveness of such registration
statement, a final prospectus in accordance with Rule 424(b). In the case of
clause (B), the Company shall include in such registration statement, as amended
at the Effective Date, all information required by the Act and the rules
thereunder to be included in the Prospectus with respect to the Rights, the


                                      - 2 -
<PAGE>   3
Securities and the offering thereof. As filed, such amendment and the form of
final prospectus, or such final prospectus, shall contain all required
information with respect to the Rights, the Securities and the offering thereof,
and shall be in form and substance reasonably acceptable to Richemont.

            The form of prospectus to be used in connection with the offering of
the Rights and the offering and sale of the Securities as first filed pursuant
to Rule 424(b) or, if no filing pursuant to Rule 424(b) is required, such form
of prospectus included in the Registration Statement at the Effective Date, is
hereinafter called the "Prospectus." The Prospectus and any related letters from
the Company to record or beneficial owners of Common Stock or Rights, related
letters from the Company to securities dealers, commercial banks, trust
companies and other nominees and other offering materials, in each case
disseminated by the Company or by any of its agents with the Company's prior
consent, including, without limitation, the Subscription Certificates, the
Instructions for Subscription Certificates, the Notices of Guaranteed Delivery,
the Form of Letter to the Holders of Common Stock, and the Form of Letter to the
Holders of Common Stock whose addresses are outside the United States, and
information that the Company may use or authorize for use in connection with the
Rights Offering, are collectively referred to hereinafter as the "Offering
Materials." Capitalized terms used herein without definition have the meanings
assigned to them in the Prospectus.

            (ii) On the Effective Date, the Registration Statement will, and
when the Prospectus is first filed (if required) in accordance with Rule 424(b)
and on the Closing Date (as hereinafter defined), the Prospectus (and any
supplements thereto) will, comply in all material respects with the applicable
requirements of the Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the respective rules thereunder; on the Effective Date, the
Registration Statement will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and on the Effective Date,
the Prospectus, if not required to be filed pursuant to Rule 424(b), and the
Offering Materials will not, and on the date of any filing pursuant to Rule
424(b) and on the Closing Date (as hereinafter defined), the Prospectus
(together with any supplement thereto) and the Offering Materials will not,
include any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the Company makes no representations or warranties as to the


                                      - 3 -
<PAGE>   4
information contained in or omitted from the Registration Statement or the
Prospectus (or any supplement thereto) in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of Richemont or
relating to Richemont or its affiliates (other than the Company) specifically
for inclusion in the Registration Statement or the Prospectus (or any supplement
thereto).

            (iii) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement; and this
Agreement has been duly authorized, executed and delivered by the Company and,
assuming due execution and delivery of this Agreement by Richemont, constitutes
a legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms except (A) as enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization or other similar
laws affecting creditors' rights generally and except as enforcement thereof is
subject to general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law), and (B) as rights to indemnity
and contribution hereunder may be limited by Federal or state securities law
and/or public policy.

            (iv) Arthur Andersen LLP, which has reported upon the audited
financial statements and schedules incorporated by reference in the Registration
Statement and the Prospectus, are as to the Company independent public
accountants as required by the Act and the Exchange Act.

            (v) The consolidated financial statements and the related notes of
the Company incorporated by reference in the Registration Statement and the
Prospectus present fairly in accordance with generally accepted accounting
principles the consolidated financial position of the Company as of the dates
indicated and the consolidated results of operations and cash flows of the
Company for the periods specified. Such financial statements have been prepared
in conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved, except as otherwise noted
therein and subject, in the case of interim statements, to normal year-end audit
adjustments. The financial statement schedules incorporated by reference in the
Registration Statement and the Prospectus present fairly in accordance with
generally accepted accounting principles the information required to be stated
therein.

            (vi) The Company is a corporation organized, validly existing and in
good standing under the laws of the State of


                                      - 4 -
<PAGE>   5
Delaware with full corporate power and corporate authority under such laws to
own, lease and operate its properties and conduct its business as described in
the Registration Statement and the Prospectus; and the Company is duly qualified
to transact business as a foreign corporation and is in good standing in each
other jurisdiction in which it owns or leases property of a nature, or transacts
business of a type, that would make such qualification necessary, except to the
extent that the failure to so qualify or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, considered as one
enterprise.

            (vii) All of the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
non-assessable; no holder thereof is or will be subject to personal liability by
reason of being such a holder; and none of the outstanding shares of capital
stock of the Company was issued in violation of the preemptive rights of any
stockholder of the Company.

            (viii) The outstanding shares of Common Stock, Series A Preferred
Stock, Series B Preferred Stock, the Rights, the Subscription Certificates and
the Securities will conform in all material respects to the descriptions thereof
contained or incorporated by reference in the Registration Statement and the
Prospectus.

            (ix) The Company had, at the date indicated, the shareholders'
equity set forth in the Consolidated Balance Sheets contained in the Annual
Report on Form 10-K for the fiscal year ended December 28, 1996.

            (x) Prior to or at the Effective Date, the Company will have entered
into a subscription agency agreement (the "Subscription Agency Agreement") with
a subscription agent (the "Subscription Agent"), which Subscription Agent shall
act on behalf of the Company in connection with, among other things, the
issuance, exercise, sale and transfer of Rights as part of the Rights Offering.
When executed by the Company, the Subscription Agency Agreement will have been
duly authorized, executed and delivered by the Company and, assuming due
authorization, execution and delivery by the Subscription Agent, will constitute
a valid and binding obligation of the Company, enforceable against the Company
in accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally and except as enforcement thereof is subject to
general principles of equity (regardless of whether enforcement is considered in
a proceeding in equity or at law).


                                      - 5 -
<PAGE>   6
            (xi) The Rights, when issued and delivered in accordance with the
terms of the Rights Offering, will be validly issued, and no holder thereof is
or will be subject to personal liability by reason of being such a holder; the
shares of Common Stock issuable upon the exercise of the Rights and the
Securities, when issued or delivered and paid for in accordance with the terms
of the Rights Offering, will be validly issued, fully paid and non-assessable,
and no holder thereof is or will be subject to personal liability by reason of
being such a holder; and the issuance of the shares of Common Stock issuable
upon the exercise of the Rights and the Securities will not be subject to the
preemptive rights of any stockholder of the Company.

            (xii) Prior to the Effective Date, the Company will have taken all
valid corporate action to duly reserve such number of its authorized and
unissued shares of Common Stock as are deliverable upon consummation of
purchases pursuant to the Rights Offering.

            (xiii) Except as otherwise stated in the Prospectus or contemplated
thereby, none of the Company or any of its subsidiaries is in violation of its
certificate of incorporation or in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other agreement or
instrument to which it is a party or by which it may be bound or to which any of
its properties may be subject, except for (a) such defaults under the Loan and
Security Agreement, dated as of November 14, 1995, as amended, with Congress
Financial Corporation, which defaults shall have been waived, and (b) such
defaults that in the aggregate would not have a material adverse effect on the
condition (financial or otherwise), results of operations or earnings of the
Company and its subsidiaries considered as one enterprise. The execution and
delivery of this Agreement, the issuance and delivery of the Rights and the
Securities, the consummation of the Rights Offering and the consummation by the
Company of the transaction contemplated in this Agreement, the Registration
Statement and the Prospectus, and compliance by the Company with terms of this
Agreement do not and will not result in any violation of the charter or by-laws
of the Company, and do not and will not conflict with, or result in a breach of
any of the terms or provisions of, or constitute a default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any of its subsidiaries under (i) any indenture,
mortgage, loan agreement, note, lease or other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which each of them or
any of them may be bound or to


                                      - 6 -
<PAGE>   7
which any of their respective properties may be subject or (ii) any existing
applicable law, rule, regulation, judgment, order or decree of any government,
governmental instrumentality or court, domestic or foreign, having jurisdiction
over the Company or any of its subsidiaries or any of their respective
properties (except, in the case of (i) and (ii) above, where such conflicts,
breaches or defaults or liens, charges or encumbrances in the aggregate would
not have a material adverse effect on the condition (financial or otherwise),
results of operations or earnings of the Company and its subsidiaries considered
as one enterprise).

            (xiv) Except as otherwise disclosed in the Prospectus, no
authorization, approval, consent or license of any government, governmental
instrumentality or court, domestic or foreign (other than under the Act and the
securities or blue sky law of the various states), is required for the offer of
the Rights, the offer and sale by the Company of Securities, the consummation of
the Rights Offering as set forth in the Registration Statement and the
Prospectus or the consummation by the Company of the transactions contemplated
in this Agreement and in the Registration Statement and the Prospectus.

            (xv) Except as disclosed in the Prospectus, there is no action, suit
or proceeding before or by any government, governmental instrumentality or
court, domestic or foreign, now pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its subsidiaries that is
required to be disclosed in the Registration Statement and the Prospectus. There
are no contracts or documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement or the Prospectus that will not be described and filed as
required.

            (xvi) The Company has not taken and will not take, directly or
indirectly, any action designed to, or that might be reasonably expected to,
cause or result in stabilization or manipulation of the price of the Rights or
the Common Stock.

            (xvii) The Rights will be duly authorized for trading on a
when-issued and, subject only to official notice of issuance, regular way basis
on the American Stock Exchange. The Securities, when issued, will be authorized
for listing on said Exchange, subject only to official notice of issuance.

            (xviii) The proceeds of the Rights Offering will be applied as set
forth in the Prospectus.


                                      - 7 -
<PAGE>   8
            (xix) The terms which follow, when used in this Agreement, shall
have the meanings indicated. The term "Effective Date" shall mean each date that
the Registration Statement and any post-effective amendment or amendments
thereto became or become effective. "Execution Time" shall mean the date and
time that this Agreement is executed and delivered by the parties hereto.
"Registration Statement" shall mean the registration statement referred to in
paragraph (i) above, including exhibits and financial statements, as amended at
the time in which it shall become effective) and, in the event any
post-effective amendment thereto becomes effective prior to the Closing Date (as
hereinafter defined), shall also mean such registration statement as so amended.
"Rule 424" refers to such rule under the Act. Any reference herein to the
Registration Statement or the Prospectus shall be deemed to refer to and include
the documents incorporated by reference therein which were filed under the
Exchange Act on or before the Effective Date of the Registration Statement or
the issue date of the Prospectus and any reference herein to the terms "amend",
"amendment" or "supplement" with respect to the Registration Statement or the
Prospectus shall be deemed to refer to and include the filing of any document
under the Exchange Act after the issue date of the Prospectus deemed to be
incorporated therein by reference.

            (b) Richemont represents and warrants to, and agrees with, the
Company as set forth below in this Section 1(b).

            (i) Richemont has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement; and this
Agreement has been duly authorized, executed and delivered by Richemont and,
assuming due execution and delivery of this Agreement by the Company,
constitutes a legal, valid and binding obligation of Richemont, enforceable
against Richemont in accordance with its terms except (A) as enforcement thereof
may be limited by applicable bankruptcy, insolvency, reorganization or other
similar laws affecting creditors' rights generally and except as enforcement
thereof is subject to general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law), and (B) as
rights to indemnity and contribution hereunder may be limited by Federal or
other national or state or provincial securities laws and/or public policy.

            (ii) To the extent that the Registration Statement contains any
information concerning Richemont furnished in writing to the Company by or on
behalf of Richemont specifically for inclusion therein, on the Effective Date
the Registration Statement will, and when the prospectus is first filed (if
required) in accordance with Rule 424(b) and on the Closing Date


                                      - 8 -
<PAGE>   9
(as hereinafter defined), the Prospectus (and any supplements thereto) will,
comply in all material respects with the applicable requirements of the Act and
the Exchange Act and the respective rules thereunder with respect to such
information; to the extent that the Registration Statement contains any
information concerning Richemont furnished in writing to the Company by or on
behalf of Richemont specifically for inclusion therein, on the Effective Date,
the Registration Statement will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading with respect to
such information; and on the Effective Date, to the extent that the Registration
Statement contains any information concerning Richemont furnished in writing to
the Company by or on behalf of Richemont specifically for inclusion therein, the
Prospectus, if not required to be filed pursuant to Rule 424(b), will not, and
on the date of any filing pursuant to Rule 424(b) and on the Closing Date (as
hereinafter defined), the Prospectus (together with any supplement thereto) will
not, include any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading with respect to such
information.

            (iii) The execution and delivery of this Agreement, the purchase of
the shares of Common Stock to be purchased by Richemont hereunder, the
consummation by Richemont of the transactions contemplated in this Agreement,
the Registration Statement and the Prospectus and compliance by Richemont with
the terms of this Agreement do not and will not result in any violation of the
Statuten of Richemont, and do not and will not conflict with, or result in a
breach of any of the terms or provisions of, or constitute a default under, or
result in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of Richemont or any of its subsidiaries under (A) any
indenture, mortgage, loan agreement, note, lease or other agreement or
instrument to which Richemont or any of its subsidiaries is a party or by which
each of them or any of them may be bound or to which any of their respective
properties may be subject or (B) any existing applicable law, rule, regulation,
judgment, order or decree of any government, governmental instrumentality or
court, domestic or foreign, having jurisdiction over Richemont or any of its
subsidiaries or any of their respective properties (except, in the case of (A)
and (B) above, where such conflicts, breaches or defaults or liens, charges or
encumbrances in the aggregate would not have a material adverse effect on the
condition (financial or otherwise), results of operations or earnings of
Richemont and its subsidiaries considered as one enterprise).


                                      - 9 -
<PAGE>   10
            (iv) Except as otherwise disclosed in the Prospectus, no
authorization, approval, consent or license of any government, governmental
instrumentality or court, domestic or foreign (other than under the Act and the
securities or blue sky laws of the various states) is required for the purchase
of the Unsubscribed Shares to be purchased by Richemont hereunder as set forth
in the Registration Statement and the Prospectus and the consummation by
Richemont of the transactions contemplated in this Agreement and in the
Registration Statement and the Prospectus.

            2. Purchase and Sale. Subject to the terms and conditions and in
reliance upon the representations and warranties herein set forth, the Company
agrees to sell to Richemont, and Richemont agrees to purchase from the Company
at a purchase price per share equal to the subscription price per share
specified in the Registration Statement 100% of the Unsubscribed Shares, if any.

            As compensation to Richemont for its commitment hereunder, the
Company agrees to pay to Richemont, on the Closing Date (as hereinafter defined)
or at such other time and date as Richemont and the Company may agree in
writing, 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, Series A Preferred Stock and Series B
Preferred Stock other than with respect to the shares of Common Stock held by
NAR Group Limited, a British Virgin Islands corporation ("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 hereunder, 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 the date hereof if (i) at least five days prior
to the Effective Date, he furnishes to Richemont an undertaking to exercise the
Rights distributed to him with respect to such shares and (ii) upon the closing
of the Rights Offering, Mr. Kruttschnitt purchases the shares which he
undertakes to purchase.


                                     - 10 -
<PAGE>   11
            If the closing for the sale of the Unsubscribed Shares shall not
occur as a result of (i) any termination of this Agreement pursuant to Section 8
or (ii) any cancellation of this Agreement pursuant to Section 6 if any such
cancellation pursuant to Section 6 is the result of any refusal, inability or
failure on the part of the Company to perform any material agreement herein or
to satisfy any material condition or other provision hereof (other than Section
6(b)(i) with respect to representations contained in paragraphs (xiii), (xiv)
and (xv) of Section 1(a) so long as the Company has made reasonable efforts to
comply with such sections) on its part to be satisfied or the material breach by
the Company of any of the representations and warranties contained in Section 1
hereof (other than the representations contained in paragraphs (xiii), (xiv) and
(xv) of Section 1(a) so long as the Company has made reasonable efforts to
comply with such sections), the Company shall pay Richemont the entire amount of
the Standby Fee.

            3. Delivery and Payment. Delivery and payment for the Unsubscribed
Shares shall be made at 10:00 A.M., New York City time, on the fifth business
day following the Expiration Date (which date and time may be postponed to a
date not later than 10 business days thereafter by agreement between Richemont
and the Company) (such date and time of delivery and payment for the Securities
being herein called the "Closing Date"). Delivery of the Securities shall be
made to Richemont against payment by Richemont of the aggregate purchase price
of the Unsubscribed Shares being sold by the Company, by wire transfer and
payable in same day funds to an account or accounts designated in writing by the
Company at least two business days before the Closing Date. Delivery of the
Unsubscribed Shares shall be made at such location in the United States as
Richemont shall reasonably designate at least one business day in advance of the
Closing Date and payment for such Unsubscribed Shares shall be made at the
office of Brown Raysman Millstein Felder & Steiner LLP, 120 West 45th Street,
New York, New York 10036. Certificates for the Unsubscribed Shares shall be
registered in such names and in such denominations as Richemont may request not
less than forty-eight hours in advance of the Closing Date.

            The Company agrees to have the Unsubscribed Shares available for
inspection, checking and packaging by Richemont in New York, New York, not later
than 1:00 P.M. on the business day prior to the Closing Date.

            Should the Company so require, Richemont will advance up to $30
million from time to time upon the Company's request against its commitment to
purchase all of the Unsubscribed Shares. In return, the Company will execute a
subordinated


                                     - 11 -
<PAGE>   12
promissory note in the amount of such advance which will be repayable on the
earlier of August 30, 1997 or the completion of the Rights Offering. Such note
will be subordinate to the Loan and Security Agreement, dated as of November 14,
1995, as amended, with Congress Financial Corporation. Should Richemont advance
any sums, payment of all or part of the aggregate purchase price of the
Unsubscribed Shares may also be made by Richemont by the surrender and
cancellation of the aforementioned note. Concurrently therewith, the Company
shall pay to Richemont interest on the principal amount outstanding under such
note as provided therein at a rate of 1.5% per annum in excess of the prime
commercial rate announced from time to time by CoreStates Bank, N.A.

            4. No Offering by Richemont. It is understood that Richemont does
not intend to offer the shares of Common Stock owned by it (including, but not
limited to, the Unsubscribed Shares) for sale to the public.

            5. Agreements. (a) The Company agrees with Richemont that:

                  (i) The Company will use its best efforts to cause the
      Registration Statement, and any amendment thereof, including any
      post-effective amendment, to become effective as soon as practicable.
      Prior to the termination of the offering of the Rights and the Securities,
      the Company will not file any amendment to the Registration Statement or
      supplement to the Prospectus without Richemont's prior consent, which
      consent shall not be unreasonably withheld or delayed. Subject to the
      foregoing sentence, if filing of the Prospectus is otherwise required
      under Rule 424(b), the Company will cause the Prospectus, properly
      completed, and any supplement thereto to be filed with the Commission
      pursuant to the applicable paragraph of Rule 424(b) within the time period
      prescribed and will provide evidence satisfactory to Richemont of such
      timely filing. The Company will promptly advise Richemont (A) when the
      Registration Statement, and any amendment thereto, shall have become
      effective, (B) when the Prospectus, and any supplement thereto, shall have
      been filed (if required) with the Commission pursuant to Rule 424(b), (C)
      when, prior to termination of the Rights Offering, any amendment to the
      Registration Statement shall have been filed or become effective, (D) of
      any request by the Commission for any amendment of the Registration
      Statement or supplement to the Prospectus or for any additional
      information, (E) of the issuance by the Commission of any stop order
      suspending the effectiveness of the Registration Statement or the


                                     - 12 -
<PAGE>   13
      institution or threatening of any proceeding for that purpose, (F) of the
      receipt by the Company of any notification with respect to the suspension
      of the qualification of the Securities for sale in any jurisdiction or the
      initiation or threatening of any proceeding for such purpose and (G) if
      any of the representations and warranties contained in Section 1 hereof
      becomes inaccurate in any material respect subsequent to the date hereof.
      The Company will use its best efforts to prevent the issuance of any such
      stop order and, if issued, to obtain as soon as possible the withdrawal
      thereof.

            (ii) If, at any time when a prospectus relating to the Rights or the
      Securities is required to be delivered under the Act, any event occurs as
      a result of which the Prospectus as then supplemented would include any
      untrue statement of a material fact or omit to state any material fact
      necessary to make the statements therein in the light of the circumstances
      under which they were made not misleading, or if it shall be necessary to
      amend the Registration Statement or supplement the Prospectus to comply
      with the Act or the rules thereunder (including to comply with Item 512(c)
      of Regulation S-K under the Act), the Company promptly will prepare and
      file with the Commission, subject to the second sentence of paragraph
      (a)(i) of this Section 5, an amendment or supplement which will correct
      such statement or omission or effect such compliance.

            (iii) As soon as practicable, the Company will make generally
      available to its security holders and to Richemont an earning statement or
      statements of the Company and its subsidiaries which will satisfy the
      provisions of Section 11(a) of the Act and Rule 158 under the Act.

            (iv) The Company will furnish to Richemont without charge, signed
      copies of the Registration Statement (including exhibits thereto) and as
      many copies of the Prospectus and any supplement thereto as Richemont may
      reasonably request. The Company will pay the expenses of printing or other
      production of all documents relating to the Rights Offering.

            (v) The Company will arrange for the qualification of the Rights for
      distribution and offering and the Securities for distribution, offering
      and sale under the laws of such jurisdictions as Richemont may designate,
      and will maintain such qualifications in effect so long as required for
      the distribution of the Rights or the Securities, as the case may be.


                                     - 13 -
<PAGE>   14
            (vi) Except as contemplated in the Registration Statement or the
      Prospectus, the Company will not, within 90 days of the Effective Date,
      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 Act without the prior written consent of
      Richemont which shall not be unreasonably withheld.

            (vii) The Company shall at all times reserve and keep available for
      issue upon the exercise of the Rights such number of authorized but
      unissued shares of Common Stock deliverable upon the exercise of the
      Rights as will be sufficient to permit the exercise in full of all Rights
      issued.

            6. Conditions to Obligations of Richemont. The obligations of
Richemont to purchase the Securities shall be subject to the accuracy of the
representations and warranties on the part of the Company contained herein as of
the Effective Date and the Closing Date, to the accuracy of the statements of
the Company made in any certificates pursuant to the provisions hereof, to the
performance by the Company of their obligations hereunder and to the following
additional conditions:

            (a) The Registration Statement shall have become effective not later
than 12:00 Noon, New York City time, or such later time as trading in the Common
Stock begins on the American Stock Exchange on the Effective Date; if filing of
the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b),
the Prospectus, and any such supplement, will be filed in the manner and within
the time period required by Rule 424(b); and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or threatened.

            (b) At the Closing Date, the Company shall have furnished to
Richemont certificates of the Company, dated respectively as of the Effective
Date and the Closing Date and signed by any two executive officers of the
Company, to the effect that the signers of such certificates have carefully
examined the Registration Statement, the Prospectus, any supplements to the
Prospectus and this Agreement and that:

                  (i) the representations and warranties of the Company in this
      Agreement are true and correct in all material respects at and as of the
      Effective Date or on and


                                     - 14 -
<PAGE>   15
      as of the Closing Date, as the case may be, with the same effect as if
      made at the Effective Date or on the Closing Date, as the case may be, and
      the Company has complied with all the agreements and satisfied all the
      conditions on its part to be performed or satisfied at or prior to the
      Effective Date or the Closing Date, as applicable; and

                  (ii) no stop order suspending the effectiveness of the
      Registration Statement has been issued and no proceedings for that purpose
      have been instituted or, to the Company's knowledge, threatened.

            (c) The Company shall have commenced mailing the Subscription
Certificates to record holders of the Common Stock not later than three days
following the Effective Date and shall have completed such mailing
expeditiously, and shall have offered the Common Stock for subscription in
accordance with the terms and under the conditions set forth in the Prospectus.
The Expiration Date shall have been not later than 5:00 P.M., New York City
time, on that day which shall not be less than 20 nor more than 40 days
following the Effective Date. Prior to 12:00 Noon, New York City time, on the
business day following the Expiration Date, the Company shall have advised
Richemont of the number of shares of Common Stock subscribed for and of the
number of Non-Richemont Shares.

            (d) NAR shall have entered into an agreement with the Company
providing for the exercise of, and shall have exercised, its Rights for that
number of Shares having an aggregate purchase price of at least $10 million.
Payment of all or part of the aggregate purchase price of such Shares will be
made by NAR by the surrender and cancellation of the Company's subordinated
promissory note, dated as of September 11, 1996, in the principal amount of $10
million. Concurrently therewith, the Company shall pay to NAR interest on the
principal amount outstanding under such note as provided therein.

            (e) Prior to the Closing Date, the Company shall have furnished to
Richemont such further information, certificates and documents as Richemont may
reasonably request.

            If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
this Agreement and all obligations of Richemont hereunder may be canceled at, or
at any time prior to, the Closing Date by Richemont. Notice of such cancellation
shall be given to the Company in writing or by telephone or telegraph confirmed
in writing.


                                     - 15 -
<PAGE>   16
            7. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless Richemont, the directors, officers, partners,
employees and agents of Richemont and each person who controls, or is in common
control with, Richemont within the meaning of either the Act or the Exchange Act
against any and all losses, claims, damages or liabilities, joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
other Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the registration statement for
the registration of the Rights and the Securities as originally filed or in any
amendment thereof, or in the Prospectus or any of the Offering Materials, or in
any amendment thereof or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
(ii) the Rights Offering or the engagement of Richemont pursuant to, and the
performance by Richemont of the services contemplated by, this Agreement, and
agrees to reimburse each such indemnified party, as incurred, for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability (A) arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by Richemont specifically for inclusion therein or (B)
in the case of clause (a)(ii) of this Section 7, is found in a final judgment by
a court of competent jurisdiction to have resulted from the bad faith or gross
negligence of such indemnified party or any party related to an indemnified
party or to have resulted from a violation of Rule 10b-6, 10b-7 or 10b-8 under
the Exchange Act by the indemnified party, other than actions performed at the
written request or with the consent of the Company. This indemnity agreement
will be in addition to any liability which the Company may otherwise have.

            The Company also agrees that no indemnified party shall have any
liability (whether direct or indirect, in contract or tort or otherwise) to the
Company or its security holders or creditors related to or arising out of the
engagement of Richemont pursuant to, or the performance by Richemont of the
services contemplated by, this Agreement, except to the extent that any loss,
claim, damage or liability is found in a final judgment by a court to have
resulted from the indemnified party's


                                     - 16 -
<PAGE>   17
bad faith or gross negligence or a breach by Richemont of its obligations under
this Agreement.

            (b) Richemont agrees to indemnify and hold harmless the Company,
each of its directors, each of its officers who signs the Registration
Statement, and each person who controls the Company within the meaning of the
Act or the Exchange Act, to the same extent as the foregoing indemnity from the
Company to Richemont, but only with reference to written information relating to
Richemont furnished to the Company by Richemont specifically for inclusion in
the documents referred to in the foregoing indemnity. This indemnity agreement
will be in addition to any liability which Richemont may otherwise have.

            (c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 7, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be entitled
to appoint counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be reasonably satisfactory to the
indemnified party. Notwithstanding the indemnifying party's election to appoint
counsel to represent the indemnified party in an action, the indemnified party
shall have the right to employ separate counsel (including local counsel), and
the indemnifying party shall bear the reasonable fees, costs and expenses of
such separate counsel if (i) the use of counsel chosen by the indemnifying party
to represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party (it being
understood, however, that in connection with such action the indem-


                                     - 17 -
<PAGE>   18
nifying party shall not be liable for the expenses of more than one separate
counsel (in addition to local counsel) in any one action or separate but
substantially similar actions in the same jurisdiction arising out of the same
general allegations or circumstances, representing the indemnified parties who
are parties to such action), (iii) the indemnifying party shall not have
employed counsel reasonably satisfactory to the indemnified party to represent
the indemnified party within a reasonable time after notice of the institution
of such action or (iv) the indemnifying party shall authorize the indemnified
party to employ separate counsel at the expense of the indemnifying party. An
indemnifying party will not, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless (x) such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding or (y) such
settlement, compromise or consent involves only the payment of money damages and
no other relief.

            (d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 7 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and Richemont agree to contribute
to the aggregate losses, claims, damages and liabilities (including legal or
other expenses reasonably incurred in connection with investigating or defending
same) (collectively "Losses") to which the Company, on the one hand, and
Richemont, on the other hand, may be subject in such proportion as is
appropriate to reflect the relative benefits received by the Company, on the one
hand, and by Richemont, on the other hand, from the purchase of the Securities;
provided, however, that in no case shall Richemont be responsible for any amount
in excess of the aggregate compensation paid hereunder to Richemont in respect
of the Securities purchased by Richemont hereunder. If the allocation provided
by the immediately preceding sentence is unavailable for any reason, the
Company, on the one hand, and Richemont, on the other hand, shall contribute in
such proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company, on the one hand, and of Richemont, on
the other hand, in connection with the statements or omissions which resulted in
such Losses as well as any other relevant equitable considerations. Benefits
received by the Company shall be deemed to be equal to the total net proceeds
from the Rights Offering (before deducting expenses), as set forth on the cover
page of the Prospectus (assuming that all such Rights are exercised), and


                                     - 18 -
<PAGE>   19
benefits received by Richemont shall be deemed to be equal to the total
compensation paid to Richemont hereunder. Relative fault shall be determined by
reference to whether any alleged untrue statement or omission relates to
information provided by the Company or Richemont. The Company and Richemont
agree that it would not be just and equitable if contribution were determined by
pro rata allocation or any other method of allocation which does not take
account of the equitable considerations referred to above. Notwithstanding the
provisions of this paragraph (d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, each person who controls
Richemont within the meaning of either the Act or the Exchange Act and each
director, officer, partner, employee and agent of Richemont shall have the same
rights to contribution as Richemont, and each person who controls the Company
within the meaning of either the Act or the Exchange Act, each officer of the
Company who shall have signed the Registration Statement and each director of
the Company shall have the same rights to contribution as the Company, subject
in each case to the applicable terms and conditions of this paragraph (d).

            8. Termination. This Agreement shall be subject to termination in
the absolute discretion of Richemont, by notice given to the Company prior to
delivery of and payment for the Unsubscribed Shares, if prior to such time
trading in the Common Stock shall have been suspended by the Commission or the
American Stock Exchange or trading in securities generally on such Exchange
shall have been suspended or limited or minimum prices shall have been
established on such Exchange.

            9. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of Richemont set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of Richemont or the Company or any of the officers,
directors or controlling persons referred to in Section 7 hereof, and will
survive delivery of and payment for the Unsubscribed Shares. The provisions of
the third paragraph of Section 2 hereof and the provisions of Section 7 hereof
shall survive the termination or cancellation of this Agreement.

            10. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to Richemont, will be mailed, delivered
or telegraphed and confirmed to it at 35 Boulevard Prince Henri, L 1724
Luxembourg, Attention: Mr. Kurt Nauer or at such other address as Richemont may
hereafter


                                     - 19 -
<PAGE>   20
designate by notice to the Company, with a copy to Brobeck Phleger & Harrison
LLP, 1633 Broadway, 47th Floor, New York, New York 10019, Attention: Robert P.
Wessely, Esq., Facsimile Number 212-586-7878 or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 1500 Harbor Boulevard,
Weehawken, New Jersey 07087, Attention: Secretary, Facsimile Number
201-392-5005, or at such other address as the Company may hereafter designate by
notice to Richemont, with a copy to Brown Raysman Millstein Felder & Steiner
LLP, 120 West 45th Street, 20th Floor, New York, New York 10036, Attention:
Monte E. Wetzler, Esq., Facsimile Number 212-840-2429.

            11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7 hereof, and no
other person will have any right or obligation hereunder. No party to this
Agreement may assign its rights under this Agreement to any other person without
the prior written consent of the other party hereto, except that Richemont may
assign its rights hereunder to one or more direct or indirect wholly-owned
subsidiaries of Richemont, provided that Richemont shall continue to be
obligated to perform all the obligations to be performed by Richemont hereunder.

            12. Applicable Law. This Agreement will be governed by and construed
in accordance with the laws of the State of New York.

            13. Business Day. For purposes of this Agreement, "business day"
means any day on which the American Stock Exchange is open for trading.

            14. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.


                                     - 20 -
<PAGE>   21
            IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, all as of the day and year first written above.

                              HANOVER DIRECT, INC.


                              By: /s/   Larry J. Svoboda
                                 ------------------------------
                                 Name:  Larry J. Svoboda
                                 Title: Senior Vice President, CFO


                              RICHEMONT S.A.


                              By: /s/   Howard S. Tanner
                                 ------------------------------
                                 Name:  Howard S. Tanner
                                 Title: Director


                              By: /s/   Jan du Plessis
                                 ------------------------------
                                 Name:  Jan du Plessis
                                 Title: Director


                                     - 21 -

<PAGE>   1
<TABLE>
<CAPTION>
                                                                                                                      Exhibit 4
<S>                                    <C>                                                         <C>

SUBSCRIPTION CERTIFICATE NO.                                                                       SUBSCRIPTION CERTIFICATE FOR
                                                                                                               SHARES
                                                        HANOVER DIRECT, INC.

                                           SUBSCRIPTION CERTIFICATE REPRESENTING RIGHTS
THE TERMS AND CONDITIONS OF THE         TO PURCHASE SHARES OF THE COMMON STOCK OF HANOVER        SUBSCRIPTION PRICE $.90 PER SHARE
RIGHTS OFFERING ARE SET FORTH IN         DIRECT, INC. THIS CERTIFICATE OR A NOTICE OF
THE COMPANY'S PROSPECTUS DATED       GUARANTEED DELIVERY MUST BE RECEIVED BY THE SUBSCRIPTION
_____ __, 1997 (THE "PROSPECTUS")       AGENT WITH PAYMENT IN FULL BY 5:00 P.M., NEW YORK                       CUSIP
AND ARE INCORPORATED HEREIN BY        CITY TIME, ON _________, 1997 (THE "EXPIRATION DATE").
REFERENCE. COPIES OF THE               THIS SUBSCRIPTION CERTIFICATE IS TRANSFERABLE AND MAY
PROSPECTUS ARE AVAILABLE UPON            BE COMBINED OR DIVIDED (BUT ONLY INTO CERTIFICATES
REQUEST FROM THE COMPANY AND              EVIDENCING A WHOLE NUMBER OF RIGHTS) AT THE OFFICE
THE SUBSCRIPTION AGENT.                       OF THE SUBSCRIPTION AGENT.
</TABLE>



NAME AND ADDRESS OF REGISTERED HOLDER:



The registered owner whose name is inscribed herein, or assigns, is entitled to
subscribe for shares of Common Stock upon the terms and subject to the
conditions set forth in the Prospectus and instructions relating thereto. The
Rights represented by this Subscription Certificate may be exercised by duly
completing Form 1; may be transferred, assigned, exercised or sold through a
bank or broker by duly completing Form 2; and may be sold through the
Subscription Agent by duly completing Form 3. Rights holders are advised to
review the Prospectus and Instructions, copies of which are available from the
Subscription Agent, before exercising or selling their Rights.

IMPORTANT: Complete appropriate Form and, if applicable, delivery instructions,
and SIGN on reverse thereof.

Date:


- -------------------------------------      -------------------------------------
         RAKESH K. KAUL                               EDWARD J. O'BRIEN
President and Chief Executive Officer         Senior Vice President, Treasurer
                                                        and Secretary
<PAGE>   2
   RIGHTS HOLDERS SHOULD BE AWARE THAT IF THEY CHOOSE TO EXERCISE OR TRANSFER
LESS THAN ALL OF THE RIGHTS EVIDENCED HEREBY, THEY MAY NOT RECEIVE A NEW
SUBSCRIPTION CERTIFICATE IN SUFFICIENT TIME TO EXERCISE THE REMAINING RIGHTS
EVIDENCED THEREBY.

   FORM I: EXERCISE AND SUBSCRIPTION: The undersigned hereby irrevocably
exercises one or more Rights to subscribe for shares of Common Stock as
indicated below, on the terms and subject to the conditions specified in the
Prospectus, receipt of which is hereby acknowledged.

   (a) Number of shares subscribed for pursuant to the Subscription Privilege
       (one Right needed to subscribe for each full share):_________________

   (b) Total Subscription Price (total number of shares subscribed for pursuant
       to the Subscription Privilege times the Subscription Price of $.90):
       _______________________*

   METHOD OF PAYMENT (CHECK ONE)

   [ ] CHECK, BANK DRAFT OR MONEY ORDER PAYABLE TO AMERICAN STOCK TRANSFER &
       TRUST COMPANY.
   [ ] WIRE TRANSFER DIRECTED TO [THE CHASE MANHATTAN BANK; ACCOUNT NO.
       323053807; ABA NO. 021000021.]
       (c) if the number of Rights being exercised pursuant to the Subscription
           Privilege is less than all of the Rights represented by this
           Subscription Certificate (check only one):
   [ ] DELIVER TO ME A NEW SUBSCRIPTION CERTIFICATE EVIDENCING THE REMAINING
       RIGHTS TO WHICH I AM ENTITLED.
   [ ] DELIVER TO ME A NEW SUBSCRIPTION CERTIFICATE EVIDENCING THE REMAINING
       RIGHTS IN ACCORDANCE WITH MY FORM 2 INSTRUCTIONS (which include any
       required signature guarantees).
   [ ] SELL THE REMAINING UNEXERCISED RIGHTS IN ACCORDANCE WITH MY FORM 3
       INSTRUCTIONS.
   [ ] CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF
       GUARANTEED DELIVERY DELIVERED TO THE SUBSCRIPTION AGENT PRIOR TO THE DATE
       HEREOF AND COMPLETE THE FOLLOWING:
         Name(s) of Registered Owner(s)_________________________________________
         Window Ticket number (if any)__________________________________________
         Date of Execution of Notice of Guaranteed Delivery_____________________
         Name of Institution which Guaranteed Delivery__________________________

   FORM 2 - TO TRANSFER YOUR SUBSCRIPTION CERTIFICATE OR SOME OR ALL OF YOUR
RIGHTS OR TO EXERCISE OR SELL RIGHTS THROUGH YOUR BANK OR BROKER. For value
received, Rights represented by this Subscription Certificate are hereby
assigned to (please print name and address and Social Security No. of
transferee in full):

Name__________________________________

Address_______________________________

______________________________________

______________________________________
       Social Security Number

   [ ] FORM 3 - CHECK HERE TO SELL YOUR UNEXERCISED RIGHTS THROUGH THE
       SUBSCRIPTION AGENT: Check box if the undersigned hereby authorizes the
       Subscription Agent to sell any Rights represented by this Subscription
       Certificate but not exercised hereby and to deliver to the undersigned a
       check for the net proceeds.

       FORM 4 - DELIVERY INSTRUCTIONS: Name and/or address for mailing any
       stock, new Subscription Certificate or cash payment if other than shown
       on the reverse hereof:

                        Name:___________________________________________________

                        Address:________________________________________________
 
                        ________________________________________________________


<PAGE>   1


                                                                       Exhibit 5

                  Brown Raysman Millstein Felder & Steiner LLP
                              120 West 45th Street
                            New York, New York 10036
                                 (212) 944-1515

                                          April 14, 1997


Hanover Direct, Inc.
1500 Harbor Boulevard
Weehawken, New Jersey  07087

      Re:  Hanover Direct, Inc.

Gentlemen:

      We refer to the Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
filed by Hanover Direct, Inc., a Delaware corporation (the "Company"), with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement covers (i) rights to purchase (the "Rights") shares of the Company's
common stock, par value $.66-2/3 per share (the "Company Common Stock"), (ii)
the oversubscription privilege to purchase rights and (iii) shares of Company
Common Stock to be issued and sold upon the exercise of the Rights to be
distributed in connection with a rights offering (the "Rights Offering").

      We have examined the originals, or photostatic or certified copies, of
such records of the Company, certificates of officers of the Company and of
public officials and such other documents as we have deemed relevant and
necessary as the basis for the opinion set forth below. In such examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such copies.

      Based upon our examination mentioned above, subject to the assumptions
stated and relying on statements of fact contained in the documents that we have
examined, we are of the opinion that the Rights proposed to be issued by the
Company and the Company Common Stock proposed to be issued and sold by the
Company have been duly authorized for issuance and that the Rights, when issued
to holders of the Company Common Stock and Series B Convertible Additional
Preferred Stock in accordance with the terms of the Rights Offering, will have
been validly issued and will be fully paid and non-assessable.

      We consent to the filing of this opinion as an Exhibit to the Registration
Statement. In giving this consent, we do not admit that we are within the
category of persons whose consent is required under Section 7 of the Securities
Act or the General Rules and Regulations of the Commission.

                                          Very truly yours,

                                          Brown Raysman Millstein
                                            Felder & Steiner LLP

<PAGE>   1
                                                                       Exhibit 8


                  Brown Raysman Millstein Felder & Steiner LLP
                              120 West 45th Street
                            New York, New York 10036
                                 (212) 944-1515



                                                      April 14, 1997


Hanover Direct, Inc.
1500 Harbor Boulevard
Weehawken, NJ  07087

                  Re:   1997 Rights Offering

Ladies and Gentlemen:

            We have acted as counsel to Hanover Direct, Inc., a Delaware
corporation (the "Company"), in connection with the distribution to holders of
record (the "Holders") of its common stock, par value $.66-2/3 per share
("Common Stock"), and its 6% Series B Convertible Additional Preferred Stock,
par value $.01 per share, outstanding as of a record date to be established of
transferable subscription rights (the "Rights") to subscribe for and purchase
shares of Common Stock (the "Rights Offering").

            We have reviewed the factual information supplied to us by the
Company that is set forth in the Registration Statement on Form S-3 dated April
11, 1997 and have prepared the statements contained therein under the headings
"Certain Federal Tax Consequences to Holders," "Federal Income Tax Consequences
of Rights Offering to the Company" and "Certain United States Tax Consequences
to Non-United States Holders" (the "Tax Discussion"). In our opinion, the Tax
Discussion, to the extent it describes matters of law or legal conclusions,
fairly presents the information set forth therein and, except to the extent
specifically indicated therein, represents our opinion as to the material United
States federal income tax consequences of the Rights Offering. Our opinion is
based on laws, regulations, rulings and decisions currently in effect, all of
which are subject to change (possibly with retroactive effect) and
reinterpretation. Such opinion represents our legal judgment and will not be
binding in any manner on the Internal Revenue Service. There can be no
<PAGE>   2
Hanover Direct, Inc.                  -2-                         April 14, 1997


assurance that the Internal Revenue Service will take a similar view as to any
of the tax consequences described in the Tax Discussion. 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
acquired thereby.

                                          Very truly yours,


                                          Brown Raysman Millstein
                                            Felder & Steiner LLP


<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 11, 1997

<PAGE>   1
                                                                    Exhibit 99.1

                            INSTRUCTIONS AS TO USE OF
                 HANOVER DIRECT, INC. SUBSCRIPTION CERTIFICATES
                                 ---------------

               CONSULT THE INFORMATION AGENT, YOUR BANK OR BROKER
                               AS TO ANY QUESTIONS



           The following instructions relate to a rights offering (the "Rights
Offering") by Hanover Direct, Inc., a Delaware corporation (the "Company"), to
the holders 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
per share (the "Series B Preferred Stock"), as described in the Company's
Prospectus dated _____ ___, 1997 (the "Prospectus"). Holders of record of Common
Stock and the Series B Preferred Stock at the close of business on _________,
_____ ___, 1997 (the "Record Date") are receiving .3824 transferable
subscription rights (the "Rights") for each share of Common Stock held by them
on the Record Date while the holders of Series B Preferred Stock are receiving
 .5742 transferable Rights for each share of Series A Preferred Stock held by
them on the Record Date. An aggregate of approximately 55,555,556 Rights
exercisable to purchase an aggregate of approximately 55,555,556 shares of
Common Stock (the "Underlying Shares") is being distributed in connection with
the Rights Offering. Each Right is exercisable, upon payment of $.90 in cash
(the "Subscription Price"), to purchase one share of Common Stock (the "Basic
Subscription Privilege"). In addition, subject to the allocation described
below, Record Date stockholders who fully exercise all Rights distributed to
them will also be entitled to subscribe at the Subscription Price for an
unlimited number of Additional Shares of Common Stock (the "Oversubscription
Privilege"). Transferees of Rights may not exercise the Oversubscription
Privilege with respect to such Rights. Underlying Shares will be available for
purchase pursuant to the Oversubscription Privilege only to the extent that all
the Underlying Shares are not subscribed for through the exercise of the Basic
Subscription Privilege by the Expiration Date. If the Underlying Shares so
available ("the Excess Shares") are not sufficient to satisfy all subscriptions
pursuant to the Oversubscription Privilege, the available Underlying Shares will
be allocated pro rata (subject to elimination of fractional shares) among the
holders of Rights who exercise the Oversubscription Privilege; provided,
however, that if such pro rata allocation results in any holder being allocated
a greater number of Excess Shares than such holder subscribed for pursuant to
the exercise of such holder's Oversubscription Privilege, then such holder will
be allocated only such number of shares of Excess Shares as such holder
subscribed for and the remaining Excess Shares will be allocated among all other
holders exercising Oversubscription Privileges. See "THE RIGHTS OFFERING -
SUBSCRIPTION PRIVILEGES" in the Prospectus.

           No fractional Rights or cash in lieu thereof will be issued or paid.
The number of Rights distributed by the Company has been rounded up to the
nearest whole number in order to avoid issuing fractional Rights.

           The Rights will expire at 5:00 p.m., New York City time, on [day],
______ ___, 1997 (the "Expiration Date"). It is anticipated that the Rights will
be traded on the American Stock Exchange and in the over-the-counter market.

           The number of Rights to which you are entitled is printed on the face
of your subscription certificate. You should indicate your wishes with regard to
the exercise or sale of your Rights by completing the appropriate form or forms
on your subscription certificate and returning the certificate to the
Subscription Agent in the envelope provided.

           PAYMENT OF THE SUBSCRIPTION PRICE AND YOUR SUBSCRIPTION CERTIFICATE
MUST BE RECEIVED BY THE SUBSCRIPTION AGENT, OR GUARANTEED DELIVERY REQUIREMENTS
WITH RESPECT TO YOUR SUBSCRIPTION CERTIFICATE MUST BE COMPLIED WITH, AND PAYMENT
OF THE SUBSCRIPTION PRICE, INCLUDING FINAL CLEARANCE OF ANY CHECKS,
<PAGE>   2
MUST BE RECEIVED BY THE SUBSCRIPTION AGENT, ON OR BEFORE 5:00 P.M., NEW YORK
CITY TIME, ON THE EXPIRATION DATE, YOU MAY NOT REVOKE ANY EXERCISE OF A RIGHT.

1.         SUBSCRIPTION PRIVILEGES.

           To exercise Rights, complete Form 1 and send your properly completed
and executed subscription certificate, 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, to the
Subscription Agent. Payment of the Subscription Price must be made in U.S.
dollars for the full number of Underlying Shares being subscribed for (a) by
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) by wire transfer of funds to the account maintained by the
Subscription Agent for such purpose at the [Chase Manhattan Bank; Account No.
323053807; ABA No. 02100021]. The Subscription Price will be deemed to have been
received by the Subscription Agent only upon (i) the clearance of any
uncertified check, (ii) the 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) the receipt of good funds in the Subscription Agent's
account designated above. IF PAYING BY UNCERTIFIED PERSONAL CHECK, PLEASE NOTE
THAT THE FUNDS PAID THEREBY MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR.
ACCORDINGLY, HOLDERS 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. You may also transfer your subscription
certificate to your bank or broker in accordance with the procedures specified
in paragraph 3(a) below, make arrangements for the delivery of funds on your
behalf and request such bank or broker to exercise the Subscription Certificate
on your behalf. Alternatively, you may cause a written guarantee substantially
in the form of Exhibit A to these instructions (the "Notice of Guaranteed
Delivery") from a member firm of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc., or from a
commercial bank or trust company having an office or correspondent in the United
States (each of the foregoing being an "Eligible Institution") to be received by
the Subscription Agent at or prior to the Expiration Date together with payment
in full of the applicable Subscription Price. Such Notice of Guaranteed Delivery
must state your name, the number of Rights represented by your subscription
certificate and the number of Rights being exercised pursuant to the Basic
Subscription Privilege and the number of Underlying Shares, if any, being
subscribed for pursuant to the Oversubscription Privilege, and will guarantee
the delivery to the Subscription Agent of your properly completed and executed
subscription certificates within three American Stock Exchange trading days
following the date of the Notice of Guaranteed Delivery. If this procedure is
followed, your subscription certificates must be received by the Subscription
Agent within three American Stock Exchange trading days of the Notice of
Guaranteed Delivery. Additional copies of the Notice of Guaranteed Delivery may
be obtained upon request from the Information Agent at the address, or by
calling the telephone number, indicated below.

           Banks, brokers and other nominee holders of Rights who exercise
Rights 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 shares
that are being subscribed for pursuant to the Oversubscription Privilege, by
each beneficial owner of rights on whole behalf such nominee holder is acting.

           If more Underlying Shares are subscribed for pursuant to the
Oversubscription Privilege than are available for sale, Underlying Shares will
be allocated, as described above, among persons exercising the Oversubscription
Privilege in proportion to the number of shares requested pursuant to the
Oversubscription Privilege.

           In the event that the conditions precedent to the obligation of
Richemont S.A., a Luxembourg public company ("Richemont"), 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


                                       -2-
<PAGE>   3
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, telephone and telecopier numbers of the Subscription
Agent are as follows:



         By Mail:                 By Facsimile                By Hand:
  American Stock Transfer         Transmission:        American Stock Transfer
      & Trust Company            (718) 234-5001            & 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 of
                     Facsimile and For General Information:
                                 (212) 936-5100
                                 (718) 921-8200



           The address and telephone number of Morrow & Co., Inc., the
Information Agent, are as follows:


                                900 Third Avenue
                                   20th Floor
                            New York, New York 10022
                                 (212) 754-8000
                            TOLL-FREE 1-800-566-9061
                        Banks and brokerage firms please
                              call 1-800-662-5200


           If you exercise less than all of the Rights evidenced by your
subscription certificate by so indicating in Form 1 of your subscription
certificate, the Subscription Agent either (i) will issue to you a new
subscription certificate evidencing the unexercised Rights, (ii) if you so
indicate on Form 2 of your subscription certificate, will transfer the
unexercised Rights in accordance with your instructions or (iii) if you so
indicate in Form 3 of your subscription certificate, will endeavor to sell such
unexercised Rights for you. HOWEVER, IF YOU CHOOSE TO HAVE A NEW SUBSCRIPTION
CERTIFICATE SENT TO YOU OR TO A TRANSFEREE, YOU OR SUCH TRANSFEREE MAY NOT
RECEIVE ANY SUCH NEW SUBSCRIPTION CERTIFICATE IN SUFFICIENT TIME TO PERMIT SALE
OR EXERCISE OF THE RIGHTS EVIDENCED THEREBY. IF YOU HAVE NOT INDICATED THE
NUMBER OF RIGHTS BEING EXERCISED OR IF YOU HAVE NOT FORWARDED 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 BASIC SUBSCRIPTION
PRIVILEGE WITH RESPECT TO THE MAXIMUM NUMBER OF WHOLE RIGHTS WHICH MAY BE
EXERCISED FOR THE SUBSCRIPTION PRICE PAYMENT DELIVERED BY YOU, AND TO THE EXTENT
THAT THE SUBSCRIPTION PRICE PAYMENT DELIVERED BY YOU EXCEEDS THE PRODUCT OF THE
SUBSCRIPTION PRICE MULTIPLIED BY THE NUMBER OF RIGHTS EVIDENCED BY THE
SUBSCRIPTION CERTIFICATES DELIVERED BY YOU (SUCH EXCESS BEING THE "SUBSCRIPTION
EXCESS"), YOU WILL BE DEEMED TO HAVE EXERCISED YOUR OVERSUBSCRIPTION PRIVILEGE
TO PURCHASE, TO THE EXTENT AVAILABLE, THAT NUMBER OF WHOLE SHARES OF CLASS A
COMMON STOCK EQUAL TO THE QUOTIENT OBTAINED BY DIVIDING THE SUBSCRIPTION EXCESS
BY THE SUBSCRIPTION PRICE.

2.         DELIVERY OF STOCK CERTIFICATE, ETC.

           The following deliveries and payments will be made to the address
shown on the face of your subscription certificate unless you provide
instructions to the contrary on Form 4.

           (a) Basic Subscription Privilege. As soon as practicable after the
Expiration Date, the Subscription Agent shall mail to each exercising Rights
holder certificates representing shares of Common Stock purchased pursuant to
the Basic Subscription Privilege.


                                       -3-
<PAGE>   4
           (b) Oversubscription Privilege. As soon as practicable after the
Expiration Date, the Subscription Agent will mail to each Rights holder who
validly exercised the Oversubscription Privilege the number of shares of Common
Stock allocated to such Rights holder pursuant to the Oversubscription
Privilege. See "The Rights Offering -- Subscription Privileges --
Oversubscription Privilege" in the Prospectus.

           (c) Cash Payments. As soon as practicable after the Expiration Date,
the Subscription Agent will mail to each Rights holder who exercises the
Oversubscription Privilege any excess funds received in payment of the
Subscription Price for Underlying Shares that are subscribed for by such Rights
holder but not allocated to such Rights holder pursuant to the Oversubscription
Privilege.

           Promptly following the Expiration Date, the Subscription Agent will
mail a check for any Rights sold through the Subscription Agent to the holder of
such Rights, less applicable commissions, taxes and other charges.

3.         TO SELL OR TRANSFER RIGHTS.

           (a) Sale of Rights through a Bank or Broker. To sell all Rights
evidenced by a subscription certificate through your bank or broker, so indicate
on Form 2 and deliver your properly completed and executed subscription
certificate to your bank or broker. If Form 2 is completed without designating a
transferee, the Subscription Agent may thereafter treat the bearer of the
subscription certificate as the absolute owner of all of the Rights evidenced by
such subscription certificate for all purposes, and the Subscription Agent shall
not be affected by any notice to the contrary. Because your bank or broker
cannot issue subscription certificates, if you wish to sell less than all of the
Rights evidenced by a subscription certificate, either you or your bank or
broker must instruct the Subscription Agent as to the action to be taken with
respect to the Rights not sold, or you or your bank or broker must first have
your subscription certificate divided into subscription certificates of
appropriate denominations by following the instructions in paragraph 4 of these
instructions. The subscription certificates evidencing the number of Rights you
intend to sell can then be transferred by your bank or broker in accordance with
the instructions in this paragraph 3(a).

           (b) Transfer of Rights to a Designated Transferee. To transfer all of
your Rights to a transferee other than a bank or broker, you must complete Form
2 in its entirety, execute the subscription certificate and have your signature
guaranteed by an Eligible Institution. A subscription certificate that has been
properly transferred in its entirety may be exercised by a new holder without
having a new subscription certificate issued. In order to exercise, or otherwise
take action with respect to, such a transferred subscription certificate, the
new holder should deliver the subscription certificate, together with payment of
the applicable Subscription Price and complete separate instructions signed by
the new holder, to the Subscription Agent in ample time to permit the
Subscription Agent to take the desired action. Because only the Subscription
Agent can issue subscription certificates, if you wish to transfer less than all
of the Rights evidenced by your subscription certificate to a designated
transferee, you must instruct the Subscription Agent as to the action to be
taken with respect to the Rights not sold or transferred, or you must divide
your subscription certificate into subscription certificates of appropriate
smaller denominations by following the instructions in paragraph 4 below. The
subscription certificate evidencing the number of Rights you intend to transfer
can then be transferred by following the instructions in this paragraph 3(b).

           (c) Sale of Rights through Subscription Agent. To sell some or all of
your Rights through the Subscription Agent, you must check the box in Form 3 and
deliver the subscription certificate to the Subscription Agent. Your
subscription certificate should be delivered to the Subscription Agent in ample
time for it to be sold and exercised, but in no event later than 11:00 a.m., New
York City time, on [day], ________, 1997. The Subscription Agent's obligation to
execute orders is subject to its ability to find buyers. If you wish to sell
less than all of your Rights, you or your bank or broker must instruct the
Subscription Agent as to the action to be taken with respect to the Rights not
sold. Promptly following the Expiration Date, the Subscription Agent will send
you a check for the net proceeds of such sale as described in the Prospectus. If
you wish to sell Rights through the Subscription Agent, you should also complete
the Substitute Form W-9 referred to in paragraph 8 below.


                                       -4-
<PAGE>   5
4.         TO HAVE A SUBSCRIPTION CERTIFICATE DIVIDED INTO SMALLER
           DENOMINATIONS.

           To have a subscription certificate divided into smaller
denominations, send your subscription certificate, together with complete
separate instructions (including specification of the denominations into which
you wish your Rights to be divided) signed by you, to the Subscription Agent,
allowing sufficient time for new subscription certificates to be issued and
returned so that they can be used prior to the Expiration Date. Alternatively,
you may ask a bank or broker to effect such actions on your behalf. Your
signature must be guaranteed by an Eligible Institution if any of the new
subscription certificates is to be issued in a name other than that in which the
old subscription certificate was issued. Subscription certificates may not be
divided into fractional Rights, and any instruction to do so will be rejected.
AS A RESULT OF DELAYS IN THE MAIL, THE TIME OF THE TRANSMITTAL, THE NECESSARY
PROCESSING TIME AND OTHER FACTORS, YOU OR YOUR TRANSFEREE MAY NOT RECEIVE SUCH
NEW SUBSCRIPTION CERTIFICATES IN TIME TO ENABLE THE RIGHTS HOLDER TO COMPLETE A
SALE OR EXERCISE BY THE EXPIRATION DATE. NEITHER THE COMPANY NOR THE
SUBSCRIPTION AGENT WILL BE LIABLE TO EITHER A TRANSFEROR OR TRANSFEREE FOR ANY
SUCH DELAYS.

5.         EXECUTION.

           (a) Execution by Registered Holder. The signature on the subscription
certificate must correspond with the name of the registered holder exactly as it
appears on the face of the subscription certificate without any alteration or
change whatsoever. Persons who sign the subscription certificate in a
representative or other fiduciary capacity must indicate their capacity when
signing and, unless waived by the Subscription Agent in its sole and absolute
discretion, must present to the Subscription Agent satisfactory evidence of
their authority to so act.

           (b) Execution by Person Other than Registered Holder. If the
subscription certificate is executed by a person other than the holder named on
the face of the subscription certificate, proper evidence of authority of the
person executing the subscription certificate must accompany the same unless,
for good cause, the Subscription Agent dispenses with proof of authority.

           (c) Signature Guarantees. Your signature must be guaranteed by an
Eligible Institution if you wish to transfer your Rights, as specified in
paragraph 3(b) above, to a transferee other than a bank or broker, if you wish a
new subscription certificate or certificates to be issued in a name other than
that in which the old subscription certificate was issued, as specified in
paragraph 4 above, or if you specify special payment or delivery instructions
pursuant to Form 4.

6.         METHOD OF DELIVERY.

           The method of delivery of subscription certificates and payment of
the Exercise Price to the Subscription Agent will be at the election and risk of
the Rights holder, but, if sent by mail, it is recommended that they 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 the clearance of any checks sent in payment of the Exercise Price
prior to 5:00 p.m., New York City time, on the Expiration Date.

7.         SPECIAL PROVISIONS RELATING TO THE DELIVERY OF RIGHTS THROUGH THE
           DEPOSITORY TRUST COMPANY.

           In the case of holders of Rights that are held of record through The
Depository Trust Company ("DTC"), exercises of the Basic Subscription Privilege
(but not the Oversubscription Privilege) may be effected by instructing DTC to
transfer Rights from the DTC account of such holder to the DTC account of the
Subscription Agent, together with payment of the Subscription Price for each
Underlying Share subscribed for pursuant to the Basic Subscription Privilege.
The Oversubscription Privilege in respect of DTC Exercised Rights may not be
exercised through DTC. The holder of a DTC Exercised Right may exercise the
Oversubscription Privilege in respect of such DTC 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,
in the form available from the


                                       -5-
<PAGE>   6
Subscription Agent, together with payment of the appropriate Subscription Price
for the number of Underlying Shares for which the Oversubscription Privilege is
to be exercised.

8.         SUBSTITUTE FORMS W-8 AND W-9.

           Each Rights holder who elects either to exercise Rights or to have
the Subscription Agent endeavor to sell such holder's Rights should provide the
Subscription Agent with either a Certificate of Foreign Status on Substitute
Form W-8 or a correct Taxpayer Identification Number ("TIN") on Substitute Form
W-9, both of which forms are included on the subscription certificate.
Additional copies of Substitute Forms W-8 and W-9 may be obtained upon request
from the Subscription Agent at the address, or by calling the telephone number,
indicated above. Failure to provide the information on these forms may subject
such holder to a $50 penalty and to 31% federal income tax withholding with
respect to (i) dividends that may be paid by the Company on shares of Common
Stock purchased upon the exercise of Rights (for those holders exercising
Rights) or (ii) funds to be remitted to Rights holders in respect of Rights sold
by the Subscription Agent (for those holders electing to have the Subscription
Agent sell their Rights).


                                       -6-
<PAGE>   7
                                                                       EXHIBIT A

                          NOTICE OF GUARANTEED DELIVERY

                                       FOR

                            SUBSCRIPTION CERTIFICATES

                                    ISSUED BY

                              HANOVER DIRECT, INC.


           This form, or one substantially equivalent hereto, must be used to
exercise Rights pursuant to the Rights Offering described in the Prospectus
dated ________, 1997 (the "Prospectus") of Hanover Direct, Inc., a Delaware
corporation (the "Company"), if a holder of Rights cannot deliver the
subscription certificates(s) evidencing the Rights (the "Subscription
Certificate(s)") to the Subscription Agent listed below (the "Subscription
Agent") at or prior to 5:00 p.m., New York City time, on [day], ________, 1997
(the "Expiration Date"). Such form must be delivered by hand or sent by
facsimile transmission or mail to the Subscription Agent, and must be received
by the Subscription Agent on or prior to the Expiration Date. See "THE RIGHTS
OFFERING - EXERCISE OF RIGHTS" in the Prospectus. Payment of the Subscription
Price of $.90 per share for each share of the Company's Common Stock subscribed
for upon exercise of such Rights must be received by the Subscription Agent in
the manner specified in the Prospectus at or prior to 5:00 p.m., New York City
time, on the Expiration Date even if the Subscription Certificate evidencing
such Rights is being delivered pursuant to the procedures for guaranteed 
delivery thereof.

                           The Subscription Agent is:

                     American Stock Transfer & Trust Company

         By Mail:                By Facsimile                  By Hand:
  American Stock Transfer        Transmission:          American Stock Transfer
      & Trust Company           (718) 234-5001              & 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 of
                     Facsimile and For General Information:
                                 (212) 936-5100
                                 (718) 921-8200


           DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.


                                       A-1
<PAGE>   8
                                                            HANOVER DIRECT, INC.

Gentlemen:

           The undersigned hereby represents that he or she is the holder of
Subscription Certificate(s) representing Rights and that such Subscription
Certificate(s) cannot be delivered to the Subscription Agent at or before 5:00
p.m., New York City time, on the Expiration Date. Upon the terms and subject to
the conditions set forth in the Prospectus, receipt of which is hereby
acknowledged, the undersigned hereby elects to exercise the Subscription
Privilege to subscribe for one share of Common Stock per Right with respect to
each of Rights represented by such Subscription Price of $.90 per share for each
share of Common Stock subscribed for pursuant to the Subscription Privilege must
be received by the Subscription agent at or before 5:00 p.m., New York City
time, on the Expiration Date and represents that such payment, in the aggregate
amount of $   , either (check appropriate box):

           [ ] is delivered herewith or [ ] was delivered separately in the
manner set forth below (check appropriate box and complete information relating
thereto):

           [ ] wire transfer of funds

           - name of transferor institution.....................................

           - date of transfer.................confirmation number (if available)

           [ ]       uncertified check (Payment by uncertified check will not be
                     deemed to have been received by the Subscription Agent
                     until such check has cleared. Holders paying by such means
                     are urged to make payment sufficiently in advance of the
                     Expiration Date to ensure that such payment clears by such
                     date.)

           [ ]       certified check

           [ ]       bank draft (cashier's check)

           - name of maker......................................................

           - date and number of check, draft or money order.....................
                                                               (date)   (number)

           - bank on which check is drawn or issuer of money order..............

Signature(s). . . . . . . . .        Address . . . . . . . . . . . . . . . . .
 . . . . . . . . . . . . . . .        . . . . . . . . . . . . . . . . . . . . .
Name(s). . . . . . . . . . . .       . . . . . . . . . . . . . . . . . . . . .

 . . . . . . . . . . . . . . .        Tel. No(s).(...). . . . . . . . . . . . .
    Please Type or Print

Subscription Certificate No(s). (if available)..................................


                                       A-2
<PAGE>   9
                              GUARANTEE OF DELIVERY
        (NOT TO BE USED FOR SUBSCRIPTION CERTIFICATE SIGNATURE GUARANTEE)

           The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the United
States, guarantees that the undersigned will deliver to the Subscription Agent
the certificates representing the Rights being exercised hereby, with any
required signature guarantees and any other required documents, all within three
American Stock Exchange, Inc. trading days after the date hereof.

 . . . . . . . . . . . . . . . .     Dated: . . . . . . . . . . . . . . . , 1997
 . . . . . . . . . . . . . . . .     . . . . . . . . . . . . . . . . . . . . . .
 . . . . . . . . . . . . . . . .     . . . . . . . . . . . . . . . . . . . . . .
 . . . . . . . . . . . . . . . .                      (Name of Firm)
            Address
 . . . . . . . . . . . . . . . .     . . . . . . . . . . . . . . . . . . . . . .
(Area Code and Telephone Number)                  (Authorized Signature)

           The institution which completes this form must communicate the
guarantee to the Subscription Agent and must deliver the Subscription
Certificate(s) to the Subscription Agent within the time period shown herein.
Failure to do so could result in a financial loss to such institution.


                                       A-3
<PAGE>   10
                                                                       EXHIBIT B

                            IMPORTANT TAX INFORMATION


           Under the federal income tax law, (i) dividend payments that may be
made by the Company on shares of Common Stock issued upon the exercise of
Rights, and (ii) payments that may be remitted by the Subscription Agent to
Rights holders in respect of Rights sold on such holders' behalf by the
Subscription Agent, may be subject to backup withholding, and each rights holder
who either exercises rights or requests the Subscription agent to sell Rights
should provide the Subscription Agent (as the Company's agent, in respect of
exercised Rights, and as payer with respect to Rights sold by the Subscription
Agent) with either a Certificate of Foreign Status on substitute Form W-8 or
such Rights holder's correct taxpayer identification number on Substitute Form
W-9, both of which forms are included on the subscription certificate. If such
Rights holder is an individual, the taxpayer identification number is his social
security number. If the Subscription Agent, which is also the transfer agent for
the Company, is not provided with either a Certificate of Foreign Status or the
correct taxpayer identification number in connection with such payments, the
Rights holder may be subject to a $50 penalty imposed by the Internal Revenue
Service.

           Exempt Rights holders (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. In general, in order for a foreign individual to qualify
as an exempt recipient, that Rights holder must submit a statement, signed under
the penalties of perjury, attesting to that individual's exempt status. Such
statements can be obtained from the Subscription Agent. See the enclosed
Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9 for additional instructions.

           If backup withholding applies, the Company or the Subscription Agent,
as the case may be, will be required to withhold 31 percent of any such payments
made to the Rights holder. Backup withholding is not an additional tax. Rather,
the tax liability of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.

PURPOSE OF SUBSTITUTE FORMS W-8 AND W-9

           To prevent backup withholding, the Rights holder is required either
to provide the Subscription Agent with a Certificate of Foreign Status by
completing the Substitute Form W-8 which is included on the subscription
certificate or to notify the Subscription Agent of his correct taxpayer
identification number by completing the Substitute Form W-9 which is included on
the subscription certificate certifying that the taxpayer identification number
provided on Substitute Form W-9 is correct (or that such Rights holder is
awaiting a taxpayer identification number).

WHAT NUMBER TO GIVE THE SUBSCRIPTION AGENT

           The Rights holder is required to give the Subscription Agent the
social security number or employer identification number of the record owner of
the Rights. If the Rights are in more than one name or are not in the name of
the actual owner, consult the enclosed Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9 for additional guidelines on which
number to report.


                                       B-1
<PAGE>   11
             GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
                          NUMBER ON SUBSTITUTE FORM W-9

           GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE
THE PAYER. Social Security numbers have nine digits separated by two hyphens:
i.e. 000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e. 00-0000000. The table below will help determine the number
to give the payer.

<TABLE>
<CAPTION>
======================================================================================================================
                                                                                  GIVE THE NAME AND
                                                                                   SOCIAL SECURITY
              FOR THIS TYPE OF ACCOUNT:                                                NUMBER OF-
- ----------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>
1.  Individual                                                  The individual
- ----------------------------------------------------------------------------------------------------------------------
2.  Two or more individuals (joint account)                     The actual owner of the account or, if combined
                                                                funds, the first individual on the account(1)
- ----------------------------------------------------------------------------------------------------------------------
3.  Custodian account of a minor (Uniform Gifts to              The minor(2)
    Minors Act)
- ----------------------------------------------------------------------------------------------------------------------
4.  a.        The usual revocable savings trust (grantor is     The grantor-trustee(1)
              also trustee)
- ----------------------------------------------------------------------------------------------------------------------
    b.        The so-called trust account that is not a         The actual owner(1)
              legal or valid trust under state law
- ----------------------------------------------------------------------------------------------------------------------
5.  Sole proprietorship                                         The owner(3)
- ----------------------------------------------------------------------------------------------------------------------
                                                                                  GIVE THE NAME AND
                                                                               EMPLOYER IDENTIFICATION
              FOR THIS TYPE OF ACCOUNT:                                                NUMBER OF-
- ----------------------------------------------------------------------------------------------------------------------
6.  A valid trust, estate or pension trust                      Legal entity (do not furnish the identification number
                                                                of the personal representative or trustee unless the
                                                                legal entity itself is not designated in the account
                                                                title)(4)
- ----------------------------------------------------------------------------------------------------------------------
7.  Corporation                                                 The corporation
- ----------------------------------------------------------------------------------------------------------------------
8.  Association, club, religious, charitable, educational or    The organization
    other tax-exempt organization
- ----------------------------------------------------------------------------------------------------------------------
9.  Partnership                                                 The partnership
- ----------------------------------------------------------------------------------------------------------------------
10. A broker or registered nominee                              The broker of nominee
- ----------------------------------------------------------------------------------------------------------------------
11. Account with the Department of Agriculture in the           The public entity
    name of a public entity (such as a State or local
    government, school district, or prison) that receives
    agricultural program payments
======================================================================================================================
</TABLE>

- --------

(1) List first and circle the name of the person whose number you furnish.

(2) Circle the minor's name and furnish the minor's social security number.

(3) Show the name of the owner. You may also enter your business name.

(4) List first and circle the name of the legal trust, estate or pension trust.

Note: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.


                                       B-2
<PAGE>   12
Obtaining a Number

           If you don't have a taxpayer identification number or you don't know
your number, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local office
of the Social Security Administration or the Internal Revenue Service and apply
for a number.

PAYEES EXEMPT FROM BACKUP WITHHOLDING

           Payees specifically exempted from backup withholding on ALL payments
include the following:

           -         A corporation.

           -         A financial institution.

           -         An organization exempt from tax under section 501(a), or an
                     individual retirement plan, or a custodial account under
                     section 403(b)(7).

           -         The United States or any agency or instrumentality thereof.

           -         A State, the District of Columbia, a possession of the
                     United States, or any subdivision or instrumentality
                     thereof.

           -         A foreign government, a political subdivision of a foreign
                     government, or any agency or instrumentality thereof.

           -         An international organization of any agency or
                     instrumentality thereof.

           -         A dealer in securities or commodities registered in the
                     United States or a possession of the United States.

           -         A real estate investment trust.

           -         A common trust fund operated by a bank under section
                     584(a).

           -         An exempt charitable remainder trust, or a non-exempt trust
                     described in section 4947(a)(1).

           -         An entity registered at all times under the Investment
                     Company Act of 1940.

           -         A foreign central bank of issue.

           Payments of dividends and patronage dividends not generally subject
           to backup withholding include the following:

           -         Payments to nonresident aliens subject to withholding under
                     section 1441.

           -         Payments to partnerships not engaged in a trade or business
                     in the United States and which have at least one
                     nonresident partner.

           -         Payments of patronage dividends where the amount received
                     is not paid in money.

           -         Payments made by certain foreign organizations.

           Payments of interest not generally subject to backup withholding
           include the following:

           -         Payments of interest on obligations issued by individuals.
                     Note: You may be subject to backup withholding if this
                     interest is $600 or more and is paid in the course of the
                     payer's trade or business and you have not provided your
                     correct taxpayer identification number to the payer.

           -         Payments of tax-exempt interest (including exempt-interest
                     dividends under section 852).

           -         Payments described in section 6049(b)(5) to nonresident
                     aliens.

           -         Payments on tax-free covenant bonds under section 1451.

           -         Payments made by certain foreign organizations.

           -         Mortgage interest paid to you.


                                       B-3
<PAGE>   13
           Exempt payees described above should file Form W-9 to avoid possible
erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR
TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, SIGN AND
DATE THE FORM AND RETURN IT TO THE PAYER.

           Payments that are not subject to information reporting are also not
subject to backup withholding. For details, see the regulations under sections
6041, 6041A(a), 6042, 6044, 6045, 6049, 6050A and 6050N.

           PRIVACY ACT NOTICE. Section 6109 requires most recipients of
dividends, interest, or other payments to give taxpayer identification numbers
to payers who must report the payments to the IRS. The IRS uses the numbers for
identification purposes and to help verify the accuracy of your tax return.
Payers must generally withhold 31% of taxable interest, dividends, and certain
other payments to a payee who does not furnish a taxpayer identification number
to a payer. Certain penalties may also apply.

PENALTIES

           (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If
you fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.

           (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.
If you make a false statement with no reasonable basis which results in no
imposition of backup withholding, you are subject to a penalty of $500.

           (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.

             FOR ADDITIONAL INFORMATION, CONTACT YOUR TAX CONSULTANT
                        OR THE INTERNAL REVENUE SERVICE.


                                       B-4
<PAGE>   14
                 GUIDELINES FOR CERTIFICATION OF FOREIGN STATUS
                             ON SUBSTITUTE FORM W-8

           Use Form W-8 to tell a payer, middleman, broker or barter exchange
that you are a nonresident alien individual, foreign entity, or exempt foreign
person not subject to certain U.S. information return reporting or backup
withholding rules. Caution: Form W-8 does not exempt the payee from the 30% (or
lower treaty) nonresident withholding rates which may apply.

NONRESIDENT ALIEN INDIVIDUAL: For income tax purposes, "nonresident alien
individual" means an individual who is neither a U.S. citizen nor resident.
Generally, an alien is considered to be a U.S. resident if:

           -         The individual was a lawful permanent resident of the
                     United States at any time during the calendar year, that
                     is, the alien held an immigrant visa (a "green card"), or

           -         The individual was physically present in the United States
                     on:

                     (1) at least 31 days during the calendar year, and

                     (2) 183 days or more during the current year and the 2
                     preceding calendar years (counting all the days of physical
                     presence in the current year, one-third the number of days
                     of presence in the first preceding year, and only one-sixth
                     of the number of days in the second preceding year).

EXEMPT FOREIGN PERSON: For purposes of Form W-8, you are an "exempt foreign
person" for a calendar year in which:

           -         You are a nonresident alien individual or a foreign
                     corporation, partnership, estate or trust,

           -         You are an individual who has not been, and plans not to
                     be, present in the United States for a total of 183 days or
                     more during the calendar year, and

           -         You are neither engaged, nor plan to be engaged during the
                     year, in a U.S. trade or business that has effectively
                     connected gains from transactions with a broker or barter
                     exchange.

PERMANENT ADDRESS: Enter your complete address in the country where you reside
permanently for income tax purposes:


<TABLE>
<S>                                                           <C>
           If you are:                                        Show the address of:

           An individual                                      Your permanent residence

           A partnership or corporation                       Principal office

           An estate or trust                                 Permanent resident or principal office of any fiduciary
</TABLE>
           Also show your current mailing address if it differs from your
             permanent address.

NOTICE OF CHANGE IN STATUS: If you become a U.S. citizen or resident after you
have filed Form W-8 or you cease to be an exempt foreign person, you must notify
the payer in writing within 30 days of your change of status.

FALSE CERTIFICATE: If you file a false certificate when you are not entitled to
the exemption from withholding or reporting, you may be subject to fines and/or
imprisonment under U.S. perjury laws.

             FOR ADDITIONAL INFORMATION, CONTACT YOUR TAX CONSULTANT
                         OR THE INTERNAL REVENUE SERVICE


                                       B-5
<PAGE>   15
                               HANOVER DIRECT INC.

                                 RIGHTS OFFERING


                 DTC PARTICIPANT OVERSUBSCRIPTION EXERCISE FORM

           THIS FORM IS TO BE USED ONLY BY DEPOSITORY TRUST COMPANY PARTICIPANTS
TO EXERCISE THE OVERSUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH RESPECT TO
WHICH THE BASIC SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED THROUGH THE
FACILITIES OF THE DEPOSITORY TRUST COMPANY, ALL OTHER EXERCISES OF
OVERSUBSCRIPTION PRIVILEGES MUST BE EFFECTED BY THE DELIVERY OF THE SUBSCRIPTION
FORMS.
                                  ------------

           THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE
COMPANY'S PROSPECTUS DATED _______________, 1997 (THE "PROSPECTUS") AND ARE
INCORPORATED HEREIN BY REFERENCE, COPIES OF THE PROSPECTUS ARE AVAILABLE UPON
REQUEST FROM THE COMPANY, THE INFORMATION AGENT AND THE SUBSCRIPTION AGENT.

                                  ------------

           VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL
BY 5:00 P.M., NEW YORK CITY TIME, ON ________, 1997 (THE "EXPIRATION DATE").

                                  ------------

           1. The undersigned hereby certifies to the Company and the
Subscription Agent that it is a participant in The Depository Trust Company
("DTC") and that it has either (i) exercised the Basic Subscription Privilege in
respect of Rights and delivered such exercised Rights to the Subscription Agent
by means of transfer to the DTC account of the Subscription Agent or (ii)
delivered to the Subscription Agent a Notice of Guaranteed Delivery in respect
of the exercise of the Basic Subscription Privilege and will deliver the
Subscription Certificate(s) called for in such Notice of Guaranteed Delivery to
the Subscription Agent by means of transfer to such DTC account of the
Subscription Delivery to the Subscription Agent by means of transfer to such DTC
account of the Subscription Agent. The undersigned hereby certifies to the
Company and the Subscription Agent that the beneficial holders owned _______
Shares of Common Stock on the Record Date.

           2. The undersigned hereby exercises the Oversubscription Privilege to
purchase, to the extent available, shares of Common Stock and certifies to the
Company and the Subscription Agent that such Oversubscription Privilege is being
exercised for the account or accounts of persons (which may include the
undersigned) on whose behalf the Basic Subscription Privilege has been exercised
in its entirety.

           3. The undersigned understands that payment of the Subscription Price
of $.90 per share for each share of Common Stock subscribed for pursuant to the
Oversubscription Privilege must be received by the Subscription Agent at or
before 5:00 p.m. New York City time on the Expiration Date and represents that
such payment, in the aggregate amount of $_________, is or was delivered in the
manner set forth below (check appropriate box and complete relating thereto):

           -         uncertified check

           -         certified check

           -         bank draft

           4. The undersigned understands that in the event it is not allocated
the full amount of shares oversubscribed for above, any excess payment to be
refunded by the Company will be mailed to it by the Subscription Agent as
provided in the Prospectus.


                                      B-6
<PAGE>   16
                     ______________________________________
                     Basic Subscription Confirmation Number


                     ______________________________________
                                 DTC Participant


                     ______________________________________
                             Name of DTC Participant


                     ______________________________________

  By:
        Name:
        Title:

Contact Name:________________________



Phone Number:________________________



Dated:_______________________________



                                       B-7



<PAGE>   1
                                                                    Exhibit 99.3


                          SUBSCRIPTION AGENCY AGREEMENT

                  SUBSCRIPTION AGENCY AGREEMENT (this "Agreement"), dated as of
______   , 1997, by and between Hanover Direct, Inc., a Delaware corporation
(the "Company"), and American Stock Transfer and Trust Company, as Subscription
Agent (the "Subscription Agent").

                  WHEREAS, the Company has caused a Registration Statement on
Form S-3 (Registration No. 333-      ) under the Securities Act of 1933, as
amended (the "Act"), to be filed with the Securities and Exchange Commission
(the "Commission") relating to a proposed distribution by the Company of
transferable subscription rights (the "Rights") and sale of newly issued shares
of the Company's Common Stock, par value $.66 2/3 per share (the "Common
Stock"), upon the exercise of such Rights (such Registration Statement, in the
form in which it first becomes effective under the Act, and as it may thereafter
be amended from time to time, is referred to herein as the "Registration
Statement"; the distribution of the Rights and the sale of shares of Common
Stock upon the exercise thereof as contemplated by the Registration Statement is
referred to herein as the "Rights Offering");

                  WHEREAS, the Rights will be distributed to holders of record
of shares of Common Stock, the Series B Convertible Additional Preferred Stock,
par value $.01 and stated value $10.00 per share (the "Series B Preferred
Stock"), as of the close of business on           ,          , 1997 (the "Record
Date") at a rate of .3824 Rights for each share of Common Stock and .5742 Rights
for each share of Series B Preferred Stock held on the Record Date;

                  WHEREAS, the Company has authorized the issuance of an
aggregate number of authorized and unissued or treasury shares of Common Stock
(the "Underlying Shares") equal to the aggregate number of rights to be
distributed pursuant to the Rights Offering;

                  WHEREAS, Rights holders will be entitled to subscribe to
purchase at a per share price of $.90 (the "Subscription Price") one Underlying
Share for each Right held (the "Basic Subscription Privilege");

                  WHEREAS, Rights holders will also be entitled to subscribe to
purchase any underlying shares that are not subscribed for through the Basic
Subscription Privilege, subject to proration by the Company, if necessary (the
"Oversubscription Privilege"). The right to subscribe for such underlying shares
pursuant to the Oversubscription Privilege is not transferrable.
<PAGE>   2
                  WHEREAS, Richemont S.A. ("Richemont") will be entitled
to subscribe to purchase any Underlying Shares that are not subscribed for
through the Basic Subscription Privilege or the Oversubscription Privilege (the
"Standby Purchase Commitment"); and

                  WHEREAS, the Company desires the Subscription Agent to act on
its behalf in connection with the Rights Offering as set forth herein, and the
Subscription Agent is willing so to act;

                  NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereto hereby agree as follows:

                  SECTION 1. Appointment of Subscription Agent. The Company
hereby appoints the Subscription Agent to act as agent for the Company in
accordance with the instructions set forth in this Agreement, and the
Subscription Agent hereby accepts such appointment. The Company may from time to
time appoint such co-subscription agents as it may deem necessary or desirable.

                  SECTION 2. Issue of Securities.

                  (a) The Company has authorized the issuance of the Rights and,
following the effectiveness of the Registration Statement and the Record Date,
will issue such Rights to holders of record of shares of Common Stock as of the
close of business on the Record Date as contemplated by the Registration
Statement. The Company will promptly notify the Subscription Agent upon the
effectiveness of the Registration Statement. As transfer agent and registrar for
the shares of Common Stock and Series B Preferred Stock, the Subscription Agent
shall provide such assistance as the Company may require in order to effect the
distribution of the Rights to holders of record of shares of Common Stock and
Series B Preferred Stock as of the close of business on the Record Date,
including assistance in determining the number of Rights to be distributed to
each such record holder and assistance in distributing the Subscription
Certificates (as defined in Section 3(b) hereof) evidencing the Rights and all
other ancillary documents.

                  (b) The Company has authorized the issuance of and will hold
in reserve the Underlying Shares, and upon the valid exercise of Rights, the
Company will issue Underlying Shares to validly exercising Rights holders as set
forth in the Registration Statement.

                  SECTION 3. Subscription Privileges; Form of Subscription
Certificates.

                                      -2-
<PAGE>   3
                  (a) Pursuant to the Basic Subscription Privilege, each Right
grants to the holder thereof, upon the valid exercise of the Right pursuant to
Section 7 hereof, the right to purchase from the Company one Underlying Share
for the Subscription Price.

                  (b) Pursuant to the Oversubscription Privilege, each Right
grants to the holder thereof, upon the valid exercise of the Right pursuant to
Section thereof, the right to purchase from the Company Underlying Shares to the
extent that any Underlying Shares are not subscribed for through the Basic
Subscription Privilege, subject to proration by the Company under certain
circumstances.

                  (c) The Standby Purchase Commitment grants to Richemont the
right to purchase from the Company Underlying Shares to the extent that any
Underlying Shares are not subscribed for through the Basic Subscription
Privilege, or the Oversubscription Privilege.

                  (d) The Rights shall be evidenced by subscription certificates
(the "Subscription Certificates"). The Subscription Certificates (and the form
of election to exercise or transfer rights to be printed on the reverse thereof)
shall be substantially in the form attached as Exhibit A hereto. The
Subscription Certificates shall be fully transferable.

                  SECTION 4. Signature and Registration.

                  (a) The Subscription Certificates shall be executed on behalf
of the Company by its President and Chief Executive Officer and by its Secretary
by facsimile signature. Any Subscription Certificate may be signed on behalf of
the Company by any person who, at the actual date of the execution of such
Subscription Certificate, shall be a proper officer of the Company to sign such
Subscription Certificate, even if at the date of the execution of this Agreement
or the date of the actual issuance of such certificate any such person is not
such an officer.

                  (b) The Subscription Agent will keep or cause to be kept, at
its principal offices in the State of New York, books for registration and
transfer of the Rights issued hereunder. Such books shall show the names and
addresses of the respective holders of the Rights and the number of Rights
evidenced by each outstanding Subscription Certificate.

                  SECTION 5. Division, Combination and Exchange of Subscription
Certificates; Mutilated, Destroyed, Lost or Stolen Subscription Certificates.

                                      -3-
<PAGE>   4
                  (a) Subject to the provisions of Section 9 hereof, any
Subscription Certificate, or any two or more Subscription Certificates, may be
divided, combined or exchanged for any number of Subscription Certificates or
for a single Subscription Certificate of different denomination; provided,
however, that the aggregate number of Rights evidenced by the Subscription
Certificate or Subscription Certificates so issued shall not exceed the
aggregate number of Rights evidenced by the Subscription Certificate or
Subscription Certificates surrendered in exchange therefor. The foregoing
notwithstanding, a bank, trust company, securities dealer or broker holding
shares of Common Stock on the Record Date for more than one beneficial owner
may, by submitting a written request by 5:00 p.m., New York City time 
on              ,              , 1997 and upon proper showing to the
Subscription Agent, exchange its Subscription Certificate to obtain Subscription
Certificates for the number of Rights which each such beneficial owner would
have been entitled to receive pursuant to Section 9(a) hereof had each such
beneficial owner been the holder of record of such beneficial owner's shares on
the Record Date; provided, however, that the Company reserves the right to
refuse to issue any such Subscription Certificate or Subscription Certificates
if such issuance would be inconsistent with the principle that each beneficial
owner's holding will be rounded up to the nearest whole Right. No Subscription
Certificates evidencing fractional Rights will be issued upon division,
combination or exchange of other Subscription Certificates, and any instructions
to divide, combine or exchange Subscription Certificates which would result in
the issuance of Subscription Certificates evidencing fractional Rights shall be
rejected.

                  (b) Any holder desiring to divide, combine or exchange any
Subscription Certificate or Subscription Certificates shall make such requests
in writing to the Subscription Agent, and shall surrender the Subscription
Certificate or Subscription Certificates to be divided, combined or exchanged to
the Subscription Agent. Thereupon the Subscription Agent shall deliver to the
person entitled thereto a Subscription Certificate or Subscription Certificates,
as the case may be, as so requested. In all cases of transfer by an
attorney-in-fact, the original power of attorney, duly approved, or a copy
thereof, duly certified, shall be deposited and remain with the Subscription
Agent. In case of transfer by executors, administrators, guardians or other
legal representatives, duly authenticated evidence of their authority
satisfactory to the Subscription Agent shall be produced and may be required to
be deposited and to remain with the Subscription Agent in its discretion. The
Company may require payment of a sum sufficient to cover any tax or governmental
charge that may be imposed in

                                      -4-
<PAGE>   5
connection with any division, combination or exchange of Subscription
Certificates.

                  (c) Upon receipt by the Company and the Subscription Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Subscription Certificate, and, in case of loss, theft or
destruction, of indemnity and/or security satisfactory to them, which may be in
the form of an open penalty bond, and reimbursement to the Company and the
Subscription Agent of all reasonable expenses incidental thereto, and upon
surrender and cancellation of the Subscription Certificate if mutilated, the
Company will make and deliver a new Subscription Certificate of like tenor to
the Subscription Agent for delivery to the registered owner in lieu of the
Subscription Certificate so lost, stolen, destroyed or mutilated. If required by
the Company or the Subscription Agent an indemnity bond must be sufficient in
the judgment of both to protect the Company, the Subscription Agent or any agent
thereof from any loss which any of them may suffer if a Subscription Certificate
is replaced.

                  SECTION 6. Subsequent Issue of Subscription Certificates.
Subsequent to their original issuance, no Subscription Certificates shall be
issued except (a) Subscription Certificates issued upon any transfer,
combination, division or exchange of Rights pursuant to Section 5(a), Section
5(b) or Section 10 hereof, (b) Subscription Certificates issued in replacement
of mutilated, destroyed, lost or stolen Subscription Certificates pursuant to
Section 5(c) hereof and (c) Subscription Certificates issued pursuant to Section
7(g) hereof upon the partial exercise of any Subscription Certificate to
evidence the unexercised portion of such Subscription Certificate.

                  SECTION 7. Exercise of Rights; Exercise Price; Expiration
Date.

                  (a) The holder of any Subscription Certificate may exercise
some or all of the Rights evidenced thereby (but not in amounts of less than one
Right or an integral multiple thereof) by delivering to the Subscription Agent,
on or prior to 5:00 p.m., New York City time, on              , 1997 (the
"Expiration Date"), a properly completed and executed Subscription Certificate
evidencing such Rights (with signatures guaranteed, if necessary, by a
commercial bank or trust company having an office or correspondent in the United
States or a member firm of a national securities exchange or a member of the
National Association of Securities Dealers, Inc. (each, an "Eligible
Institution")), together with payment of the Subscription Price (as hereinafter
defined) for each Underlying Share subscribed for pursuant to the Basic
Subscription Privilege, the Oversubscription Privilege and the Standby Purchase
Commitment.

                                      -5-
<PAGE>   6
In the case of holders of Rights that are held of record through The Depository
Trust Company ("DTC"), exercises of the Basic Subscription Privilege may be
effected by instructing DTC to transfer Rights from the DTC account of such
holder to the DTC account of the Subscription Agent, together with payment of
the Subscription Price for each Underlying Share subscribed for pursuant to the
Basic Subscription Privilege. Exercises of the Oversubscription Privilege may be
effected by properly executing and delivering to the Subscription Agent 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. Alternatively, the holder of any
Subscription Certificate may exercise the Rights evidenced thereby by effecting
compliance with the procedures for guaranteed delivery set forth in Section 7(b)
below.

                  (b) If a 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 in Section
                  7(d) hereof) 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 Subscription Certificates (the
                  "Instructions") distributed with the Subscription
                  Certificates, from 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 the Subscription Certificate
                  evidencing such Rights at or prior to 5:00 p.m., New York

                                      -6-
<PAGE>   7
                  City time, on the date three American Stock Exchange ("AMEX")
                  trading days following the date of the Notice of Guaranteed
                  Delivery; and

                  (iii) the properly completed Subscription Certificate(s)
                  evidencing the Rights being exercised, with any required
                  signatures guaranteed, are received by the Subscription Agent,
                  or such Rights are transferred into the DTC account of the
                  Subscription Agent, at or prior to 5:00 p.m., New York City
                  time, on the date three AMEX 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).

                  (c) The Rights shall expire at 5:00 p.m., New York City time,
on the Expiration Date.

                  (d) The "Subscription Price" shall be $.90 per share of Common
Stock subscribed for pursuant to the Subscription Privilege payable (in United
States dollars) (i) by check or bank draft drawn upon a U.S. bank or postal,
telegraphic or express money order payable to the Subscription Agent, as
Subscription Agent, or (ii) by wire transfer of funds to the account maintained
by the Subscription Agent for such purpose at the [Chase Manhattan Bank, Account
No. 323053807; ABA No. 021000021] (the "Bank Account"). The Subscription Price
shall 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 or postal, telegraphic or express money order
or (iii) receipt of good funds in the Subscription Agent's account designated
above, in payment of the Subscription Price.

                  (e) If an exercising Rights holder has not indicated the
number of Rights being exercised, or if the Subscription Price payment forwarded
by such holder to the Subscription Agent is not sufficient to purchase the
number of shares subscribed for, the Rights holder will be deemed to have
exercised the Basic Subscription Privilege with respect to the maximum number of
whole Rights which may be exercised for the Subscription Price delivered to the
Subscription Agent and, to the extent that the Subscription Price payment
delivered by such holder exceeds the Subscription Price multiplied by the
maximum number of whole

                                      -7-
<PAGE>   8
Rights which may be exercised (such excess being the "Subscription Excess"), the
Subscription Agent, as soon as practicable after such exercise of Rights, shall
mail to such Rights holder the Subscription Excess paid by such holder without
interest or deduction.

                  (f) The Subscription Agent shall pay to credit to the account
of or otherwise transfer to the Company all funds received by the Subscription
Agent in payment of the Subscription Price for Underlying Shares subscribed for
pursuant to the Basic Subscription Privilege, as soon as practicable following
the Expiration date.

                  (g) Funds received by the Subscription Agent in payment of the
Subscription Price for Excess Shares subscribed for pursuant to the
Oversubscription Privilege shall be held in a segregated account pending
issuance of such excess shares.

                  (h) Upon receipt by the Subscription Agent of a notice of
satisfaction or waiver of the conditions to the standby purchase commitment from
the Company substantially in the form of Annex A hereto on or before the
Expiration Date, the Subscription Agent shall and is hereby directed to withdraw
from the Bank Account and pay to, credit to the account of or otherwise transfer
to the Company all such funds on               , 1997 (the "Closing Date"). Upon
receipt by the Subscription Agent of a notice of failure to satisfy or waive the
conditions to the standby purchase commitment from the Company substantially in
the form of Annex B hereto on or before the Expiration Date, the Subscription
Agent shall and is hereby directed to withdraw from the Bank Account and return
to exercising Rights holders all such funds as promptly as practicable following
the Expiration Date.

                  (i) In case the holder of any Subscription Certificate shall
exercise less than all the Rights evidenced thereby, a new Subscription
Certificate evidencing the number of Rights remaining unexercised shall be
issued by the Subscription Agent to the registered holder of such Subscription
Certificate or to his duly authorized assigns, subject to the provisions of
Section 9 hereof.

                  (j) The Subscription Agent is authorized to accept only
Subscription Certificates (other than Subscription Certificates delivered in
accordance with the procedure for guaranteed delivery set forth in Section
7(b)), or transfers of Rights to its account at DTC, received prior to 5:00
p.m., New York City time, on the Expiration Date.

                  (k) Once a holder of Rights has exercised a Right, such
exercise may not be revoked.

                                      -8-
<PAGE>   9
                  (l) Unless a Subscription Certificate (i) provides that the
Underlying Shares to be issued pursuant to the exercise of Rights represented
thereby are to be delivered to the holders 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.

                  SECTION 8. Delivery of Stock Certificates.

                  (a) As soon as practicable after the Expiration Date, the
Subscription Agent shall deliver to such exercising Rights holder certificates
representing the shares of Common Stock purchased pursuant to the Basic
Subscription Privilege and the Oversubscription Privilege, if any.

                  (b) As soon as practicable after the Expiration Date, the
Subscription Agent shall deliver to Richemont Certificates representing the
shares of Common Stock purchased pursuant to the Standby Purchase Commitment.

                  SECTION 9. Fractional Rights and Shares.

                  (a) The Company shall not issue fractions of Rights nor shall
the Subscription Agent distribute Subscription Certificates which evidence
fractional Rights. The number of Rights issued to each holder will be rounded up
to the nearest whole number. All questions as to the validity and eligibility of
any rounding of fractional Rights shall be determined by the Company in its sole
discretion, and its determination shall be final and binding.

                  (b) The Company shall not issue fractional shares of Common
Stock to exercising Rights holders upon exercise and acceptance of Rights.

                  SECTION 10. Transfer of Rights.

                  (a) Any holder may transfer (a) all of the Rights evidenced by
a Subscription Certificate by properly endorsing the Subscription Certificate
for transfer in accordance with the instructions accompanying the Subscription
Certificate or (b) some of the Rights evidenced by a Subscription Certificate
(but not fractional Rights) by delivering to the Subscription Agent such
Subscription Certificate properly endorsed for transfer, with instructions to
register the Rights to be transferred in the name of the transferee (and to
issue a new Subscription Certificate to the transferee evidencing such
transferred Rights). In such event, the Subscription Agent shall issue a new
Subscription Certificate evidencing the balance of

                                      -9-
<PAGE>   10
the Rights to the holder or, if so instructed, to an additional transferee.

                  (b) Any holder may place an order with the Subscription Agent
to sell all or some of the Rights evidenced by a Subscription Certificate by
delivering to the Subscription Agent such Subscription Certificate properly
executed for sale. If only a portion of the Rights evidenced by a single
Subscription Certificate are to be sold, 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. Upon the timely receipt by the Subscription
Agent of appropriate instructions to sell Rights, the Subscription Agent will
use its best efforts to complete the sale and, 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 on the day such Rights are sold, less any applicable commissions, taxes
and other direct expenses of sale. The Subscription Agent will also attempt to
sell all Rights which remain unclaimed as a result of Subscription Certificates
being returned by the postal authorities to the Subscription Agent as
undeliverable as of the fourth business day prior to the Expiration Date. Such
sales will be made net of commissions on behalf of the nonclaiming Rights
holders. The Subscription Agent will hold the proceeds from those sales for the
benefit of such nonclaiming Rights holders until such proceeds are either
claimed or escheat. The Subscription Agent's obligation to execute orders is
subject to its ability to find buyers. 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 obtain in such sales. In connection therewith,
the Subscription Agent agrees that it (i) is acting solely on behalf and for the
benefit of such holders who wish to sell their Rights and not as agent, or on
behalf, of the Company, (ii) shall not accept any instructions from the Company
with respect to the timing of such sales and (iii) shall effect all such sales
in accordance with applicable law.

                  SECTION 11. Foreign and Certain Other Stockholders. The
Subscription Agent shall not mail Subscription Certificates to holders of Common
Stock whose addresses are outside the U.S. The Subscription Agent shall hold
such Subscription Certificates for the account of such holders and upon notice
from such holders shall exercise the Rights on their behalf. To so exercise such
Rights, such stockholders must notify the Subscription Agent not later than
11:00 a.m., New York City time, on               , 1997. If no instructions have
been received, the Subscription Agent will use its best efforts to sell the
Rights. The net proceeds,

                                      -10-
<PAGE>   11
if any, from the sale of those Rights by the Subscription Agent will be remitted
to such holders by the Subscription Agent. 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. In connection therewith, the Subscription Agent agrees that it (i) is
acting solely on behalf and for the benefit of such holders who wish to sell
their Rights and not as agent, or on behalf, of the Company, (ii) shall not
accept any instructions from the Company with respect to the timing of such
sales, (iii) shall effect all such sales in accordance with applicable law, and
(iv) shall not effect any such sales in a manner that would cause a material
adverse change in the market for the Rights.

                  SECTION 12. Reports. The Subscription Agent shall notify both
the Company and its designated representatives (including the Information Agent,
Morrow & Co., Inc.) by telephone as requested during the period commencing with
the mailing of Subscription Certificates and ending on the Expiration Date (and
in the case of guaranteed deliveries pursuant to Section 7(b), the period ending
three AMEX trading days after the Expiration Date), which notice shall
thereafter be confirmed in writing, of (i) the number of Rights exercised on the
day of such request, (ii) the number of Underlying Shares subscribed for
pursuant to the Basic Subscription Privilege and the Oversubscription Privilege,
if any, and the number of such Rights for which payment has been received, (iii)
the number of Rights subject to guaranteed delivery pursuant to Section 7(b) on
such day, (iv) the number of Rights for which defective exercises have been
received on such day and (v) cumulative totals derived from the information set
forth in clauses (i) through (iv) above. At or before noon p.m., New York City
time, on the first AMEX trading day following the Expiration Date, the
Subscription Agent shall certify in writing to the Company the cumulative totals
through the Expiration Date derived from the information set forth in clauses
(i) through (iv) above. The Subscription Agent shall also maintain and update a
listing of holders who have fully or partially exercised their Rights, holders
who have transferred their Rights and their transferees and holders who have not
exercised their Rights. The Subscription Agent shall provide the Company or its
designated representatives with the information compiled pursuant to this
Section 12 as any of them shall request. The Subscription Agent hereby
represents, warrants and agrees that the information contained in each
notification referred to in this Section 12 shall be accurate in all material
respects.

                                      -11-
<PAGE>   12
                  SECTION 13. Future Instructions and Interpretation.

                  (a) All questions as to the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by the Company whose
determinations shall be final and binding. The Company in its sole discretion
may waive any defect or irregularity, 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 shall 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.

                  (b) The Subscription Agent is hereby authorized and directed
to accept instructions with respect to the performance of its duties hereunder
from an authorized officer of the Company, and to apply to such officers for
advice or instructions in connection with its duties, and it shall not be liable
for any action taken or suffered to be taken by it in good faith in accordance
with instructions of any such officer.

                  SECTION 14. Payment of Taxes. The Company covenants and agrees
that it will pay when due and payable all documentary, stamp and other taxes, if
any, which may be payable in respect of the issuance or delivery of any
Subscription Certificate or of the Underlying Shares; provided, however, that
the Company shall not be liable for any tax liability arising out of any
transaction which results in, or is deemed to be, an exchange of Rights or
shares or a constructive dividend with respect to the Rights or shares and
provided further that the Company shall not be required to pay any tax or other
governmental charge which may be payable in respect of any transfer involved in
the transfer or delivery of any Subscription Certificate or the issuance or
delivery of certificates for shares of Common Stock in a name other than that of
the registered holder of such Subscription Certificate evidencing the Rights
exercised or transferred, and the Subscription Agent shall not register any such
transfer or issue any such certificate until such tax or governmental charge, if
required, shall have been paid.

                  SECTION 15. Cancellation and Destruction of Subscription
Certificates. All Subscription Certificates surrendered for the purpose of
exercise, exchange, substitution or transfer shall be canceled by the
Subscription Agent, and no Subscription Certificates shall be issued in lieu
thereof except as expressly permitted by provisions of this Agreement. The

                                      -12-
<PAGE>   13
Company shall deliver to the Subscription Agent for cancellation and retirement,
and the Subscription Agent shall so cancel and return, any other Subscription
Certificate purchased or acquired by the Company otherwise than upon the
exercise thereof. The Subscription Agent shall deliver all canceled Subscription
Certificates to the Company, or shall, at the written request of the Company,
destroy such canceled Subscription Certificates, and in such case shall deliver
a certificate of destruction thereof to the Company.

                  SECTION 16. Right of Action. All rights of action in respect
of this Agreement are vested in the Company and the respective registered
holders of the Subscription Certificates, and any registered holder of any
Subscription Certificate, without the consent of the Subscription Agent or of
the holder of any other Subscription Certificate, may, on his own behalf and for
his own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, his
right to exercise the Rights evidenced by such Subscription Certificate in the
manner provided in such Subscription Certificate and in this Agreement.

                  SECTION 17. Concerning the Subscription Agent;
Indemnification.

                  (a) The Company agrees to pay to the Subscription Agent
compensation in accordance with the fee letter attached hereto as Exhibit B for
all services rendered by it hereunder and, from time to time, on demand of the
Subscription Agent, its reasonable expenses and counsel fees and other
disbursements incurred in the administration and execution of this Agreement and
the exercise and performance of its duties hereunder.

                  (b) The Company also agrees to indemnify and hold the
Subscription Agent harmless against any losses, claims, damages, liabilities,
costs or expenses (including reasonable fees and disbursements of legal counsel)
which the Subscription Agent may incur or become subject to arising from or out
of any claim or liability resulting from actions taken as Subscription Agent
pursuant to this Agreement; provided, however, that such covenant and agreement
does not extend to, and the Subscription Agent shall not be indemnified or held
harmless with respect to, such losses, claims, damages, liabilities, costs or
expenses incurred or suffered by the Subscription Agent as a result, or arising
out, of the Subscription Agent's negligence, misconduct, bad faith or breach of
this Agreement. In connection therewith: (i) in no case shall the Company be
liable with respect to any claim against the Subscription Agent unless the
Subscription Agent shall have notified the Company in writing, of the assertion
of a claim against it or of any action commenced against it, promptly

                                      -13-
<PAGE>   14
after the Subscription Agent shall have notice of a claim or shall have been
served with the summons or other legal process giving information as to the
nature and basis of the claim; provided, however, that the failure of the
Subscription Agent to notify the Company in the above manner will absolve the
Company of liability only when such failure will result or has resulted in
prejudice to the Company with respect to such claim or action; (ii) the Company
shall be entitled to participate at its own expense in the defense of any suit
brought to enforce any such claim and, if the Company so elects, it shall assume
the defense of any such suit, in which event the Company shall not be liable for
the fees and expenses of any additional counsel that the Subscription Agent may
retain, so long as the Company shall retain counsel satisfactory to the
Subscription Agent, in the exercise of the Subscription Agent's reasonable
judgement, to defend such suit; and (iii) the Subscription Agent agrees not to
settle any litigation in connection with any claim or liability with respect to
which it may seek indemnification from the Company without the prior written
consent of the Company.

                  (c) The Subscription Agent shall be protected and shall incur
no liability for or in respect of any action taken, suffered or omitted by it
without negligence and in good faith in connection with its administration of
this Agreement in reliance upon any Subscription Certificate, instrument of
assignment or transfer, power of attorney, endorsement, affidavit, letter,
notice, direction, consent, certificate, statement or other paper or document
reasonably believed by it to be genuine and to be signed, executed and, where
necessary, verified or acknowledged by the proper person or persons.

                  SECTION 18. Merger or Consolidation of Subscription Agent. Any
corporation into which the Subscription Agent or any successor Subscription
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Subscription Agent or
any successor Subscription Agent shall be a party, or any corporation succeeding
to the corporate trust business of the Subscription Agent or any successor
Subscription Agent shall be the successor to the Subscription Agent under this
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto.

                  SECTION 19. Duties of Subscription Agent. The Subscription
Agent undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Subscription Certificates by their acceptance thereof shall be bound:

                                      -14-
<PAGE>   15
                  (a) The Subscription Agent may consult with legal counsel (who
         may be, but is not required to be, legal counsel for the Company), and
         the opinion of such counsel shall be full and complete authorization
         and protection to the Subscription Agent as to any action taken or
         omitted by it in good faith and in accordance with such opinion.

                  (b) Whenever in the performance of its duties under this
         Agreement the Subscription Agent shall deem it necessary or desirable
         that any fact or matter be proved or established by the Company prior
         to taking or suffering any action hereunder, such fact or matter
         (unless other evidence in respect thereof be herein specifically
         prescribed) may be deemed to be conclusively proved and established by
         a certificate signed by the Chairman of the Board, the President or a
         Vice President (including any Senior or Executive Vice President) and
         by the Treasurer or any Assistant Treasurer or the Secretary or any
         Assistant Secretary of the Company and delivered to the Subscription
         Agent; and such certificate shall be full authorization to the
         Subscription Agent for any action taken or suffered in good faith by it
         under the provisions of this Agreement in reliance upon such
         certificate.

                  (c) The Subscription Agent shall be liable hereunder only for
         its own negligence or willful misconduct.

                  (d) The Subscription Agent shall not be liable for or by
         reason of any of the statements of fact or recitals contained in this
         Agreement or in the Subscription Certificates or be required to verify
         the same, but all such statements and recitals are and shall be deemed
         to have been made by the Company only.

                  (e) The Subscription Agent shall not be under any
         responsibility in respect of the validity of this Agreement or the
         execution and delivery hereof (except the due execution hereof by the
         Subscription Agent) or in respect of the validity or execution of any
         Subscription Certificate; nor shall it be responsible for any breach by
         the Company of any covenant or condition contained in this Agreement or
         in any Subscription Certificate; nor shall it by any act hereunder be
         deemed to make any representation or warranty as to the authorization
         or reservation of any shares of Common Stock to be issued pursuant to
         this Agreement or any Subscription Certificate or as to whether any
         shares of Common Stock will, when issued, be validly authorized and
         issued, fully paid and nonassessable.

                                      -15-
<PAGE>   16
                  (f) The Company agrees that it will perform, execute,
         acknowledge and deliver or cause to be performed, executed,
         acknowledged and delivered all such further and other acts, instruments
         and assurances as may reasonably be required by the Subscription Agent
         for the carrying out or performing by the Subscription Agent of the
         provisions of this Agreement.

                  (g) Nothing herein shall preclude the Subscription Agent from
         acting in any other capacity for the Company.

                  (h) The Subscription Agent shall comply with the information
         and backup withholding requirements of the Internal Revenue Code of
         1986, as amended (the "Code"), including without limitation, where
         appropriate, on a timely basis, filing with the Internal Revenue
         Service and furnishing to holders of Rights duly completed Forms 1099B
         and 1099DIV. The Subscription Agent shall also collect and duly
         preserve Forms W-8 and W-9 and other forms or information necessary to
         comply with the backup withholding requirements of the Code.

                  (i) The Subscription Agent shall withhold from payments made
         to record owners amounts sufficient to comply with the backup
         withholding requirements of the Code. For purposes of backup
         withholding that may be applicable in respect of Rights distributed to
         record owners other than foreign holders, the Subscription Agent shall
         withhold and sell Rights on behalf of such record owners in amounts
         necessary to satisfy such backup withholding requirements.

                  SECTION 20. Notices to the Company, Holders and Subscription
Agent. All notices and other communications provided for or permitted hereunder
shall be made by hand delivery, prepaid first-class mail, or telecopier:

                  (a)      if to the Company, to:

                  Hanover Direct, Inc.
                  1500 Harbor Boulevard
                  Weehawken, New Jersey  07087
                  Attention:  Edward J. O'Brien
                  Telecopier:  (201) 392-5005

                  (b)      if to the Subscription Agent, to:

                                      -16-
<PAGE>   17
                  American Stock Transfer & Trust Company
                  6201 Fifteenth Avenue
                  Brooklyn, New York  11219
                  Attention:  Donna Ansbro and
                                      Herbert Lemmer
                  Telecopier:  (718) 236-4588 or
                               (718) 234-5001

                  (c) if to a registered holder, at the address shown on the
registry books of the Company.

                  All such notices and communications shall be deemed to have
been duly given: when delivered by hand, if personally delivered; two business
days after being deposited in the mail, postage prepaid, if mailed as aforesaid;
and when receipt is acknowledged, if telecopied.

                  SECTION 21. Supplements and Amendments. The Company and the
Subscription Agent may from time to time supplement or amend this Agreement
without the approval of any holders of Subscription Certificates in order to
cure any ambiguity or to correct or supplement any provision maintained herein
which may be defective or inconsistent with any other provision herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Subscription Agent may deem necessary or desirable and
which shall not adversely affect the interests of the holders of the
Subscription Certificates.

                  SECTION 22. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Subscription Agent
shall bind and inure to the benefit of their respective successors and assigns
hereunder.

                  SECTION 23. Termination. This Agreement shall terminate at
5:00 p.m., New York City time, on the thirtieth day following the Expiration
Date. Upon termination of this Agreement, and provided that all shares of Common
Stock for Rights accepted for execution prior to such termination are issued and
delivered by the Company, the Company shall be discharged from all obligations
under this Agreement except for its obligation to the Subscription Agent under
Section 17 hereof and except with respect to the obligation of the Company to
provide instruction and direction to the Subscription Agent as may be provided
in this Agreement.

                  SECTION 24. Governing Law. This Agreement and each
Subscription Certificate shall be deemed to be a contract made under the laws of
the State of New York and for all purposes

                                      -17-
<PAGE>   18
shall be construed in accordance with the internal laws of said State.

                  SECTION 25. Benefits of This Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than the
Company, the Subscription Agent and the holders of the Subscription Certificates
any legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Subscription Agent and the holders of the Subscription Certificates.

                  SECTION 26. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, but all such counterparts shall together constitute
one and the same instrument.

                  SECTION 27. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.

                  IN WITNESS WHEREOF, each of the parties hereto has caused the
Agreement to be duly executed as of the date first above written.

                                       HANOVER DIRECT, INC.

                                       By:___________________________

                                       Title:________________________


                                       AMERICAN STOCK TRANSFER &
                                       TRUST COMPANY, Subscription
                                         Agent


                                       By:___________________________

                                       Title:________________________

                                      -18-
<PAGE>   19
                                    EXHIBIT A

                        FORM OF SUBSCRIPTION CERTIFICATE

                                 ATTACHED HERETO
<PAGE>   20
                                    EXHIBIT B

                         SUBSCRIPTION AGENT'S FEE LETTER

              [American Stock Transfer & Trust Company Letterhead]

                                  _____   , 1997


Edward J. O'Brien
Hanover Direct, Inc.
1500 Harbor Boulevard
Weehawken, NJ  07087

Dear Mr. O'Brien:

         This is to confirm that American Stock Transfer & Trust
Company will act as Hanover Direct, Inc.'s Subscription Agent and
we will perform the following services:

         -        Mailing material to shareholders;
         -        Issuing certificates to subscribing shareholders;
         -        Curing all deficient items;
         -        Collecting checks;
         -        Remitting payments to the company;
         -        Researching all problem items;
         -        Communicating with shareholders;
         -        Communicating with Depository Trust Company and
                  all brokers regarding their respective record
                  date positions;
         -        Changing addresses; and
         -        Reporting to company on daily totals.

         Our fee will be $         plus out-of-pocket expenses limited to 
postage, envelopes and 1099 forms. Payment will be due to us upon completion of 
the offering.

         Looking forward to working with you.

         Please rest assured that we will do everything in our power to merit
your goodwill and confidence.

                                       Very truly yours,

                                       AMERICAN STOCK TRANSFER
                                            & TRUST COMPANY


<PAGE>   21
                                    ANNEX A

                                 FORM OF NOTICE

                              Hanover Direct, Inc.
                              1500 Harbor Boulevard
                           Weehawken, New Jersey 07087


                                  _____   , 1997


American Stock Transfer & Trust Company
6201 Fifteenth Avenue
Brooklyn, New York  11219
Attention:  Donna Ansbro and
            Herbert Lemmer

         Re:  Disbursement of Funds

Dear Sirs:

         Pursuant to Section 7(h) of the Subscription Agency Agreement, dated as
of _____   , 1997 (the "Agreement"), by and between Hanover Direct, Inc., a
Delaware public company (the "Company"), and American Stock Transfer and Trust
Company, as Subscription Agent (the "Subscription Agent"), you are hereby
notified that all the conditions set forth in that certain Standby Purchase
Agreement, dated March 26, 1997, between the Company and Richemont S.A., a
Luxembourg corporation ("Richemont"), have been satisfied or otherwise waived
by Richemont. Capitalized terms used but not defined herein have the meanings
set forth in the Agreement.

         Accordingly you are hereby directed to withdraw from the Bank Account
and pay to, credit to the account of or otherwise transfer to the Company all
the funds in the Bank Account as promptly as practicable and in no event later
than noon on   , 1997 as provided in Section 7(h) of the Agreement.

         IN WITNESS WHEREOF, the Company has duly caused this Notice to be
delivered to you in accordance with the terms of the Agreement.

                                      HANOVER DIRECT, INC.


                                      By:___________________________
                                         Name:
                                         Title:
<PAGE>   22
                                     ANNEX B

                                 FORM OF NOTICE

                             [Company's Letterhead]


                                  _____   , 1997


                      Notice of Failure to Satisfy or Waive
                         Conditions of Standby Purchase


American Stock Transfer & Trust Company
6201 Fifteenth Avenue
Brooklyn, New York  11219
Attention:  Donna Ansbro and
            Herbert Lemmer

                           Re:  Disbursement of Funds

Dear Sirs:

         Pursuant to Section 7(h) of the Subscription Agency Agreement, dated as
of _____   , 1997 (the "Agreement"), by and between Hanover Direct, Inc., a
Delaware corporation (the "Company"), and American Stock Transfer and Trust
Company, as Subscription Agent (the "Subscription Agent"), you are hereby
notified that certain of the conditions set forth in that certain Standby
Purchase Agreement, dated March 26, 1997, between the Company and Richemont,
S.A., a Luxembourg public company ("Richemont"), have not been satisfied or
otherwise waived by Richemont. Capitalized terms used but not defined herein
have the meanings set forth in the Agreement.


         Accordingly you are hereby directed to withdraw from the Bank Account
and return to exercising Rights holders all such funds as promptly as
practicable following the Expiration Date as provided in Section 7(h) of the
Agreement.

         IN WITNESS WHEREOF, the Company has duly caused this Notice to be
delivered to you in accordance with the terms of the Agreement.

                                           HANOVER DIRECT, INC.


                                           By:___________________________
                                              Name:
                                              Title:

<PAGE>   1
                                                                    Exhibit 99.4



                       [Letterhead of Morrow & Co., Inc.]

 
                                                            __________ __, 1997


Hanover Direct, Inc.
1500 Harbor Boulevard
Weehawken, NJ 07087

Gentlemen:

        This letter will serve as the agreement pursuant to which you will
retain us to act as Information Agent in connection with your Rights Offer to
Shareholders of Hanover Direct, Inc. (the "Offer"), currently expected to take
place in ____________, 1997.

        The services we will perform on your behalf will include the following
services in connection with your Offer: consultation and preparation, delivery
of material to brokers, banks and nominees, acting as Information Agent,
receiving calls from shareholders, and telephoning holders of record and
non-objecting beneficial owners (NOBOs).

        For the above services our fee will be $6,500.00.  One half of the fee
($3,250.00), plus an advance against disbursements of $5,000.00, is due upon
the signing of this agreement.  The balance of our fee, plus additional
disbursements incurred by us on your behalf, will be payable upon the
expiration of the Offer.  Included in our disbursements will be our charge for
incoming and outgoing telephone calls, which will be $5.00 per shareholder,
such charge will include labor, directory assistance and all related telephone
expenses.  The number of shareholders to be called is to be approved by you in 
advance.

        For a service charge of $5.00 per check, we will process and prepare
checks for Broker/Nominee invoices submitted for the mailing by them of your
Offer materials.  A statement listing each of the Broker/Nominee invoices will
be furnished by us for your review and payment.

        By signing this agreement you agree to indemnify and hold us harmless
against any loss, damage, expense (including reasonable legal fees and
expenses), liability or claim relating to or arising out of our performance of
this agreement except where we,

<PAGE>   2



Hanover Direct, Inc.
Page Two

or our employees, fail to comply with this agreement.  However, you shall not
be obliged to indemnify us or hold us harmless against any such loss, damage,
expense, liability or claim which results from gross negligence, bad faith or
willful misconduct on our part or on the part of any of our employees.  At your
election, you may assume the defense of any such action.  We shall promptly
advise you in writing of any such liability or claim after receipt of notice of
any action or claim for which we may be entitled to indemnification hereunder.

        This agreement shall be construed and enforced in accordance with the
laws of the State of New York and shall inure to the benefit of, and the
obligations created hereby shall be binding upon, the successors and assigns of
the parties hereto.

        If any provision of this agreement shall be held illegal, invalid or
unenforceable by any court, this agreement shall be construed and enforced as
if that provision had not been contained herein and shall be deemed an
agreement among us to the full extent permitted by applicable law.

        Please acknowledge receipt of this agreement and confirm the
arrangements herein provided by signing and returning the enclosed copy of this
letter to the undersigned, whereupon this agreement and your acceptance of the
terms and conditions herein provided shall constitute a binding agreement among 
us.

                                            Very truly yours,


                                            MORROW & CO. INC.


Accepted:

HANOVER DIRECT, INC.

By: _______________________                 By: _________________________

Title: ____________________                 Title: ______________________

Date: _____________________



                                                                


<PAGE>   1
                                                                    Exhibit 99.5

                                                        Hanover Direct, Inc.
                                                        1500 Harbor Boulevard
                                                        Weehawken, N.J.
                                                        07087

                                                        201 863 7300


                                                           _______ __, 1997



To Our Shareholders:

         Hanover Direct, Inc. is distributing to the holders of its outstanding
Common Stock, at no cost, Rights to purchase additional shares of Common Stock
in a Rights Offering. Shareholders will receive .3824 Rights for each share of
Common Stock held by them as of the close of business on [day], ________, 1997.
Each whole right will entitle the holder thereof to a Subscription Privilege to
purchase one share of Common Stock at $.90 per share.

         Enclosed herewith is a Subscription Certificate evidencing .3824
transferable Rights for each share of Common Stock that you owned at the close
of business on [day], ________, 1997. Your Rights may be exercised, transferred
or sold as explained more fully in the accompanying Instructions. If you choose
to exercise your Rights, you must submit payment in full of the Subscription
Price and appropriate documentation to the Subscription Agent no later than 5:00
p.m., New York City time, on [day], ________, 1997.

         The enclosed Prospectus provides the details of the Rights Offering and
important information concerning the Company and the Common Stock being offered.
Please read it carefully.

         YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE RIGHTS WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY], ________, 1997.

                                   Very truly yours,



                                   RAKESH K. KAUL
                                   President and Chief Executive Officer

<PAGE>   1
                                                                    Exhibit 99.6


                                                    Hanover Direct, Inc.
                                                    1500 Harbor Boulevard
                                                    Weehawken, N.J.
                                                    07087

                                                    201 863 7300



                                                _______, 1997


To Our Shareholders:

         Hanover Direct, Inc. is distributing to the holders of its outstanding
Common Stock, at no cost, Rights to purchase additional shares of Common Stock
in a Rights Offering. Shareholders will receive .3824 Rights for each share of
Common Stock held by them as of the close of business on [day], _________, 1997.
Each whole right will entitle the holder thereof to a Subscription Privilege to
purchase one share of Common Stock at $.90 per share.

         Subscription certificates will not be mailed to shareholders whose
addresses are outside the United States. Instead, the Subscription Agent,
American Stock Transfer & Trust Company, is holding on your behalf a
Subscription Certificate evidencing .3824 transferable Rights for each share of
Common Stock that you owned at the close of business on [day], _________, 1997.
Your Rights may be exercised, transferred or sold as explained more fully in the
accompanying Instructions by instructing the Subscription Agent. If such
instructions are not received by the Subscription Agent by 11:00 a.m., New York
City time, on [day], _________, 1997, your Rights will, if feasible, be sold,
and the net proceeds will be remitted to you, unless prohibited by applicable
laws and regulations.

         Instructions to the Subscription Agent should be directed (1) if by
mail, to American Stock Transfer & Trust Company, 40 Wall Street, 46th Floor,
New York, New York 10005, or (2) if by telephone, to ___________________
(212) 936-5100.

         Please act promptly if you choose to exercise, sell or otherwise
dispose of your Rights. Please bear in mind that in order for the exercise of
the Rights to be valid, the payment of the Subscription Price for the Rights
being exercised must be received no later than 5:00 p.m., New York City time, on
[day], _________, 1997, and such payments by uncertified check must have cleared
by such time.

         The enclosed Prospectus provides the details of the Rights Offering and
important information concerning the Company and the Common Stock being offered.
Please read it carefully.

         YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE RIGHTS WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY], _________, 1997.

                                        Very truly yours,



                                        RAKESH K. KAUL
                                        President and Chief Executive Officer

<PAGE>   1
                                                                    Exhibit 99.7

                                                        Hanover Direct, Inc.
                                                        1500 Harbor Boulevard
                                                        Weehawken, N.J.
                                                        07087

                                                        201 863 7300



                                                   ________, 1997



To Our Shareholders:

         Hanover Direct, Inc. is distributing to the holders of its outstanding
Common Stock, at no cost, Rights to purchase additional shares of Common Stock
in a Rights Offering. Shareholders will receive .3824 Rights for each share of
Common Stock held by them as of the close of business on [day], ________, 1997.
Each whole right will entitle the holder thereof to a Subscription Privilege to
purchase one share of Common Stock at $.90 per share.

         Your bank or broker has received on your behalf a Subscription
Certificate evidencing .3824 transferable Rights for each share of Common Stock
that you owned at the close of business on [day], ________, 1997. Your Rights
may be exercised, transferred or sold as explained more fully in the
accompanying Instructions. If you choose to exercise your Rights, your bank or
broker must submit payment in full of the Subscription Price and appropriate
documentation to the Subscription Agent no later than 5:00 p.m., New York City
time, on [day], ________, 1997.

         The enclosed Prospectus provides the details of the Rights Offering and
important information concerning the Company and the Common Stock being offered.
Please read it carefully.

         YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE RIGHTS WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY], ________, 1997.

                                         Very truly yours,



                                         RAKESH K. KAUL
                                         President and Chief Executive Officer

<PAGE>   1
                                                                   Exhibit 99.8



RIGHTS OFFERING


                                   55,555,556

                              HANOVER DIRECT, INC.

                                  Common Stock

                              ($.66 2/3 par value)

           THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
                                    ,   , 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         , 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         ,   , 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"). The terms and conditions of this
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, 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 possible in
order to permit us to exercise the rights, and
<PAGE>   2
complete and deliver the Subscription Certificate on your behalf in accordance
with the provisions of the Rights Offering. This Rights Offering will expire at
5:00 p.m., New York City time, on [day],             , 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 not indicted 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 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 (1):
                                                  --------------------
         (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:

                                       ________________________________________



- --------

         * Each Whole right entitles the holder thereof to subscribe for one
share of Common Stock. The number of Rights distributed to each stockholder will
be rounded up to the nearest whole number and no fractional Rights or cash in
lieu thereof will be issued or paid.

<PAGE>   1
                                                                   Exhibit 99.9

                                                        Hanover Direct, Inc.
                                                        1500 Harbor Boulevard
                                                        Weehawken, N.J.
                                                        07087

                                                        201 863 7300



                                                            _______ __, 1997



To Our Shareholders:

         Hanover Direct, Inc. is distributing to the holders of its outstanding
Series B Convertible Additional Preferred Stock ("Series B Preferred Stock"), at
no cost, Rights to purchase shares of Common Stock in a Rights Offering.
Shareholders will receive .5742 Rights for each share of Series B Preferred
Stock held by them as of the close of business on [day], __________, 1997. Each
whole Right will entitle the holder thereof to a Subscription Privilege to
purchase one share of Common Stock at $.90 per share.

         Enclosed herewith is a Subscription Certificate evidencing .5742
transferable Rights for each share of Series B Preferred Stock that you owned at
the close of business on [day], _____________, 1997_. Your Rights may be
exercised, transferred or sold as explained more fully in the accompanying
Instructions. If you choose to exercise your Rights, you must submit payment in
full of the Subscription Price and appropriate documentation to the Subscription
Agent no later than 5:00 p.m., New York City time, on [day], _______, 1997.

         The enclosed Prospectus provides the details of the Rights Offering and
important information concerning the Company and the Common Stock being offered.
Please read it carefully.

         YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE RIGHTS WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY],________, 1997.

                                       Very truly yours,



                                       RAKESH K. KAUL
                                       President and Chief Executive Officer

<PAGE>   1
                                                                  Exhibit 99.10

                 CERTIFICATION AND REQUEST FOR ADDITIONAL RIGHTS


To the Subscription Agent:


         The undersigned hereby certifies that it is a broker-dealer registered
with the Securities and Exchange Commission, a commercial bank or trust company,
a securities depository or participant therein, or nominee therefor, holding of
record ______________________ shares of Common Stock, par value $.66 2/3 per
share (the "Common Stock"), of Hanover Direct, Inc. (the "Company") on behalf of
______________________ beneficial owners as of the close of business on [day],
________, 1997, the record date (the "Record Date") for the offering of up to
55,555,556 shares of Common Stock, all as described in a Prospectus dated
______________, 1997, a copy of which the undersigned has received. Such holders
shall receive .3824 Rights for each share of Common Stock held of record as of
the close of business on the Record Date and any fractional Right will be
rounded up to the nearest whole number. The undersigned further certifies that
__________________ shares of Common Stock registered in the name of the
undersigned are entitled to an additional Right in accordance with the principle
that any fractional Right to which a beneficial owner would otherwise be
entitled should be rounded up to the nearest whole number. Accordingly, the
undersigned requests that upon surrender of its Subscription Certificate
evidencing Rights, a Subscription Certificate evidencing _____ Rights (including
___ additional Rights) be issued. The undersigned further certifies that each
such beneficial owner is a bona fide beneficial owner of Common Stock as of the
close of business on the Record Date, that such beneficial ownership is
reflected on the undersigned's records and that all shares of Common Stock
which, to the undersigned's knowledge, are beneficially owned by any such
beneficial owner through the undersigned have been aggregated in calculating the
foregoing. The undersigned agrees to provide the Company or its designee with
such additional information as the Company deems necessary to verify the
foregoing.


                                     __________________________________________
                                     Name of Record Holder


                                     By:_______________________________________
                                              Name:
                                              Title:
                                              Address:
                                              Telephone Number:


                                     Dated:_________________________, 1997

NOTE: Deliver this form with your Subscription Certificate to: American Stock
Transfer & Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005

<PAGE>   1
                                                                   Exhibit 99.11






                                           _____ __, 1997



To Participants in the 1994 Bonus Plan

                  Hanover Direct, Inc. is distributing to the holders of its
outstanding Common Stock, at no cost, Rights to purchase additional shares of
Common Stock in a Rights Offering. Shareholders will receive .3824 Rights for
each share of Common Stock held by them as of the close of business on [day],
________, 1997. Each whole Right will entitle the holder thereof to a
Subscription Privilege to purchase one share of Common Stock at $.90 per share.

                  Enclosed herewith is a Subscription Certificate evidencing
 .3824 transferable Rights for each of the shares of Common Stock that were
awarded to you under the 1994 Bonus Plan and that have not yet vested
("Nonvested Shares"). Your Rights may be exercised, transferred or sold as
explained more fully in the accompanying Instructions. If you choose to exercise
your Rights, you must submit payment in full of the Subscription Price and
appropriate documentation to the Subscription Agent no later than 5:00 p.m., New
York City time, on [day], ________, 1997.

                  The enclosed Prospectus provides the details of the Rights
Offering and important information concerning the Company and the Common Stock
being offered. Please read it carefully.

                  There are certain federal income tax consequences under
current law of the distribution of Rights with respect to your Nonvested Shares.
The following is a brief summary of such tax consequences. Please note that this
summary is not intended to be exhaustive and does not describe state or local
tax consequences.

                  -        You will be required to include in your gross income,
                           as compensation, the fair market value of the Rights
                           distributed to you with respect to your Nonvested
                           Shares. The Company will include this amount in the
                           taxable wages reported on your 1997 Form W-2.
<PAGE>   2
                  -        The exercise of your Rights will not have any
                           immediate tax consequences. Upon a subsequent sale or
                           taxable exchange of the shares you acquire when you
                           exercise your Rights, you will recognize long or
                           short-term capital gain or loss equal to the
                           difference between (i) the amount realized on the
                           sale and (ii) the sum of the Subscription Price you
                           paid to exercise the Rights and the amount that was
                           includible in your gross income as a result of the
                           distribution of the Rights to you.

                  -        If you sell you Rights rather than exercise them, you
                           will recognize short-term capital gain or loss equal
                           to the difference between the amount realized on the
                           sale and the amount includible in your gross income
                           as a result of the distribution of the Rights to you.

                  -        The Company will be entitled to a deduction for the
                           amount of the compensation income that you recognize
                           in connection with the distribution to you of Rights.

                           The foregoing discussion does not apply to you if,
at the time you acquired your Nonvested Shares, you made an election under
Section 83(b) of the Internal Revenue Code to accelerate the recognition of
income. If you made such an election, you should consult your tax advisor with
regard to the tax consequences associated with the distribution to you of
Rights.

                  YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE
RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY], ________, 1997.

                                        Very truly yours,



                                        ----------------------------
                                        Rakesh K. Kaul President and
                                        Chief Executive Officer

<PAGE>   1
                                                                   Exhibit 99.12

                                         _________________, 1997


To Participants in the 1995 Bonus Plan

        Hanover Direct, Inc. is distributing to the holders of its outstanding
Common Stock, at no cost, Rights to purchase additional shares of Common Stock
in a Rights Offering. Shareholders will receive .3824 Rights for each share of
Common Stock held by them as of the close of business on [day], _____________,
1997. Each whole Right will entitle the holder thereof to a Subscription
Privilege to purchase one share of Common Stock at $.90 per share.

        Enclosed herewith is a Subscription Certificate evidencing .3824
transferable Rights for each of the shares of Common Stock that were awarded to
you under the 1995 Bonus Plan and that have not yet vested ("Nonvested
Shares"). Your rights may be exercised, transferred or sold as explained more
fully in the accompanying Instructions. If you choose to exercise your Rights,
you must submit payment in full of the Subscription Price and appropriate
documentation to the Subscription Agent no later than 5:00 p.m., New York City
time, on [day], ________________, 1997.

        The enclosed Prospectus provides the details of the Rights Offering and
important information concerning the Company and the Common Stock being
offered. Please read it carefully.

        There are certain federal income tax consequences under current law of
the distribution of Rights with respect to your Nonvested Shares. The following
is a brief summary of such tax consequences. Please note that this summary is
not intended to be exhaustive and does not describe state or local tax
consequences.

        -       You will be required to include in your gross income, as
                compensation, the fair market value of the Rights distributed
                to you with respect to your Nonvested Shares. The Company will
                include this amount in the taxable wages reported on your 1997
                Form W-2.



<PAGE>   2
        -       The exercise of your Rights will not have any immediate tax
                consequences. Upon a subsequent sale or taxable exchange of the
                shares you acquire when you exercise your Rights, you will
                recognize long or short-term capital gain or loss equal to the
                difference between (i) the amount realized on the sale and (ii)
                the sum of the Subscription Price you paid to exercise the
                Rights and the amount that was includible in your gross income
                as a result of the distribution of the Rights to you.

        -       If you sell your Rights rather than exercise them, you will
                recognize short-term capital gain or loss equal to the
                difference between the amount realized on the sale and the
                amount includible in your gross income as a result of the
                distribution of the Rights to you.

        -       The Company will be entitled to a deduction for the amount of
                the compensation income that you recognize in connection with
                the distribution to you of Rights.



                The foregoing discussion does not apply to you if, at the time
you acquired your Nonvested Shares, you made an election under Section 83(b) of
the Internal Revenue Code to accelerate the recognition of income. If you made
such an election, you should consult your tax advisor with regard to the tax
consequences associated with the distribution to you of Rights.

        YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE RIGHTS WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY], ________________, 1997.

                                       Very truly yours,



                                       ___________________________________
                                       Rakesh K. Kaul
                                       President and Chief
                                       Executive Officer

<PAGE>   1
                                                                Exhibit 99.13











                                        _____ __, 1997



To Participants in the All Employee Equity Investment Plan

                  Hanover Direct, Inc. is distributing to the holders of its
outstanding Common Stock, at no cost, Rights to purchase additional shares of
Common Stock in a Rights Offering. Shareholders will receive .3824 Rights for
each share of Common Stock held by them as of the close of business on [day],
________, 1997. Each whole Right will entitle the holder thereof to a
Subscription Privilege to purchase one share of Common Stock at $.90 per share.

                  Enclosed herewith is a Subscription Certificate evidencing
 .3824 transferable Rights for each of the shares of Common Stock that were
awarded to you under the All Employee Equity Investment Plans and that have not
yet vested ("Nonvested Shares"). Your Rights may be exercised, transferred or
sold as explained more fully in the accompanying Instructions. If you choose to
exercise your Rights, you must submit payment in full of the Subscription Price
and appropriate documentation to the Subscription Agent no later than 5:00 p.m.,
New York City time, on [day], ________, 1997.


                  The enclosed Prospectus provides the details of the Rights
Offering and important information concerning the Company and the Common Stock
being offered. Please read it carefully.

                  There are certain federal income tax consequences under
current law of the distribution of Rights with respect to your Nonvested Shares.
The following is a brief summary of such tax consequences. Please note that this
summary is not intended to be exhaustive and does not describe state or local
tax consequences.

                  -        You will be required to include in your gross income,
                           as compensation, the fair market value of the Rights
                           distributed to you with respect to your Nonvested
                           Shares. The Company will include this amount in the
                           taxable wages reported on your 1997 Form W-2.
<PAGE>   2
                  -        The exercise of your Rights will not have any
                           immediate tax consequences. Upon a subsequent sale or
                           taxable exchange of the shares you acquire when you
                           exercise your Rights, you will recognize long or
                           short-term capital gain or loss equal to the
                           difference between (i) the amount realized on the
                           sale and (ii) the sum of the Subscription Price you
                           paid to exercise the Rights and the amount that was
                           includible in your gross income as a result of the
                           distribution of the Rights to you.

                  -        If you sell your Rights rather than exercise them,
                           you will recognize short-term capital gain or loss
                           equal to the difference between the amount realized
                           on the sale and the amount includible in your gross
                           income as a result of the distribution of the Rights
                           to you.

                  -        The Company will be entitled to a deduction for the
                           amount of the compensation income that you recognize
                           in connection with the distribution to you of Rights.

                           The foregoing discussion does not apply to you if,
at the time you acquired your Nonvested Shares, you made an election under
Section 83(b) of the Internal Revenue Code to accelerate the recognition of
income. If you made such an election, you should consult your tax advisor with
regard to the tax consequences associated with the distribution to you of
Rights.

                  YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE
RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY], ________, 1997.

                                              Very truly yours,



                                             -------------------
                                             Rakesh K. Kaul
                                             President and Chief
                                             Executive Officer


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