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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 26, 1998
COMMISSION FILE NUMBER 1-12082
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HANOVER DIRECT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION
OR ORGANIZATION)
1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
13-0853260
(IRS EMPLOYER IDENTIFICATION NO.)
07087
(ZIP CODE)
(201) 863-7300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
COMMON STOCK, $.66 2/3 PAR VALUE AMERICAN STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No []
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 17, 1999, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the registrant was
$242,954,538 (based on the closing price of the Common Stock on the American
Stock Exchange on March 17, 1999; shares of Common Stock owned by directors and
officers of the Company are excluded from this calculation; such exclusion does
not represent a conclusion by the Company that all of such directors and
officers are affiliates of the Company).
As of March 17, 1999, the registrant had 210,827,854 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement to be filed by the Company
pursuant to Regulation 14A is incorporated into items 10, 11, 12 and 13 of Part
III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Hanover Direct, Inc. (the "Company") is a leading specialty direct marketer
with a diverse branded portfolio of home fashions, general merchandise, men's
and women's apparel and gift catalogs delivered via direct mail and electronic
commerce. The Company's catalog titles are organized into six brand groups --
Home Fashions -- Mid-Market brands, Home Fashions-Upscale brands, General
Merchandise brands, Women's Apparel brands, Men's Apparel brands and Gift brands
groups -- each consisting of one or more catalog titles. All of these brand
groups utilize the Company's common systems platform and central purchasing,
telemarketing, fulfillment, distribution and administrative functions.
The Company's Home Fashions-Mid-Market brands includes Domestications(R), a
leading specialty home fashions catalog, and Colonial Garden Kitchens(R),
featuring work saving and lifestyle enhancing items for the kitchen and home.
The Home Fashions-Upscale brands includes The Company Store(R), an upscale home
fashions catalog focusing on high quality down comforters and other down and
related products for the home including sheets and towels, and Kitchen &
Home(R), an upscale kitchen and home product catalog. The General Merchandise
brands includes Improvements(R), a do-it-yourself home improvements catalog, and
The Safety Zone(R), offering safety, prevention and protection products. The
Women's Apparel brands 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 brands includes
International Male(R), offering unique men's fashions with an international
flair, Austad's(R), featuring golf equipment, apparel and accessories, and
Undergear(R), a leader in activewear, workout wear and fashion underwear for
men. The Gift brands includes Gump's By Mail(R), a leading upscale catalog of
jewelry and luxury gifts, and Gump's, the well known retail store based in San
Francisco.
The Company reviews its portfolio of catalogs as well as new opportunities
to acquire or develop catalogs from time to time. No catalog brands were
discontinued during the 1996, 1997 or 1998 fiscal years. However, in the fourth
quarter of 1998, the Company selected Austad's, Tweeds and Colonial Garden
Kitchens for repositioning away from traditional catalog operations.
Early in 1999, the Company began the repositioning efforts for Austad's,
Tweeds and Colonial Garden Kitchens primarily as e-commerce brands. If these
repositioning efforts are unsuccessful, these brands are likely to be sold or
discontinued.
During 1998, the Company mailed approximately 242 million catalogs. The
Company maintains a proprietary customer list currently containing approximately
12 million names of customers (the same as in 1997 but down from approximately
14 million names in 1996) who have made purchases from at least one of the
Company's catalogs within the past 36 months. Approximately 4 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 same as in 1997 but
down from approximately 6 million names in 1996).
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. Richemont Finance S.A. ("Richemont"), a Luxembourg
company, owns approximately 49% of the Company's common stock on a fully diluted
basis. Additionally, on June 1, 1998 Richemont entered into an agreement with a
third party, whereby Richemont was granted an irrevocable proxy to vote
approximately 9.3 million shares currently held by the third party. Richemont is
a wholly owned subsidiary of Compagnie Financiere Richemont, A.G., a Swiss
public company engaged in luxury goods, tobacco and other business. The Company
is a successor in interest to The Horn & Hardart Company, a restaurant company
founded in 1911, and Hanover House Industries, Inc., founded in 1934.
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STRATEGIC REALIGNMENT
The Company recently adopted plans for a strategic realignment of the
Company pursuant to which it will create two separate business units, a brand
marketing division and a web services division.
The brand marketing division will be a marketing/merchandising organization
comprised of the Company's branded portfolio of home fashions, apparel and gift
catalogs and associated e-commerce sites as well as all related inventory. It
will also contain customer lists, databases and trademarks/intellectual
property. Credit marketing agreements as well as internet strategic partnerships
and alliances, such as those already in effect with Excite, ArtSelect and Xoom,
will also fall within the business unit's responsibility.
The web services division will offer the full range of back-end services
required by companies wanting to conduct e-commerce including a comprehensive
range of fulfillment, order management and web marketing services as well as web
site development, system platform interface, and the back-end services of
Keystone Fulfillment, a Company affiliate launched last year, which currently
provides services to a growing portfolio of customers. In addition to its
existing contracts, the web services division has the warehouses and telephone
centers as well as the means to flexibly add capacity as needed. Its system
platform performs the high volume logistical services required by e-commerce
companies and is supported by a state-of-the-art MACS II system, a warehouse
management system and data warehouse applications. Its Internet Management Group
is equipped to provide services both to the Hanover portfolio as well as others
wanting to sell on-line.
Inter-company agreements will be put in place whereby the brand marketing
division will utilize the services of the web services division for web hosting,
system interface, fulfillment and corporate services. Rakesh K. Kaul will
continue as President and Chief Executive Officer of the Company, overseeing
both of the newly created business units.
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. Each catalog's merchandise strategy,
including the appropriate price points, mailing plans and presentation of its
products is determined through market research and ongoing testing of new
products and concepts. The Company is continuing its development of exclusive or
private label products for a number of its catalogs, including Domestications,
The Company Store and Improvements, to further enhance the brand identity of the
catalogs.
The Company's specialty catalogs typically range in size from 32 to 132
pages with six to 12 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 following is a description of the Company's catalogs in each of the
Company's six brand groups:
Home Fashions -- Mid-Market Brands:
Domestications is a leading specialty home fashions catalog and a fashion
decorating source book for today's value-oriented and style-conscious consumer.
Domestications features sheets, towels, comforters, tablecloths, draperies and
other items for the home, and offers coordinated decorating ideas for the home
at value prices.
Colonial Garden Kitchens features work saving and lifestyle enhancing items
for the kitchen and home.
Home Fashions -- Upscale Brands:
The Company Store is an upscale home fashions catalog focusing on high
quality down comforters and other down and related products for the home
including sheets and towels. The Company Store also features designer brand name
sheets, towels and other bedding accessories.
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Kitchen & Home features distinctive and highly functional kitchen and home
products for entertaining and decorating.
General Merchandise Brands:
Improvements is a leading do-it-yourself home improvement catalog featuring
home improvement accessories.
The Safety Zone offers safety, protection and prevention products.
Women's Apparel Brands:
Silhouettes is a leading fashion authority for larger sized women
specializing in casual, career and special occasion apparel for this customer's
lifestyle needs.
Tweeds features apparel with a European flair for contemporary women.
Men's Apparel Brands:
International Male is positioned as an authority for unique men's fashion
with an international flair.
Undergear is a leader in activewear, workout wear and fashion underwear for
men.
Austad's features golf equipment and related apparel and accessories.
Gift Brands:
Gump's By Mail is a leading upscale catalog featuring jewelry, luxury
gifts, specialized housewares and other unique items.
Gump's is the well-known San Francisco retailer.
MARKETING AND DATABASE MANAGEMENT
The Company maintains a proprietary customer list currently containing
approximately 12 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.
The Company utilizes modeling and segmentation analysis to devise catalog
marketing and circulation strategies that are intended to maximize customer
contribution by catalog. This analysis is the basis for the Company's
determination of which of the Company's catalogs will be mailed and how
frequently to a particular customer, as well as the promotional incentive
content of the catalog(s) such customer receives.
The primary source of new customers for the Company's catalogs is lists
rented from other mailers and compilers. Prior to mailing these lists, the lists
are edited using statistical segmentation tools to enhance their probable
performance. Other sources of new customers include traditional print space
advertisements and promotional inserts in outbound merchandise packages. In
addition, many of the catalogs participate in a consortium database of catalog
buyers whereby new customers are obtained by the periodic submission of desired
customer buying behavior and interests to the consortium and the subsequent
rental of non-duplicative names from the consortium. The Internet as a source of
new customers continues to grow in importance. The Websites for each brand are
promoted within each catalog, at Hanover's partner websites, in traditional
print media advertising and most recently in TV commercials for several of the
Company's brands.
The Company maintains an active presence on the Internet by having a
commerce-enabled Web site for each one of its catalogs which offers its
merchandise, takes catalog requests, and accepts orders for not only Web site
merchandise but also from any print catalog already mailed. The Company also
utilizes commissionable marketing opportunities available to it by posting its
catalog merchandise and accepting orders on third party Web sites. Publicly
announced alliances include with WebTV as well as Excite.
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The Company continues to use direct response television marketing, having
taken advantage of the opportunity to offer a particular catalog's merchandise
on a 24-hour television shopping channel and on long-form television
infomercials. In addition, the Company has entered into an agreement to post
some of its catalog merchandise offerings on electronic marketing channels which
are not directed to residences but to airport lounges, hotel rooms and airplane
electronic networks.
TELEMARKETING
The Company receives approximately 84% of its orders through its toll-free
telephone service which offers customer access seven days per week, 24 hours per
day. The Company has created a telephone network to link its three primary
telemarketing facilities in Hanover, Pennsylvania, LaCrosse, Wisconsin and San
Diego, California. 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. The Company handled approximately 9 million telephone order and
customer service calls in 1998. As part of its December 1996 plan to reduce
operating costs, the Company shut down its telemarketing capacity in its
Roanoke, Virginia facility in February 1997. In the first quarter of 1997, the
Company entered into a call center services agreement with MCI Communications
Corp. which resulted in significant cost savings for such services. See
"Purchasing."
The Company trains its telemarketing service representatives to be
courteous, efficient and knowledgeable about the Company's products.
Telemarketing service representatives generally receive 40 hours of training in
selling products, services, systems and communication skills through simulated
as well as actual phone calls. A substantial portion of the evaluation of
telemarketing service representatives' performance is based on how well the
representative meets customer service standards. While primarily trained with
product knowledge to serve customers of one or more specific catalogs,
telemarketing service representatives also receive cross-training that enables
them to take overflow calls from other catalogs. The Company utilizes customer
surveys as an important measure of customer satisfaction.
DISTRIBUTION
The Company presently operates three distribution centers in three
principal locations: one in Roanoke, Virginia, one in Hanover, Pennsylvania, and
one in LaCrosse, Wisconsin. The Company's facilities processed approximately 7
million packages in 1998. As part of its 1996 plan to reduce annual operating
costs, the Company developed a plan to consolidate certain of its operations in
Roanoke, VA and its Hanover, PA operations into its distribution center in
Roanoke, VA. The apparel operations and two of the six catalogs located in
Hanover, PA were consolidated into the Roanoke distribution center in the second
half of 1997. Two other catalogs were consolidated into the Roanoke distribution
center in 1998.
The Company mails its catalogs through the United States Postal Service
("USPS") utilizing pre-sort, bulk mail and other discounts. Most of the
Company's packages are shipped through the USPS. Overall, catalog mailing and
package shipping costs approximated 15% of the Company's net revenues in 1998.
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 USPS increased mailing rates effective January
1999 (see Item 7. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations). The Company also utilizes United Parcel
Service, Federal Express and other delivery services. United Parcel Service
raised its rates for domestic deliveries by 3.6% for ground rates and 3.3% for
air rates effective February 7, 1998.
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
independently. Major goods and services used by the Company are purchased or
leased from selected suppliers by its central buying staff.
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These goods and services include: paper, catalog printing and printing related
services such as order forms and color separations, communication systems
including telephone time and switching devices, packaging materials, expedited
delivery services, computers and associated network software and hardware.
The Company's telephone telemarketing costs (both inbound and outbound
calls) are typically contracted for a three-year period. In the first quarter of
1997, the Company entered into a three-year call center services agreement with
MCI Communications Corp. under which it obtained a material reduction in the
rate which it had been paying pursuant to its then current telecommunications
contract and savings with respect to certain database services which are
provided to it. See "Telemarketing."
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 1998, paper costs
approximated 7% of the Company's net revenues.
MANAGEMENT INFORMATION SYSTEMS
The Company has successfully converted all catalogs to its integrated mail
order and catalog system operating on its mid-range computer systems.
Additionally, the remaining fulfillment center migrated to the newly developed
warehouse management system. The migration of the Company's business
applications to mid-range computers was an important part of the Company's
overall systems plan which defined the long-term systems and computing strategy
for the Company. The Company modified and installed, 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 Company is
continuing to devote resources to improving its systems.
The new software system is an on-line, real-time system which includes
order processing, fulfillment, inventory management, list management and
reporting. The software 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. Two catalogs were brought
onto the Company's common systems platform in 1994. The Company brought eight
additional catalogs onto the Company's common systems platform in 1995, one in
1996 and the balance of the catalogs onto the Company's common systems platform
in 1997. As of December 26, 1998, the Company had invested capitalized costs of
approximately $18.6 million in such systems.
Based on its identification and assessment of year 2000 issues, the Company
estimates it will incur total expenditures of $3.6 million to modify its
computer information systems enabling proper processing of transactions relating
to the year 2000 and beyond. The Company continues to take appropriate courses
of corrective action, including replacement of certain systems and contracting
with a consultant to develop contingency plans. The Company does not expect the
amounts required to be expensed over the next year related to the year 2000
modifications to have a material effect on its financial position or results of
operations. The Company has contacted vendors and others on whom it relies to
assure that their systems will be timely converted. However, there can be no
assurance that the systems of other companies on which the Company relies also
will be timely converted or that any such failure to convert by another company
would not have an adverse effect on the Company's operations.
CREDIT MANAGEMENT
Several of the Company's catalogs, including Domestications, International
Male and Gump's by Mail, offer their own private label credit cards. 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. The
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Company is required to maintain certain financial covenants related to this
agreement which the Company failed to maintain, but has received a waiver for
the event of default at December 26, 1998. In March 1999, the Company entered
into an account purchase and credit card marketing and services agreement with
Capital One Services, Inc. and Capital One Bank establishing that Capital One
will provide services generally of a type provided previously by GECC with
respect to the Company's private label credit card program. Capital One will do
this by purchasing from the Company the existing portfolio of credit card
accounts on terms which will create neither a gain or loss to the Company on the
closing date. The purchase is currently scheduled for July 1999.
INVENTORY MANAGEMENT
The Company's inventory management strategy is designed to maintain
inventory levels that provide optimum in-stock positions while maximizing
inventory turnover rates and minimizing the amount of unsold merchandise at the
end of each season. The Company manages inventory levels by monitoring sales and
fashion trends, making purchasing adjustments as necessary and by promotional
sales. Additionally, the Company sells excess inventory in its special sale
catalogs, its outlet stores and to jobbers.
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 1998. 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.
FINANCING
Credit Facility. The Congress Credit Facility is comprised of a revolving
line of credit of up to $65 million and term loans aggregating $14.0 million at
December 26, 1998. The Congress Facility is secured by all assets of the Company
and places limitations on the incurrence of additional indebtedness. The amount
that can be borrowed under the Congress Facility is based on percentages of
eligible inventory and accounts receivable as reported to Congress from time to
time. An inventory appraisal was completed in March 1997 and the advance rate
remained the same through the balance of 1997. In November 1997, a new inventory
appraisal was completed and advance rates were increased along with other
modifications that increased the Company's availability under the Facility. At
that time, negotiations for the refinancing of the Revolving Credit Facility
commenced. Under the terms of the renegotiated Credit Facility, effective March
1998, the facility was extended to January 31, 2001.
The Congress Revolving Credit Facility, prior to the amendment, bore
interest at 1.25% above the prime rate and the Revolving Term Note bore interest
at 1.5% above prime rate. As amended, the Revolving Credit Facility bears
interest at prime plus .5% or Eurodollar plus 2.5% and the Revolving Term Note
bears interest at prime plus .75% or Eurodollar plus 2.75%. The Company is
required to maintain minimum net worth and working capital throughout the terms
of the agreement. The Company was in compliance with such covenants at December
26, 1998. At December 26, 1998, the Company had no revolving indebtedness and
$14.0 million outstanding in Revolving Term Notes, respectively. As of December
27, 1997, the Company also had no revolving indebtedness and $7.9 million
outstanding in Revolving Term Notes, respectively. The face amount of unexpired
documentary letters of credit at December 26, 1998 and December 27, 1997 were
$2.8 million and $3.0 million, respectively. At December 26, 1998, availability
under the Congress Facility was approximately $49 million, including cash on
hand. The Congress Facility financial covenant requirements are as follows:
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WORKING CAPITAL (AS DEFINED) AMOUNT
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December 1997 and forward................................. $(10,000,000)
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NET WORTH AMOUNT
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June 1997 and thereafter.................................. $ 21,500,000
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Reimbursement Agreement. In December 1996, the Company finalized its
agreement (the "Reimbursement Agreement") with Richemont Finance S.A.
("Richemont") that provided the Company with up to approximately $28 million of
letters of credit through Swiss Bank Corporation, New York Branch. The three
letters of credit, which were to expire on February 18, 1998, carry an interest
rate of 3.5% above the prime rate, payable to Swiss Bank Corporation quarterly
on amounts drawn under the letters of credit. The Company also agreed to pay a
facility fee to Richemont equal to 5% of the principal amount of the letters of
credit as well as other fees incurred in connection with providing the facility.
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.
In November 1997, Richemont definitively agreed to extend its guarantee
under the Reimbursement Agreement to March 30, 1999. As consideration for this
transaction, the Company agreed to pay to Richemont a fee of 4% of the principal
amount of each letter of credit, which fee aggregated $1,073,483.28. The
extension required the approval of Congress and Swiss Bank which approvals were
obtained in February 1998, and was subject to certain other conditions. On
February 18, 1998, the extension of the Richemont guarantee and the closing of
this transaction were consummated. Accordingly, the expiration dates of two of
the letters of credit were extended through March 30, 1999, and the letters of
credit were amended to reflect the assignment of all obligations thereon from
Swiss Bank, New York Branch to Swiss Bank, Stamford Branch. A substitute letter
of credit having an expiration date of March 30, 1999 was issued to replace the
third letter of credit. On each of October 1, 1997 and October 1, 1998 the
Company paid down approximately $1 million of the underlying debt thus reducing
the principal amount of the letters of credit to $25.8 million.
In the first quarter of 1999, Richemont agreed to extend its guarantee
under the Reimbursement Agreement to March 31, 2000. As consideration for this
transaction, the Company agreed to pay to Richemont a facility fee of 9.5% of
the principal amount of each letter of credit. The extension required the
approval of Congress and UBS AG which approvals were obtained in March 1999, and
was subject to certain other conditions. In March 1999, the extension of the
Richemont guarantee and the closing of this transaction will be consummated.
Accordingly, the expiration dates of the letters of credit will be extended
through March 31, 2000.
1997 Rights Offering. The Company commenced a $50 million rights offering
(the "1997 Rights Offering") on April 29, 1997. Holders of record of the
Company's Common Stock, par value $.66 2/3 per share (the "Common Stock"), and
Series B Convertible Additional Preferred Stock, par value $.01 and stated value
$10.00 per share (the "Series B Preferred"), as of April 28, 1997, the record
date, were eligible to participate in the 1997 Rights Offering. The rights were
exercisable at a price of $.90 per share. Shareholders received .38 rights for
each share of Common Stock held and .57 rights for each share of Series B
Preferred held as of the record date. The 1997 Rights Offering expired on May
30, 1997, with 55,654,623 rights to purchase shares exercised, and it closed on
June 6, 1997.
Richemont entered into a standby purchase agreement (the "Richemont Standby
Purchase Agreement") to purchase all shares in the 1997 Rights Offering not
subscribed to by shareholders of record at the subscription price. Richemont
purchased 40,687,970 shares in the 1997 Rights Offering and, as a result, then
owned approximately 20.3% of the Company. The Company paid in cash, from the
proceeds of the 1997 Rights Offering, to Richemont on the closing date, a
standby purchase fee of approximately $1.8 million which represented an amount
equal to 1% of the aggregate offering price of the aggregate number of shares
issuable upon closing of the 1997 Rights Offering other than with respect to the
shares of Common Stock held by NAR Group Limited ("NAR") or its affiliates plus
an amount equal to one-half of one percent of the aggregate number of shares
acquired by NAR upon exercise of their rights (Standby Fee) plus an amount equal
to 4% of the aggregate offering price in respect to all unsubscribed shares
(Take-Up Fee). In connection with the entering of the Richemont Standby Purchase
Agreement, the Company named two Richemont representatives, Messrs. Jan P.
DuPlessis and Howard M.S. Tanner, to its Board of Directors.
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On April 26, 1997, NAR irrevocably agreed with the Company, subject to and
upon the consummation of the 1997 Rights Offering, to exercise certain of the
rights distributed to it for the purchase of 11,111,111 shares of Common Stock
that had an aggregate purchase price of approximately $10 million. NAR agreed to
pay for and the Company agreed to accept as payment for the exercise of such
rights the surrender by NAR of the principal amount due under a subordinated
promissory note dated September 1996 due by the Company to Intercontinental
Mining & Resources Incorporated, an affiliate of NAR ("IMR"), in the principal
amount of $10 million the ("IMR Promissory Note") and cancellation thereof.
In order to facilitate vendor shipments and to permit the commencement of
the Company's plan to consolidate certain of its warehouse facilities, Richemont
advanced $30 million as of April 23, 1997 against its commitment to purchase all
of the unsubscribed shares pursuant to the Richemont Standby Purchase Agreement.
The Company then executed a subordinated promissory note in the amount of $30
million to evidence this indebtedness (the "Richemont Promissory Note") which
was repaid out of the proceeds of the 1997 Rights Offering.
The Company issued 55,654,623 shares as a result of the 1997 Rights
Offering which generated gross cash proceeds of approximately $40 million (after
giving effect to the acquisition and exercise by NAR of rights having an
aggregate purchase price of $10 million which were paid for by the surrender and
cancellation of the IMR Promissory Note). The proceeds of the 1997 Rights
Offering were used by the Company: (i) to repay the $30 million principal amount
outstanding under the Richemont Promissory Note, and (ii) for working capital
and general corporate purposes including repayment of amounts outstanding under
the Credit Facility with Congress.
ADDITIONAL INVESTMENTS
In November 1997, SMALLCAP World Fund, Inc. ("SMALLCAP"), a mutual fund and
substantial investor in the Company, agreed to purchase 3.7 million shares of
the Company's Common Stock at $1.41 per share for an aggregate purchase price of
approximately $5.2 million in a private placement. This transaction was
consummated on November 6, 1997. These shares were restricted and were
subsequently registered under the Securities Act of 1933, as amended, pursuant
to a registration rights agreement with SMALLCAP that called for the Company to
use its best efforts to effect the registration of such shares as soon as
practicable after April 1, 1998.
On July 31, 1998, Richemont acquired 5,646,490 additional shares of Common
Stock of the Company pursuant to the exercise of certain common stock purchase
warrants with exercise prices from $1.95 to $2.59 per share and an aggregate
total exercise price of $13.6 million. The Company used the proceeds of the
warrant exercise to reduce the amounts outstanding under the Congress Credit
Facility.
EMPLOYEES
The Company currently employs approximately 2,700 persons on a full time
basis and approximately 600 persons on a part time basis. Approximately 300
employees at one of the Company's subsidiaries are represented by a union. The
Company believes its relations with its employees are good.
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, holiday season
purchases and decreasing apparel sales as a percentage of total sales.
COMPETITION
The Company believes that the principal bases upon which it competes are
quality, value, service, product offerings, catalog design, convenience and
efficiency. The Company's catalogs compete with other mail order catalogs, both
specialty and general, and retail stores, including department stores, specialty
stores and discount stores. Competitors also exist in each of the Company's
catalog specialty areas of women's
8
<PAGE> 10
apparel, home fashions, general merchandise, men's apparel and gifts. A number
of the Company's competitors have substantially greater financial, distribution
and marketing resources than the Company.
The Company is maintaining an active commerce-enabled Internet Web site
presence for all of its catalogs. A substantial number of each of the Company's
catalog competitors maintain an active commerce-enabled Internet Web site
presence as well. A number of such competitors have substantially greater
financial, distribution and marketing resources than the Company. Sales from the
Internet for Web site merchandisers have grown in 1998. The Company believes
strongly in the future of the Internet and online commerce, including the speed
at which marketing opportunities are evolving in this medium, and is adjusting
its marketing focus, resources, and manpower to that end.
TRADEMARKS
Each of the Company's catalogs has its own federally registered trademark.
The Company also owns numerous trademarks, copyrights and service marks on its
logos, products and catalog offerings. The Company has also protected various
trademarks internationally. The Company vigorously protects such marks and
believes there is substantial goodwill associated with them.
GOVERNMENT REGULATION
The Company is subject to Federal Trade Commission regulations governing
its advertising and trade practices, Consumer Product Safety Commission and Food
and Drug Administration regulations governing the safety of the products it
sells in its catalogs and other regulations relating to the sale of merchandise
to its customers. The Company is also subject to the Department of
Treasury-Customs regulations with respect to any goods it directly imports.
The imposition of a sales and use tax collection obligation on out-of-state
catalog companies in states to which they ship products was the subject of a
case decided in 1994 by the United States Supreme Court. While the Court
reaffirmed an earlier decision that allowed direct marketers to make sales into
states where they do not have a physical presence without collecting sales taxes
with respect to such sales, the Court further noted that Congress has the power
to change this law. The Company believes that it collects sales tax in all
jurisdictions where it is currently required to do so.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in a modern
85,000-square-foot office in Weehawken, New Jersey. The facility houses
merchandising and marketing personnel, catalog production personnel and
corporate and administrative offices. The Weehawken facility is leased for a
15-year term expiring in 2005. The Company has subleased a portion of these
premises effective April 1998 as part of its plan to further reduce costs. In
addition to this office facility, the Company leases administrative facilities
for men's apparel in San Diego, California, maintains 15,000 square feet of
administrative facilities for the Gump's retail business in its store facility
in San Francisco, California discussed below and maintains administrative
facilities for the Improvements business in Beachwood, Ohio.
The Company currently operates three warehouses and fulfillment facilities
in three principal locations: one in Roanoke, Virginia for home fashions,
apparel and general merchandise, one in Hanover, Pennsylvania for hardgoods,
including sporting goods and giftware, and one in LaCrosse, Wisconsin for
upscale home fashions.
In Roanoke, Virginia, the Company owns a 633,000 square-foot home fashions
distribution center. The facility became operational in the second half of 1995
and handled all of Domestications' fulfillment processing. As a result of the
Company's cost reduction plan, the Company transferred during 1997 the
fulfillment functions for two of the six catalogs previously fulfilled from the
Hanover, Pennsylvania distribution facility as well as all the fulfillment
functions handled by the apparel distribution facility located in Roanoke,
Virginia to the home fashions distribution center in Roanoke, Virginia. See
"Distribution." The apparel distribution center in Roanoke, Virginia is a
175,000 square-foot facility which the Company leases from a
9
<PAGE> 11
partnership in which it owns a 50% interest. The Company and the partnership are
currently looking for a sublessee for this facility.
In Hanover, Pennsylvania, the Company owns a distribution center of
approximately 265,000 square feet which handles hardgoods, including sporting
goods and giftware. Two of the six catalogs serviced by such facility were
consolidated with and into the home fashions distribution center in Roanoke,
Virginia in 1997. Two other catalogs were consolidated into the Roanoke,
Virginia distribution center in 1998. During 1999, the Company intends to use
the Hanover, Pennsylvania distribution center for third-party fulfillment and
processing.
In LaCrosse, Wisconsin, the Company leases a warehouse and fulfillment
center of 185,000 square feet under a short-term lease. The Company also owns a
150,000 square-foot home fashions manufacturing and assembly facility and a
58,000 square-foot telemarketing and customer service facility in LaCrosse,
Wisconsin.
In addition to the LaCrosse, Wisconsin facility, the Company utilizes
portions of facilities in San Diego, California and Hanover, Pennsylvania as
telemarketing and customer service facilities. Specifically, in Hanover,
Pennsylvania, the Company leases a telemarketing and administrative office
facility of 123,000 square feet. Renewal terms on this telemarketing center
extend through 2009.
The Company's principal retail operations consist of the Gump's retail
store, which occupies approximately 43,000 square feet in a building in downtown
San Francisco, California which is leased pursuant to a 15-year lease. A portion
of the Gump's facility is subleased and a portion is used for administrative
offices. The Company also operates and leases 10 other retail and outlet stores
at various locations.
The Company leases premises in Edgewater, New Jersey which it vacated in
1995. The Company has sublet a portion of the Edgewater facility and is actively
seeking to sub-lease the remainder. The Company sold its interest in a Cleveland
facility in May 1997.
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION STATUS SQUARE FOOTAGE
- -------- ------ --------------
<S> <C> <C>
WAREHOUSE AND FULFILLMENT CENTERS:
Roanoke, VA Owned 633,000
Roanoke, VA Vacant 175,000
Hanover, PA Leased/Owned 277,500
LaCrosse, WI Leased 185,000
CORPORATE AND ADMINISTRATIVE OFFICES:
Weehawken, NJ Leased 84,700(a)
Edgewater, NJ Leased 65,000
San Diego, CA Leased 30,000(b)
San Francisco, CA Leased 15,000(c)
Beachwood, OH Leased 7,740(d)
TELEMARKETING AND CUSTOMER SERVICE:
Hanover, PA Leased 123,000
LaCrosse, WI Owned 58,000
San Diego, CA Leased 30,000(b)
RETAIL STORES:
San Francisco, CA Leased 43,000(c)
San Diego, CA Leased 3,800
West Hollywood, CA Leased 3,600
Mayfield Heights, OH Leased 3,750
Hanover, PA Leased 24,000
Kenosha, WI Leased 5,500
LaCrosse, WI Leased 13,326
Madison, WI Leased 5,206
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION STATUS SQUARE FOOTAGE
- -------- ------ --------------
<S> <C> <C>
Oshkosh, WI Leased 2,000
Philadelphia, PA Leased 3,017
Roanoke, VA Leased 7,389
MANUFACTURING AND ASSEMBLY:
LaCrosse, WI Owned 150,000
</TABLE>
- ---------------
(a) After sublease of approximately 20,000 square feet to an outside tenant
effective April 1998, approximate square footage will be utilized by the
Company for the 65,000 square feet of office space.
(b) Telemarketing and corporate/administrative functions are all located and
performed at the one facility. Square footage stated represents the entire
facility.
(c) Retail and office space are all located at the one facility. Square footage
stated represents allocations to administrative, retail and retail storage
space.
(d) Administration and product development for Improvements catalog.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine lawsuits of a nature which are
deemed customary and incidental to its businesses. In the opinion of management,
the ultimate disposition of such actions will not have a material adverse effect
on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the American Stock Exchange (Symbol: HNV).
The following table sets forth, for the periods shown, the high and low sale
prices of the Common Stock reported on the American Stock Exchange Composite
Tape.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
First Quarter $ 1 1/8 $ 5/8
Second Quarter 1 1/8 5/8
Third Quarter 1 11/16 1 1/16
Fourth Quarter 3 1 1/4
1998
First Quarter $ 3 1/2 $ 2 3/8
Second Quarter 3 5/8 2 11/16
Third Quarter 3 7/16 2 9/16
Fourth Quarter 3 7/16 1 15/16
</TABLE>
The Company is restricted from paying dividends on its Common Stock or from
acquiring its capital stock by certain debt covenants contained in agreements to
which the Company is a party.
As of March 18, 1999, there were approximately 4,010 holders of record of
Common Stock.
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<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for each of the years
indicated:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
----------- ----------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $ 768,884 $ 749,767 $ 700,314 $ 557,638 $ 546,114
Special charges (credits) -- 1,563 36,724 (2,209) (485)
Depreciation and amortization 6,157 9,020 12,192 8,227 9,478
Operating (loss) income 15,975 (22,619) (94,497) (1,849) (16,807)
Interest expense, net 2,813 4,531 8,398 8,028 7,778
Income (loss) before
extraordinary items 14,838 (28,153) (103,895) (10,876) (25,585)
Extraordinary items -- (1,837) (1,134) -- --
----------- ----------- ------------ ------------ ------------
Net income (loss) 14,838 (29,990) (105,029) (10,876) (25,585)
Preferred stock dividends (135) (240) (225) (190) (578)
----------- ----------- ------------ ------------ ------------
Net income (loss) applicable
to common stockholders $ 14,703 $ (30,230) $ (105,254) $ (11,066) $ (26,163)
----------- ----------- ------------ ------------ ------------
EBITDA (earnings before
interest, taxes,
depreciation and
amortization) $ 22,132 $ (13,599) $ (82,305) $ 6,378 $ (7,329)
EBITDA before special
charges $ 22,132 $ (12,036) $ (45,581) $ 4,169 $ (7,814)
----------- ----------- ------------ ------------ ------------
PER SHARE:
Income (loss) before
extraordinary items $ .16 $ (.30) $ (.93) $ (.06) $ (.13)
Extraordinary items -- (.02) (.01) -- --
----------- ----------- ------------ ------------ ------------
Net income (loss) -- basic
and diluted $ .16 $ (.32) $ (.94) $ (.06) $ (.13)
----------- ----------- ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 93,285,190 93,029,816 111,441,247 176,621,080 206,508,110
Diluted 93,285,190 93,029,816 111,441,247 176,621,080 206,508,110
----------- ----------- ------------ ------------ ------------
BALANCE SHEET DATA (END OF
PERIOD):
Working capital (deficit) $ 58,501 $ 28,774 $ (1,507) $ 47,570 $ 43,929
Total assets 262,246 279,009 220,827 230,299 218,870
Total debt(1) 37,915 62,802 65,189 59,958 58,859
Shareholders' equity 109,725 87,210 31,740 75,551 66,470
----------- ----------- ------------ ------------ ------------
</TABLE>
- ---------------
(1) The amounts for 1997 and 1998 include obligations under receivable financing
of $21,918 and $18,998, respectively, pursuant to SFAS No. 125.
There were no cash dividends declared on the Common Stock in any of the
periods.
See Notes to Consolidated Financial Statements.
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<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the
percentage relationship to revenues of certain items in the Company's
Consolidated Statements of Income (Loss):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of sales and operating expenses 68.4 64.2 62.9
Write-down of inventory of discontinued catalogs .2 -- .7
Special charges (credit) 5.2 (.4) (.1)
Selling expenses 27.9 25.3 27.2
General and administrative expenses 10.1 9.7 10.6
Depreciation and amortization 1.7 1.5 1.7
Loss from operations (13.5) (.3) (3.1)
Interest expense, net 1.2 1.4 1.4
Net (loss) (15.0)% (2.0)% (4.8)%
</TABLE>
RESULTS OF OPERATIONS
1998 Compared with 1997
Net (Loss). The Company reported a net loss of $25.6 million or $(.13) per
common share, compared with a net loss of $10.9 million, or ($.06) per common
share, for 1997. Per share amounts are expressed after deducting preferred
dividends of $.6 million and $.2 million in 1998 and 1997, respectively. The
weighted average number of shares outstanding was 206,508,110 for the year ended
December 26, 1998 compared to 176,621,080 in 1997. The increase in weighted
average shares outstanding is primarily due to a rights offering completed in
June 1997.
The higher loss in fiscal 1998 is attributed to:
(i) a $3.7 million charge for the writedown of non core catalog
inventory as well as a $2.2 million charge for other costs associated with
plans to discontinue certain under performing company catalog brands
(ii) higher promotional activity primarily in the fourth quarter
(iii) costs related to new business initiatives
(iv) higher selling expenses due to increased promotional activity and
more competitive mailings in advance of the 1999 postal rate increase
(v) the 1997 special credit exceeded the amount recorded in 1998 by
$1.7 million
(vi) 1997 income from the partial recovery of previously written-off
investment securities amounting to $1.3 million
partially offset by,
(i) improved gross margins from reductions in the cost of merchandise
resulting from the benefits of improved purchasing strategies and
efficiencies in inventory management for the core catalog brands, as well
as the positive impact of upsell promotions.
(ii) reduced distribution costs resulting from the completion of the
consolidation of distribution activities into the Company's Roanoke,
Virginia facility.
Revenues. Revenues decreased in 1998 to $546.1 million from $557.6 million
in 1997, primarily as a result of the under performing (non core) catalog
brands, (Tweeds, Austad's and Colonial Garden Kitchens)
14
<PAGE> 16
partially offset by revenue growth in other brands and the impact of upsell
promotions. The Company's revenues for 1998 for the core catalog brands
increased 3% over 1997.
Catalog circulation decreased to 242 million in 1998 from 244 million in
1997.
Operating Costs and Expenses. Cost of sales and operating expenses, which
include fulfillment and telemarketing costs, decreased by $14.7 million from
1997. This decrease was the result of a reduction in catalog sales and reduced
merchandise costs as the Company's margins were enhanced by improved product
sourcing and merchandise mix as well as continued improvement in telemarketing
and fulfillment costs. Additionally, the Company attained inventory management
efficiencies resulting in improved order fill rates, lower product delivery
costs and lower backorder levels.
Selling expenses increased $7.4 million in 1998 as a result of the
increased utilization of name list rentals, additional catalog production costs
and new marketing initiatives partially offset by the benefit of reduced, more
targeted circulation strategies. These expenses also include $2.2 million of
charges related to the aforementioned discontinuance of certain under performing
company catalog brands.
General and administrative expenses increased $4.0 million in 1998
primarily due to an increase in spending to support growth initiatives,
including electronic commerce, as well as the impact of an offset to general and
administrative expenses ($1.3 million of income) recorded in 1997 as a result of
asset distributions made to the Company relating to previously written-off
investment securities.
The operating results for 1998 and 1997 include benefits of $0.5 million
and $2.2 million, respectively, relating to the reversal of a portion of the
restructuring charges that were recorded in 1996. The 1998 reversal related to
the Company's decision to remain in its Hanover, Pa. fulfillment center. The
1997 reversal related primarily to the Company's decision to remain in its
Weehawken corporate facility.
Depreciation and amortization increased $1.3 million in 1998 resulting from
fixed asset additions associated with the improvements in the distribution
center in Roanoke, Virginia.
(Loss) from Operations. The Company's loss from operations increased $15.0
million to $16.8 million in 1998 from a loss of $1.8 million in 1997. As
discussed above, the 1998 operating results include $5.9 million in charges
related to discontinuing certain non core catalog brands as the Company focuses
on building brands with a strong core customer base. The operating results also
include infrastructure costs related to the Company e-commerce initiatives. The
operating results for 1998 and 1997 include a $0.5 and $2.2 million credit,
respectively, relating to the reversal of a portion of the restructuring charges
that were recorded in 1996.
Interest Expense, Net. Interest expense, net decreased $0.2 million to
$7.8 million in 1998 from $8.0 million in 1997. This improvement was primarily
due to lower interest rates and lower amortization of capitalized debt costs.
Income Taxes. The Company did not record a Federal income tax provision in
1998 or 1997 based on each years' net operating losses. The Company's state tax
provision was $1.0 million in 1998 and 1997.
Shareholders' Equity. The number of shares of Common Stock outstanding
increased by 6,672,063 in 1998 due to 5.6 million shares issued in connection
with the exercise of certain common stock purchase warrants, its equity and
incentive plans, and other activities. At December 26, 1998, there were
210,427,385 shares of Common Stock outstanding compared to 203,755,322 shares of
Common Stock outstanding at December 27, 1997.
1997 Compared with 1996
Net (Loss). The Company reported a net loss of $10.9 million or $(.06) per
common share, compared with a net loss before an extraordinary item of $104
million, or ($.93) per common share, for 1996. The 1996 extraordinary item of
$1.1 million, or ($.01) per common share relates to the early extinguishment of
debt. After giving effect to the extraordinary item, the net loss for 1996 was
$105 million, or ($.94) per common share. Per share amounts are expressed after
deducting preferred dividends of $.2 million in both 1997 and 1996. The weighted
average number of shares outstanding was 176,621,080 for the year ended December
27,
15
<PAGE> 17
1997 compared to 111,441,247 in 1996. The increase in weighted average shares
outstanding is due to two $50 million rights offerings which were completed in
August 1996 and June 1997, respectively.
The improved operating results in fiscal 1997 are attributed to (i) reduced
circulation to prospective customers and to customers other than core customers,
which resulted in decreased catalog costs, (ii) increased circulation to core
customers, focusing on core products, which resulted in lower selling expenses
relative to sales, (iii) reduced costs of merchandise as the Company began to
realize improvements in its product offerings, (iv) reduced fixed overhead costs
due to the planned relocation and consolidation of facilities, as well as the
Company's cost reduction plan implemented in 1997, (v) improved liquidity,
reduced backorder levels and improved inventory in-stock positions due to the
Company's 1997 Rights Offering, all of which contributed to operating
efficiencies, and (vi) the reversal of a portion of certain non-recurring
charges accrued in the prior year.
Revenues. Revenues decreased in 1997 to $557.6 million from $700.3 million
in 1996, primarily as a result of a decrease in sales for discontinued catalogs
of $93.8 million. Revenues from continuing catalog brands decreased $48.9
million to $548.6 million from $597.5 million for the prior year. The Company's
revenues for 1997 were planned at reduced levels from 1996 due to the Company's
business formula of reduced circulation, reduced prospecting for most catalogs
and a concentrated focus on core customers with core products. Circulation of
catalogs decreased 7.9% to 243.8 million in 1997.
Operating Costs and Expenses. Cost of sales and operating expenses, which
include fulfillment and telemarketing costs, decreased by $121 million from
1996. This decrease was primarily the result of reduced merchandise costs of
$91.2 million and other cost reductions of $29.8 million for telemarketing and
fulfillment activities, which are attributable to the planned sales reduction
for 1997, as well as savings created by the consolidation of telemarketing and
fulfillment facilities during the year. In addition, on an overall basis, the
Company's margins were enhanced by improved purchasing strategies and
efficiencies attained through inventory management.
Selling expenses decreased $53.6 million to $141.4 million from $195
million in 1996 as a result of the reduced circulation plan implemented in 1997.
The Company experienced substantial paper price increases in 1997. In spite of
these increased paper prices, the Company was able to reduce its paper costs by
2% as a percentage of net revenues versus 1996 as a result of more targeted
circulation strategies.
General and administrative expenses decreased $16.8 million to $53.8
million in 1997. This decrease resulted from the Company's previously announced
cost reduction plan. These savings were achieved from the reduced overhead
structure resulting from the reorganization of management and operations that
began at the end of 1996. The Company also experienced approximately $2.9
million of decreased costs and bad debt expense associated with its private
label credit program as compared with 1996. In addition, general and
administrative expenses were offset by $1.3 million of income recorded in 1997
as a result of asset distributions made to the Company relating to previously
written-off investment securities.
The operating results for 1997 include a $2.2 million benefit relating to
the reversal of a portion of the restructuring charges that were recorded in
1996. The reversal relates primarily to the Company's decision to remain in its
Weehawken corporate facility.
Depreciation and amortization decreased $4.0 million to $8.2 million in
1997 as a result of the Company's decision to write-off certain intangible
assets and close certain of its facilities at the end of the 1996 fiscal year.
(Loss) from Operations. The Company's loss from operations decreased to
$1.8 million in 1997 from a loss of $94.5 million in 1996. The Company's focus
on building brands with a core customer base coupled with the cost savings
programs implemented in 1997, as discussed above, has resulted in an improved
operating margin.
Interest Expense, Net. Interest expense, net decreased $.4 million to $8.0
million in 1997, which includes amortization on debt costs paid in prior years
of $2.3 million. Throughout the 1997 year, the Company maintained lower debt
levels than the prior year due to better management of its working capital.
16
<PAGE> 18
This improvement was partially offset by increased amortization of debt costs
related to the Company's $26.9 million letter of credit facility.
Income Taxes. The Company did not record a Federal income tax provision in
1997 or 1996 based on each years' net operating losses. The Company's state tax
provision was $1.0 million in 1997 and 1996.
Shareholders' Equity. The number of shares of Common Stock outstanding
increased by 59,107,424 in 1997 due to shares issued in connection with the
Company's 1997 Rights Offering, its equity and incentive plans, and other
activities. At December 27, 1997, there were 203,755,322 shares of Common Stock
outstanding compared to 144,647,898 shares of Common Stock outstanding at
December 28, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company had $12.2 million and $14.8 million of cash and
cash equivalents at December 26, 1998 and December 27, 1997, respectively.
Working capital and current ratio were $43.9 million and 1.47 to 1 at December
26, 1998 compared to working capital and current ratio of $47.6 million and 1.48
to 1 at December 27, 1997. The primary sources of cash in 1998 were the $13.6
million in proceeds resulting from the exercise of warrants held by Richemont in
addition to $7.3 million in proceeds resulting from additional term loan
borrowings under the Congress Credit Facility. The primary sources of cash in
1997 were the 1997 Rights Offering, which provided $40.1 million of cash and the
$5.2 million issuance of the Company's Common Stock to SMALLCAP WorldFund, Inc.
in a private placement. Cash was used in 1998 primarily to fund a $12.1 million
use of cash in operating activities, capital expenditures of $6.1 million, the
$2.8 million repayment of The Company Store 6% mortgage notes and to reduce the
amounts outstanding under its secured Revolving Credit Facility with Congress.
In 1996, as a result of the Company's continued operating losses, the
Company experienced tightened vendor credit and increased levels of debt. Order
cancellation rates increased and negatively affected initial fulfillment which
resulted in an increase in split shipments and higher customer inquiry calls in
1996 and the first quarter of 1997. As a result of these factors, the Company
decided in late 1996 that it was necessary to obtain relief under its Credit
Facility and to investigate an equity infusion. In December 1996, the Company
closed its agreement with Richemont that provided the Company with approximately
$28 million of letters of credit to replace letters of credit which were issued
under the Credit Facility with Congress. Although this agreement provided the
Company added liquidity, its timing, on December 19, 1996, had minimal effect on
reducing back orders in 1996. Therefore, these back orders carried over to the
first quarter of 1997 and caused an increase in the order cancellation rates in
the period. When the 1996 final financial results became known to the Company,
it concluded such results would have a further negative impact on the Company's
ability to conduct business on normal trade terms. Therefore, the Company
decided it was necessary to obtain an additional equity infusion which would
restore the Company's equity base and provide the Company with additional
liquidity.
On March 26, 1997, the Company announced that it intended to distribute
subscription rights to subscribe for and purchase additional shares of Common
Stock to holders of record of the Company's Common Stock and Series B
Convertible Additional Preferred Stock. The 1997 Rights Offering expired on May
30, 1997 and closed on June 6, 1997. The 1997 Rights Offering generated gross
proceeds of approximately $40 million after giving effect to the $10 million of
indebtedness NAR Group Limited ("NAR") applied to acquire its shares. Richemont
purchased 40,687,970 shares of Common Stock with rights which were not
subscribed for and purchased by shareholders in the 1997 Rights Offering per an
agreement with the Company. On April 23, 1997, Richemont advanced $30 million
against this commitment. This advance was used to repay approximately $13
million of indebtedness under the revolving line of credit, bring past due
vendor accounts current and for other general corporate purposes. The Company
also incurred fees of approximately $3 million in relation to the 1997 Rights
Offering which were paid from such gross proceeds.
The agreement by which Richemont provided the Company with a $27.9 million
letter of credit facility was to expire in February 1998. On October 1, 1997,
the Company paid down $1 million of the underlying debt, reducing the letters of
credit to approximately $26.9 million. The letters of credit carry an interest
rate of
17
<PAGE> 19
3.5% above the prime rate, currently 11.25%. At that time, Richemont agreed to
extend its guarantee to March 30, 1999. As consideration for this transaction,
the Company paid to Richemont, in 1998, a fee equal to 4% of the $26.9 million
outstanding letters of credit. On October 1, 1998, the Company paid down an
additional $1 million of the underlying debt, reducing the letters of credit to
approximately $25.8 million. In March 1999, Richemont again definitively agreed
to extend its guarantee under the Reimbursement Agreement to March 31, 2000. As
consideration for this transaction, the Company agreed to pay to Richemont a
facility fee of 9.5% of the principal amount of each letter of credit.
On July 31, 1998, Richemont acquired 5,646,490 additional shares of Common
Stock of the Company pursuant to the exercise of certain common stock purchase
warrants with exercise prices ranging from $1.95 to $2.59 per share and an
aggregate total exercise price of $13.6 million. The Company used the proceeds
of the warrant exercise to reduce amounts outstanding under the Congress Credit
Facility.
In March 1997, the Company received waivers for events of default which
existed at December 28, 1996 under the Credit Facility with Congress. At that
time, Congress and the Company agreed to new working capital and net worth
covenants.
On March 25, 1998, Congress agreed to extend the Revolving Credit Facility
and the Revolving Term Notes to January 31, 2001. The Company is required to
maintain certain financial covenants related to the Credit Facility with
Congress with which the Company was in compliance at December 26, 1998.
At December 26, 1998, the Company had $2.6 million of current debt. Based
upon the December 26, 1998 balance of the Revolving Term Notes, the Company will
continue to make principal payments of $125,000 per month. The Company had zero
amounts outstanding on the Congress Credit Facility at December 26, 1998 and at
December 27, 1997. The total amount available under the Facility at December 26,
1998 was $49 million, including cash on hand.
The Company experiences seasonality in its working capital requirements and
fluctuations in the revolving Credit Facility with peak borrowing requirements
normally occurring during the first and fourth quarters of the year.
Foreign Currency Translation. The Company minimizes currency risks by
making most foreign purchases in U.S. dollars and does not utilize hedging
instruments.
Effect of Inflation and Cost Increases. The Company normally experiences
increased costs of sales and operating expenses as a result of the general rate
of inflation and commodity price fluctuations. Operating margins are generally
maintained through internal cost reductions and operating efficiencies and then
through selective price increases where market conditions permit. The Company's
inventory is primarily mail-order merchandise which undergoes sufficiently high
turnover so that the cost of goods sold approximates replacement cost. Because
sales are not dependent on a particular supplier or product brand, the Company
can adjust product mix to mitigate the effects of inflation on its overall
merchandise base.
Paper and Postage. The Company mails its catalogs and ships most of its
merchandise through the United States Postal Service (USPS), with catalog
mailing and product shipment expenses representing approximately 15% of revenues
in 1998 and 14% of revenues in 1997. Paper costs represented approximately 7% of
revenues in 1998 and 6% of revenues in 1997.
The USPS increased its mailing rates in early 1999. The Company is
implementing plans to mitigate the effect of these increases. If the Company
does not successfully implement any such plans, it may have a material adverse
effect on the results of operations. The United Parcel Service (UPS) raised its
rates for domestic deliveries by 3.6 percent for ground rates and 3.3 percent
for air rates effective February 7, 1998. It has generally been the experience
and the intention of the Company as well as its policy to recover the costs of
shipping, including outbound freight, and handling from its customers.
YEAR 2000 ISSUE
The Year 2000 issue relates to the way computer systems and programs
interpret calendar date entries in two-digit date code fields. A system could
fail or make miscalculations due to the inability to distinguish the
18
<PAGE> 20
year 2000 from the year 1900. Also, some other systems not normally
characterized as information technology systems may contain embedded hardware or
software that would be susceptible to this problem. As a result, many companies
will need to upgrade or replace computer systems in order to comply with Year
2000 requirements.
During 1996, the Company initiated a strategy to begin the process of
correcting the Year 2000 problems. As part of this strategy, the Company formed
a project team to address internal and external Year 2000 issues related to both
information technology and non-information technology systems. The project was
divided into the following phases: 1) Discovery -- identification of all systems
with potential Year 2000 problems and inventorying those systems which must be
modified or replaced, 2) Assessment -- evaluating, categorizing and prioritizing
of Year 2000 issues, 3) Remediation -- correction of Year 2000 issues by
performing modifications to existing systems or converting to new systems, and
4) Testing/Deployment -- validation testing of Year 2000 readiness to ensure all
problems which were discovered are adequately corrected. At the present time,
the remediation and testing/deployment phases for the Company's information
technology infrastructure are approximately 90% complete and should be completed
by July 1999.
The Company has also performed surveys of its suppliers to determine their
Year 2000 readiness. At October 1998, 34% of all suppliers and 80% of the top
100 suppliers represented their products and services to be Year 2000 compliant.
The Company is requesting remaining suppliers to represent their Year 2000
readiness while it also conducts searches for alternate suppliers.
The Company believes the critical systems which it operates will be Year
2000 compliant by July 1999 and believes it is not likely to encounter any
significant operational problems. However, there is no guarantee that a Year
2000 related failure will not arise. This uncertainty is due, to a large extent,
to the uncertainty surrounding potential third party related Year 2000 problems
as well as the potential failure to discover all its own susceptible internal
systems. The risk to the Company resulting from the failure of third party or
internal systems is similar to other database marketing firms and, for the most
part, to other businesses. A reasonable worst case scenario could involve the
failure of Company or supplier systems which would cause a material disruption
to the Company's operations. For example, this could result in an interruption
of certain normal business activities or operations such as a temporary
inability to process transactions, send invoices or engage in certain business
activities. If the worst case scenario should occur (for any significant
duration), it could have a material adverse impact on the Company's business,
results of operations, liquidity and financial position. However, at this time
the Company is unable to completely determine the financial consequences of such
potential Year 2000 failures.
While the Company expects that its efforts will provide reasonable
assurance that material disruptions will not occur, the potential for
interruption still exists. Accordingly, the Company has contracted with a
consulting firm to develop a contingency plan to provide for the continuation of
processing based upon the outcome of its Year 2000 testing program as well as
the results of surveying its major suppliers. Such a contingency plan may
include securing alternate sources of supply, securing redundant
telecommunication sources, accelerating 1999 year end shipments and any other
measures deemed appropriate. At this time, the Company cannot estimate the
additional cost, if any, that might develop from the implementation of such
contingency plans.
The Company believes it is taking the necessary steps to become Year 2000
compliant. The Company's total cost associated with the necessary modifications
is not expected to be material to its financial position. To date, the Company
has spent an estimated $0.2 million and arranged for the replacement of
equipment in 1999 at a cost of $2.9 million. The entire cost estimated for this
project is $3.6 million. These costs primarily represent planned expenditures to
upgrade or replace computer hardware and software in 1999, as well as the costs
of staff and consultants to perform the project and the costs of software tools
for discovery and testing.
19
<PAGE> 21
CAUTIONARY STATEMENTS
The following statements constitute forward looking statements which
involve risks and uncertainties:
The Company does not expect the amount required to be expensed over the
next year to have a material effect on its financial position or results of
operations.
The following are important factors, among others, that could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf, of the Company:
A general deterioration of economic conditions in the United States leading
to increased competitive activity including a business failure of a substantial
size company in the retail industry, a reduction in consumer spending generally,
or specifically with reference to the types of merchandise the Company offers in
its catalogs. The failure of the Internet generally to achieve the projections
for it with respect to growth of e-commerce or otherwise.
The ability of the Company's computer system to connect with the systems of
others and to be able to serve the other's fulfillment needs.
The Company has a history of operating losses. Continuation of the
operating losses may prevent the Company from making the investments in
e-commerce which are required to be made to achieve a position of leadership in
serving the e-commerce needs of companies doing business or desiring to do
business on the Internet.
The ability of the Company to attract management with the requisite
experience in e-commerce or in Internet businesses and to develop a culture
which is consistent with the manner in which e-commerce is managed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
20
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Hanover Direct, Inc.:
We have audited the accompanying consolidated balance sheets of Hanover
Direct, Inc. (a Delaware corporation) and subsidiaries as of December 26, 1998
and December 27, 1997, and the related consolidated statements of income (loss),
shareholders' equity and cash flows for each of the three fiscal years in the
period ended December 26, 1998. 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 26, 1998 and December 27, 1997 and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 26, 1998 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 of valuation and qualifying
accounts is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
February 16, 1999 (except with respect to
the matter discussed in Note 7,
as to which the date is March 2, 1999)
21
<PAGE> 23
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 27, 1997 AND DECEMBER 26, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,758 $ 12,207
Accounts receivable, net of allowance for doubtful
accounts of $3,358 in 1997 and $2,544 in 1998 17,684 22,737
Accounts receivable under financing agreement 21,918 18,998
Inventories 64,330 62,322
Prepaid catalog costs 20,684 16,033
Deferred tax asset, net 3,300 3,300
Other current assets 3,083 2,402
--------- ---------
Total Current Assets 145,757 137,999
--------- ---------
PROPERTY AND EQUIPMENT, AT COST:
Land 4,909 4,634
Buildings and building improvements 16,486 22,724
Leasehold improvements 9,040 9,303
Furniture, fixtures and equipment 47,210 51,193
Construction in progress 4,519 113
--------- ---------
82,164 87,967
Accumulated depreciation and amortization (29,712) (37,884)
--------- ---------
Property and Equipment, net 52,452 50,083
--------- ---------
Goodwill, net 17,412 16,890
Deferred tax asset, net 11,700 11,700
Other assets 2,978 2,198
--------- ---------
Total Assets $ 230,299 $ 218,870
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations $ 5,305 $ 2,573
Accounts payable 58,799 64,594
Accrued liabilities 30,259 22,212
Customer prepayments and credits 3,824 4,691
--------- ---------
Total Current Liabilities 98,187 94,070
--------- ---------
NON-CURRENT LIABILITIES:
Long-term debt 32,735 37,288
Obligations under receivable financing 21,918 18,998
Other 1,908 2,044
--------- ---------
Total Non-current Liabilities 56,561 58,330
--------- ---------
Total Liabilities 154,748 152,400
========= =========
COMMITMENTS AND CONTINGENCIES (Note 16)
SHAREHOLDERS' EQUITY:
Series B Convertible Additional Preferred Stock, $.01 par
value, authorized, issued and outstanding 634,900 shares
in 1997 and 1998 5,938 6,128
Common Stock, $.66 2/3 par value, authorized 225,000,000
shares; issued 204,441,538 shares in 1997 and
210,785,688 in 1998 136,294 140,524
Capital in excess of par value 285,165 297,751
Accumulated deficit (347,652) (373,815)
--------- ---------
79,745 70,588
--------- ---------
Less:
Treasury stock, at cost (686,216 shares in 1997 and
358,303 shares in 1998) (968) (813)
Notes receivable from sale of Common Stock (3,226) (3,305)
--------- ---------
Total Shareholders' Equity 75,551 66,470
--------- ---------
Total Liabilities and Shareholders' Equity $ 230,299 $ 218,870
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE> 24
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
REVENUES $ 700,314 $557,638 $546,114
--------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of sales and operating expenses 479,155 358,219 343,554
Write-down of inventory of discontinued catalogs 1,100 -- 3,726
Special charges (credit) 36,724 (2,209) (485)
Selling expenses 195,032 141,411 148,767
General and administrative expenses 70,608 53,839 57,881
Depreciation and amortization 12,192 8,227 9,478
--------- -------- --------
794,811 559,487 562,921
--------- -------- --------
(LOSS) FROM OPERATIONS (94,497) (1,849) (16,807)
Interest expense, net (8,398) (8,028) (7,778)
(Loss) before income taxes (102,895) (9,877) (24,585)
Income tax provision 1,000 999 1,000
--------- -------- --------
(Loss) before extraordinary item (103,895) (10,876) (25,585)
Extraordinary item (Note 8) (1,134) -- --
--------- -------- --------
NET (LOSS) (105,029) (10,876) (25,585)
Preferred stock dividends (225) (190) (578)
--------- -------- --------
NET (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $(105,254) $(11,066) $(26,163)
========= ======== ========
COMPREHENSIVE INCOME $(105,254) $(11,066) $(26,163)
========= ======== ========
NET (LOSS) PER SHARE:
Loss before extraordinary item $ (.93) $ (.06) $ (.13)
Extraordinary item (.01) -- --
--------- -------- --------
Net (loss) per share -- basic and diluted $ (.94) $ (.06) $ (.13)
========= ======== ========
Weighted average common shares outstanding -- basic
and diluted 111,441 176,621 206,508
========= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE> 25
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997, AND DECEMBER 26, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(105,029) $(10,876) $(25,585)
Adjustments to reconcile net (loss) to net cash (used) by
operating activities:
Depreciation and amortization including deferred fees 13,277 10,581 11,466
Provision for doubtful accounts 6,805 3,973 3,278
Provision for catalog and facility closings 14,720 (2,209) (485)
Write-down of inventory of discontinued catalogs 1,100 -- 3,726
Write-off of long-lived assets 22,000 -- --
Extraordinary item-early extinguishment of debt 1,134 -- --
Provision for losses on notes receivable and marketable
securities 888 -- --
Other, net 53 -- --
Compensation expense related to stock options 540 1,800 2,684
Recovery from investments previously written off -- (1,274) --
Changes in assets and liabilities, net of effects of
acquired businesses
and dispositions of assets:
Accounts receivable, net (7,863) 7,742 (8,331)
Inventories 10,571 3,280 (1,718)
Prepaid catalog costs 13,717 2,717 4,651
Accounts payable (13,704) (20,788) 5,795
Accrued liabilities 679 (6,583) (7,562)
Customer prepayments and credits (2,430) (893) 867
Other 1,332 (205) (867)
--------- -------- --------
Net cash (used) by operating activities (42,210) (12,735) (12,081)
========= ======== ========
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment, net (8,862) (4,222) (6,111)
Proceeds from sales of businesses 1,980 -- --
Proceeds from investment 794 1,274 --
--------- -------- --------
Net cash (used) by investing activities (6,088) (2,948) (6,111)
========= ======== ========
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) under revolving credit facility 11,699 (13,710) --
Proceeds from term loan facility -- -- 7,272
Proceeds from issuance of debt 10,000 -- --
Payments of long-term debt and capital lease obligations (17,625) (3,575) (5,433)
Payment of stock issuance costs (1,670) (3,073) --
Payment of debt issuance costs (1,490) -- --
Proceeds from issuance of Common Stock 50,653 45,351 561
Proceeds from issuance of Warrant Exercise -- -- 13,640
Other, net (778) 275 (399)
--------- -------- --------
Net cash provided by financing activities 50,789 25,268 15,641
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,491 9,585 (2,551)
Cash and cash equivalents, beginning of year 2,682 5,173 14,758
--------- -------- --------
Cash and cash equivalents, end of year $ 5,173 $ 14,758 $ 12,207
========= ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ 7,773 $ 5,674 $ 5,095
Income taxes paid $ 1,096 $ 685 $ 447
========= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE> 26
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK
SERIES B PREFERRED STOCK COMMON STOCK CAPITAL
CUMULATIVE SERIES A, 6.0% 2/3 PAR6VALUE IN EXCESS
---------------- ---------------- ---------------------- OF ACCUM.
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAR VALUE (DEFICIT)
------- ------ ------- ------ ----------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 634,900 $5,558 78,300 $795 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 190 35
Conversion of the 6% Preferred
Stock (78,300) (830) 819,733 546 284
Purchase of treasury stock
Transfer of treasury stock
related to employment
agreement (2,750)
Sale of treasury stock 28
Issuances & forfeitures of
Common Stock for employee
stock plan 1,778,235 1,187 678
------- ------ ------- ---- ----------- -------- -------- ---------
BALANCE AT DECEMBER 28, 1996 634,900 $5,748 0 $ 0 145,039,915 $ 96,693 $270,097 $(336,586)
Net income/(loss) applicable to
common shareholders (11,066)
Preferred stock accretion 190
Stock options granted 2,340
Shares issued in 1997 Rights
Offering, net of issue costs 55,654,623 37,103 9,958
Issuance of Common Stock to
SMALLCAP World Fund, Inc. 3,700,000 2,467 2,750
Issuances & forfeitures of
Common Stock for employee
stock plan 47,000 31 20
------- ------ ------- ---- ----------- -------- -------- ---------
BALANCE AT DECEMBER 27, 1997 634,900 $5,938 0 $ 0 204,441,538 $136,294 $285,165 $(347,652)
Net income/(loss) applicable to
common shareholders (26,163)
Cash received for tandem
receivable
Preferred stock accretion 190
Stock options granted 2,684
Exercise of Warrants 5,646,490 3,764 9,876
Issuances & forfeitures of
Common Stock for employee
stock plan 697,660 466 26
------- ------ ------- ---- ----------- -------- -------- ---------
BALANCE AT DECEMBER 26, 1998 634,900 $6,128 0 $ 0 210,785,688 $140,524 $297,751 $(373,815)
======= ====== ======= ==== =========== ======== ======== =========
<CAPTION>
NOTES
TREASURY STOCK RECEIVABLE DEFERRED
-------------------- FROM SALE OF COMPEN-
SHARES AMOUNT COMMON STOCK SATION TOTAL
---------- ------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 (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
Issuances & forfeitures of
Common Stock for employee
stock plan (1,376) 294 783
---------- ------- ------- ----- ---------
BALANCE AT DECEMBER 28, 1996 (392,017) $ (813) $(3,399) $ 0 $ 31,740
Net income/(loss) applicable to
common shareholders (11,066)
Preferred stock accretion 190
Stock options granted 2,340
Shares issued in 1997 Rights
Offering, net of issue costs 47,061
Issuance of Common Stock to
SMALLCAP World Fund, Inc. 5,217
Issuances & forfeitures of
Common Stock for employee
stock plan (294,199) (155) 173 69
---------- ------- ------- ----- ---------
BALANCE AT DECEMBER 27, 1997 (686,216) $ (968) $(3,226) $ 0 $ 75,551
Net income/(loss) applicable to
common shareholders (26,163)
Cash received for tandem
receivable 69 69
Preferred stock accretion 190
Stock options granted 2,684
Exercise of Warrants 13,640
Issuances & forfeitures of
Common Stock for employee
stock plan 327,913 155 (148) 499
---------- ------- ------- ----- ---------
BALANCE AT DECEMBER 26, 1998 (358,303) $ (813) $(3,305) $ 0 $ 66,470
========== ======= ======= ===== =========
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
1. BACKGROUND OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Hanover Direct, Inc., a Delaware corporation
("HDI"), is a leading specialty direct marketer with a diverse branded portfolio
of home fashions, general merchandise, men's and women's apparel and gift
catalogs, delivered via direct mail and electronic commerce platforms. The
Company currently operates in one line of business direct marketing, through its
branded portfolio of specialty catalogs and related retail operations. The
operations of the Company are directed principally by the Chief Executive
Officer, with oversight by the Executive Committee of the Board of Directors.
The Company utilizes a common support platform for the management of its
operations, consisting of uniform telemarketing, distribution, and inventory
management strategies, as well as a shared financial and accounting organization
and universal information systems that provide customer database management and
support the e-commerce marketing plan. All business is domestic in nature with
no operations or sales outside the United States. Accordingly, there are no
specific operating or geographic segment disclosures, pursuant to SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", other
than the consolidated financial position and results of operations.
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.
Effective for fiscal 1997, the Company changed its fiscal year to the last
Saturday in December. The years ended December 26, 1998, December 27, 1997 and
December 28, 1996 were 52 week years. Had the Company not changed its year end,
fiscal 1997 would have been a 53 week year and the net loss for 1997 would have
increased by approximately $0.6 million.
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 directly 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 -- Prepaid catalog costs consist of direct response
advertising costs related to catalog production and mailing. These costs are
deferred and amortized as selling expenses over the estimated period in which
the sales associated with such advertising are generated, in accordance with SOP
93-7, "Reporting on Advertising Costs". Total catalog expense was $193.5
million, $139.0 million and $145.0 million, respectively, in 1996, 1997 and
1998.
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.
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
Goodwill, Net -- 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 $3.5 million and $4.0 million at December 27, 1997
and December 26, 1998, respectively.
Mailing Lists -- The costs of acquired mailing lists are amortized over a
five year period. Mailing lists, included in Other assets, amounted to $.7
million and $.3 million at December 27, 1997 and December 26, 1998,
respectively, and are carried net of accumulated amortization of $2.5 million
and $2.9 million, respectively.
Asset Recoverability -- In accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Improvement of
Long-lived Assets and Long-Lived Assets 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 undiscounted 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). No such adjustment was recorded in 1997
or 1998.
Accounting for Stock Based Compensation -- The Company accounts for its
stock based compensation to employees using the fair value-based method under
SFAS No. 123, "Accounting for Stock-Based Compensation."
Accounting for Income Taxes -- The Company accounts for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." It requires an
asset and liability approach for financial accounting and reporting for income
taxes. The provision for income taxes is based on 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.
Accounting for Transfers of Credit Card Receivables -- The Company accounts
for transfers and servicing of financial assets in accordance with SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." This statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. The adoption of this statement in fiscal 1997 resulted in the
recognition of approximately $21.9 million and $19.0 million of additional
accounts receivable and associated long-term debt at December 27, 1997 and
December 26, 1998, respectively. This adjustment was based on the terms of the
Company's agreement with an unrelated third party for the sale and servicing of
accounts receivable. The provisions of this pronouncement were applied
prospectively, from January 1, 1997.
Cash and Cash Equivalents -- Cash and cash equivalents include cash and all
highly liquid investments with original maturities of ninety days or less.
Net (Loss) per Share -- Net (loss) per share is computed using the weighted
average number of common shares outstanding in accordance with the provisions of
SFAS No. 128, "Earnings Per Share." The weighted average number of shares used
in the calculation for both basic and diluted net (loss) per share in 1996, 1997
and 1998 was 111,441,247, 176,621,080 and 206,508,110 shares, respectively.
Diluted earnings per share equals basic earnings per share as the dilutive
calculation would have an antidilutive impact as a result of the net loss
incurred in each of the years 1996, 1997 and 1998.
Recently Issued Accounting Standards -- In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes new accounting and reporting standards for
derivative financial instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. This statement is effective
for fiscal years beginning after June 15, 1999. As
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
the Company currently does not engage in derivative instruments and hedging
activities, this statement is not expected to have a significant impact on the
Company's financial statements.
Revenues -- The Company recognizes revenue at the time 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 NON-CASH ACTIVITIES
<TABLE>
<CAPTION>
1996 1997 1998
------ ------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligations $ -- $ 163 $--
------ ------- ---
Other equity issuances and exchanges $2,855 $10,000 $--
------ ------- ---
</TABLE>
2. ACQUISITIONS AND INVESTMENTS
Acquisitions -- During fiscal 1995, the Company acquired the entities
described below, which were accounted for by the purchase method of accounting.
The operating results of these acquired businesses have been included in the
consolidated statements of income (loss) 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 was
being held for sale, was written down to its estimated net realizable value as
of December 28, 1996. During fiscal 1997, the Company sold this facility.
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 9. 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 excess
purchase price over the fair values of the net assets acquired (goodwill) was
$4.5 million. Approximately $1.2 million of
28
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
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).
Other Investments -- Other investments, which are recorded in Other assets
in the accompanying consolidated balance sheets, include the following:
Blue Ridge Associates -- In January 1994, the Company purchased for $1.1
million a 50% interest in Blue Ridge Associates ("Blue Ridge"), a partnership
which owns the apparel distribution center in Roanoke, VA. The remaining 50%
interest is held by an unrelated third party. This investment is accounted for
by the equity method of accounting. The Company's investment in Blue Ridge was
approximately $.9 million at December 27, 1997 and December 26, 1998. In
December 1996, the Company decided to consolidate fulfillment and telemarketing
activities handled at this facility into its home fashions distribution facility
in Roanoke, VA and attempted to sublease the vacated space. The partnership is
currently looking for a sub-lessee for the apparel distribution center.
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 convertible debt matures on June 15, 2008, only $.8 million of
distributions were received through 1996. Due to the uncertainty that
recoverability of substantially all of the remaining investment balance was
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. In the third and fourth quarters of 1997, the
Company received approximately $1.3 million related to distributions made by
Regal. This amount was recorded as income and is reflected as a reduction in
general and administrative expenses in the accompanying consolidated statements
of income (loss).
3. SPECIAL CHARGES
In December 1996, the Company recorded special charges aggregating
approximately $36.7 million. These charges consisted of severance and facility
exit/relocation costs and fixed asset write-offs related to the downsizing of
the Company. In addition, the special charges included a write-off for
impairment of long-lived assets of certain underperforming catalogs. In December
1997, the Company adjusted its previous estimates for severance, facility
exit/relocation and fixed asset write-offs based upon exit plan modifications
related to its Weehawken, NJ corporate facility and delays in relocating from
its Hanover, PA distribution center. Such adjustments resulted in a reduction of
special charges of approximately $2.2 million which consisted of $.4 million in
restructuring reserve reductions and $1.8 million related to the reversal of the
reserve for fixed assets expected to be abandoned. In 1998, the Company further
adjusted its estimate for fixed asset write-offs by $0.5 million based upon its
decision not to exit its distribution facility in Hanover, PA.
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. The
Company paid approximately $0.6 million and $2.7 million of severance during
fiscal 1998 and 1997, respectively. No remaining reserve was required at
December 26, 1998 for severance costs.
Facility Exit/Relocation Costs and Fixed Asset Write-Offs -- These costs
are primarily composed of the Company's decision to sublet its Weehawken, NJ
corporate facility, and consolidate its Roanoke, VA apparel distribution center
and Hanover, PA distribution center into its Roanoke, VA home fashion
distribution center. As of December 27, 1997, the Company consolidated the
Roanoke, VA apparel distribution center and relocated two of six catalogs from
its Hanover, PA distribution center into its Roanoke, VA home fashion
distribution center. Two of the remaining four catalogs were relocated by the
end of fiscal 1998, while the other two catalogs will remain in the Hanover, PA
distribution center. In addition, the Company modified its
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
plan to vacate from its Weehawken, NJ corporate facility by agreeing to sublet a
portion of the facility. Approximately $3.3 million and $4.4 million of these
costs are recorded in Accrued liabilities in the accompanying consolidated
balance sheets at December 26, 1998 and December 27, 1997, respectively.
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 assets are deemed to be impaired if a forecast of
undiscounted future operating cash flows is less than the carrying amounts.
Considerable management judgment is necessary to estimate discounted future cash
flows and, accordingly, actual results could vary significantly from such
estimates. The Company recognized an impairment loss of approximately $22.0
million in fiscal 1996 which was primarily composed of the write-off of goodwill
and mailing lists associated with Tweeds, Austad's and The Safety Zone.
4. WRITE-DOWN OF INVENTORY OF DISCONTINUED CATALOGS
In 1998, the Company made a decision to discontinue the traditional catalog
operations of the Tweeds, Austad's and Colonial Garden Kitchens catalog brands.
These brands are to be repositioned primarily as e-commerce brands. The three
non core catalogs generated revenues of $96.2 million, $65.6 million and $46.3
million and variable contribution losses of $6.6 million, $1.9 million and $8.9
million in 1996, 1997 and 1998, respectively. The variable contribution losses
in 1998 include provisions of approximately $3.7 million related to the
write-down of inventory associated with these catalogs to their net realizable
value based on the planned liquidation of such inventory and $2.2 million of
additional fourth quarter charges relating to prepaid catalog costs associated
with the discontinuance of the catalog operations.
In 1995, the Company made a decision to discontinue six catalog brands. The
six discontinued catalog brands generated revenues of $20 million and $0.6
million and losses of $5.1 million and $0.1 million in 1996 and 1997,
respectively. The loss in 1996 includes a provision of approximately $1.1
million primarily related to the write-down of inventory associated with these
catalog brands to their net realizable value based on the planned liquidation of
such inventory. This write-down 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.
These losses represent an incremental provision in excess of the original
provision included in cost of sales expense.
5. ACCOUNTS RECEIVABLE, NET
The Company currently maintains an agreement with an unrelated third party
which provides for the sale and servicing of accounts receivable originating
from the Company's revolving credit 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 annual financial covenants related
to this agreement and was not in compliance at December 26, 1998 and
subsequently has received waivers for the default.
On March 9, 1999, the Company executed an agreement with a third party
whereby the third party will replace the current service provider of the
Company's private label credit card program. The agreement provides for the sale
of the existing portfolio to the third party, at similar terms, and also
provides for the Company to share credit risk with the third party above an
agreed upon benchmark for the first eighteen months of the agreement. After the
expiration of this period, the transaction is non-recourse to the Company. No
gain or loss will be recognized upon execution of the new agreement. The
agreement expires in
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
March 2002 and can be renewed for additional one year terms. There are no
financial covenants associated with this agreement. The Company expects
conversion to the new program to occur by mid 1999.
The proceeds to the Company relating to the sale of receivables for 1996,
1997 and 1998 were $39.2 million, $39.0 million, and $33.3 million respectively.
At December 27, 1997 and December 26, 1998, the uncollected balances under this
program were $29.4 million and $24.7 million, respectively, of which $4.0
million and $3.5 million respectively represent deposits under the agreement
which are included in Accounts receivable, net. The total reserve balances
maintained for the repurchase of uncollectible accounts were $2.5 million and
$2.0 million at December 27, 1997 and December 26, 1998, of which $1.4 million
at December 27, 1997 and $1.5 million at December 26, 1998 are included in
Accrued liabilities and the remaining balance is included in the allowance for
doubtful accounts.
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.
In addition, in accordance with SFAS No. 125 (Note 1), the Company has
reflected approximately $19.0 million of balances transferred pursuant to the
agreement with the unrelated third party as Accounts receivable under financing
agreement and as a long-term obligation on the consolidated balance sheet at
December 26, 1998.
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
Restructuring $ 5,424 $ 3,286
Reserve for future sales returns 6,043 4,778
Compensation 7,189 3,999
Taxes 1,983 1,211
Reserve for repurchase of accounts receivable sold
with recourse 1,397 1,491
Other 8,223 7,447
------- -------
Total $30,259 $22,212
======= =======
</TABLE>
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
Congress Facility $ 7,917 $14,033
Term Financing Facility 18,000 17,000
6% Mortgage Notes Payable due 1998 2,787 --
Industrial Revenue Bonds due 2003 8,000 8,000
7.5% Convertible Subordinate Debentures due 2007 751 751
Obligations under Capital Leases 585 77
------- -------
38,040 39,861
Less: current portion 5,305 2,573
------- -------
Total $32,735 $37,288
======= =======
</TABLE>
31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
Congress Facility -- The Congress Facility is comprised of a revolving line
of credit of up to $65 million and term loans aggregating $14.0 million at
December 26, 1998. The amount that can be borrowed under the Congress Facility
is based on percentages of eligible inventory and accounts receivable. The
Congress Facility is secured by all assets of the Company. On March 25, 1998,
the Company amended its agreement with Congress to extend the facility until
January 31, 2001. The Congress Facility places limitations on the incurrence of
additional indebtedness. Beginning in November 1996, Congress lowered the
advance rate by which the available inventory is calculated. Pursuant to the
amendment discussed above, advance rates were increased along with other
modifications that increased the Company's availability under the Facility. The
Congress Revolving Credit Facility, prior to the amendment, bore interest at
1.25% above the prime rate and the Revolving Term Notes bore interest at 1.5%
above prime rate. As amended, the Revolving Credit Facility bears interest at
prime plus .5% or Eurodollar plus 2.5% and the Revolving Term Note bears
interest at prime plus .75% or Eurodollar plus 2.75%. The Company is required to
maintain minimum net worth and working capital throughout the terms of the
agreement. The Company was in compliance with such covenants at December 26,
1998. At December 26, 1998 and for the remainder of the agreement, net worth and
working capital are required to be $21.5 and $(10) million, respectively. The
rates of interest related to the Congress Revolving Credit Facility and
Revolving Term Notes at December 26, 1998 were 8.25% and 8.5%, respectively. As
of December 26, 1998, the Company had no revolving indebtedness and $14.0
million outstanding in Revolving Term Notes, respectively. As of December 27,
1997, the Company also had no revolving indebtedness and $7.9 million
outstanding in Revolving Term Notes, respectively. The face amount of unexpired
documentary letters of credit at December 27, 1997 and December 26, 1998 were
$3.0 million and $2.8 million respectively. At December 26, 1998, availability
under the Congress Facility was approximately $49 million, including cash on
hand.
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 5.24% to 5.91%
at December 26, 1998 and 5.13% to 6.04% at December 27, 1997. The Term Financing
Facility was reduced by annual principal payments of $1.0 million in October
1997 and 1998 and requires annual principal payments of $1.0 million in October
1999 with this amount increasing to $1.6 million for each of the nine years
thereafter. The Term Financing Facility continues to be outstanding and in
effect under its original terms.
In December 1996, the Company finalized its agreement (the "Reimbursement
Agreement") with Richemont Finance S.A. ("Richemont"), who along with the family
of Alan G. Quasha, Chairman of the Board of the Company, jointly own NAR Group
Limited ("NAR"), that provided the Company with approximately $27.9 million of
letters of credit through Swiss Bank, New York Branch 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. On October 1, 1997 and October 1, 1998, the Company paid
down $1 million of the underlying debt, reducing the letters of credit to
approximately $25.8 million. The letters of credit were originally due on
February 18, 1998, however, the term was extended through March 30, 1999 and the
letters of credit were modified to reflect assignment of obligations to Swiss
Bank, Stamford Branch. The letters of credit carry an interest rate of 3.5%
above the prime rate, currently 11.25%. In 1998, the Company paid a facility fee
of $1.1 million which is equal to 4% of the principal amount of the letters of
credit. On March 2, 1999, Richemont agreed to extend its guarantee under the
Reimbursement Agreement to March 31, 2000. As consideration for this guarantee,
the Company agreed to pay to Richemont a facility fee of 9.5% of the principal
amount of 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
32
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
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.
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 notes were repaid in
full in August 1998.
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 the Reimbursement Agreement. The obligations are
guaranteed by the Company.
General -- At December 26, 1998, the aggregate annual principal payments
required on debt instruments are as follows (in thousands): 1999 -- $2,573;
2000 -- $3,104; 2001 -- $12,633; 2002 -- $1,600; 2003 -- $9,600 and
thereafter -- $10,351.
8. RIGHTS OFFERINGS AND ADDITIONAL INVESTMENTS
1997 RIGHTS OFFERING
The Company commenced a $50 million rights offering (the "1997 Rights
Offering") on April 29, 1997. Holders of record of the Company's Common Stock
and Series B Convertible Additional Preferred Stock as of April 28, 1997, the
record date, were eligible to participate in the 1997 Rights Offering. The
Rights were exercisable at $.90 per share. The 1997 Rights Offering expired on
May 30, 1997, with 55,654,623 rights to purchase shares exercised, and it closed
on June 6, 1997.
Richemont entered into a standby purchase agreement to purchase all shares
not subscribed for by shareholders of record at the subscription price.
Richemont purchased 40,687,970 shares in the 1997 Rights Offering and, as a
result, then owned approximately 20.3% of the Company. The Company paid in cash,
from the proceeds of the 1997 Rights Offering, to Richemont on the closing date
approximately $1.8 million, which represented an amount equal to 1% of the
aggregate offering price of the aggregate number of shares issuable upon closing
of the 1997 Rights Offering other than with respect to the shares of Common
Stock held by NAR or its affiliates plus an amount equal to one-half of one
percent of the aggregate number of shares acquired by NAR upon exercise of their
rights (Standby Fee) plus an amount equal to 4% of the aggregate offering price
in respect to all unsubscribed shares (Take-Up Fee).
On April 26, 1997, NAR irrevocably agreed with the Company, subject to and
upon the consummation of the 1997 Rights Offering, to exercise certain of the
rights distributed to it for the purchase of 11,111,111 shares of Common Stock
that had an aggregate purchase price of approximately $10 million. NAR agreed to
pay for, and the Company agreed to accept as payment, for the exercise of such
rights the surrender by NAR of the principal amount due under the
Intercontinental Mining & Resources Limited ("IMR") Promissory Note dated
September 1996 in the principal amount of $10 million and cancellation thereof.
In order to facilitate vendor shipments and to permit the commencement of
the Company's plan to consolidate certain of its warehousing facilities,
Richemont advanced $30 million as of April 23, 1997 against its commitment to
purchase all of the unsubscribed shares pursuant to the standby purchase
agreement. The Company executed a subordinated promissory note in the amount of
$30 million to evidence this indebtedness (the "Richemont Promissory Note").
The gross cash proceeds from the 1997 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 which were paid for by surrender and
cancellation of the $10 million IMR Promissory Note) were used to repay the $30
million principal amount outstanding under the Richemont Promissory Note and the
balance of the proceeds
33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
were used for working capital and general corporate purposes, including
repayment of amounts outstanding under the Company's Revolving Credit Facility.
1996 RIGHTS OFFERING
The Company commenced its $50 million Rights Offering (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 were eligible to participate in
the 1996 Rights Offering. The rights were exercisable at a price of $1.03 per
share.
Shareholders received 0.51 rights for each share of Common Stock held, 3.72
rights for each share of Series A Convertible Additional Preferred Stock held
and 0.77 rights for each share of Series B Convertible Additional Preferred
Stock held as of the record date. The 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 the 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 pursuant to 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 for 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% 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.
ADDITIONAL INVESTMENTS
In November 1997, the Company announced that SMALLCAP World Fund, Inc.
("SMALLCAP"), a mutual fund and substantial investor in the Company, agreed to
purchase 3.7 million shares of the Company's Common Stock at $1.41 per share,
which represented fair market value, for an aggregate purchase price of
approximately $5.2 million in a private placement. This transaction was
consummated on November 6, 1997. These shares were restricted and were
subsequently registered under the Securities Act of 1933, as amended, pursuant
to a registration rights agreement with SMALLCAP that called for the Company to
use its best efforts to effect the registration of such shares as soon as
practicable after April 1, 1998.
On July 31, 1998, Richemont acquired 5,646,490 additional shares of Common
Stock of the Company pursuant to the exercise of certain common stock purchase
warrants with exercise prices from $1.95 to $2.59 per share and an aggregate
total exercise price of $13.6 million. The Company used the proceeds of the
warrant exercise to reduce the amounts outstanding under the Congress Credit
Facility.
9. CAPITAL STOCK
Series B Convertible Additional Preferred Stock -- In February 1995, the
Company issued 634,900 shares of its Class B Convertible Additional Preferred
Stock ("Series B Stock") to acquire the remaining 80% of the outstanding common
stock of Aegis Safety Holdings, Inc. ("Aegis"), publisher of The Safety Zone
catalog. The Series B Stock has a stated value of $10 per share. Non-cumulative
dividends were to accrue and be paid at 5% per annum during each of the first
three years after the February 1995 closing if Aegis attains at least $1
34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
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 1997 based on The Safety Zone catalog's operating results for the year.
In 1998 no dividend was paid, however, an accrual was made for $388,000 to cover
the dividend requirement for a portion of the fourth year at a rate of 7%.
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. 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 consolidated statements of
income (loss) in 1996, 1997 and 1998.
General -- At December 26, 1998, there were 210,427,385 shares of Common
Stock and 634,900 shares of Series B Stock outstanding. Additionally, an
aggregate of 14,362,830 shares of Common Stock were reserved for issuance
pursuant to the exercise of outstanding options.
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.
10. STOCK BASED COMPENSATION PLANS
The Company has established several stock based compensation programs for
the benefit of its employees. As discussed in Note 1, the Company adopted the
fair value provisions of SFAS No 123. The Company has recorded compensation
charges of $2.7 million, $1.8 million and $.5 million in 1998, 1997 and 1996,
respectively. 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
35
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
discretion of the Compensation Committee. Changes in options outstanding,
expressed in numbers of shares, are as follows:
1978 STOCK OPTION PLAN
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------ -----------------
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 90,000 $2.42 70,000 $2.11 30,000 $2.25
Granted -- -- -- -- -- --
Exercised -- -- -- -- -- --
Forfeited -- -- (40,000) $2.00 -- --
Expired (20,000) $3.50 -- -- -- --
------- ----- ------- ----- ------ -----
Options outstanding, end of period 70,000 $2.11 30,000 $2.25 30,000 $2.25
======= ===== ======= ===== ====== =====
Options exercisable, end of period 23,333 $2.11 20,000 $2.25 30,000 $2.25
======= ===== ======= ===== ====== =====
</TABLE>
The options outstanding at December 26, 1998 have a weighted average
exercise price of $2.25 with a weighted average contractual life of 1.8 years.
Director Options -- 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 February 1996, four directors were
granted options to purchase 5,000 shares each, at the current market price,
which at the time was $1.44. These options expire in February 2001. In 1998,
5,000 options were canceled for a director no longer on the board.
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. Company financing is
36
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
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:
EXECUTIVE EQUITY INCENTIVE PLAN
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- -------------------- --------------------
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 877,163 1,062,496 1,109,496
Shares purchased 202,000 47,000 --
Shares forfeited (16,667) -- (2,000)
--------- --------- ---------
Shares outstanding, end of
period 1,062,496 1,109,496 1,107,496
========= ========= =========
Options outstanding,
beginning of period 1,021,170 $2.66 640,498 $1.73 664,000 $1.53
Granted 350,000 $1.00 94,000 $1.00 -- --
Forfeited (730,672) $2.68 (70,498) $2.60 (50,000) $2.50
--------- ----- --------- ----- --------- -----
Options outstanding, end of
period 640,498 $1.73 664,000 $1.53 614,000 $1.44
========= ===== ========= ===== ========= =====
Options exercisable, end of
period 173,832 $2.56 130,000 $2.58 80,000 $2.63
========= ===== ========= ===== ========= =====
</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 and 1997: risk free interest rate of
6.06% -- 6.37%, expected lives of 6 years, expected volatility of
39.07% -- 40.81%, and no expected dividends.
The following table summarizes information about stock options outstanding
at December 26, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/26/98 LIFE PRICE AT 12/26/98 PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .69 to $1.00 444,000 3.8 $ .97 -- --
$2.50 to $3.00 170,000 1.4 $2.65 80,000 $2.63
------- ------
Total 614,000 3.1 $1.44 80,000 $2.63
</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 is payable 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.
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
Changes to the notes receivable related to the Incentive Plan are as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Notes receivable balance, beginning of
period $1,651,000 $1,742,000 $1,734,000
Additions 202,000 32,000 --
Payments (111,000) (40,000) (31,000)
---------- ---------- ----------
Notes receivable, end of period $1,742,000 $1,734,000 $1,703,000
========== ========== ==========
</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. The plan
was terminated on July 31, 1996 and closed to any future purchases.
Under the Investment Plan, employees were given the opportunity to purchase
shares of the Company's Common Stock at a 40% discount from the average market
value of a share of stock over a 20-day period prior to subscription. Shares
became vested over a three-year period and upon such date when a participant
ceased employment, any unvested shares were forfeited.
Changes in shares outstanding expressed in numbers of shares for the
Investment Plan were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Shares outstanding, beginning of period 508,134 521,032 482,771
Shares purchased 80,550 -- --
Shares forfeited (67,652) (38,261) (10,432)
------- ------- -------
Shares outstanding, end of period 521,032 482,771 472,339
======= ======= =======
</TABLE>
As of December 26, 1998, a total of 11,027 of outstanding shares are
scheduled to vest in February 1999. There are no other outstanding shares
purchased under the Investment Plan which have not yet been vested.
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.
1996 Stock Option Plan -- Pursuant to the Company's 1996 Stock Option Plan
(the "1996 Plan"), an aggregate of 7,000,000 shares of the Company's Common
Stock were approved for issuance to employees of the Company. The option
exercise price is the fair market value as of the date of grant. The exercise
price of incentive stock options granted to an employee who owns more than 10%
of the total combined voting power of all classes of stock of the Company is
equal to 110% of the fair market value of the Company's Common Stock on the date
of grant. Options granted may be performance based and all options granted must
be specifically identified as incentive stock options or nonqualified options,
as defined in the Internal Revenue Code. No employee may be granted stock
options in excess of 500,000 shares of the Company's Common
38
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
Stock and the aggregate fair market value of Common Stock for which an employee
is granted incentive stock options that first became exercisable during any
given calendar year shall be limited to $100,000. To the extent such limitation
is exceeded, the option shall be treated as nonqualified. Stock options may be
granted for terms not to exceed 10 years and shall be exercisable in accordance
with the terms and conditions specified in each option agreement. In the case of
an employee who owns stock possessing more than 10% of the total combined voting
power of all classes of stock, the options must become exercisable within 5
years. Payment for shares purchased upon exercise of options shall be in cash or
stock of the Company.
Changes in options outstanding, granted and the weighted average exercise
prices are as follows:
1996 STOCK OPTION PLAN
<TABLE>
<CAPTION>
1996 1997 1998
--------------------- --------------------- ---------------------
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 -- -- 3,445,000 $0.98 4,451,249 $0.98
Granted 3,445,000 $0.98 1,765,000 $1.29 1,550,000 $3.07
Exercised -- -- -- -- (363,949) $1.01
Forfeited -- -- (758,751) $1.01 (335,900) $1.52
Expired -- -- -- -- -- --
---------- ----- ---------- ----- ---------- -----
Options outstanding, end of period 3,445,000 $0.98 4,451,249 $1.10 5,301,400 $1.66
========== ===== ========== ===== ========== =====
Options exercisable, end of period -- $ -- 855,443 $0.98 1,749,232 $1.07
========== ===== ========== ===== ========== =====
Weighted average fair value of
options granted $ 0.67 $ 0.66 $ 1.50
========== ========== ==========
</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, 1997 and 1998: risk free interest rate of 6.80%,
6.21% and 5.64% respectively, expected lives of 7, 4 and 4 years, respectively,
and expected volatility of 45.35%, 59.40% and 55.82%, respectively, and no
expected dividends. The following table summarizes information about stock
options outstanding at December 26, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/26/98 LIFE PRICE AT 12/26/98 PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.69 to $1.00 2,688,570 4.9 $0.96 1,405,958 $0.97
$1.43 to $1.75 1,122,830 5.6 $1.46 343,274 $1.46
$2.44 to $2.88 415,000 6.8 $2.60 -- --
$3.19 to $3.50 1,075,000 6.1 $3.24 -- --
--------- ---------
Total 5,301,400 5.4 $1.66 1,749,232 $1.07
</TABLE>
The Chief Executive Officer (The "CEO") Stock Option Plans -- the
information below details each of the stock based plans granted in 1996 for the
benefit of the CEO. In each of the plans: (1) the option price represents the
average of the low and high fair market values of the Common Stock on August 23,
1996, the date of the closing of the 1996 Rights Offering, (2) the options
outstanding at December 26, 1998 have an
39
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
exercise price of $1.16, and (3) payment for shares purchased upon the exercise
of the option shall be in cash or stock of the Company.
The details of the plans are as follows:
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 is subject to antidilution
provisions and due to the Company's 1996 Rights Offering was 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. The options
outstanding at December 26, 1998 have a weighted average contractual life
of 7.25 years.
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 in
1996. 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. The options expire 10
years from the date of grant and vest over four years. Payment for shares
purchased upon the exercise of the options shall be in cash or stock of the
Company. The options outstanding at December 26, 1998 have a weighted
average contractual life of 7 years.
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 in 1996. The options expire 10 years from the date of grant and
will become vested upon the Company's stock price reaching a specific
target over a consecutive 91 calendar day period as defined by the
Compensation Committee of the Board of Directors. In May 1998, the
Compensation Committee of the Board of Directors reduced the target per
share market price at which the Company's Common Stock had to trade in
consideration of the dilutive effect of the increase in outstanding shares
from the date of the grant. The performance period has a range of 6 years
beginning August 23, 1996, the date of the closing of the 1996 Rights
Offering. The options outstanding at December 26, 1998 have a weighted
average contractual life of 7.25 years.
The CEO Six Year Stock Option Plan -- Pursuant to NAR's Six Year Stock
Option Plan (the "Six Year Plan"), an option to purchase an aggregate of
250,000 shares of Common Stock was granted to the CEO by NAR. 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. The options outstanding at
December 26, 1998 have a weighted average contractual life of 3.25 years.
The CEO Seven Year Stock Option Plan -- Pursuant to NAR's Seven Year
Stock Option Plan (the "Seven Year Plan"), an option to purchase an
aggregate of 250,000 shares of Common Stock was granted to the CEO by NAR.
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. The options
outstanding at December 26, 1998 have a weighted average contractual life
of 4.25 years.
The CEO Eight Year Stock Option Plan -- Pursuant to NAR's Eight Year
Stock Option Plan (the "Eight Year Plan"), an option to purchase an
aggregate of 250,000 shares of Common Stock was granted to the CEO by NAR.
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. The options
outstanding at December 26, 1998 have a weighted average contractual life
of 5.25 years.
40
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
The CEO Nine Year Stock Option Plan -- Pursuant to NAR's Nine Year
Stock Option Plan (the "Nine Year Plan"), an option to purchase an
aggregate of 250,000 shares of common stock was granted to the CEO by NAR.
The option was 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. The options
outstanding at December 26, 1998 have a weighted average contractual life
of 6.25 years.
For the combined CEO plans, options outstanding, granted and the weighted
average exercise prices are as follows:
CEO STOCK OPTION PLANS
<TABLE>
<CAPTION>
1996 1997 1998
---------------------- -------------------- --------------------
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 -- -- 7,530,000 $1.16 7,530,000 $1.16
Granted 7,530,000 $1.16 -- -- -- --
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
Expired -- -- -- -- -- --
----------- --------- ---------
Options outstanding, end of period 7,530,000 $1.16 7,530,000 $1.16 7,530,000 $1.16
=========== ===== ========= ===== ========= =====
Options exercisable, end of period -- $ -- 1,382,500 $1.16 2,765,000 $1.16
=========== ===== ========= ===== ========= =====
Weighted average fair value of
options granted $0.17- 0.77 -- --
=========== ========= =========
</TABLE>
The fair value of the options granted in 1996 for each of the CEO Stock
Option Plans was estimated on the date of grant using the Black-Scholes
option-price model with the following weighted average assumptions:
<TABLE>
<CAPTION>
EXPECTED
INTEREST EXPECTED DIVIDEND LIFE
RISK-FREE RATE VOLATILITY YIELD (YEARS)
--------- -------- ---------- -------- -------
<S> <C> <C> <C> <C>
CEO Tandem Plan 6.79% 45.02% 0.00% 9.85
CEO Performance Plan 6.79% 45.02% 0.00% 9.85
CEO Closing Price Plan(1) 6.79% 45.02% 0.00% 9.85
CEO Six Year Plan 6.42% 45.02% 0.00% 5.85
CEO Seven Year Plan 6.53% 45.02% 0.00% 6.85
CEO Eight Year Plan 6.62% 45.02% 0.00% 7.85
CEO Nine Year Plan 6.73% 45.02% 0.00% 8.85
</TABLE>
- ---------------
(1) The CEO Closing Price Option Plan used the Black-Scholes option-pricing
model in conjunction with a Monte Carlo simulation.
41
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
The following table summarizes information about stock options outstanding
at December 26, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/26/98 CONTRACTUAL LIFE PRICE AT 12/26/98 PRICE
--------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.16 7,530,000 6.7 $1.16 2,765,000 $1.16
</TABLE>
OTHER STOCK AWARDS
During 1997, the Company granted, and the Compensation Committee approved,
non-qualified options to certain employees for the purchase of an aggregate of
1,000,000 shares of the Company's Common Stock. The options become vested over
three years and expire in 2003.
The options have an exercise price of $1.00 and a remaining contractual
life of 4.2 years. The fair value of the options at the date of grant was
estimated to be $.52 based on the following weighted average assumptions: risk
free interest rate of 6.48%, expected life of 4 years, expected volatility of
59.40% and no expected dividends. During 1998, 191,000 options were exercised
leaving 809,000 options outstanding (with 142,332 exercisable) at December 26,
1998.
11. EMPLOYEE BENEFIT PLANS
The Company maintains four defined contribution plans, one of which
terminated in 1997. The current plans collectively benefit all employees of the
Company and provide employees with the option of investing in the Company's
stock. The employer's matching contributions range from 2% to 4 1/2% of annual
compensation. Combined matching contributions for all plans were $.8 million,
$.7 million and $.6 million for 1996, 1997 and 1998, respectively.
12. INCOME TAXES
At December 26, 1998, the Company had net operating loss carryforwards
("NOLs") totalling $283.2 million which expire as follows: In the year
2001 -- $18.1 million, 2003 -- $14.6 million, 2004 -- $14.3 million,
2005 -- $20.6 million, 2006 -- $46.9 million, 2007 -- $27.7 million,
2010 -- $24.6 million, 2011 -- $64.9 million, 2012 -- $30.0 million and
2018 -- $21.5 million. The Company also has $1 million of general business tax
credit carry-forwards that expire in 2000 through 2009. The Company's available
NOLs for tax purposes consist of $92.2 million of NOLs subject to a $4 million
annual limitation under Section 382 of the Internal Revenue Code of 1986 and
$191.0 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 $30.0 million
in 1997 and $21.5 million in 1998, 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 future operating plans.
For the years ended December 27, 1997 and December 26, 1998, the Company
maintained its deferred tax asset of $15 million (net of a valuation allowance
of $80.1 million in 1997 and $94.7 million in 1998). Management believes that
the $15 million net deferred tax asset still represents a reasonable 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.
42
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
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 zero in 1996, 1997 and 1998.
The Company's provision for state income taxes was $1.0 million per year in
1996, 1997, and 1998.
A reconciliation of the Company's net loss for financial statement purposes
to taxable loss for the years ended December 28, 1996, December 27, 1997 and
December 26, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
(Loss) before income taxes $(102,895) $ (9,877) $(24,585)
Extraordinary item (1,134) -- --
Differences between income before taxes for
financial statement purposes and taxable income:
State income taxes (1,000) (999) (1,000)
Permanent differences 14,917 413 420
Net change in temporary differences 26,983 (19,543) 3,677
--------- -------- --------
Taxable loss $ (63,129) $(30,006) $(21,488)
========= ======== ========
</TABLE>
The components of the net deferred tax asset at December 26, 1998 are as
follows (in millions):
<TABLE>
<CAPTION>
NON-
CURRENT CURRENT TOTAL
------- ------- -----
<S> <C> <C> <C>
Federal tax NOL and business tax credit carry forwards $ -- $99.1 $99.1
Allowance for doubtful accounts 0.9 -- 0.9
Inventories 1.7 -- 1.7
Prepaid catalog costs (1.5) -- (1.5)
Property and equipment -- 1.8 1.8
Excess of net assets of acquired business -- (1.0) (1.0)
Mailing Lists -- 1.2 1.2
Accrued liabilities 4.4 -- 4.4
Customer prepayments and credits 1.7 -- 1.7
Deferred Credits -- 0.4 0.4
Tax basis in net assets of discontinued operations in
excess of financial statement amount 0.7 -- 0.7
Executive Incentive Plan -- 0.1 0.1
Other -- 0.2 0.2
---- ----- -----
Deferred Tax Asset 7.9 101.8 109.7
Valuation allowance (4.6) (90.1) (94.7)
---- ----- -----
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.
43
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
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>
1996 1997 1998
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 0.6 6.6 2.6
Net increase in (reversal of) temporary differences
Depreciation and amortization 4.0 (10.3) 3.1
Deferred compensation -- 7.3 0.9
Restructuring reserves 5.3 (44.8) (7.8)
Customer allowance & return reserves 0.9 (9.4) (0.5)
Inventory (0.4) (11.5) 4.8
Prepaid catalog costs (1.1) 7.6 2.0
Allowance for doubtful accounts 1.1 (9.4) (1.2)
Other (0.6) 1.2 3.9
Tax NOLs for which no benefit could be recognized 21.1 106.4 30.6
Permanent differences 5.1 1.5 0.6
----- ----- -----
1.0% 10.2% 4.0%
===== ===== =====
</TABLE>
13. 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>
1996 1997 1998
------- ------- ------
<S> <C> <C> <C>
Minimum rentals $12,931 $12,013 $9,297
------- ------- ------
</TABLE>
44
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
Future minimum lease payments under noncancelable 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 26, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING LEASES LEASES
- ----------- --------- -------
<S> <C> <C>
1999 $ 7,957.9 73.7
2000 6,073.2 4.0
2001 5,104.5 --
2002 4,875.5 --
2003 4,454.9 --
Thereafter 25,442.7 --
--------- -----
Total minimum lease payments $53,908.7 77.7
=========
Less amount representing interest(a) .8
-----
Present value of minimum lease payments(b) $76.9
=====
</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 $1,344,000 and $482,000 at December 28, 1996 and $518,000 and
$67,000 at December 27, 1997, and $73,000 and $4,000 at December 26, 1998.
The future minimum lease payments under noncancelable leases that remain
from the discontinued restaurant operations as of December 26, 1998 are as
follows: 1999 -- $.7 million; 2000 -- $.7 million; 2001 -- $.7 million;
2002 -- $.5 million; 2003 -- $.4 million and thereafter $.7 million. The above
amounts exclude annual sublease income from subleases which have the same
expiration as the underlying leases as follows: 1999 -- $.6 million, 2000 -- $.6
million, 2001 -- $.6 million, 2002 -- $.4 million, 2003 -- $.3 million and
thereafter $.5 million.
In connection with the Company's investment in Blue Ridge Associates, a
subsidiary of the Company is contingently liable with respect to the lease
obligation related to the apparel distribution center in Roanoke, VA. The
Company does not guarantee the indebtedness associated with the Roanoke apparel
center held by Blue Ridge Associates.
14. CHANGES IN MANAGEMENT AND EMPLOYMENT AGREEMENTS
On March 7, 1996, Rakesh K. Kaul was named President and Chief Executive
Officer and elected to the Board of Directors of the Company. Effective that
date, Mr. Kaul entered into an Executive Employment Agreement (the "Employment
Agreement") which provides for an "at will" term commencing on March 7, 1996 at
a base salary of $525,000 per year. The Employment Agreement also provides for
Mr. Kaul's participation in the Short-Term Incentive Plan for Rakesh K. Kaul.
That plan, which 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 objective formulae or standards 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 Plan") Common Stock; an option
expiring March 7, 2006 to purchase
45
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
2,000,000 shares of Common Stock (the "Closing Price Plan") exercisable only
upon satisfaction of the condition that the closing price of the Common Stock
has attained an average of $7.00 per share, subsequently amended to $4.50 per
share (as discussed in Note 10, "Stock Based Compensation Plans"), 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, granted by NAR, the Company's majority shareholder
(the "NAR Options"). As a result of the 1996 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 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.
15. RELATED PARTY TRANSACTIONS
At December 26, 1998, current and former officers and executives of the
Company owed the Company approximately $3.0 million of which approximately $1.7
million relates to receivables, excluding accrued interest, 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. An additional $1.0
million relates to a receivable, excluding accrued interest, under the Long-Term
Incentive Plan for Rakesh K. Kaul.
At December 26, 1998, Richemont Finance S.A., a Luxemburg company, owned
approximately 49% of the Company's common stock through direct ownership. On
June 1, 1998, Richemont entered into an agreement with a third party, whereby
Richemont was granted an irrevocable proxy to vote approximately 9.3 million
shares currently held by the third party. Accordingly, Richemont has voting
control of 53% of the Company.
16. COMMITMENTS AND CONTINGENCIES
The Company is involved in 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.
46
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 28, 1996, DECEMBER 27, 1997 AND DECEMBER 26, 1998
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 26, 1998 are as follows (in
thousands): 1998 -- $.4; 1999 -- $.4; 2000 -- $.4; 2001 -- $.4; 2002 -- $.3, and
thereafter $.9.
17. SELECTED 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>
1997
Revenues $129,725 $133,750 $122,597 $171,566
Gross profit 43,663 47,210 42,228 66,318
Loss from operations (4,339) (3,142) (1,677) 7,309
Net (loss) (6,621) (5,648) (3,421) 4,814
Preferred stock dividends (48) (47) (47) (48)
Net (loss) applicable to Common Shareholders $ (6,669) $ (5,695) $ (3,468) $ 4,766
-------- -------- -------- --------
Net (loss) per share basic and diluted $ (.05) $ (.04) $ (.02) $ .02
======== ======== ======== ========
1998
Revenues $124,535 $134,562 $123,417 $163,600
Gross profit 45,834 50,903 46,554 59,269
Income (loss) from operations (2,964) (2,367) (763) (10,713)
Net income (loss) (4,649) (4,859) (2,836) (13,241)
Preferred stock dividends (122) (158) (158) (140)
Net income (loss) applicable to Common Shareholders $ (4,771) $ (5,017) $ (2,994) $(13,381)
-------- -------- -------- --------
Net income (loss) per share-basic and diluted $ (.02) $ (.02) $ (.01) $ (.06)
======== ======== ======== ========
</TABLE>
47
<PAGE> 49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
<PAGE> 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors:
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
(b) Identification of Executive Officers:
<TABLE>
<CAPTION>
OFFICE HELD
NAME AGE TITLE AND OTHER INFORMATION(A) SINCE
- ---- --- ------------------------------ -----------
<S> <C> <C> <C>
Rakesh K. Kaul 47 President, Chief Executive Officer and Director 1996
since March 7, 1996. From 1995 until February 1996,
Mr. Kaul served as the Vice Chairman and Chief
Operating Officer of Fingerhut Companies, Inc. From
January 1992 until March 1995, Mr. Kaul was the
Executive Vice President and Chief Administrative
Office of Fingerhut. Prior to January 1992, Mr.
Kaul served as the Senior Vice President, Strategy
and Finance and a director at Shaklee Corporation.
Michael Lutz 56 Executive Vice President -- Chief Operating Officer 1994
since March 1998. From September 1994 to March
1998, Mr. Lutz was Executive Vice
President -- Operations of the Company. Prior to
September 1994, Mr. Lutz held various positions
with New Hampton, Inc./Avon Direct Response.
Larry J. Svoboda 50 Senior Vice President and Chief Financial Officer 1996
since September 25, 1996. From 1987 to September
1996, Mr. Svoboda was the Chief Financial Officer
of the Florsheim Shoe Company. Prior to 1987, Mr.
Svoboda was with the Sara Lee Corporation.
Richard B. Hoffman 52 Senior Vice President and Chief Marketing Officer 1998
since March 1998. Prior to March 1998, Mr. Hoffman
was engaged in private marketing consulting from
March 1997. Mr. Hoffman was President and Chief
Operating Officer of Jayhawk Acceptance Corporation
from February 1996 to March 1997. Prior to February
1996, Mr. Hoffman was a Senior Vice President at
Fingerhut Companies, Inc.
Michael D. Contino 38 Senior Vice President and Chief Information Officer 1996
since December 1996. Mr. Contino joined the Company
in 1995 as Director of Computer Operations and
Telecommunications. Prior to 1995, Mr. Contino was
the Senior Manager of I.S. Operations at New
Hampton, Inc., a subsidiary of Spiegel, Inc.
Ralph Bulle 49 Senior Vice President -- Human Resources since June 1996
1996. Mr. Bulle joined the Company in 1993 as Vice
President -- Human Resources. Prior to 1993, Mr.
Bulle was Senior Vice President -- Operations &
Human Resources for Seaman Furniture Company.
Robert J. Vill 42 Vice President -- Finance and Treasurer since 1998
November 1998. From April 1995 to November 1998,
Mr. Vill was Vice President and Treasurer for Saks
Fifth Avenue; prior thereto, he served as its
Assistant Treasurer.
</TABLE>
49
<PAGE> 51
<TABLE>
<CAPTION>
OFFICE HELD
NAME AGE TITLE AND OTHER INFORMATION(A) SINCE
- ---- --- ------------------------------ -----------
<S> <C> <C> <C>
William C. Kingsford 52 Vice President and Corporate Controller since May 1997
1997. Prior to May 1997, Mr. Kingsford was Vice
President and Chief Internal Auditor at Melville
Corporation.
</TABLE>
- ---------------
(a) All references to dates and positions held by such executive officers prior
to September 1993 refer to the Company's predecessor, The Horn & Hardart
Company ("H&H"). H&H merged with and into the Company in September 1993,
with the Company surviving.
Pursuant to the Company's By-Laws, its officers are chosen annually by the
Board of Directors and hold office until their respective successors are chosen
and qualified.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
50
<PAGE> 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
<TABLE>
<CAPTION>
PAGE
NO.
----
<C> <S> <C>
1. Index to Financial Statements
Report of Independent Public Accountants -- Hanover Direct,
Inc. and Subsidiaries Financial Statements.................. 21
Consolidated Balance Sheets as of December 27, 1997 and
December 26, 1998........................................... 22
Consolidated Statements of Income (Loss) for the years ended
December 28, 1996, December 27, 1997 and December 26,
1998........................................................ 23
Consolidated Statements of Cash Flows for the years ended
December 28, 1996, December 27, 1997 and December 26,
1998........................................................ 24
Consolidated Statements of Shareholders' Equity for the
years ended December 28, 1996, December 27, 1997 and
December 26, 1998........................................... 25
Notes to Consolidated Financial Statements for the years
ended December 28, 1996, December 27, 1997 and December 26,
1998........................................................ 26
Supplementary Data:
Selected quarterly financial information (unaudited) for the
two fiscal years ended December 26, 1998.................... 47
2. Index to Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts............ 52
Schedules other than that listed above are omitted because
they are not applicable or the required information is shown
in the financial statements or notes thereto................
3. Exhibits
The exhibits required by Item 601 of Regulation S-K filed as
part of, or incorporated by reference in, this report are
listed in the accompanying Exhibit Index.................... 54
</TABLE>
Reports on Form 8-K: None.
(c) Exhibits required by Item 601 of Regulation S-K.
See Exhibit Index.
(d) Financial Statement Schedules
See (a) 2. above.
51
<PAGE> 53
SCHEDULE II
HANOVER DIRECT, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 26, 1998, DECEMBER 27, 1997
AND DECEMBER 28, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- ----------- -----------
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1998:
Allowance for Doubtful Accounts
Receivable, Current.......... $ 4,755,000 3,278,000 3,998,000(1) 4,035,000
Reserves for Discontinued
Operations................... 1,354,000 372,000(2) 982,000
Restructuring Reserve.......... 5,424,000 2,138,000(2) 3,286,000
Reserves for Sales Returns..... 6,043,000 14,755,000 16,020,000(2) 4,778,000
Deferred Tax Asset Valuation
Allowance.................... 80,100,000 14,600,000(4) 94,700,000
Allowance for Net Unrealized
Losses on Convertible Debt
Securities...................
1997:
Allowance for Doubtful Accounts
Receivable, Current.......... $ 6,419,000 3,973,000 5,637,000(1) 4,755,000
Reserves for Discontinued
Operations................... 1,722,000 368,000(2) 1,354,000
Restructuring Reserve.......... 9,504,000 (400,000) 3,680,000(2) 5,424,000
Reserves for Sales Returns..... 9,036,000 76,507,000 79,500,000(2) 6,043,000
Deferred Tax Asset Valuation
Allowance.................... 82,600,000 (2,500,000)(4) 80,100,000
Allowance for Net Unrealized
Losses on Convertible Debt
Securities................... 1,888,000 1,888,000(1)
1996:
Allowance for Doubtful Accounts
Receivable, Current.......... $ 3,988,000 6,805,000 4,374,000(1) 6,419,000
Reserves for Discontinued
Operations................... 1,639,000 83,000(2) 1,722,000
Restructuring Reserve.......... 9,504,000 9,504,000
Reserves for Sales Returns..... 5,535,000 106,836,000 103,335,000(2) 9,036,000
Deferred Tax Asset Valuation
Allowance.................... 48,500,000 34,100,000(4) 82,600,000
Allowance for Net Unrealized
Losses on Convertible Debt
Securities................... 1,000,000 888,000 1,888,000
</TABLE>
- ---------------
(1) Accounts written-off.
(2) Utilization of reserves.
(3) Represents acquired allowance for doubtful accounts receivable.
(4) Represents the change in the valuation allowance offset by the change in the
gross tax asset.
52
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment to report to
be signed on its behalf by the undersigned, thereunto duly authorized.
HANOVER DIRECT, INC.
(registrant)
By: /s/ RAKESH K. KAUL
------------------------------------
Rakesh K. Kaul
President and Chief
Executive Officer
Date: March 31, 1999
53
<PAGE> 55
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER
ITEM 601 OF PAGE
REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE NO.
- -------------- ----------------------------------------------------------------------- ----
<C> <S> <C>
2.1 Asset Purchase Agreement dated as of December 1, 1994 among the
Company, LWI Holdings, Inc., Bankers Trust Company, Leichtung, Inc. and
DRI Industries, Inc. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
2.2 Stock Purchase Agreement dated as of February 16, 1995 among the
Company, Hanover Holdings, Inc., Aegis Safety Holdings, Inc., F.L.
Holdings, Inc., Roland A.E. Franklin, Martin E. Franklin, Jonathan
Franklin, Floyd Hall, Frederick Field, Homer G. Williams, Frank
Martucci, Norm Thompson Outfitters, Inc. and Capital Consultants, Inc.
(as agent) (collectively, the "Aegis Sellers"). Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
2.3 Stock Purchase Agreement dated as of May 19, 1995 by and among the
Company, Austad Holdings, Inc. ("AHI"), The Austad Company ("TAC"),
David B. Austad ("DBA"), Denise Austad ("DA"), David Austad, as
custodian ("DBAC"), Oscar Austad, Dorothy Austad, Randall Austad,
Kristi Austad, Lori Miller, Robin Miller, Kerri Derenge, Sharon Stahl,
Lori Miller, as custodian, Dorothy Austad, as attorney-in-fact, and
Kara Miller (collectively, the "Austad Individuals"). Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 30, 1995.
2.4 Agreement and Plan of Corporate Separation and Reorganization dated as
of February 16, 1996 by and among the Company, AHI, TAC, DBA, DBAC, and
DA. Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 30, 1995.
3.1 Restated Certificate of Incorporation. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 28,
1996.
3.2 Certificate of Correction filed to correct a certain error in the
Restated Certificate of Incorporation. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 26,
1998.
3.3 By-laws. Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 27, 1997.
4.1 Warrant Agreement dated as of October 25, 1991 ("NAR Warrant") between
the Company* and NAR Group Limited ("NAR") for 279,110 shares of Common
Stock. Incorporated by reference to the Company's* Current Report on
Form 8-K dated October 25, 1991.
4.2 Registration Rights Agreement dated as of July 8, 1991 among the
Company*, NAR and Intercontinental Mining & Resources Limited ("IMR").
Incorporated by reference to the Company's* Current Report on Form 8-K
Dated July 10, 1991.
4.3 Warrant Agreement dated as of January 1, 1994 between the Company and
Sears Shop At Home Services, Inc. ("Sears"). Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December
31, 1994.
4.4 Registration Rights Agreement dated as of February 16, 1995 among the
Company and the Aegis Sellers. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994.
4.5 Warrant Agreement dated as of July 8, 1991 between the Company and IMR
for 1,750,000 shares of Common Stock. Incorporated by reference to the
Company's Current Report on Form 8-K dated July 10, 1991.
4.6 Warrant Agreement dated as of October 25, 1991 between the Company and
NAR for 931,791 shares of Common Stock. Incorporated by reference to
the Company's Current Report on Form 8-K dated October 25, 1991.
</TABLE>
54
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT NUMBER
ITEM 601 OF PAGE
REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE NO.
- -------------- ----------------------------------------------------------------------- ----
<C> <S> <C>
4.7 Second Amendment to Warrant Agreement and Warrant Certificate for
931,791 shares of Common Stock, between the Company and NAR dated as of
November 13, 1995. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 30, 1995.
4.8 First Amendment to Warrant Agreement and Warrant Certificate for
1,750,000 shares of Common Stock, between the Company and IMR dated as
of November 13, 1995. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 30, 1995.
4.9 First Amendment to Warrant Agreement and Warrant Certificate for
279,110 shares of Common Stock, between the Company and NAR dated as of
November 13, 1995. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 30, 1995.
4.10 Second Amendment to Warrant Agreement between the Company and IMR dated
as of August 23, 1996. Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 28, 1996.
4.11 Second Amendment to Warrant Agreement between the Company and NAR dated
as of August 23, 1996. Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 28, 1996.
4.12 Third Amendment to Warrant Agreement between the Company and NAR dated
as of August 23, 1996. Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 28, 1996.
10.1 Stock Option Plan, as amended. Incorporated by reference to the
Company's* Annual Report on Form 10-K for the fiscal year ended
December 28, 1991.
10.2 Account Purchase Agreement dated as of December 21, 1992 among the
Company*, Hanover Direct Pennsylvania, Inc. ("HDPI"), Brawn of
California, Inc. ("Brawn") and General Electric Capital Corporation
("GECC"). Incorporated by reference to the Company's* Annual Report on
Form 10-K for the fiscal year ended December 26, 1992.
10.3 Amendment No. 1 to the Account Purchase Agreement dated as of July 12,
1993 among the Company*, HDPI, Brawn, Gump's By Mail, Gump's, Gump's
Holdings and GECC. Incorporated by reference to the Company's* Current
Report on Form 8-K dated July 12, 1993.
10.4 Amendment No. 2 to the Account Purchase Agreement dated as of June 1,
1995 among the Company, HDPI, Brawn, Gump's, Gump's By Mail, Gump's
Holdings and GECC. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 30, 1995.
10.5 Waiver and Amendment No. 3 to the Account Purchase Agreement dated as
of December 14, 1995 among the Company, HDPI, Brawn and GECC.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 30, 1995.
10.6 Amendment No. 4 to the Amended and Restated Account Purchase Agreement
dated as of June 28, 1996 among the Company, HDPI, Brawn, Gump's,
Gump's by Mail, Gump's Holdings and GECC. Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended December
28, 1996.
10.7 Form of Stock Option Agreement between the Company* and certain
Directors of the Company, as amended. Incorporated by reference to the
Company's* Annual Report on Form 10-K for the fiscal year ended
December 28, 1991.
10.8 Termination of Employment Agreement and Employment and Consulting
Agreement dated as of December 31, 1995 between the Company and Jack E.
Rosenfeld. Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 28, 1996.
10.9 Registration Rights Agreement between the Company and Rakesh K. Kaul,
dated as of August 23, 1996. Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 28, 1996.
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT NUMBER
ITEM 601 OF PAGE
REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE NO.
- -------------- ----------------------------------------------------------------------- ----
<C> <S> <C>
10.10 Form of Indemnification Agreement among the Company* and each of the
Company's directors and executive officers. Incorporated by reference
to the Company's* Current Report on Form 8-K dated October 25, 1991.
10.11 Letter Agreement dated May 5, 1989 among the Company*, Theodore H.
Kruttschnitt, J. David Hakman and Edmund R. Manwell. Incorporated by
reference to the Company's* Current Report on Form 8-K dated May 10,
1989.
10.12 Hanover Direct, Inc. Savings Plan as amended. Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended January
1, 1994.
10.13 Restricted Stock Award Plan. Incorporated by reference to the
Company's* Registration Statement on Form S-8 filed on February 24,
1993, Registration No. 33-58760.
10.14 All Employee Equity Investment Plan. Incorporated by reference to the
Company's* Registration Statement on Form S-8 filed on February 24,
1993, Registration No. 33-58756.
10.15 Executive Equity Incentive Plan, as amended. Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December
28, 1996.
10.16 Form of Supplemental Retirement Plan. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended January 1,
1994.
10.17 1996 Stock Option Plan, as amended. Incorporated by reference to the
Company's 1997 Proxy Statement.
10.18 Loan and Security Agreement dated as of November 14, 1995 by and among
Congress Financial Corporation ("Congress"), Hanover Direct
Pennsylvania, Inc. ("HDPA"), Brawn of California, Inc. ("Brawn"),
Gump's by Mail, Inc. ("Gump's by Mail"), Gump's Corp.("Gump's"), The
Company Store, Inc. ("The Company Store") , Tweeds, Inc. ("Tweeds"),
LWI Holdings, Inc.("LWI"), Aegis Catalog Corporation ("Aegis"), Hanover
Direct Virginia, Inc. ("HDVA") and Hanover Realty Inc. ("Hanover
Realty"). Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 30, 1995.
10.19 First Amendment to Loan and Security Agreement dated as of February 22,
1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The
Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and TAC.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
10.20 Second Amendment to Loan and Security Agreement dated as of April 16,
1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The
Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
10.21 Third Amendment to Loan and Security Agreement dated as of May 24, 1996
by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The Company
Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
10.22 Fourth Amendment to Loan and Security Agreement dated as of May 31,
1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The
Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
10.23 Fifth Amendment to Loan and Security Agreement dated as of September
11, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's,
The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
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10.24 Sixth Amendment to Loan and Security Agreement dated as of December 5,
1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The
Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
10.25 Seventh Amendment to Loan and Security Agreement dated as of December
18, 1996 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's,
The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
10.26 Eighth Amendment to Loan and Security Agreement dated as of March 26,
1997 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The
Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 26, 1998.
10.27 Ninth Amendment to Loan and Security Agreement dated as of April 18,
1997 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The
Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 26, 1998.
10.28 Tenth Amendment to Loan and Security Agreement dated as of October 31,
1997 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's, The
Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and Austad.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 26, 1998.
10.29 Eleventh Amendment to Loan and Security Agreement dated as of
, 1998 by and among Congress, HDPA, Brawn, Gump's by Mail,
Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA, Hanover Realty and
Austad. Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 26, 1998.
10.30 Subordination Agreement, dated as of November 14, 1995, among Congress,
IMR, and the Trustee. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 30, 1995.
10.31 Long-Term Incentive Plan for Rakesh K. Kaul. Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December
28, 1996.
10.32 Short-Term Incentive Plan for Rakesh K. Kaul. Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December
28, 1996.
10.33 Employment Agreement dated as of March 7, 1996 between the Company and
Rakesh K. Kaul. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
10.34 Tandem Option Plan dated as of August 23, 1996 between the Company and
Rakesh K. Kaul. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
10.35 Closing Price Option dated as of August 23, 1996 between the Company
and Rakesh K. Kaul. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
10.36 Performance Price Option dated as of August 23, 1996 between the
Company and Rakesh K. Kaul. Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 28, 1996.
10.37 Six-Year Stock Option dated as of August 23, 1996 between NAR and
Rakesh K. Kaul. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
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10.38 Seven-Year Stock Option dated as of August 23, 1996 between NAR and
Rakesh K. Kaul. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
10.39 Eight-Year Stock Option dated as of August 23, 1996 between NAR and
Rakesh K. Kaul. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
10.40 Nine-Year Stock Option dated as of August 23, 1996 between NAR and
Rakesh K. Kaul. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
10.41 Letter of Credit, dated December 18, 1996, from Swiss Bank Corporation,
New York Branch in favor of Fleet National Bank, as trustee.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
10.42 Substitute Letter of Credit, dated February 18, 1998, from Swiss Bank
Corporation, Stamford Branch ("Swiss Bank") in favor of State Street
Bank and Trust Company, as trustee. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 26,
1998.
10.43 Reimbursement Agreement, dated as of December 18, 1996, by and between
Swiss Bank and the Company. Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 28, 1996.
10.44 First Amendment to Reimbursement Agreement, dated as of February 18,
1998, by and between Swiss Bank and the Company. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 26, 1998.
10.45 Hanover Indemnity Agreement, dated as of December 18, 1996, between
Richemont Finance S.A. ("Richemont") and the Company, HDPI, Brawn,
Gump's, Gump's by Mail, The Company Store, Tweeds, LWI, Aegis, HDVA and
Hanover Realty. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
10.46 Subordination Agreement, dated as of December 18, 1996, between
Congress and Swiss Bank. Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 28, 1996.
10.47 Subordination Agreement, dated as of December 18, 1996 between Congress
and Richemont. Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 28, 1996.
10.48 Series A Note Agreement, dated as of November 9, 1994, between the
Company and Norwest Bank Minnesota, N.A. ("Norwest"), as trustee.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
10.49 Placement Agreement, dated as of November 9, 1994, by and between the
Company and NationsBank of North Carolina, N.A. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 28, 1996.
10.50 Remarketing and Interest Services Agreement, dated as of November 9,
1994, by and between the Company and NationsBank of North Carolina,
N.A. Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 28, 1996.
10.51 First Supplemental Series A Note Agreement, dated as of December 29,
1995, between the Company and Norwest. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 28,
1996.
10.52 First Amendment to Placement Agreement, dated as of December 29, 1995
by and between the Company and NationsBank of North Carolina, N.A.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
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10.53 First Amendment to Remarketing and Interest Services Agreement, dated
as of December 29, 1995 by and between the Company and NationsBank of
North Carolina, N.A. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
10.54 Second Supplemental Series A Note Agreement, dated as of December 18,
1996, between the Company and Norwest. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 28,
1996.
10.55 Second Amendment to Series A Note, dated December 18, 1996 made by the
Company. Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 28, 1996.
10.56 Second Amendment to Placement Agreement, dated as of December 18, 1996
by and between the Company and NationsBank of North Carolina, N.A.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
10.57 Second Amendment to Remarketing and Interest Services Agreement, dated
as of December 18, 1996 by and between the Company and NationsBank of
North Carolina, N.A. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
10.58 Series B Note Agreement dated as of April 25, 1995, between the Company
and Norwest. Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 28, 1996.
10.59 First Amendment to Series B Note Agreement, dated as of December 29,
1995, between the Company and Norwest. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 28,
1996.
10.60 Second Amendment to Series B Note Agreement, dated as of December 18,
1996, between the Company and Norwest. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 28,
1996.
10.61 Second Amendment to Series B Note, dated December 18, 1996 made by the
Company. Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 28, 1996.
10.62 Series B Letter of Credit, dated as of December 18, 1996, issued by
Swiss Bank. Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 28, 1996.
10.63 Amendment to Series B Letter of Credit, dated as of February 18, 1998,
between Swiss Bank and Norwest. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 26,
1998.
10.64 NAR Promissory Note dated as of September 11, 1996. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 28, 1996.
10.65 Series A Letter of Credit, dated as of December 18, 1996, issued by
Swiss Bank. Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 28, 1996.
10.66 Amendment to Series A Letter of Credit, dated as of February 18, 1998,
between Swiss Bank and Norwest. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 26,
1998.
10.67 First Amendment to Series A Note, dated as of December 29, 1995 made by
Hanover Direct, Inc. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
10.68 $10,000,000 Series B Note, dated as of April 27, 1995 and made by
Hanover Direct, Inc. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
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10.69 First Supplemental Series B Note Agreement, dated as of December 29,
1995. Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 28, 1996.
10.70 $10,000,000 Series A Note, dated as of November 9, 1994 and made by
Hanover Direct, Inc. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
10.71 Stock Purchase Agreement, dated as of November 4, 1997, by and between
the Company and SMALLCAP World Fund, Inc. ("SMALLCAP") Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 27, 1997.
10.72 Registration Rights Agreement, dated as of November 4, 1997, by and
between the Company and SMALLCAP. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 27,
1997.
**10.73 Twelfth Amendment to Loan and Security Agreement, dated as of September
30, 1998 by and among Congress, HDPI, Brawn, GBM, Gump's, Hanover
Holding Corp. ("HH Corp."), LWI, Aegis, HDV, Hanover Realty, Austad,
Tweeds, LLC ("Tweeds LLC"), Silhouettes, LLC ("Silhouettes LLC"),
Hanover Company Store, LLC ("HCS LLC"), Domestications, LLC
("Domestications LLC") and Colonial Garden Kitchens, Inc. ("Colonial
Garden"). **FILED HEREWITH
**10.74 Thirteenth Amendment to Loan and Security Agreement, dated as of
September 30, 1998, by and among Congress, HDPI, Brawn, GBM, Gump's, HH
Corp., LWI, Aegis, HDV, Hanover Realty, Austad, Tweeds LLC, Silhouettes
LLC, HCS LLC, Domestications LLC and Colonial Garden. **FILED HEREWITH
**21.1 Subsidiaries of the Registrant. **FILED HEREWITH
**23.1 Consent of Independent Public Accountants. **FILED HEREWITH
27.1 Financial Data Schedule. **FILED HEREWITH
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* Hanover Direct, Inc., a Delaware corporation, is the successor by merger to
The Horn & Hardart Company and The Hanover Companies.
** EDGAR filing only.
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Exhibit 10.73
TWELFTH AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS TWELFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT, dated as of
September 30, 1998, is entered into by and among CONGRESS FINANCIAL CORPORATION,
a Delaware corporation, successor by merger to Congress Financial Corporation, a
California corporation ("Lender"), HANOVER DIRECT PENNSYLVANIA, INC., a
Pennsylvania corporation ("HDPI"), BRAWN OF CALIFORNIA, INC., a California
corporation ("Brawn"), GUMP'S BY MAIL, INC., a Delaware corporation ("GBM"),
GUMP'S CORP., a California corporation ("Gump's"), HANOVER HOLDING CORP., a
Delaware corporation, successor by merger of The Company Store, Inc. with and
into Tweeds, Inc., which has changed its name to Hanover Holding Corp. ("HH
Corp."; as hereinafter further defined), LWI HOLDINGS, INC., a Delaware
corporation ("LWI"), AEGIS CATALOG CORPORATION, a Delaware corporation
("Aegis"), HANOVER DIRECT VIRGINIA INC., a Delaware corporation ("HDV"), HANOVER
REALTY, INC., a Virginia corporation ("Hanover Realty"), and THE AUSTAD COMPANY,
a South Dakota corporation ("Austad"; and together with HDPI, Brawn, GBM,
Gump's, HH Corp., LWI, Aegis, HDV and Hanover Realty, each individually referred
to herein as an "Existing Borrower" and collectively, "Existing Borrowers"), and
HANOVER DIRECT, INC., a Delaware corporation ("Hanover"), AEGIS RETAIL
CORPORATION, a Delaware corporation, AEGIS SAFETY HOLDINGS, INC., a Delaware
corporation ("Aegis Holdings"), AEGIS VENTURES, INC., a Delaware corporation
("Aegis Ventures"), AMERICAN DOWN & TEXTILE COMPANY, a Wisconsin corporation,
BRAWN WHOLESALE CORP., a California corporation ("Brawn Wholesale"), THE COMPANY
STORE FACTORY, INC., a Delaware corporation, successor by merger of The Company
Factory, Inc., a Wisconsin corporation, with and into The Company Store Factory,
Inc. ("TCS Factory"), THE COMPANY OFFICE, INC., a Delaware corporation,
successor by merger to The Company Office, Inc., a Wisconsin corporation ("TCS
Office"), COMPANY STORE HOLDINGS, INC., a Delaware corporation ("CSHI"), D.M.
ADVERTISING, INC., a New Jersey corporation, GUMP'S CATALOG, INC., a Delaware
corporation, GUMP'S HOLDINGS, INC., a Delaware corporation, HANOVER CASUALS,
INC., a Delaware corporation ("Hanover Casuals"), HANOVER CATALOG HOLDINGS,
INC., a Delaware corporation ("Hanover Catalog"), HANOVER FINANCE CORPORATION, a
Delaware corporation ("HFC"), HANOVER LIST MANAGEMENT INC., a New Jersey
corporation ("Hanover List"), HANOVER VENTURES, INC., a Delaware corporation
("Hanover Ventures"), LWI RETAIL, INC., an Ohio corporation, SCANDIA DOWN
CORPORATION, a Delaware corporation ("Scandia"), AUSTAD HOLDINGS, INC., a
Delaware corporation ("Austad Holdings"), YORK FULFILLMENT COMPANY, INC., a
Pennsylvania corporation ("York Fulfillment"), and TWEEDS OF VERMONT, INC., a
Delaware corporation (each individually an "Existing Guarantor" and
collectively, "Existing Guarantors"), TWEEDS, LLC, a Delaware limited liability
company ("Tweeds LLC"; as hereinafter further defined), SILHOUETTES, LLC, a
Delaware limited liability company ("Silhouettes LLC"; as hereinafter further
defined), HANOVER COMPANY STORE, LLC, a Delaware limited
<PAGE> 2
liability company ("HCS LLC"; as hereinafter further defined), DOMESTICATIONS,
LLC, a Delaware limited liability company ("Domestications LLC"; as hereinafter
further defined), COLONIAL GARDEN KITCHENS, INC., a Delaware corporation
("Colonial Garden"; as hereinafter further defined), HANOVER HOME FASHIONS
GROUP, LLC, a Delaware limited liability company ("HHFG LLC"; as hereinafter
further defined), HANOVER WOMEN'S APPAREL, LLC, a Delaware limited liability
company ("HWA LLC"; as hereinafter further defined), and KEYSTONE FULFILLMENT,
INC., a Delaware corporation ("Keystone"; as hereinafter further defined). Each
Existing Borrower, together with Tweeds LLC, Silhouettes LLC, HCS LLC,
Domestications LLC and Colonial Garden, shall hereinafter be referred to
individually as a "Borrower" and collectively as "Borrowers", and each Existing
Guarantor, together with HWA LLC, HHFG LLC and Keystone, shall hereinafter be
referred to individually as a "Guarantor" and collectively as "Guarantors".
W I T N E S S E T H:
WHEREAS, Existing Borrowers, Existing Guarantors and Lender are
parties to the Loan and Security Agreement, dated November 14, 1995, as amended
by the First Amendment to Loan and Security Agreement, dated February 22, 1996,
the Second Amendment to Loan and Security Agreement, dated April 16, 1996 (the
"Second Amendment to Loan Agreement"), the Third Amendment to Loan and Security
Agreement, dated May 24, 1996, the Fourth Amendment to Loan and Security
Agreement, dated May 31, 1996, the Fifth Amendment to Loan and Security
Agreement, dated September 11, 1996, the Sixth Amendment to Loan and Security
Agreement, dated as of December 5, 1996, the Seventh Amendment to Loan and
Security Agreement, dated as of December 18, 1996, the Eighth Amendment to Loan
and Security Agreement, dated as of March 26, 1997, the Ninth Amendment to Loan
and Security Agreement, dated as of April 18, 1997, the Tenth Amendment to Loan
and Security Agreement, dated as of October 31, 1997, and the Eleventh Amendment
to Loan and Security Agreement, dated as of March 25, 1998 (as so amended, the
"Loan Agreement"), pursuant to which Lender has made loans and advances to
Existing Borrowers; and
WHEREAS, Existing Borrowers and Existing Guarantors have requested
that Lender consent to, and enter into certain amendments to the Loan Agreement
and agreements with respect to certain transactions as described herein in
connection with, the corporate reorganization of certain Existing Borrowers and
certain Existing Guarantors; and
WHEREAS, Existing Borrowers and Existing Guarantors have requested
that each of Tweeds LLC, Silhouettes LLC, HCS LLC, Domestications LLC and
Colonial Garden become a Revolving Loan Borrower pursuant to the terms and
conditions of the Loan Agreement, as amended hereby, and that each of HWA LLC,
HHFG LLC
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and Keystone become a Guarantor pursuant to the terms and conditions of the Loan
Agreement, as amended hereby; and
WHEREAS, Existing Borrowers and Existing Guarantors have also
requested that Lender acknowledge that it has released certain availability
reserves previously established by Lender against the Revolving Loan
availability of LWI and HDPI; and
WHEREAS, Existing Borrowers and Existing Guarantors have also
requested that Lender consent to the assignment by Hanover Catalog and Brawn of,
and that Lender release its security interest in and lien on, certain Trademarks
described herein; and
WHEREAS, the parties to the Loan Agreement desire to enter into this
Twelfth Amendment to Loan and Security Agreement (this "Amendment") to evidence
and effectuate such consents, amendments and agreements, and certain other
amendments to the Financing Agreements relating thereto, in each case subject to
the terms and conditions and to the extent set forth herein;
NOW, THEREFORE, in consideration of the premises and covenants set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Definitions.
(a) Additional Definitions. As used herein or in any of the
other Financing Agreements, the following terms shall have the meanings given to
them below, and the Loan Agreement shall be deemed and is hereby amended to
include, in addition and not in limitation, the following definitions:
(i) "Additional Hanover Subsidiary Merger Agreements"
shall mean, collectively, the certificates or agreements executed, delivered or
filed in connection with, or otherwise evidencing, the Hanover List/DM
Advertising Merger, the Austad/Austad Holdings Merger, the LWI Retail/LWI
Holdings Merger, the TCS Factory/Company Factory Merger, the TCS Office/Company
Office Merger, the TCSI/Tweeds Merger, and the Aegis Safety/HDI Merger and all
related agreements, documents and instruments, as the same now exist or may
hereafter be entered into, amended, modified, supplemented, extended, renewed,
restated or replaced.
(ii) "Aegis Safety/HDI Merger" shall mean the merger of
Aegis Safety Holdings, Inc. with and into Hanover Direct, Inc., with Hanover
Direct, Inc. as the surviving corporation.
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(iii) "Austad/Austad Holdings Merger" shall mean the
merger of The Austad Company with and into Austad Holdings, Inc., with Austad
Holdings, Inc. as the surviving corporation, which shall, contemporaneously with
that merger and pursuant thereto, change its name to The Austad Company.
(iv) "Colonial Garden" shall mean Colonial Garden
Kitchens, Inc., a Delaware corporation, and its successors and assigns.
(v) "Colonial Garden Catalog Assets" shall mean all of
the assets and properties that (A) are or were owned by HDPI immediately before
the consummation of Phase I of the Hanover 1998 Reorganization as to Colonial
Garden and (B) are or have been owned or acquired by Colonial Garden at any time
on or after the effective date of Phase I of the Hanover 1998 Reorganization as
to Colonial Garden, which assets and properties were and are primarily related
to or primarily used in connection with or arise from the sale of merchandise or
services sold through the "Colonial Garden Kitchens" mail order catalog,
including, without limitation, all Accounts, Inventory, Customer Lists and other
General Intangibles so related, used or sold.
(vi) "Colonial Garden Eligible Inventory" shall mean all
Colonial Garden Catalog Assets consisting of finished goods Inventory of
Colonial Garden in the merchandise categories of work saving and lifestyle
enhancing items for the kitchen and home offered for sale by Colonial Garden in
its "Colonial Garden Kitchen" catalog, or such other catalogs created or
acquired by Colonial Garden covering substantially similar merchandise which
Colonial Garden has requested Lender to include in this Inventory category.
(vii) "Company Store Catalog Assets" shall mean all of
the assets and properties that (A) are or were owned by HH Corp. immediately
before the consummation of Phase I of the Hanover 1998 Reorganization as to HH
Corp. and (B) are or have been owned or acquired by HCS LLC at any time after
the effective date of Phase I of the Hanover 1998 Reorganization as to HH Corp.,
which assets and properties were and are primarily related to or primarily used
in connection with or arise from the sale of merchandise or services sold
through the "The Company Store" mail order catalog, including, without
limitation, all Accounts, Inventory, Customer Lists and other General
Intangibles so related, used or sold.
(viii) "Domestications Catalog Assets" shall mean all of
the assets and properties that (A) are or were owned by HDV immediately before
the consummation of Phase I of the Hanover 1998 Reorganization as to HDV, and
(B) are or have been owned or acquired by Domestications LLC at any time on or
after the effective date of Phase I of the Hanover 1998 Reorganization
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as to HDV, which assets and properties were and are primarily related to or
primarily used in connection with or arise from the sale of merchandise or
services sold through the "Domestications" mail order catalog, including,
without limitation, all Accounts, Inventory, Customer Lists and other General
Intangibles so related, used or sold.
(ix) "Domestications LLC" shall mean Domestications,
LLC, a Delaware limited liability company, and its successors and assigns.
(x) "Domestications LLC Eligible Inventory" shall mean
all Domestications Catalog Assets consisting of Inventory of Domestications LLC
in the merchandise categories of home fashions offered for sale by
Domestications LLC in its "Domestications" catalog or such other catalogs
created or acquired by Domestications LLC covering substantially similar
merchandise which Domestications LLC has requested Lender to include in this
Inventory category.
(xi) "HCS LLC" shall mean Hanover Company Store, LLC, a
Delaware limited liability company, and its successors and assigns.
(xii) "HCS LLC Eligible Inventory" shall mean all the
Company Store Catalog Assets consisting of Inventory of HCS LLC in the
merchandise categories of comforters, blankets, sheets, towels, curtains,
pillows, featherbeds, decorative home products, loungewear and outer garments
offered for sale by HCS LLC in its "The Company Store" catalog, or such other
catalog created by HCS LLC covering substantially similar merchandise which HCS
LLC has requested Lender to include in this Inventory category.
(xiii) "HH Corp." shall mean Hanover Holding Corp., a
Delaware corporation, and its successors and assigns, the surviving corporation
of the TCSI/Tweeds Merger.
(xiv) "HHFG LLC" shall mean Hanover Home Fashions Group,
LLC, a Delaware limited liability company, and its successors and assigns.
(xv) "HWA LLC" shall mean Hanover Women's Apparel, LLC,
a Delaware limited liability company, and its successors and assigns.
(xvi) "Hanover List/DM Advertising Merger" shall mean
the merger of Hanover List Management, Inc. with and into D.M. Advertising,
Inc., with D.M. Advertising, Inc. as the surviving corporation.
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(xvii) "Hanover 1998 Reorganization" shall mean,
individually and collectively, the reorganization steps and transactions
effected under the Hanover 1998 Reorganization Agreements.
(xviii) "Hanover 1998 Reorganization Agreements" shall
mean, collectively, the agreements, documents and instruments listed in Schedule
1 hereto, the Hanover Subsidiary Dissolution Agreements, the Additional Hanover
Subsidiary Merger Agreements, and all related agreements, documents and
instruments executed, delivered or filed in connection with, or otherwise
evidencing, each of the transactions consented to in Section 2 hereof, as the
same now exist or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced.
(xix) "Hanover Subsidiary Dissolution Agreements" shall
mean, collectively, the certificates or agreements executed, delivered or filed
in connection with, or otherwise evidencing, the dissolution of Aegis Ventures,
Hanover Casuals, Gump's Catalog, HFC, York Fulfillment, Brawn Wholesale, Hanover
Ventures, and all related agreements, documents and instruments, as the same now
exist or may hereafter entered into, be amended, modified, supplemented,
extended, renewed, restated or replaced.
(xx) "Keystone Fulfillment" shall mean Keystone
Fulfillment, Inc., a Delaware corporation, and its successors and assigns.
(xxi) "La Crosse, Wisconsin Telemarketing Center Assets"
shall mean all of the fixed assets that (A) are or were owned by HH Corp.
immediately before the consummation of Phase I of the Hanover 1998
Reorganization as to HH Corp. and (B) are or have been owned or acquired by HHFG
LLC at any time on or after the effective date of Phase I of the Hanover 1998
Reorganization as to HH Corp, which fixed assets were and are primarily related
to or primarily used in connection with the business and operations of the
telemarketing and call center located at 455 Park Plaza, La Crosse, Wisconsin.
(xxii) "LWI Retail/LWI Holdings Merger" shall mean the
merger of LWI Retail, Inc. with and into LWI Holdings, Inc., with LWI Holdings,
Inc. as the surviving corporation.
(xxiii) "Phase I of the Hanover 1998 Reorganization"
shall mean the transactions comprising part of the Hanover 1998 Reorganization
consented to in Section 2(a) hereof.
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(xxiv) "Roanoke, Virginia Fulfillment Center Assets"
shall mean all of the fixed assets that (A) are or were owned by HDV immediately
before the consummation of Phase I of the Hanover 1998 Reorganization as to HDV,
and (B) are or have been owned or acquired by HHFG LLC at any time on or after
the effective date of Phase I of the Hanover 1998 Reorganization as to HDV,
which fixed assets were and are primarily related to or primarily used in
connection with the business and operations of the mail order fulfillment center
located at 5022 Hollins Road, Roanoke, Virginia, also known as The Home Fashion
Center, including, without limitation, any leasehold interest of HDV with
respect to such premises.
(xxv) "Silhouettes Catalog Assets" shall mean all of the
assets and properties that (A) are or were owned by HDPI immediately before the
consummation of Phase I of the Hanover 1998 Reorganization as to HDPI, and (B)
are or have been owned or acquired by Silhouettes LLC at any time on or after
the effective date of Phase I of the Hanover 1998 Reorganization as to HDPI,
which assets and properties were and are primarily related to or primarily used
in connection with or arise from the sale of merchandise or services sold
through the "Silhouettes" mail order catalog, including, without limitation, all
Accounts, Inventory, Customer Lists and other General Intangibles so related,
used or sold.
(xxvi) "Silhouettes LLC" shall mean Silhouettes, LLC, a
Delaware limited liability company, and its successors and assigns.
(xxvii) "Silhouettes LLC Eligible Inventory" shall mean
all Silhouettes Catalog Assets consisting of finished goods Inventory of
Silhouettes LLC in the merchandise category of women's apparel and accessories
offered for sale by Silhouettes LLC in its "Silhouettes" catalog, or such other
catalogs created or acquired by Silhouettes LLC covering substantially similar
merchandise which Silhouettes LLC has requested Lender to include in this
Inventory category.
(xxviii) "TCS Factory/Company Factory Merger" shall mean
the merger of The Company Factory, Inc., a Wisconsin corporation, with and into
The Company Store Factory, Inc., a Delaware corporation, with The Company Store
Factory, Inc. as the surviving corporation.
(xxix) "TCS Office/Company Office Merger" shall mean the
merger of The Company Office, Inc., a Wisconsin corporation, with and into The
Company Office, Inc., a Delaware corporation, with The Company Office, Inc., a
Delaware corporation, as the surviving corporation.
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(xxx) "TCSI/Tweeds Merger" shall mean the merger of The
Company Store, Inc. with and into Tweeds, Inc., with Tweeds, Inc. as the
surviving corporation, which thereafter has changed its name to Hanover Holding
Corp.
(xxxi) "Tweeds Catalog Assets" shall mean all of the
assets and properties (A) that are or were owned by Tweeds immediately before
the consummation of Phase I of the Hanover 1998 Reorganization as to Tweeds, and
(B) are or have been owned or acquired by Tweeds LLC at any time on or after the
effective date of Phase I of the Hanover 1998 Reorganization as to Tweeds, which
assets and properties were and are primarily related to or used in connection
with or arise from the sale of merchandise or services through the "Tweeds" mail
order catalog, including, without limitation, all Accounts, Inventory, Customer
Lists and other General Intangibles so related, used or sold.
(xxxii) "Tweeds LLC" shall mean Tweeds, LLC, a Delaware
limited liability company, and its successors and assigns.
(xxxiii) "Tweeds LLC Eligible Inventory" shall mean all
Tweeds Catalog Assets consisting of Inventory of Tweeds LLC in the merchandise
categories of men's and women's apparel, shoes, hosiery, costume jewelry,
accessories and outerwear offered for sale by Tweeds LLC in its "Tweeds" catalog
or such other catalogs created or acquired by Tweeds LLC covering substantially
similar merchandise which Tweeds LLC has requested Lender to include in this
Inventory category.
(xxxiv) "Tweeds of Vermont" shall mean Tweeds of
Vermont, Inc., a Delaware corporation, and its successors and assigns.
(xxxv) "Wisconsin Retail Outlet Assets" shall mean all
of the assets and properties that (A) are or were owned by HH Corp. immediately
before the consummation of Phase I of the Hanover 1998 Reorganization as to HH
Corp., and (B) are or have been owned or acquired by HH Corp. on and after the
effective date of Phase I of the Hanover 1998 Reorganization as to HH Corp.,
which assets and properties are primarily related to or primarily used in
connection with or arise from the business and operations of the four (4) retail
outlet stores previously operated by HH Corp. and located in La Crosse,
Wisconsin, including, without limitation, all Accounts, Inventory, and other
General Intangibles so related, used or sold.
(b) Amendments to Definitions.
(i) Revolving Loan Borrowers. Effective as of the
consummation of Phase I of the Hanover 1998
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Reorganization, Section 1.117 of the Loan Agreement shall be deemed deleted in
its entirety and replaced with the following:
"1.117 "Revolving Loan Borrowers" shall mean, individually and
collectively, HDPI, Brawn, GBM, Gump's, HH Corp., Tweeds LLC,
Silhouettes LLC, HCS LLC, Domestications LLC, Colonial Garden,
LWI, HDV, Aegis and Austad."
(ii) General Merchandise Inventory. Effective as of the
consummation of Phase I of the Hanover 1998 Reorganization as to Colonial
Garden, Section 1.47 of the Loan Agreement shall be deemed amended by deleting
the reference to "Colonial Garden Kitchens" referred to in that Section.
(iii) Home Furnishings Inventory. Effective as of the
consummation of Phase I of the Hanover 1998 Reorganization as to HDV, Section
1.66 of the Loan Agreement shall be deemed amended by deleting the reference to
the catalog "Domestications" referred to in that Section.
(iv) Eligible Inventory. Effective as of the
consummation of Phase I of the Hanover 1998 Reorganization, the first sentence
of Section 1.34 of the Loan Agreement is hereby shall be deemed amended by
deleting the references to "TCS Eligible Inventory", "Tweeds Eligible Inventory"
and "Women's Fashion Inventory", which shall be replaced with the following
references: "Tweeds LLC Eligible Inventory", "HCS LLC Eligible Inventory",
"Silhouettes LLC Eligible Inventory", "Domestications LLC Eligible Inventory"
and "Colonial Gardens Eligible Inventory."
(v) TCS Eligible Inventory. Effective as of the
consummation of Phase I of the Hanover 1998 Reorganization as to HH Corp., (A)
Section 1.130 of the Loan Agreement shall be deemed deleted in its entirety and
replaced with the following: "[Intentionally Deleted]" and (B) all references to
the term "TCS Eligible Inventory" contained in the Loan Agreement and any of the
other Financing Agreements shall be deemed deleted.
(vi) Tweeds Eligible Inventory. Effective as of the
consummation of Phase I of the Hanover 1998 Reorganization as to Tweeds, (A)
Section 1.140 of the Loan Agreement shall be deemed deleted in its entirety and
replaced with the following: "Section 1.140 [Intentionally Deleted]" and (B) all
references to the term "Tweeds Eligible Inventory" contained in the Loan
Agreement or in any of the other Financing Agreements shall be deemed deleted.
(vii) Women's Fashion Inventory. Effective as of the
consummation of Phase I of the Hanover 1998 Reorganization as to HDPI, (A)
Section 1.145 of the Loan
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<PAGE> 10
Agreement shall be deemed deleted in its entirety and replaced with the
following: "1.145 [Intentionally Deleted]" and (B) all references to the term
"Women's Fashion Inventory" contained in the Loan Agreement or in any of the
other Financing Agreements shall be deemed deleted.
(c) Interpretation. For purposes of this Amendment, unless
otherwise defined herein, all capitalized terms used herein that are defined in
the Loan Agreement, shall have the respective meanings given to such terms in
the Loan Agreement.
2. Consents.
(a) Phase I of Hanover 1998 Reorganization. Subject to the
terms and conditions contained herein and in the Loan Agreement and in the other
Financing Agreements, and notwithstanding anything contained in Sections 6.2,
6.5, 6.6(a), 6.6(c) or 6.9 of the Loan Agreement to the contrary, Lender
consents to the following transactions:
(i) the merger of TCSI with and into Tweeds, Inc.,
pursuant to the TCSI/Tweeds Merger, with Tweeds, Inc. as the surviving
corporation, pursuant to which merger Tweeds, Inc. changed its name to Hanover
Holding Corp. in accordance with the applicable Hanover 1998 Reorganization
Agreements;
(ii) the formation of Silhouettes LLC and the
contribution, assignment and transfer by HDPI to Silhouettes LLC of all of the
Silhouettes Catalog Assets, subject to the security interests and liens of
Lender therein, in consideration of a one hundred percent (100%) membership
interest in Silhouettes LLC, and the assumption by Silhouettes LLC of all
obligations, liabilities and indebtedness of HDPI allocated to the Silhouettes
Catalog Assets (including the Obligations of HDPI allocated thereto, but without
thereby releasing HDPI from liability therefor), all in accordance with the
applicable Hanover 1998 Reorganization Agreements;
(iii) the formation of Tweeds LLC and the contribution,
assignment and transfer by HH Corp. to Tweeds LLC of all of the right, title and
interest of HH Corp., in and to the Tweeds Catalog Assets, but in any event
excluding (A) the fifty percent (50%) ownership interest of HH Corp. in the Blue
Ridge Associates general partnership, and (B) the leasehold interest of HH Corp.
in the premises located at One Avery Row, Roanoke, Virginia, in each case,
subject to the security interests and liens of Lender therein, in consideration
of a one hundred percent (100%) membership interest in Tweeds LLC, and the
assumption by Tweeds LLC of all obligations, liabilities and indebtedness of HH
Corp. allocated to the Tweeds Catalog Assets (including the Obligations of HH
Corp. allocated thereto, but
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without thereby releasing HH Corp. from liability therefor, but excluding in any
event any obligations, liabilities and indebtedness of HH Corp. as a general
partner of Blue Ridge Associates general partnership and also excluding loans
made by Hanover to Tweeds, Inc. before the TCSI/Tweeds Merger for the purpose of
funding the capital contribution of Tweeds, Inc. to the Blue Ridge Associates
general partnership and those relating to the leasehold interest in One Avery
Row) all in accordance with the applicable Hanover 1998 Reorganization
Agreements;
(iv) the formation of HWA LLC by HDPI and HH Corp. and
(A) the contribution, assignment and transfer by HH Corp. to HWA LLC of
ninety-nine and nine tenths percent (99.9%) of HH Corp.'s membership interest in
Tweeds LLC in consideration of a membership interest in HWA LLC, expressed as a
percentage equal to the fraction, (1) the numerator of which is the book value
of the net assets contributed by HH Corp. to HWA LLC as of the effective date of
Phase I of the Hanover 1998 Reorganization as to HH Corp. and (2) the
denominator of which is equal to the sum of the book value of net assets
contributed by each of HH Corp. and HDPI to HWA LLC as of the effective date of
Phase I of the Hanover 1998 Reorganization as to HH Corp. and HDPI, and (B) the
contribution, assignment and transfer by HDPI to HWA LLC of ninety-nine and nine
tenths percent (99.9%) of HDPI's membership interest in Silhouettes LLC in
consideration of a membership interest in HWA LLC, expressed as a percentage,
equal to the fraction, (1) the numerator of which is the book value of the net
assets contributed by HDPI to HWA LLC as of the effective date of Phase I of the
Hanover 1998 Reorganization as to HDPI and (2) the denominator of which is the
sum of the book value of the net assets contributed by each of HH Corp. and HDPI
to HWA LLC as of the effective date of Phase I of the Hanover 1998
Reorganization as to HH Corp. and HDPI, in each case subject to the security
interests and liens of Lender in the assets of HH Corp. and HDPI; provided,
that, HWA LLC shall deliver to Lender, as soon as available, but in any event no
later than January 15, 1999, a Secretary's or Assistant Secretary's Certificate
stating the percentage membership interests of HDPI and HH Corp. in HWA LLC as
of the effective date of that portion of Phase I of the Hanover 1998
Reorganization described in this Section 2(a)(iv) as reflected on the books and
records of HWA LLC;
(v) the formation of HCS LLC and the contribution,
assignment and transfer by HH Corp. to HCS LLC of all of the Company Store
Catalog Assets (excluding in any event the Wisconsin Retail Outlet Assets and
the La Crosse, Wisconsin Telemarketing Center Assets), subject to the security
interests and liens of Lender therein, in consideration of a one hundred percent
(100%) membership interest in HCS LLC, and the assumption by HCS LLC of all
obligations, liabilities and indebtedness of HH Corp., as the surviving
corporation to the TCSI/Tweeds Merger, allocated to the Company Store Catalog
Assets (including the
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Obligations of HH Corp., as the surviving corporation of the TCSI/Tweeds Merger,
allocated thereto, but excluding in any event any obligations, liabilities and
indebtedness of HH Corp. allocated to the Wisconsin Retail Outlet Assets and the
La Crosse, Wisconsin Telemarketing Center Assets, but without thereby releasing
HH Corp. from liability therefor), all in accordance with the applicable Hanover
1998 Reorganization Agreements;
(vi) the formation of Domestications LLC and the
contribution, assignment and transfer by HDV to Domestications LLC of all of the
Domestications Catalog Assets (excluding in any event, the Roanoke, Virginia
Fulfillment Center Assets), subject to the security interests and liens of
Lender therein, in consideration of a one hundred percent (100%) membership
interest in Domestications LLC, and the assumption by Domestications LLC of all
obligations, liabilities and indebtedness of HDV allocated to the Domestications
Catalog Assets (including the Obligations of HDV allocated thereto, but
excluding in any event any obligations, liabilities and indebtedness of HDV
allocated to the Roanoke, Virginia Fulfillment Center Assets, but without
thereby releasing HDV from liability therefor), all in accordance with the
applicable Hanover 1998 Reorganization Agreements;
(vii) the formation of HHFG LLC by HDV and HH Corp., and
(A) the contribution, assignment and transfer by HH Corp. to HHFG LLC of the La
Crosse, Wisconsin Telemarketing Center Assets and ninety-nine and nine tenths
percent (99.9%) of HH Corp.'s membership interest in HCS LLC in consideration of
a membership interest in HHFG LLC expressed as a percentage equal to the
fraction, (1) the numerator of which is the book value of the net assets
contributed by HH Corp. to HHFG LLC as of the effective date of Phase I of the
Hanover 1998 Reorganization as to HDV and (2) the denominator of which is the
sum of the book value of the net assets contributed by each of HDV and HH Corp.
to HHFG LLC, as of the effective date of Phase I of the Hanover 1998
Reorganization as to HDV and HH Corp. and (B) the contribution, assignment and
transfer by HDV to HHFG LLC of the Roanoke, Virginia Fulfillment Center Assets
and the ninety-nine and nine tenths percent (99.9%) of HDV's membership interest
in Domestications LLC in consideration of a membership interest in HHFG LLC,
expressed as a percentage, equal to the fraction, (1) the numerator of which is
the book value of the net assets contributed by HDV as of the effective date of
Phase I of the Hanover 1998 Reorganization and (2) the denominator of which is
the sum of the book value of net assets contributed by each of HDV and HH Corp.
to HHFG LLC as of the effective date of Phase I of the Hanover 1998
Reorganization, in each case, subject to the security interests and liens of
Lender in the assets of HDV and HH Corp.; provided, that, HHFG LLC shall deliver
to Lender, as soon as available, but in any event no later than January 15,
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1999, a Secretary's or Assistant Secretary's Certificate stating the percentage
membership interests of HDV and HH Corp. in HHFG LLC as of the effective date of
that portion of Phase I of the Hanover 1998 Reorganization described in this
Section 2(a)(vii) as reflected on the books and records of HHFG LLC;
(viii) the formation of Colonial Garden and the
contribution, assignment and transfer by HDPI to Colonial Garden of all of the
Colonial Garden Catalog Assets, subject to the security interests and liens of
Lender therein, in consideration of all of the issued and outstanding shares of
capital stock of Colonial Garden, and the assumption by Colonial Garden of all
obligations, liabilities and indebtedness of HDPI allocated to the Colonial
Garden Catalog Assets (including the Obligations of HDPI allocated thereto, but
without thereby releasing HDPI from liability therefor), all in accordance with
the applicable Hanover 1998 Reorganization Agreements;
(ix) the formation of Keystone Fulfillment and the
capital contribution by Hanover of Ten Dollars ($10) in consideration of all of
the issued and outstanding shares of capital stock of Keystone Fulfillment, in
accordance with the applicable Hanover 1998 Reorganization Agreements;
(x) the merger of The Company Factory, Inc. with and
into The Company Store Factory, Inc., pursuant to the TCS Factory/Company
Factory Merger, with The Company Store Factory, Inc. as the surviving
corporation, in accordance with the applicable Hanover 1998 Reorganization
Agreements; and
(xi) the merger of The Company Office, Inc., a Wisconsin
Corporation, with and into The Company Office, Inc., a Delaware corporation,
pursuant to the TCS Office/Company Office Merger, with The Company Office, Inc.,
a Delaware corporation, as the surviving corporation, in accordance with the
applicable Hanover 1998 Reorganization Agreements.
(b) Additional Hanover Subsidiary Mergers. Subject to the
terms and conditions contained herein and in the Loan Agreement and in the other
Financing Agreements, and notwithstanding anything contained in Section 6.7 of
the Loan Agreement to the contrary, Lender consents to the Hanover List/DM
Advertising Merger, the Austad/Austad Holdings Merger, the LWI Retail/LWI
Holdings Merger and the Aegis Safety/HDI Merger, conditioned on the following:
(i) as soon as available, but in any event no later than
ten (10) days after the date of the effectiveness of each of the Hanover List/DM
Advertising Merger, the Austad/Austad Holdings Merger, the LWI Retail/LWI
Holdings Merger and the Aegis Safety/HDI Merger, Lender shall have received, in
form and substance satisfactory to Lender, (A) true and complete
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copies of all of the Additional Hanover Subsidiary Merger Agreements with
respect to each such merger and (B) evidence that the Additional Hanover
Subsidiary Merger Agreements with respect to each such merger have been duly
executed and delivered by and to the appropriate parties thereto and the
transactions contemplated under the terms of such Additional Hanover Subsidiary
Merger Agreements have been duly and validly effected;
(ii) as soon as available, but in any event no later
than ten (10) days after the date of the effectiveness of each of the Hanover
List/DM Advertising Merger, the Austad/Austad Holdings Merger, the LWI
Retail/LWI Holdings Merger and the Aegis Safety/HDI Merger, Lender shall have
received, in form and substance satisfactory to Lender, evidence that the
certificates of merger with respect to each such merger have been filed with the
Secretary of State of the appropriate States of incorporation of each
constituent corporation;
(iii) after giving effect to the consummation of the
respective mergers consented to in this Section 2(b), no Event of Default or
Incipient Default shall exist or have occurred and be continuing; and
(iv) the mergers consented to under this Section 2(b)
and contemplated by the Additional Hanover Subsidiary Merger Agreements shall
have occurred and be effective by no later than December 26, 1998 or such later
date or dates as Lender shall approve in writing.
(c) Guarantor dissolutions. Subject to the terms and
conditions contained herein and in the Loan Agreement and in the other Financing
Agreements, and notwithstanding anything contained in Section 6.7 of the Loan
Agreement to the contrary, Lender consents to the dissolution of Aegis Ventures,
Hanover Casuals, Gump's Catalog, HFC and York Fulfillment, conditioned on the
following:
(i) as soon as available, but in any event, no later
than ten (10) days after the effectiveness of each of the dissolutions described
in this Section 2(c), Borrowers and Guarantors shall deliver to Lender, in form
and substance satisfactory to Lender, (A) true and complete copies of all of the
Hanover Subsidiary Dissolution Agreements with respect to the dissolution of
each such Guarantor and (B) evidence that the Hanover Subsidiary Dissolution
Agreements with respect to the dissolution of each such Guarantor have been duly
executed and delivered by and to the appropriate parties thereto, and the
transactions contemplated under the terms of such Hanover Subsidiary Dissolution
Agreements have been effected;
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(ii) as soon as available, but in any event, no later
than ten (10) days after the effectiveness of each of the dissolutions consented
to in this Section 2(c), Lender shall have received, in form and substance
satisfactory to Lender, evidence that the certificate of dissolution with
respect to such Guarantor has been issued by the appropriate State governmental
authority;
(iii) after giving effect to the respective dissolutions
consented to in this Section 2(c), no Event of Default or Incipient Default
shall exist or have occurred and be continuing; and
(iv) the dissolutions consented to under this Section
2(c) and contemplated by the Hanover Subsidiary Dissolution Agreements shall
have occurred, and be effective, by no later than December 26, 1998 or such
later date as Lender shall approve in writing.
(d) Withdrawal of Foreign Qualification by Tweeds of Vermont.
(i) Borrowers and Guarantors hereby notify Lender that
Tweeds of Vermont intends to withdraw its qualification to do business as a
foreign corporation in the State of Vermont on or before December 26, 1998.
Borrowers and Guarantors jointly and severally represent and warrant to Lender
that the nature of the business of Tweeds of Vermont as presently conducted does
not require Tweeds of Vermont to qualify to do business as a foreign corporation
in the State of Vermont, and the failure to be qualified does not and shall not
have a material adverse effect on Borrowers or on the rights and interests of
Lender in the Collateral or Guarantor Collateral.
(ii) As soon as available, but in any event no later
than ten (10) days after the date of the effectiveness of the withdrawal by
Tweeds of Vermont from qualification to do business as a foreign corporation in
the State of Vermont, Borrowers shall deliver, or cause to be delivered, to
Lender a certificate of withdrawal to do business as a foreign corporation that
has been issued by the Vermont Secretary of State with respect to Tweeds of
Vermont.
3. Assumption of Obligations; Amendments to Guarantees and Financing
Agreements; Acknowledgments with respect to Hanover 1998 Reorganization.
Effective as of the earlier of the date hereof or effective date of
completion of Phase I of the Hanover 1998 Reorganization as to the respective
parties thereto:
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(a) Each of Domestications LLC, HCS LLC, Tweeds LLC,
Silhouettes LLC and Colonial Garden hereby expressly (i) assumes and agrees to
be directly liable to Lender, jointly and severally with the other Borrowers,
for all Obligations under, contained in, or arising out of the Loan Agreement
and the other Financing Agreements applicable to all Borrowers and as applied to
each of Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial
Garden as a Borrower and Guarantor, (ii) agrees to perform, comply with and be
bound by all terms, conditions and covenants of the Loan Agreement and the other
Financing Agreements applicable to all Borrowers and as applied to each of
Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial Garden as
a Borrower and Guarantor, with the same force and effect as if each of
Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial Garden had
originally executed and been an original Borrower and Guarantor party signatory
to the Loan Agreement and the other Financing Agreements, and (iii) agrees that
Lender shall have all rights, remedies and interests, including security
interests in and to the Collateral granted pursuant to Section 4(a) hereof, the
Loan Agreement and the other Financing Agreements, with respect to each of
Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial Garden and
their respective properties and assets with the same force and effect as Lender
has with respect to the other Borrowers and their respective assets and
properties as if each of Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes
LLC and Colonial Garden had originally executed and had been an original
Borrower and Guarantor party signatory to the Loan Agreement and the other
Financing Agreements.
(b) Each of the respective Guarantee and Waivers, dated
November 14, 1995, made by the Existing Borrowers as of that date in their
capacities as Guarantors, as heretofore amended (collectively, the "Borrower
Guarantees") shall be deemed further amended to include each of Domestications
LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial Garden as an additional
Guarantor party signatory thereto. Each of Domestications LLC, HCS LLC, Tweeds
LLC, Silhouettes LLC and Colonial Garden hereby expressly (i) assumes and agrees
to be directly liable to Lender, jointly and severally with the other Borrowers
signatories thereto and the Guarantors, for all Obligations as defined in the
Borrower Guarantees, (ii) agrees to perform, comply with and be bound by all
terms, conditions and covenants of the Borrower Guarantees with the same force
and effect as if each of Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes
LLC and Colonial Garden had originally executed and been an original party
signatory to each of the Borrower Guarantees, and (iii) agrees that Lender shall
have all rights, remedies and interests with respect to each of Domestications
LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial Garden and their
respective properties under the Borrower Guarantees with the same force and
effect as if each of Domestications LLC, HCS LLC, Tweeds LLC,
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Silhouettes LLC and Colonial Garden had originally executed and been an original
party signatory to each of the Borrower Guarantees.
(c) The Guarantee and Waiver, dated November 14, 1995,
executed by the Existing Guarantors as of such date, other than Hanover and the
Existing Borrowers as of such date, in favor of Lender, as heretofore amended
(the "Subsidiary Guarantee"), shall be deemed further amended to include HHFG
LLC, HWA LLC and Keystone as an additional Guarantor party signatory thereto.
Each of HHFG LLC, HWA LLC and Keystone hereby expressly (i) assumes and agrees
to be directly liable to Lender, jointly and severally with the other Guarantors
signatories thereto and the Borrowers, for all Obligations (as defined in the
Subsidiary Guarantee), (ii) agrees to perform, comply with and be bound by all
terms, conditions and covenants of the Subsidiary Guarantee with the same force
and effect as if each of HHFG LLC, HWA LLC and Keystone had originally executed
and been an original party signatory to the Subsidiary Guarantee, and (iii)
agrees that Lender shall have all rights, remedies and interests with respect to
each of HHFG LLC, HWA LLC and Keystone and their respective properties with the
same force and effect as if each of HHFG LLC, HWA LLC and Keystone had
originally executed and been an original party signatory to the Subsidiary
Guarantee.
(d) Each of HHFG LLC, HWA LLC and Keystone hereby expressly
(i) assumes and agrees to be directly liable for all Obligations under,
contained in, or arising out of the Loan Agreement, the General Security
Agreement, dated November 14, 1995, by the Existing Guarantors as of such date,
other than Hanover and Borrowers as of such date, in favor of Lender, as
heretofore amended (the "Subsidiary General Security Agreement") and the other
Financing Agreements applicable to all Guarantors and as applied to each of HHFG
LLC, HWA LLC and Keystone as a Guarantor, (ii) agrees to perform, comply with
and be bound by all terms, conditions and covenants of the Loan Agreement, the
Subsidiary General Security Agreement and the other Financing Agreements
applicable to all Guarantors and as applied to each of HHFG LLC and HWA LLC and
Keystone as a Guarantor with the same force and effect as if each of HHFG LLC,
HWA LLC and Keystone had originally executed and been an original Guarantor or
Debtor, as the case may be, party signatory to the Loan Agreement, the
Subsidiary General Security Agreement and the other Financing Agreements, and
(iii) agrees that Lender shall have all rights, remedies and interests,
including security interests in the Collateral granted pursuant to Section 4(b)
hereof, the Loan Agreement, the Subsidiary General Security Agreement, and the
other Financing Agreements, with respect to each of HHFG LLC, HWA LLC and
Keystone and their respective properties and assets with the same force and
effect as if each of HHFG LLC, HWA LLC and Keystone had originally executed and
had been an original Guarantor or Debtor, as the case may be, party signatory to
the
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<PAGE> 18
Loan Agreement, the Subsidiary General Security Agreement and the other
Financing Agreements, and such agreements shall be deemed so amended.
(e) Each Guarantor, including without limitation,
Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial Garden, in
its capacity as Guarantor pursuant hereto, and each of HHFG LLC, HWA LLC and
Keystone as a Guarantor pursuant hereto, hereby expressly and specifically
ratifies, restates and confirms the terms and conditions of its respective
Guarantee(s) in favor of Lender and its liability for all of the Obligations (as
defined in its Guarantee(s)), and all other obligations, liabilities, agreements
and covenants thereunder.
(f) Each Borrower, including, without limitation,
Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial Garden,
and each Guarantor, including, without limitation, HHFG LLC, HWA LLC and
Keystone, hereby agrees that all references to Borrower or Borrowers or other
terms intended to refer to a Borrower or Borrowers, such as Debtor or Debtors,
contained in any of the Financing Agreements are hereby amended to include each
of Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial Garden,
and each other person or entity at any time hereafter made a "Borrower" under
the Loan Agreement, as an additional Borrower or Debtor, or other appropriate
term of similar import, as the case may be. Each Borrower, including, without
limitation, Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and
Colonial Garden, and each Guarantor, including, without limitation, HHFG LLC,
HWA LLC and Keystone, hereby agrees that all references to Guarantor or
Guarantors or other terms intended to refer to a Guarantor or Guarantors, such
as Debtor or Debtors, contained in any of the Financing Agreements are hereby
amended to include each of Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes
LLC and Colonial Garden, in its capacity as Guarantor and each of HHFG LLC, HWA
LLC and Keystone and each other person or entity at any time hereafter made a
"Guarantor" under the Loan Agreement, as an additional Guarantor or Debtor, or
other appropriate term of similar import, as the case may be.
(g) Each Borrower and Guarantor hereby acknowledges, confirms
and agrees that, by operation of law and as provided in the Hanover 1998
Reorganization Agreements, as the case may be, and this Amendment:
(i) HH Corp., as the surviving corporation pursuant to
the TCSI/Tweeds Merger, has continued and shall continue to be directly and
primarily liable in all respects for the Obligations of TCSI arising prior to
the effective time of the TCSI/Tweeds Merger;
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(ii) Lender shall continue to have valid and perfected
security interests, liens and rights in and to all of the Silhouettes Catalog
Assets and the Company Store Catalog Assets and any other assets and properties
owned and acquired (A) by HH Corp., as the surviving corporation of the
TCSI/Tweeds Merger, and (B) by each Borrower or Guarantor that is the purchaser,
assignee or transferee of any such assets and properties, pursuant to the
Hanover 1998 Reorganization Agreements or otherwise, and all such assets and
properties shall be deemed included in the Collateral or the Guarantor
Collateral, as the case may be, and such security interests, liens and rights
and their perfection and priorities have continued and shall continue in all
respects in full force and effect;
(iii) The Company Store Factory, Inc., as the surviving
corporation pursuant to the TCS Factory/Company Factory Merger, has continued
and shall continue to be directly and primarily liable in all respects for the
Obligations of The Company Factory, Inc. arising prior to the effective time of
the TCS Factory/Company Factory Merger;
(iv) The Company Office, Inc., a Delaware corporation,
as the surviving corporation pursuant to the TCS Office/Company Office Merger,
has continued and shall continue to be directly and primarily liable in all
respects for the Obligations of The Company Office, Inc., a Wisconsin
corporation, arising prior to the effective time of the TCS Office/Company
Office Merger;
(v) Lender has and shall continue to have valid and
perfected security interests, liens and rights in and to all of the assets and
properties owned and acquired (A) by The Company Store Factory, Inc., as the
surviving corporation of the TCS Factory/Company Factory Merger, and (B) by The
Company Office, Inc., a Delaware corporation, as the surviving corporation of
the TCS Office/Company Factory Merger, pursuant to the Hanover 1998
Reorganization Agreements or otherwise, and all such assets and properties shall
be deemed included in the Collateral and such security interests, liens and
rights and their perfection and priorities have continued and shall continue in
all respects in full force and effect;
(vi) Without limiting the generality of the foregoing,
(A) none of the transactions contemplated by the Hanover 1998 Reorganization
Agreements shall in any way limit, impair or adversely affect the Obligations
now or hereafter owed to Lender by any existing or former Borrowers or
Guarantors or any security interests or liens in any assets or properties
securing the same, (B) the security interests, liens and rights of Lender in and
to the assets and properties of (1) The Company Store Factory, Inc., as the
surviving corporation of the TCS Factory/Company Factory Merger, (2) The Company
Office, Inc., a
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<PAGE> 20
Delaware corporation, as the surviving corporation of the TCS Office/Company
Office Merger, (3) HH Corp., as the surviving corporation of the TCSI/Tweeds
Merger, or (4) any Borrower or Guarantor that is the recipient, assignee or
transferee of any such assets and properties contributed, assigned or
transferred pursuant to the Hanover 1998 Reorganization Agreements have
continued and, upon and after the consummation of the TCSI/Tweeds Merger, TCS
Factory/Company Factory Merger, the TCS Office/Company Office Merger, or such
contribution, assignment or transfer, as the case may be, shall continue to
secure all Obligations to Lender of HH Corp., TCS Factory, TCS Office, or the
predecessor owner of such assets and properties, as the case may be, in addition
to all other existing and future Obligations of HH Corp, TCS Factory, TCS Office
or such Borrower or Guarantor, as the case may be, to Lender.
4. Collateral.
(a) New Borrower Collateral. Without limiting the provisions
of Section 3(a) hereof, the Loan agreement and the other Financing Agreements,
as collateral security for the prompt performance, payment and performance when
due of all of the Obligations of Domestications LLC, HCS LLC, Tweeds LLC,
Silhouettes LLC and Colonial Garden to Lender, each of Domestications LLC, HCS
LLC, Tweeds LLC, Silhouettes LLC and each of Colonial Garden hereby grant to
Lender, a continuing security interest in, and liens upon, and rights of setoff
against, and Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and
Colonial Garden hereby pledges and assigns to Lender, all of its now owned and
hereafter acquired and arising assets and properties, all of which shall be
included in the definition of Collateral as set forth in the Loan Agreement
(which definition is hereby amended accordingly), including, without limitation,
the following:
(i) all of the following, whether now owned or hereafter
acquired or arising: (A) all Accounts, including, without limitation, all
MasterCard/VISA Receivables and all other Third Party Credit Card Receivables,
and all monies, credit balances and other amounts due from or through or held by
Third Party Credit Card Issuers, or other parties to the Third Party Credit Card
Agreements, all monies paid by or through the Private Credit Card Purchaser, all
rentals or license fees receivable in respect of sale, lease, or license of
Customer Lists, all monies, securities and other property and the proceeds
thereof, now or hereafter held or received by, or in transit to, Lender from or
for it, whether for safekeeping, pledge, custody, transmission, collection or
otherwise, and all of its respective deposits (general or special), balances,
sums and credits with Lender at any time existing; (B) all its right, title and
interest, and all rights, remedies, security and liens, in, to and in respect of
the Accounts and other Collateral, including, without limitation,
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<PAGE> 21
rights of stoppage in transit, replevin, repossession and reclamation and other
rights and remedies of an unpaid vendor, lienor or secured party, guarantees or
other contracts of suretyship with respect to the Accounts, deposits or other
security for the obligations of any Account Debtor, all credit and other
insurance; (C) all its right, title and interest in, to and in respect of all
goods relating to, or which by sale have resulted in, Accounts, including,
without limitation, all goods described in invoices, documents, contracts or
instruments with respect to, or otherwise representing or evidencing, any
Account or other Collateral, including, without limitation, all returned,
reclaimed or repossessed goods; (D) all deposit accounts; and (E) all other
general intangibles of every kind and description, including, without
limitation, (1) tradenames and trademarks, and the goodwill of the business
symbolized thereby, (2) patents, (3) copyrights, (4) licenses, (5) Federal,
State and local tax and duty refund claims of all kinds, (6) catalogs and
promotional materials, (7) all Customer Lists, and (8) all of its right, title
and interest in and to Mail Order Joint Ventures, and other joint ventures,
partnerships and other Persons;
(ii) Inventory;
(iii) Equipment;
(iv) Real Property;
(v) all present and future books, records, ledger cards,
computer software (including all manuals, upgrades, modifications, enhancements
and additions thereto), computer tapes, disks, other electronic data storage
media, documentation of file and record formats and source code, documents,
other property and general intangibles evidencing or relating to any of the
above, any other Collateral or any Account Debtor, together with the file
cabinets or containers in which the foregoing are stored; and
(vi) all present and future products and proceeds of the
foregoing, in any form whatsoever, including, without limitation, any insurance
proceeds and any claims against third persons for loss or damage to or
destruction of any or all of the foregoing.
Notwithstanding the foregoing, the Collateral does not include (a) the GECC
Collateral owned by Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and
Colonial Garden, other than the respective right, title and interest of
Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial Garden in
and to the GECC Reserve Balance or (b) any leasehold interests of Domestications
LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial Garden in real property.
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<PAGE> 22
(b) New Guarantor Collateral. Without limiting the provisions
of Section 3(d) hereof, the Loan Agreement, the Subsidiary General Security
Agreement and the other Financing Agreements, as collateral security for the
prompt payment and performance when due of all of the Obligations of HHFG LLC,
HWA LLC and Keystone to Lender, each of HHFG LLC, HWA LLC and Keystone hereby
grants to Lender, a continuing security interest in, and lien upon, and right of
setoff against, and each of HHFG LLC, HWA LLC and Keystone hereby pledges and
assigns to Lender, all of its now owned and hereafter acquired and arising
assets and properties, all of which shall be included in the definition of
Collateral as set forth in the Subsidiary General Security Agreement (which
definition is hereby amended accordingly), including, without limitation, the
following:
(i) all present and future: (A) accounts, credit card
receivables (including credit card charge records and other evidences of credit
card transactions), contract rights, general intangibles, chattel paper,
documents and instruments (collectively, "Accounts"), including, without
limitation, all obligations for the payment of money arising out of the sale,
lease or other disposition of goods or other property or rendition of services,
all monies, all credit balances, reserve balances and other monies due from or
held by factors or credit card issuers or servicing agents or financial
intermediaries; (B) all monies, securities and other property and the proceeds
thereof, now or hereafter held or received by, or in transit to, Lender or any
participant from or for it whether for safekeeping, pledge, custody,
transmission, collection or otherwise, and all of its deposits (general or
special), balances, sums and credits with Lender or any participant at any time
existing; (C) all of its right, title and interest, and all of its rights,
remedies, security and liens, in, to and in respect of the Accounts and other
collateral, including, without limitation, rights of stoppage in transit,
replevin, repossession and reclamation and other rights and remedies of an
unpaid vendor, lienor or secured party, guaranties or other contracts of
suretyship with respect to the Accounts, deposits or other security for the
obligation of any account debtor, credit and other insurance; (D) all of its
right, title and interest in, to and in respect of all goods relating to, or
which by sale have resulted in Accounts, including, without limitation, all
goods described in invoices, documents, contracts or instruments with respect
to, or otherwise representing or evidencing, any Account or other collateral,
including, without limitation, all returned, reclaimed or repossessed goods; (E)
all deposit accounts; and (F) all other general intangibles of every kind and
description, including, without limitation, (1) trade names and trademarks, and
the goodwill of the business symbolized thereby, (2) patents, (3) copyrights,
(4) licenses, (5) claims and other choses in action, (6) Federal, State, local
and foreign tax refund claims of all kinds, (7) catalogs and promotional
materials, customer and
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<PAGE> 23
mailing lists, and (8) all of its right, title and interest in and to joint
ventures and partnerships;
(ii) all Inventory;
(iii) all Equipment;
(iv) all Real Property;
(v) all present and future books, records, ledger cards,
computer programs and other property and general intangibles evidencing or
relating to any of the above, any other collateral or any account debtor,
together with the file cabinets or containers in which the foregoing are stored;
and
(vi) all present and future products and proceeds of the
foregoing, in any form, including, without limitation, any insurance proceeds
and any claims against third persons for loss or damage to or destruction of any
or all of the foregoing.
Notwithstanding the foregoing, the Collateral does not include (a) the GECC
Collateral owned by HHFG LLC, HWA LLC and Keystone, other than the respective
right, title and interest of HHFG LLC, HWA LLC and Keystone in and to the GECC
Reserve Balance or (b) any leasehold interests of HHFG LLC, HWA LLC and Keystone
in real property.
5. Acknowledgments Regarding Additional Hanover Subsidiary Mergers
and Hanover Guarantor Subsidiary Dissolutions.
(a) Mergers. Each of Borrowers and Guarantors hereby
acknowledges, confirms and agrees that, upon the effectiveness of the mergers
consented to under Section 2(b) hereof, by operation of law and this Amendment:
(i) Effective as of the effective time of the
Austad/Austad Holdings Merger, (A) Austad Holdings, Inc. as the surviving
corporation pursuant to the Austad/Austad Holdings Merger, which shall have
contemporaneously therewith changed its name to The Austad Company, shall
continue to be directly and primarily liable in all respects for the Obligations
of Austad arising prior to the effective time of the Austad/Austad Holdings
Merger and (B) Section 1.13 of the Loan Agreement shall be deleted in its
entirety and replaced with the following:
"1.13 "Austad" shall mean The Austad
Company, a Delaware corporation, and its
successors and assigns."
(ii) Effective as of the effective time of the Hanover
List/D.M. Advertising Merger, D.M. Advertising, Inc.,
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<PAGE> 24
as the surviving corporation pursuant to the Hanover List/DM Advertising Merger,
shall continue to be directly and primarily liable in all respects for the
Obligations of Hanover List Management, Inc. arising prior to the effective time
of the Hanover List/DM Advertising Merger;
(iii) Effective as of the effective time of the LWI
Retail/LWI Holdings Merger, LWI Holdings, Inc., as the surviving corporation
pursuant to the LWI Retail/LWI Holdings Merger, shall continue to be directly
and primarily liable in all respects for the Obligations of LWI Retail, Inc.
arising prior to the effective time of the LWI Retail/LWI Holdings Merger;
(iv) Effective as of the effective time of the Aegis
Safety/HDI Merger, Hanover Direct, Inc., as the surviving corporation pursuant
to the Aegis Safety/HDI Merger, shall continue to be directly and primarily
liable in all respects for the Obligations of Aegis Safety Holdings, Inc.
arising prior to the effective time of the Aegis Safety/HDI Merger;
(v) Lender shall continue to have valid and perfected
security interests, liens and rights in and to all assets and properties owned
and acquired by the respective surviving corporations, including, without
limitation, all assets and properties acquired pursuant to the mergers consented
to under Section 2(b) hereof, and all such assets and properties shall be deemed
included in the Guarantor Collateral or the Collateral, as the case may be, and
such security interests, liens and rights and their perfection and priorities
shall continue in all respects in full force and effect; and
(vi) Without limiting the generality of the foregoing,
(A) none of the mergers to be consummated as consented to under Section 2(b)
hereof shall in any way limit, impair or adversely affect the Obligations then
or thereafter owed to Lender by any existing or former Borrowers or Guarantors
or any security interests or liens in any assets or properties securing the
same, and (B) the security interests, liens and rights of Lender in and to the
assets and properties of each Borrower and each Guarantor that is either the
merged or the surviving corporation pursuant to the mergers consented to under
Section 2(b) hereof, shall, upon and after the consummation of such mergers,
continue to secure all Obligations to Lender of the merged corporation and of
each surviving corporation, in addition to all other existing and future
Obligations of such surviving corporation to Lender.
(b) Guarantor dissolutions. Each of Borrowers and Guarantors
hereby acknowledges, confirms and agrees that, upon the effectiveness of the
dissolutions of those Guarantors consented to under Section 2(c) hereof:
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<PAGE> 25
(i) The dissolutions of those Guarantors consented to
under Section 2(c) hereof shall not in any way limit, impair or adversely affect
the Obligations now or hereafter owed to Lender by any continuing Borrower or
Guarantor, including, without limitation, any such Obligations they have as
shareholders of such dissolved Guarantors pursuant to applicable law; and
(ii) Lender shall continue to have valid and perfected
security interests, liens and rights in and to all assets and properties of each
existing or former Guarantor whose dissolution has been consented to under
Section 2(c) hereof. Such assets and properties shall continue to be deemed
included in the Guarantor Collateral, and such security interests, liens and
rights and their perfection and priorities shall continue in all respects in
full force and effect.
(iii) On or before the dissolution of HFC as consented
to under Section 2(c) hereof, the Austad Subordinated Notes shall, pursuant to
the Hanover Subsidiary Dissolution Agreements and by operation of law, be
assigned, distributed or conveyed to HDPI as the sole shareholder of HFC. The
security interests, liens, rights and their perfection and priority of Lender in
the Austad Subordinated Notes shall continue in all respects in full force and
effect. HDPI and HFC shall deliver to Lender, in form and substance satisfactory
to Lender, documents, agreements or instruments to amend the existing Allonge
Indorsements in favor of Lender to each of the Austad Subordinated Notes to
reflect such assignment, distribution or conveyance.
6. Allocation of Revolving Loans and Letter of Credit
Accommodations. Each of Borrowers and Guarantors confirms, acknowledges and
agrees that:
(a) as of the effective date of Phase I of the Hanover 1998
Reorganization, the portion of the Revolving Loans and Letter of Credit
Accommodations to or for the account of HDPI determined by Lender to be
allocable to the Silhouettes Catalog Assets before the consummation of Phase I
of the Hanover 1998 Reorganization as to HDPI, shall be deemed to be Revolving
Loans and Letter of Credit Accommodations of Silhouettes LLC;
(b) as of and after the effective date of Phase I of the
Hanover 1998 Reorganization as to Colonial Garden, the portion of the Revolving
Loans and Letter of Credit Accommodations to or for the account of HDPI
determined by Lender to be allocable to the Colonial Garden Catalog Assets
before the consummation of Phase I of the Hanover 1998 Reorganization as to
Colonial Garden, shall be deemed to be Revolving Loans and Letter of Credit
Accommodations of Colonial Garden;
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<PAGE> 26
(c) as of and after the effective date of Phase I of the
Hanover 1998 Reorganization as HDV, the portion of the Revolving Loans and
Letter of Credit Accommodations to or for the account of HDV determined by
Lender to be allocable to the Domestications Catalog Assets before the
consummation of Phase I of the Hanover 1998 Reorganization shall be deemed to be
Revolving Loans and Letter of Credit Accommodations of Domestications LLC;
(d) as of and after the effective date of Phase I of the
Hanover 1998 Reorganization as to HH Corp., the portion of the Revolving Loans
and Letter of Credit Accommodations to or for the account of HH Corp. determined
by Lender to be allocable to the Tweeds Catalog Assets before the consummation
of Phase I of the Hanover 1998 Reorganization as to HH Corp. shall be deemed to
be Revolving Loans and Letter of Credit Accommodations of Tweeds LLC;
(e) as of and after the effective date of Phase I of the
Hanover 1998 Reorganization, the portion of the Revolving Loans and Letter of
Credit Accommodations to or for the account of HH Corp. determined by Lender to
be allocable to the Company Store Catalog Assets before the consummation of
Phase I of the Hanover 1998 Reorganization as to HH Corp., shall be deemed to be
Revolving Loans and Letter of Credit Accommodations of HCS LLC; and
(f) contemporaneously with any determination by Lender of the
outstanding amount of Revolving Loans and Letter of Credit Accommodations to be
allocated to each of Silhouettes LLC, Colonial Garden, Domestications LLC,
Tweeds LLC and HCS LLC, as provided in Sections 6(a) through (e) hereof,
respectively, the outstanding amount of Revolving Loans and Letter of Credit
Accommodations of the transferor Borrower shall be reduced by those amounts so
allocated, but without thereby relieving the transferor Borrower of liability
therefor.
7. Amendments to Lending Sublimits.
(a) Brawn. Section 2.2(a) of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:
"(a) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Inventory Loans and Letter of Credit Accommodations made
available to Brawn shall not exceed Five Million Five Hundred
Thousand Dollars ($5,500,000) at any one time outstanding."
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<PAGE> 27
(b) HDPI. Section 2.2(b) of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:
"(b) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Inventory Loans and Letter of Credit Accommodations made
available to HDPI shall not exceed One Million Five Hundred
Thousand Dollars ($1,500,000) at any one time outstanding."
(c) GBM. Section 2.2(c) of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:
"(c) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Inventory Loans and Letter of Credit Accommodations made
available to GBM shall not exceed Five Million Dollars
($5,000,000) at any one time outstanding."
(d) Gump's. Section 2.2(d) of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:
"(d) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Inventory Loans and Letter of Credit Accommodations made
available to Gump's shall not exceed Three Million Five
Hundred Thousand Dollars ($3,500,000) at any one time
outstanding."
(e) HCS LLC. Section 2.2(e) of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:
"(e) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Inventory Loans and Letter of Credit Accommodations made
available to HCS LLC shall not exceed Ten Million Three
Hundred Fifty Thousand Dollars ($10,350,000) at any one time
outstanding."
(f) Tweeds LLC. Section 2.2(f) of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:
"(f) Subject to, and upon the terms and
conditions contained herein, the aggregate
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principal amount of Revolving Inventory Loans and Letter of
Credit Accommodations made available to Tweeds LLC shall not
exceed Three Million Five Hundred Thousand Dollars
($3,500,000) at any one time outstanding."
(g) Domestications LLC. Section 2.2(g) of the Loan Agreement
is hereby deleted in its entirety and replaced with the following:
"(g) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Inventory Loans and Letter of Credit Accommodations made
available to Domestications LLC shall not exceed Twenty-One
Million Five Hundred Thousand Dollars ($21,500,000) at any one
time outstanding."
(h) Silhouettes LLC. Section 2.2(h) of the Loan Agreement is
hereby deleted in its entirety and replaced with the following:
"(h) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Inventory Loans and Letter of Credit Accommodations made
available to Silhouettes LLC shall not exceed Four Million
Dollars ($4,000,000) at any one time outstanding."
(i) LWI. Section 2.2(i) of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:
"(i) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Inventory Loans and Letter of Credit Accommodations made
available to LWI shall not exceed Two Million Five Hundred
thousand Dollars ($2,500,000) at any one time outstanding."
(j) Colonial Garden. Section 2.2(j) of the Loan Agreement (as
previously amended by the Eleventh Amendment to Loan Agreement) is hereby
redesignated Section 2.2(o) and a new Section 2.2(j) of the Loan Agreement is
hereby added as follows:
"(j) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Inventory Loans and Letter of Credit Accommodations made
available to Colonial Garden shall not exceed Seven Hundred
Fifty Thousand Dollars ($750,000) at any one time
outstanding."
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<PAGE> 29
(k) Austad. Section 2.2(k) of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:
"(k) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Inventory Loans and Letter of Credit Accommodations made
available to Austad shall not exceed Two Million Three Hundred
Thousand Dollars ($2,300,000) at any one time outstanding."
(l) Aegis. A new Section 2.2(l) of the Loan Agreement is
hereby added as follows:
"(l) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Inventory Loans and Letter of Credit Accommodations made
available to Aegis shall not exceed Two Hundred Thousand
Dollars ($200,000) at any one time outstanding."
(m) HDV. A new Section 2.2(m) of the Loan Agreement is hereby
added as follows:
"(m) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Inventory Loans and Letter of Credit Accommodations made
available to HDV shall not exceed zero ($0) at any one time
outstanding."
(n) HH Corp. A new Section 2.2(n) of the Loan Agreement is
hereby added as follows:
"(n) Subject to, and upon the terms and conditions
contained herein, the aggregate principal amount of Revolving
Inventory Loans and Letter of Credit Accommodations made
available to HH Corp. shall not exceed zero ($0) at any one
time outstanding."
8. Exhibits.
(a) Exhibits A and B-1 to the Loan Agreement are hereby
amended to include, in addition and not in limitation, the information set forth
on Exhibits A and B attached hereto. Exhibit C to the Loan Agreement is hereby
deleted in its entirety and replaced with the information set forth on Exhibit C
hereto.
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<PAGE> 30
(b) Exhibit A to the Subsidiary General Security Agreement is
hereby amended to include, in addition and not in limitation, the information
set forth on Exhibit D attached hereto.
9. Release of Certain Existing Availability Reserves. The parties
hereto acknowledge and agree that Lender has previously released the following
availability reserves under the Loan Agreement in the following amounts:
(a) the availability reserve in the amount of $641,740 against
the amount of Revolving Loans and Letter of Credit Accommodations
otherwise determined by Lender to be available to LWI, previously
established and being maintained by Lender pursuant to Section 3 of the
letter agreement, dated May 15, 1997, among Lender, Borrowers and
Guarantors re: Sale of Certain Improved Property and Fixtures of LWI
Holdings, Inc.;
(b) the availability reserve in the amount of $1,000,000
against the amount of Revolving Loans and Letter of Credit Accommodations
otherwise determined by Lender to be available to HDPI, previously
established and being maintained by Lender pursuant to Section 3 of the
Second Amendment to Loan Agreement; and
(c) the availability reserve in the amount of $317,540.59
against the amount of Revolving Loans and Letter of Credit Accommodations
otherwise determined by Lender to be available to HDPI, previously
established and being maintained by Lender pursuant to Section 3(b) of the
letter agreement, dated July 16, 1996, among Lender, Borrowers and
Guarantors re: Sale of Certain Real Property, Fixtures and Equipment of
The Austad Company.
10. Consent and Release by Lender of Certain Trademarks.
(a) In accordance with the request by Borrowers, Hanover
Catalog and the other Guarantors, subject to the terms hereof, Lender consents
to the assignment by Hanover Catalog to the American Cancer Society Foundation
of all of the right, title and interest of Hanover Catalog in and to the
trademark entitled "TLC" and Design, Registration No. 2,002,663, together with
the goodwill of the business symbolized thereby (the "TLC Trademark"). Lender
hereby releases all interests in the TLC Trademark previously assigned to Lender
under the Trademark Security Agreement between certain Guarantors and Lender,
and all interests in the TLC Trademark previously assigned to Lender under that
Trademark Security Agreement are hereby reassigned to Hanover Catalog, without
representation or warranty of any kind, nature or description.
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<PAGE> 31
(b) In accordance with the request by Brawn and the other
Borrowers and Guarantors, subject to the terms hereof, Lender consents to the
assignment by Brawn to Eugene R. Burkard ("Burkard") of all of the right, title
and interest in and to the trademark entitled "FREIGHTER", Registration No.
1,365,700, together with the goodwill of the business symbolized thereby (the
"Freighter Trademark"), and Lender hereby releases all interests in the
Freighter Trademark previously assigned to Lender under the Trademark Security
Agreement between certain Borrowers and Lender, and all interests in the
Freighter Trademark previously assigned to Lender under that Trademark Security
Agreement are hereby reassigned to Brawn, without representation or warranty of
any kind, nature or description; provided, that, Brawn shall have delivered to
Lender, in form and substance satisfactory to Lender, (i) a royalty free license
agreement between Burkard and Brawn with respect to the license by Burkard to
Brawn of the trademark entitled "BUNS", Registration No. 1,023,313, together
with the goodwill of the business symbolized thereby (the "Buns Trademark"), and
(ii) an agreement between Lender and Burkard, as consented to by Brawn,
providing for, among other things, the use by Lender of the Buns Trademark upon
an Event of Default.
(c) Conditioned as provided in Sections 10(a) and (b) hereof,
Lender agrees, at the request of Borrowers and Guarantors, to deliver to
Borrowers and Guarantors or their counsel, at the sole cost and expense of
Borrowers and Guarantors, an instrument, in form and substance satisfactory to
Lender, evidencing the release and reassignment of the Freighter Trademark that
is part of the Collateral held by Lender.
11. Representations, Warranties and Covenants. Borrowers and
Guarantors represent, warrant and covenant with and to Lender as follows, which
representations, warranties and covenants are continuing and shall survive the
execution and delivery hereof, the truth and accuracy of, or compliance with
each, together with the representations, warranties and covenants in the other
Financing Agreements, being a condition of the effectiveness of this Amendment
and a continuing condition of the making or providing of any Revolving Loans or
Letter of Credit Accommodations by Lender to Borrowers:
(a) This Amendment and each other agreement or instrument to
be executed and delivered by each of Domestications LLC, HCS LLC, Tweeds LLC,
Silhouettes LLC, Colonial Garden, HHFG LLC, HWA LLC and Keystone, the other
Borrowers and/or the other Guarantors hereunder have been duly authorized,
executed and delivered by all necessary action on the part of each of
Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC, Colonial Garden, HHFG
LLC, HWA LLC and Keystone, the other Borrowers and each of the other Guarantors
which is a party
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<PAGE> 32
hereto and thereto and, if necessary, their respective stockholders (with
respect to any corporation) or members (with respect to any limited liability
company), and is in full force and effect as of the date hereof, as the case may
be, and the agreements and obligations of each of Domestications LLC, HCS LLC,
Tweeds LLC, Silhouettes LLC, Colonial Garden, HHFG LLC, HWA LLC and Keystone,
the other Borrowers and/or the other Guarantors, as the case may be, contained
herein and therein constitute legal, valid and binding obligations of each of
Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC, Colonial Garden, HHFG
LLC, HWA LLC and Keystone, the other Borrowers and/or the other Guarantors, as
the case may be, enforceable against them in accordance with their terms.
(b) Neither the execution and delivery of the Hanover 1998
Reorganization Agreements, nor the consummation of the transactions contemplated
by the Hanover 1998 Reorganization Agreements, nor compliance with the
provisions of the Hanover 1998 Reorganization Agreements, shall result in the
creation or imposition of any lien, claim, charge or encumbrance upon any of the
Silhouettes Catalog Assets, the Company Store Catalog Assets, the Tweeds Catalog
Assets, the Domestications Catalog Assets and the Colonial Garden Catalog
Assets, the La Crosse, Wisconsin Telemarketing Center Assets, the Wisconsin
Retail Outlet Assets, the Roanoke, Virginia Fulfillment Center Assets, or any
other Collateral, except in favor of Lender pursuant to this Amendment and the
Financing Agreements as amended hereby.
(c) Neither the execution and delivery of the Hanover 1998
Reorganization Agreements, nor the consummation of the transactions therein
contemplated, nor compliance with the provisions thereof, (i) has violated or
shall violate any Bulk Sales Act, Bulk Transfer Act or Article 6 of the UCC, if
applicable, the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as
amended, if applicable, or any Federal or State securities laws or any other law
or regulation or any order or decree of any court or governmental
instrumentality in any respect or (ii) does, or shall conflict with or result in
the breach of, or constitute a default in any respect under any mortgage, deed
of trust, security agreement, agreement or instrument to which any of
Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC, Colonial Garden, HHFG
LLC, HWA LLC or Keystone, or any other Borrower or other Guarantor is a party or
may be bound, or (iii) shall violate any provision of the Certificates of
Incorporation or By-Laws of Keystone or Colonial Garden, or any other Borrower
or other Guarantor, or (iv) shall violate any provision of the Certificates of
Formation or Operating Agreements of any of Domestications LLC, HCS LLC, Tweeds
LLC, Silhouettes LLC, HHFG LLC or HWA LLC.
(d) All of the outstanding shares of capital stock of each of
Keystone and Colonial Garden have been duly
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<PAGE> 33
authorized, validly issued and are fully paid and non-assessable, free and clear
of all claims, liens, pledges and encumbrances of any kind. Hanover is the
beneficial and direct owner of record of one hundred (100%) percent of the
issued and outstanding shares of capital stock of each of Keystone and Colonial
Garden.
(e) None of the membership interests in any of Domestications
LLC, HCS LLC, Tweeds LLC, Silhouettes LLC, HHFG LLC and HWA LLC have been
evidenced by a membership certificate or other certificate, document, instrument
or security. All of the membership interests in each of Domestications LLC, HCS
LLC, Tweeds LLC, Silhouettes LLC, HHFG LLC and HWA LLC (i) are noted in the
respective books and records of each such company, (ii) have been duly
authorized, validly issued and (iii) are fully paid and non-assessable, free and
clear of all claims, liens, pledges and encumbrances of any kind .
(f) No court of competent jurisdiction has issued any
injunction, restraining order or other order which has prohibited or prohibits
consummation of the Hanover 1998 Reorganization or any part thereof, and no
governmental action or proceeding has been threatened or commenced seeking any
injunction, restraining order or other order which seeks to void or otherwise
modify the transactions described in the Hanover 1998 Reorganization Agreements.
(g) Each of Keystone and Colonial Garden is a Delaware
corporation, duly organized and validly existing in good standing under the laws
of the State of Delaware. Each of Domestications LLC, HCS LLC, Tweeds LLC,
Silhouettes LLC, HHFG LLC and HWA LLC is a limited liability company, duly
formed and validly existing in good standing under the laws of the State of
Delaware. Each of Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC,
Colonial Garden, HHFG LLC, HWA LLC and Keystone (i) is duly licensed or
qualified to do business as a foreign limited liability company or foreign
corporation, as the case may be, and is in good standing in each of the
jurisdictions set forth in Exhibit A annexed hereto, which are the only
jurisdictions wherein the character of the properties owned or licensed or the
nature of the business of any of Domestications LLC, HCS LLC, Tweeds LLC,
Silhouettes LLC, Colonial Garden, HHFG LLC, HWA LLC or Keystone, makes such
licensing or qualification to do business necessary; and (ii) has all requisite
power and authority to own, lease and operate its properties and to carry on its
business as it is now being conducted and will be conducted in the future.
(h) The assets and properties of Domestications LLC, HCS LLC,
Tweeds LLC, Silhouettes LLC, Colonial Garden, HHFG LLC, HWA LLC and Keystone are
owned by them, free and clear of all security interests, liens and encumbrances
of any kind, nature or description, as of the date hereof, except those
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<PAGE> 34
security interests existing in favor of Lender and those granted pursuant hereto
in favor of Lender, and except for Liens (if any) permitted under Section 6.4 of
the Loan Agreement or the other Financing Agreements.
(i) Upon the effectiveness of each of the mergers consented to
under Sections 2(a) or 2(b) hereof, each such merger has or shall become
effective in accordance with the terms of each of the Additional Hanover
Subsidiary Merger Agreements applicable to it and of the applicable corporate
statutes of the States of incorporation of each Borrower and each Guarantor that
is a constituent corporation pursuant to the mergers so consented to. As of the
respective date of the effectiveness of the respective mergers consented to
under Sections 2(a) or 2(b) hereof, (i) Austad Holdings, Inc. shall be the
surviving corporation of the Austad/Austad Holdings Merger and the name of
Austad Holdings, Inc. shall have been changed to The Austad Company in
accordance with the applicable State laws of Delaware and South Dakota, (ii)
D.M. Advertising, Inc. shall be the surviving corporation of the Hanover List/DM
Advertising Merger, (iii) LWI Holdings, Inc. shall be the surviving corporation
of the LWI Retail/LWI Holdings Merger, (iv) The Company Store Factory, Inc. was
and is the surviving corporation of the TCS Factory/Company Factory Merger, (v)
The Company Office, Inc. was and is the surviving corporation of the TCS
Office/Company Office Merger, and (vi) Hanover Direct, Inc. shall be the
surviving corporation of the Aegis Safety/HDI Merger.
(j) Neither the consummation of the mergers, as consented to
under Section 2(a) or 2(b) hereof, nor the dissolution of certain Guarantors as
consented to under Section 2(c) hereof, nor the execution, delivery and/or
filing of the Additional Hanover Subsidiary Merger Agreements, the Hanover
Subsidiary Dissolution Agreements or any other agreements, documents or
instruments in connection therewith, nor the consummation of the transactions
therein contemplated, nor compliance with the provisions thereof if consummated
or effected on or before the date hereof has resulted in or if consummated or
effected after the date hereof shall result in the creation or imposition of any
lien, claim, charge or incumbrance upon any of the Collateral, except in favor
of Lender.
(k) All actions and proceedings required by the Additional
Hanover Subsidiary Merger Agreements applicable to the mergers consented to
under Sections 2(a) and 2(b) hereof and the Hanover Subsidiary Dissolution
Agreements, applicable law and regulation, have been or shall be taken prior to
the effectiveness of such mergers and dissolutions and all transactions required
thereunder have been and shall be, or will be duly and validly consummated.
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<PAGE> 35
(l) No court of competent jurisdiction has, or prior to the
effectiveness thereof shall have, issued any injunction, restraining order or
other order which prohibits consummation of the mergers as consented to under
Sections 2(a) or 2(b) hereof or the dissolution of certain Guarantors as
consented to under Section 2(c) hereof, and no governmental action or proceeding
has been, or, prior to the effectiveness thereof, shall have been, threatened or
commenced, seeking any injunction, restraining order or other order which seeks
to void or otherwise modify the transactions described in the Additional Hanover
Subsidiary Merger Agreements or the Hanover Subsidiary Dissolution Agreements.
(m) Neither the consummation of the mergers consented to under
Section 2(a) or 2(b) hereof, nor the dissolution of certain Guarantors consented
to under Section 2(c) hereof, nor the execution, delivery or filing of the
Additional Hanover Subsidiary Merger Agreements, the Hanover Subsidiary
Dissolution Agreements or any other agreements, documents or instruments in
connection therewith, nor the consummation of the transactions therein
contemplated, nor compliance with the provisions thereof before the date hereof
or upon the effectiveness of such mergers and dissolutions (i) has violated or
will violate any Federal or State securities laws, any State corporation law, or
any other law or regulation or any order or decree of any court or governmental
instrumentality in any respect, or (ii) does or will conflict with or result in
the breach of, or constitute a default in any respect under any mortgage, deed
of trust, security agreement, agreement or instrument to which any existing or
former Guarantor or Borrower is a party or may be bound, or (iii) does or will
violate any provision of the Certificate of Incorporation or By-Laws of any
Guarantor or any Borrower.
(n) The aggregate amount of the actual and contingent
indebtedness, liabilities and obligations, other than those owed to Lender,
incurred by the Guarantors dissolved or which will be dissolved as consented to
under Section 2(c) hereof, including any such indebtedness, liabilities and
obligations arising in connection with or relating to such dissolutions, shall
not exceed $10,000 for any one such dissolved Guarantor.
(o) No action of, or filing with, or consent of any
governmental or public body or authority, other than the filing of UCC financing
statements, and no approval or consent of any other party, is required to
authorize, or is otherwise required in connection with, the execution, delivery
and performance of this Amendment.
(p) All of the representations and warranties set forth in the
Loan Agreement as amended hereby, and the other
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<PAGE> 36
Financing Agreements, are true and correct in all material respects after giving
effect to the provisions of this Amendment, except to the extent any such
representation or warranty is made as of a specified date, in which case such
representation or warranty shall have been true and correct as of such date.
(q) After giving effect to the provisions of this Amendment,
no Event of Default or Incipient Default exists or has occurred and is
continuing.
(r) Within fifteen (15) days after the date of the
consummation of the mergers consented to in Section 2(b) hereof, Borrowers and
Guarantors shall deliver and/or cause to be delivered to Lender, each in form
and substance satisfactory to Lender, appropriate UCC amendments to the existing
UCC financing statements filed by the Lender against the merged Borrower or
Guarantor changing the debtor's name and/or mailing address to that of the
respective surviving corporation of the merger with such merged corporation as
consented to under Section 2(b) hereof.
12. Conditions Precedent. Concurrently with the execution and
delivery hereof (except to the extent otherwise indicated below), and as a
further condition to the effectiveness of this Amendment and the agreement of
Lender to the modifications and amendments set forth in this Amendment:
(a) Lender shall have received, in form and substance
satisfactory to Lender, evidence that (i) the Hanover 1998 Reorganization
Agreements in connection with Phase I of the Hanover 1998 Reorganization have
been duly executed and delivered by and to the appropriate parties thereto and
(ii) the transactions contemplated by Phase I of the Hanover 1998 Reorganization
have been consummated prior to, or contemporaneously with, the execution of this
Amendment;
(b) Each of Domestications LLC, HCS LLC, Tweeds LLC,
Silhouettes LLC, Colonial Garden, HHFG LLC, HWA LLC and Keystone, Existing
Borrowers and Existing Guarantors shall have delivered to Lender, in form and
substance satisfactory to Lender, each of the following agreements to which it
is a party, duly authorized, executed and delivered:
(i) Second Amendment to Trademark Collateral Assignment
and Security Agreement, dated November 14, 1995, by and among Hanover, Hanover
Catalog, Scandia, Aegis Holdings, CSHI, Austad Holdings and Lender, providing
for certain amendments to the existing exhibit(s) to such Trademark Collateral
Assignment and Security Agreement, and any such documents, instruments or
filings with respect thereto with the U.S. Patent and Trademark Office to
protect such Collateral;
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<PAGE> 37
(ii) First Amendment to Trademark Collateral Assignment
and Security Agreement, dated November 14, 1995, by and among Gump's, Tweeds,
Brawn and Lender, providing for certain amendments to the existing exhibit(s) to
such Trademark Collateral Assignment and Security Agreement,, and any such
documents, instruments or filings with respect thereto with the U.S. Patent and
Trademark Office to protect such Collateral;]
(iii) amendments to the Third Party Credit Card
Acknowledgments setting forth such acknowledging parties' agreement to transfer
to the Blocked Accounts all monies due and other funds payable to or for the
account of Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial
Garden under the applicable Third Party Credit Card Agreements;
(iv) evidence that notice has been received by the
Customer List Escrow Agent setting forth any changes in ownership to all
existing Customer Lists that are being held by the Customer List Escrow Agent
pursuant to the Customer List Escrow Agreement;
(v) Amended and Restated Agency Agreement by and among
Hanover, Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial
Garden and certain Borrowers;
(vi) Guarantee and Waiver by Borrowers, other than
Domestications LLC, HDPI and Hanover Realty, in favor of Lender with respect to
the Obligations of Domestications LLC to Lender (HDPI and Hanover Realty hereby
acknowledge and confirm that each of the Guarantee and Waivers, dated June 26,
1998, by each of them in favor of Lender with respect to the existing and future
Obligations of Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and
Colonial Garden to Lender, are in full force and effect);
(vii) Guarantee and Waiver by Borrowers, other than HCS
LLC, HDPI and Hanover Realty, in favor of Lender with respect to the Obligations
of HCS LLC to Lender;
(viii) Guarantee and Waiver by Borrowers, other than
Tweeds LLC, HDPI and Hanover Realty, in favor of Lender with respect to the
Obligations of Tweeds LLC to Lender;
(ix) Guarantee and Waiver by Borrowers, other than
Silhouettes LLC, HDPI and Hanover Realty, in favor of Lender with respect to the
Obligations of Silhouettes LLC to Lender;
(x) Guarantee and Waiver by Borrowers, other than
Colonial Garden, HDPI and Hanover Realty, in favor of Lender with respect to the
Obligations of Colonial Garden to Lender;
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<PAGE> 38
(xi) Guarantee and Waiver by Guarantors, other than
Borrowers and Hanover, in favor of Lender with respect to the Obligations of
Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial Garden to
Lender;
(xii) Guarantee and Waiver by Hanover in favor of Lender
with respect to the Obligations of Domestications LLC, HCS LLC, Tweeds LLC,
Silhouettes LLC and Colonial Garden to Lender; and
(xiii) Blocked Account Agreement(s) by and among The
First National Bank of Maryland, Borrowers, certain Guarantors and Lender
providing for the establishment of a Blocked Account for each of Domestications
LLC, HCS LLC, Tweeds LLC, Silhouettes LLC and Colonial Garden;
(c) Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC,
Colonial Garden, HHFG LLC, HWA LLC and Keystone and all other Borrowers and
Guarantors shall have duly executed and delivered to Lender such UCC financing
statements and other documents and instruments which Lender in its sole
discretion has determined are necessary to perfect the security interests of
Lender in all Collateral now or hereafter owned by Domestications LLC, HCS LLC,
Tweeds LLC, Silhouettes LLC, Colonial Garden, HHFG LLC, HWA LLC and Keystone;
(d) Each of Colonial Garden and Keystone shall have delivered
to Lender (i) a copy of its Certificate of Incorporation, and all amendments
thereto, certified by the Secretary of State of its jurisdiction of
incorporation as of the most recent practicable date certifying that each of the
foregoing documents remains in full force and effect and has not been modified
or amended, except as described therein, (ii) a copy of its By-Laws, certified
by its Secretary or Assistant Secretary, (iii) a certificate from its Secretary
or Assistant Secretary dated the date hereof certifying that each of the
foregoing documents remains in full force and effect and has not been modified
or amended, except as described therein;
(e) Each of Domestications LLC, HCS LLC, Tweeds LLC,
Silhouettes LLC, HHFG LLC and HWA LLC shall have delivered to Lender (i) a copy
of its Certificate of Formation or Articles of Organization, and all amendments
thereto, certified by the Secretary of State of its jurisdiction of formation as
of the most recent practicable date certifying that each of the foregoing
documents remains in full force and effect and has not been modified or amended,
except as described therein, (ii) a copy of its Operating Agreement, certified
by the Secretary or Assistant Secretary of the company, and (iii) a certificate
from its Secretary or Assistant Secretary dated the date hereof certifying that
each of the foregoing documents remains in full
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<PAGE> 39
force and effect and has not been modified or amended, except as described
therein;
(f) Each of HWA LLC, HCS LLC, Domestications LLC, HHFG LLC and
Keystone shall have delivered to Lender evidence, as of the most recent
practicable date, that it is duly qualified and in good standing in each
jurisdiction set forth in Exhibit A annexed hereto;
(g) Lender shall have received, in form and substance
satisfactory to Lender, Secretary's or Assistant Secretary's Certificates of
Directors' Resolutions with Shareholders' Consent evidencing the adoption and
subsistence of corporate resolutions approving the execution, delivery and
performance by Borrowers, Colonial Garden, Keystone and the other Guarantors of
this Amendment and the agreements, documents and instruments to be delivered
pursuant to this Amendment;
(h) Lender shall have received, in form and substance
satisfactory to Lender, for each of Domestications LLC, HCS LLC, Tweeds LLC,
Silhouettes LLC, HHFG LLC and HWA LLC (i) a Management and Incumbency
Certificate of each such company identifying all managers, officers or other
persons authorized to act on behalf of such company and if applicable, the
specific management responsibilities of each such manager, officer or other
authorized person, including a description of any restriction on any such
manager's, officer's or other person's authority to act for such company or, if
no restrictions are so imposed, a statement to that effect, (ii) Company
Resolutions of each such company, evidencing the adoption and subsistence of
company resolutions approving the execution, delivery and performance by each of
Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC, HHFG LLC and HWA LLC,
respectively, of this Amendment and the agreements, documents and instruments to
be delivered pursuant to this Amendment, in each case signed by all members of
each such company, and (iii) Certificates of the Secretary or Assistant
Secretary of each such company identifying all members of such company and the
relative voting and/or management rights of the members, if applicable, of such
company;
(i) Lender shall have received, in form and substance
satisfactory to Lender, updates or amendments to the existing Evidence of
Property Insurance and Certificate of Liability Insurance issued by the existing
insurance broker or agent of Borrowers and Guarantors in favor of Lender;
(j) Lender shall have received an opinion of counsel to
Domestications LLC, HCS LLC, Tweeds LLC, Silhouettes LLC, Colonial Garden, HHFG
LLC, HWA LLC and Keystone, the other Borrowers and other Guarantors with respect
to the transactions contemplated by this Amendment and the Hanover 1998
Reorganization Agreements, and such other matters as Lender shall
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<PAGE> 40
reasonably addressed to Lender, in form and substance and satisfactory to
Lender; and
(k) each of Borrowers and Guarantors shall deliver, or cause
to be delivered, to Lender a true and correct copy of any consent, waiver or
approval to or of this Amendment, which any Borrower or Guarantor is required to
obtain from any other Person, and such consent, approval or waiver shall be in a
form reasonably acceptable to Lender.
13. Effect of this Amendment. This Amendment constitutes the entire
agreement of the parties with respect to the subject matter hereof, and
supersedes all prior oral or written communications, memoranda, proposals,
negotiations, discussions, term sheets and commitments with respect to the
subject matter hereof. Except as expressly provided herein, no other changes or
modifications to the Loan Agreement or any of the other Financing Agreements, or
waivers of or consents under any provisions of any of the foregoing, are
intended or implied by this Amendment, and in all other respects the Financing
Agreements are hereby specifically ratified, restated and confirmed by all
parties hereto as of the effective date hereof. To the extent that any provision
of the Loan Agreement or any of the other Financing Agreements conflicts with
any provision of this Amendment, the provision of this Amendment shall control.
14. Further Assurances. Borrowers and Guarantors shall execute and
deliver such additional documents and take such additional action as may be
reasonably requested by Lender to effectuate the provisions and purposes of this
Amendment.
15. Governing Law. The rights and obligations hereunder of each of
the parties hereto shall be governed by and interpreted and determined in
accordance with the internal laws of the State of New York (without giving
effect to principles of conflict of laws).
16. Binding Effect. This Amendment shall be binding upon and inure
to the benefit of each of the parties hereto and their respective successors and
assigns.
17. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
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<PAGE> 41
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed on the day and year first written.
CONGRESS FINANCIAL CORPORATION
By: /s/ Janet S. Hart
-------------------------------------
Title: 1st VP
----------------------------------
HANOVER DIRECT PENNSYLVANIA, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
BRAWN OF CALIFORNIA, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
GUMP'S BY MAIL, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
GUMP'S CORP.
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
HANOVER HOLDING CORP., as successor
to the merger of The Company Store,
Inc. with and into Tweeds,Inc.
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
LWI HOLDINGS, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
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<PAGE> 42
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
AEGIS CATALOG CORPORATION
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
HANOVER DIRECT VIRGINIA INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
HANOVER REALTY, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
THE AUSTAD COMPANY
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
TWEEDS, LLC
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
SILHOUETTES, LLC
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
HANOVER COMPANY STORE, LLC
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
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<PAGE> 43
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
DOMESTICATIONS, LLC
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
COLONIAL GARDEN KITCHENS, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
By their signatures below, the
undersigned Guarantors acknowledge and
agree to be bound by the applicable
provisions of this Amendment:
HANOVER DIRECT, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: Senior Vice President
----------------------------------
AEGIS RETAIL CORPORATION
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
AEGIS SAFETY HOLDINGS, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
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<PAGE> 44
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
AEGIS VENTURES, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
AMERICAN DOWN & TEXTILE COMPANY
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
BRAWN WHOLESALE CORP.
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
THE COMPANY STORE FACTORY, INC., a
Delaware corporation, as successor by
merger to The Company Factory, Inc., a
Delaware corporation
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
THE COMPANY OFFICE, INC., a Delaware
corporation, as successor by merger to
The Company Office, Inc., a Wisconsin
corporation
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
COMPANY STORE HOLDINGS, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
-44-
<PAGE> 45
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
D.M. ADVERTISING, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
GUMP'S CATALOG, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
GUMP'S HOLDINGS, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
HANOVER CASUALS, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
HANOVER CATALOG HOLDINGS, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
HANOVER FINANCE CORPORATION
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
HANOVER LIST MANAGEMENT INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
-45-
<PAGE> 46
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
HANOVER VENTURES, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
LWI RETAIL, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
SCANDIA DOWN CORPORATION
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
TWEEDS OF VERMONT, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
YORK FULFILLMENT COMPANY, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: President
----------------------------------
AUSTAD HOLDINGS, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
HANOVER HOME FASHIONS GROUP, LLC
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
-46-
<PAGE> 47
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
HANOVER WOMEN'S APPAREL, LLC
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
KEYSTONE FULFILLMENT, INC.
By: /s/ Larry Svoboda
-------------------------------------
Title: VP
----------------------------------
-47-
<PAGE> 48
SCHEDULE 1
TO
TWELFTH AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
HANOVER 1998 REORGANIZATION DOCUMENTS
Formation/Contribution Agreements:
Silhouettes, LLC:
Certificate of Formation of Silhouettes, LLC
Registration of Foreign Limited Liability Company - NJ
Certificate of Registration - VA
Certificate of Correction
Operating Agreement of Silhouettes, LLC
Unanimous Consent of the Board of Managers of Silhouettes, LLC
Unanimous Consent of Members of Silhouettes, LLC
Unanimous Written Consent of the Board of Managers of Silhouettes, LLC
Assignment and Assumption Agreement with HDPI
Written Consent of Sole Stockholder of HDPI
Unanimous Written Consent of the Board of Directors of HDPI
Membership Interest Subscription by HDPI
Tweeds, LLC:
Certificate of Formation of Tweeds, LLC
Registration of Foreign Limited Liability Company - NJ
Certificate of Registration - VA
Certificate of Correction
Operating Agreement of Tweeds, LLC
Unanimous Consent of the Board of Managers of Tweeds, LLC
Unanimous Consent of Members of Tweeds, LLC
Unanimous Written Consent of the Board of Managers of Tweeds, LLC
Assignment and Assumption Agreement with HHC
Written Consent of Sole Stockholder of HHC
Unanimous Written Consent of the Board of Directors of HHC
Membership Interest Subscription by HHC
HWA LLC:
Certificate of Formation of HWA LLC
Registration of Foreign Limited Liability Company - NJ
Certificate of Registration - VA
Certificate of Correction
Unanimous Consent of the Board of Managers of HWA LLC
Unanimous Consent of Members of HWA LLC
Operating Agreement of HWA LLC
<PAGE> 49
Unanimous Written Consent of the Board of Managers of HWA LLC
Assignment Agreement with HHC
Assignment Agreement with HDPI
Written Consent of Sole Stockholder of HHC
Unanimous Written Consent of the Board of Directors of HHC
Membership Interest Subscription by HHC
Membership Interest Subscription by HDPI
TCSI/Tweeds Merger and related name change:
Certificate of Merger -- TCSI/Tweeds becomes Hanover Holding Corp.
Articles of Merger of TCSI with Tweeds
HCS LLC:
Certificate of Formation of HCS LLC
Registration of Foreign Limited Liability Company - NJ
Certificate of Authority or Registration - WI
Certificate of Correction
Unanimous Consent of the Board of Managers of HCS LLC
Unanimous Consent of Members of HCS LLC
Operating Agreement of HCS LLC
Unanimous Written Consent of the Board of Managers of HCS LLC
Assignment and Assumption Agreement with HHC
Written Consent of Sole Stockholder of HHC
Unanimous Written Consent of the Board of Directors of HHC
Membership Interest Subscription by HHC
Domestications, LLC:
Certificate of Formation of Domestications, LLC
Registration of Foreign Limited Liability Company - NJ
Certificate of Registration - VA
Certificate of Correction
Unanimous Consent of the Board of Managers of Domestications, LLC
Unanimous Consent of Members of Domestications, LLC
Operating Agreement of Domestications, LLC
Unanimous Written Consent of the Board of Managers of Domestications, LLC
Assignment and Assumption Agreement with HDV
Written Consent of Sole Stockholder of HDV
Unanimous Written Consent of the Board of Directors of HDV
Membership Interest Subscription by HDV
HHFG LLC:
Certificate of Formation of HHFG LLC
Registration of Foreign Limited Liability Company - NJ
Certificate of Registration - VA Certificate of Authority or Registration - WI
Certificate of Correction
Unanimous Consent of the Board of Managers of HHFG LLC
<PAGE> 50
Unanimous Consent of Members of HHFG LLC
Operating Agreement of HHFG LLC
Unanimous Written Consent of the Board of Managers of HHFG LLC
Assignment and Assumption Agreement with HHC
Assignment and Assumption Agreement with HDV
Written Consent of Sole Stockholder of HHC
Unanimous Written Consent of the Board of Directors of HHC
Membership Interest Subscription by HHC
Membership Interest Subscription by HDV
Colonial Garden:
Certificate of Incorporation of Colonial Garden
By-laws of Colonial Garden
Statement of Sole Incorporator
Unanimous Written Consent of the Board of Directors of Colonial Garden
Written Consent to Action of the Sole Shareholder of Colonial Garden
Unanimous Written Consent to Action of the Executive Committee of the Board of
Directors of HDI
Subscription Agreement by HDI
Unanimous Written Consent of the Board of Directors of HDPI
Stock Certificate issued to HDI
Assignment and Assumption Agreement by HDI
Keystone:
Certificate of Incorporation of Keystone
By-laws of Keystone
Statement of Sole Incorporator of Keystone
Unanimous Written Consent of the Board of Directors of Keystone
Written Consent to Action of the Sole Shareholder of Keystone
Subscription Agreement by HDI
Stock Certificate issued to HDI
Hanover Subsidiary Dissolution and Withdrawal Agreements for filing in the
following States:
Aegis Ventures: DE
Hanover Casuals: DE, CA, MA, VA
Gump's Catalog: DE, CA, TX
Hanover Finance Corporation: DE, CA
<PAGE> 51
York Fulfillment: CA
Tweeds of Vermont: MA
Additional Hanover Subsidiary Merger Agreements for filing in the following
States::
Hanover List Management, Inc. into DM Advertising, Inc.:
Certificate of Merger to be filed in the state of New Jersey
The Austad Company into Austad Holdings, Inc.:
Certificate of Merger to be filed in the states of South
Dakota and Delaware
(The name of the surviving corporation shall be amended to The Austad
Company)
LWI Retail, Inc. into LWI Holdings, Inc.:
Certificate of Merger to be filed in the states of Ohio and Delaware
Additional Hanover Subsidiary Merger Agreements
TCS Factory/Company Factory Merger:
Articles of Merger of TCS Factory with Company Factory
Certificate of Authority or Registration - TCS Factory
TCS Office/Company Office Merger:
Articles of Merger of TCS Office with The Company Office
Certificate of Authority or Registration - The Company Office
<PAGE> 52
Exhibit A
to 12th Amendment
to Loan and Security Agreement
The following additional information is hereby added
to Exhibit A to the Loan and Security Agreement
Jurisdictions of Qualification
<TABLE>
<CAPTION>
Company State of Incorporation Qualifications
- ------- or --------------
Formation
---------
<S> <C> <C>
Colonial Garden Kitchens, Inc. Delaware New Jersey
Ohio
Virginia
Domestications, LLC Delaware New Jersey
Virginia
Hanover Company Store, LLC Delaware New Jersey
Wisconsin
Hanover Home Fashions Group, LLC Delaware New Jersey
Virginia
Wisconsin
Hanover Women's Apparel, LLC Delaware New Jersey
Virginia
Keystone Fulfillment, Inc. Delaware Pennsylvania
Silhouettes, LLC Delaware New Jersey
Virginia
Tweeds, LLC Delaware New Jersey
Virginia
</TABLE>
<PAGE> 53
EXHIBIT B
TO
TWELFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
The following additional subsidiaries
are hereby added to Exhibit B-1 to Loan and Security Agreement
Existing Subsidiaries
Name of New Borrower Subsidiary
- -------------------------------
Colonial Garden Kitchens, Inc.
Domestications, LLC
Hanover Company Store, LLC
Silhouettes, LLC
Tweeds, LLC
Name of Guarantor Subsidiary Percentage Owned by Parent
- ---------------------------- --------------------------
Keystone Fulfillment, Inc. 100%
Hanover Home Fashions Group, LLC Equal to the proportion the
book value of the net assets
contributed to the company
bears to the total book
value of the net assets of
the company.
Hanover Women's Apparel, LLC Equal to the proportion the
book value of the net assets
contributed to the company
bears to the total book
value of the net assets of
the company.
<PAGE> 54
AMENDED AND RESTATED EXHIBIT C
TO
12th AMENDMENT TO LOAN AND SECURITY AGREEMENT
Borrowers and Guarantors
Chief Executive Offices, Principal Places of Business,
Locations and Types of Collateral
<TABLE>
<CAPTION>
======================================================================================================================
Location of Chief Places of
Company Executive Office Business Location of Collateral Types of Collateral
- ------- ----------------- --------- ---------------------- -------------------
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aegis Ventures, Inc. (1)
- ----------------------------------------------------------------------------------------------------------------------
Aegis Retail Corporation (2) Roanoke, VA Roanoke, VA Roanoke, VA Documents
Instruments
Inventory
Lease
Equipment
Fixtures
- ----------------------------------------------------------------------------------------------------------------------
Aegis Safety Holdings, Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ Stock
- ----------------------------------------------------------------------------------------------------------------------
Aegis Catalog Corporation Weehawken, NJ Weehawken, NJ Weehawken, NJ Inventory
Hanover, PA Hanover, PA Accounts
Documents
Instruments
- ----------------------------------------------------------------------------------------------------------------------
American Down & Textile Company La Crosse, WI La Crosse, WI La Crosse, WI Accounts
Equipment
Fixtures
General Intangibles
Inventory
Documents
Instruments
- ----------------------------------------------------------------------------------------------------------------------
The Austad Company, SD (3) San Diego, CA San Diego, CA San Diego, CA
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
======================================================================================================================
Location of Chief Places of
Company Executive Office Business Location of Collateral Types of Collateral
- ------- ----------------- --------- ---------------------- -------------------
======================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Austad Company, DE (4) San Diego, CA San Diego, CA San Diego, CA Trademarks
Accounts
Conewago Township, PA Equipment
General Intangibles
Documents
Instruments
Inventory
Lease
- ----------------------------------------------------------------------------------------------------------------------
Brawn Wholesale Corp. (5) San Diego, CA San Diego, CA
- ----------------------------------------------------------------------------------------------------------------------
Brawn of California, Inc. San Diego, CA San Diego, CA San Diego, CA Accounts (CA)
Los Angeles, CA Los Angeles, CA Documents (CA)
Roanoke, VA Roanoke, VA Equipment (CA)
Fixtures (CA)
General Intangibles
(CA)
Inventory
(VA and CA)
- ----------------------------------------------------------------------------------------------------------------------
Colonial Garden Kitchens, Inc. (6) Beachwood, OH Beachwood, OH Beachwood, OH Accounts (NJ)
Conewago Township, PA Documents (NJ)
Weehawken, NJ Weehawken, NJ General Intangibles
(NJ)
Inventory (PA)
- ----------------------------------------------------------------------------------------------------------------------
Company Store Holdings, Inc. (7) Weehawken, NJ Weehawken, NJ Weehawken, NJ Stock
General Intangibles
Accounts
- ----------------------------------------------------------------------------------------------------------------------
D.M. Advertising, Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ Lease
Hanover, PA Fixtures
Roanoke, VA Equipment
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE> 56
<TABLE>
<CAPTION>
======================================================================================================================
Location of Chief Places of
Company Executive Office Business Location of Collateral Types of Collateral
- ------- ----------------- --------- ---------------------- -------------------
======================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestications, LLC (8) Weehawken, NJ Weehawken, NJ Weehawken, NJ Accounts (NJ)
Roanoke, VA Roanoke, VA Documents (VA)
General Intangibles
(NJ)
Instruments
Inventory (VA)
- -----------------------------------------------------------------------------------------------------------------------
Gump's By Mail, Inc. Weehawken, NJ Weehawken, NJ Hanover, PA Accounts
Hanover, PA Documents
San Francisco, CA Equipment
Fixtures
General Intangibles
Instruments
Inventory
- -----------------------------------------------------------------------------------------------------------------------
Gump's Corp. San Francisco, CA San Francisco, CA San Francisco, CA Accounts
Documents
Equipment
Fixtures
General Intangibles
Instruments
Inventory
- -----------------------------------------------------------------------------------------------------------------------
Gump's Holdings, Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ Stock
General Intangibles
- -----------------------------------------------------------------------------------------------------------------------
Gump's Catalog, Inc. (9)
- -----------------------------------------------------------------------------------------------------------------------
Hanover Company Store, LLC (10) Weehawken, NJ LaCrosse, WI Weehawken, NJ Accounts (WI)
Weehawken, NJ LaCrosse, WI Documents (WI)
Roanoke, VA General Intangibles
(WI)
Instruments
Inventory (WI)
- -----------------------------------------------------------------------------------------------------------------------
Hanover Direct Virginia Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ Ownership Interests
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
-3-
<PAGE> 57
<TABLE>
<CAPTION>
==========================================================================================================================
Location of Chief Places of
Company Executive Office Business Location of Collateral Types of Collateral
- ------- ----------------- --------- ---------------------- -------------------
==========================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hanover Finance Corporation (11)
- --------------------------------------------------------------------------------------------------------------------------
Hanover Direct Pennsylvania, Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ Ownership Interests
Hanover, PA Hanover, PA Equipment
Roanoke, VA Fixtures
LaCrosse, WI General Intangibles
San Diego, CA Stock
San Francisco, CA Documents
Instruments
- --------------------------------------------------------------------------------------------------------------------------
Hanover Home Fashions Group, LLC (12) Weehawken, NJ Roanoke, VA Weehawken, NJ Equipment
LaCrosse, WI Ownership Interests
Roanoke, VA Fixtures
- --------------------------------------------------------------------------------------------------------------------------
Hanover Ventures, Inc. (13) Weehawken, NJ Weehawken, NJ
- --------------------------------------------------------------------------------------------------------------------------
Hanover Women's Apparel, LLC (14) Weehawken, NJ Weehawken, NJ Weehawken, NJ Ownership Interests
- --------------------------------------------------------------------------------------------------------------------------
Hanover Realty, Inc. Roanoke, VA Roanoke, VA Roanoke, VA Property
Fixtures
- --------------------------------------------------------------------------------------------------------------------------
Hanover List Management Inc. (15)
- --------------------------------------------------------------------------------------------------------------------------
Hanover Casuals, Inc. (16)
- --------------------------------------------------------------------------------------------------------------------------
Hanover Catalog Holdings, Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ General Intangibles
- --------------------------------------------------------------------------------------------------------------------------
Keystone Fulfillment, Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ
- --------------------------------------------------------------------------------------------------------------------------
Hanover Direct, Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ Accounts
Stock
General Intangibles
Documents
Instruments
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
-4-
<PAGE> 58
<TABLE>
<CAPTION>
=============================================================================================================================
Location of Chief Places of
Company Executive Office Business Location of Collateral Types of Collateral
- ------- ----------------- --------- ---------------------- -------------------
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LWI Retail, Inc. (17) Mayfield Heights, OH Mayfield Heights, OH Mayfield Heights, OH Accounts
Inventory
Lease
Fixtures
Equipment
Documents
Instruments
- -----------------------------------------------------------------------------------------------------------------------------
LWI Holdings, Inc. Beachwood, OH Beachwood, OH Beachwood, OH Accounts
Conewago Township, PA Equipment
Fixtures
Inventory (PA)
Property
Leases
Documents
Instruments
General Intangibles
- -----------------------------------------------------------------------------------------------------------------------------
Scandia Down Corporation Weehawken, NJ Weehawken, NJ Weehawken, NJ Documents
General Intangibles
Instruments
- -----------------------------------------------------------------------------------------------------------------------------
Silhouettes, LLC (18) Weehawken, NJ Weehawken, NJ Weehawken, NJ Accounts
Roanoke, VA Roanoke, VA Documents
General Intangibles
Instruments
Inventory (VA)
- -----------------------------------------------------------------------------------------------------------------------------
The Company Office, Inc. La Crosse, WI La Crosse, WI La Crosse, WI Accounts
Fixtures
General Intangibles
Real Property
Documents
Instruments
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-5-
<PAGE> 59
<TABLE>
<CAPTION>
=======================================================================================================================
Location of Chief Places of
Company Executive Office Business Location of Collateral Types of Collateral
- ------- ----------------- --------- ---------------------- -------------------
=======================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Company Factory, Inc. La Crosse, WI La Crosse, WI La Crosse, WI Accounts
Equipment
Fixtures
General Intangibles
Real Property
Documents
Instruments
Inventory
- -----------------------------------------------------------------------------------------------------------------------
The Company Store, Inc. (19)
- -----------------------------------------------------------------------------------------------------------------------
Tweeds of Vermont, Inc. (20)
- -----------------------------------------------------------------------------------------------------------------------
Tweeds, Inc.(21) Weehawken, NJ Weehawken, NJ Weehawken, NJ Accounts
Roanoke, VA Roanoke, VA Equipment
LaCrosse, WI LaCrosse, WI Fixtures
Madison, WI Madison, WI General Intangibles
Kenoshat, WI Kenoshat, WI Inventory
Oshkosh, WI Oshkosh, WI Documents
Instruments
Ownership Interests
- -----------------------------------------------------------------------------------------------------------------------
Tweeds, LLC (22) Weehawken, NJ Weehawken, NJ Weehawken, NJ Accounts
Roanoke, VA Roanoke, VA Documents
General Intangibles
Instruments
Inventory
=======================================================================================================================
York Fulfillment Company, Inc.(23)
=======================================================================================================================
</TABLE>
-6-
<PAGE> 60
<TABLE>
<CAPTION>
=======================================================================================================================
Location of Chief Places of
Company Executive Office Business Location of Collateral Types of Collateral
- ------- ----------------- --------- ---------------------- -------------------
=======================================================================================================================
<S> <C> <C> <C> <C>
</TABLE>
- --------------------------------------------------------------------------------
(1) Hanover Direct, Inc. intends to liquidate Aegis Ventures, Inc. The
corporation is inactive and has no assets.
(2) The McLean, Virginia store will be closed and vacated by September 30,
1998.
(3) Hanover Direct, Inc., intends to merge The Austad Company with and into
Austad Holdings, Inc.
(4) Following the merger of The Austad Company with and into Austad Holdings,
Inc., the name of Austad Holdings, Inc. is to be changed to The Austad
Company.
(5) Brawn Wholesale Corp. has been inactive since early 1998 and will be
dissolved by December 26, 1998.
(6) Colonial Garden Kitchens, Inc. is a newly formed entity which, following
consummation of the transactions contemplated by the 12th Amendment to
Loan and Security Agreement, will own the assets of the Hanover House and
Colonial Garden Kitchens catalogs. All the assets located in Beachwood,
Ohio will be moved to Weehawken, New Jersey by December 26, 1998.
(7) Company Store Holdings, Inc. is to merge with Tweeds, Inc.; the name of
the surviving company is to be changed to Hanover Holding Corp.
(8) Domestications, LLC is a newly formed entity which, following consummation
of the transactions contemplated by the 12th Amendment to Loan and
Security Agreement, will own certain assets of the Domestications catalog.
(9) Hanover Direct, Inc. intends to liquidate Gump's Catalog, Inc. The
corporation is inactive and has no assets.
(10) Hanover Company Store, LLC is a newly formed entity which, following
consummation of the transactions contemplated by the 12th Amendment to
Loan and Security Agreement, will own certain assets of The Company Store
catalog.
(11) Hanover Direct, Inc. intends to liquidate Hanover Finance Corporation.
(12) Hanover Home Fashions, LLC is a newly formed entity which, following
consummation of the transactions contemplated by the 12th Amendment to
Loan and Security Agreement, will own the primary ownership interests in
Domestications, LLC and Hanover Company Store, LLC.
(13) Hanover Direct, Inc. intends to dissolve Hanover Ventures, Inc.
(14) Hanover Women's Apparel, LLC is a newly formed entity which, following
consummation of the transactions contemplated by the 12th Amendment to
Loan
-7-
<PAGE> 61
<TABLE>
<CAPTION>
=======================================================================================================================
Location of Chief Places of
Company Executive Office Business Location of Collateral Types of Collateral
- ------- ----------------- --------- ---------------------- -------------------
=======================================================================================================================
<S> <C> <C> <C> <C>
</TABLE>
- --------------------------------------------------------------------------------
and Security Agreement, will own the primary ownership interests in
Tweeds, LLC and Silhouettes, LLC.
(15) Hanover Direct, Inc. intends to liquidate Hanover List Management, Inc.
The corporation is inactive and has no assets.
(16) Hanover Direct, Inc. intends to liquidate Hanover Casuals, Inc. The
corporation is inactive and has no assets.
(17) LWI Retail, Inc. is to merge with and into LWI Holdings, Inc.
(18) Silhouettes, LLC is a newly formed entity which, following consummation of
the transactions contemplated by the 12th Amendment to Loan and Security
Agreement, will own certain assets of the Silhouettes catalog.
(19) The Company Store, Inc. is to merge with and into Tweeds, Inc.
(20) Hanover Direct, Inc. intends to liquidate Tweeds of Vermont, Inc. The
corporation is inactive and has no assets.
(21) Tweeds, Inc. still has a lease for property at 155 River Road in
Edgewater, NJ but is subleasing a portion of the space and has no
intention of recommencing operations at that facility prior to the lease
expiration.
(22) Tweeds, LLC is a newly formed entity which, following consummation of the
transactions contemplated by the 12th Amendment to Loan and Security
Agreement, will own certain assets of the Tweeds catalog.
(23) Hanover Direct, Inc. intends to liquidate York Fulfillment Company, Inc.
The corporation is inactive and has no assets.
-8-
<PAGE> 62
Mailing Addresses
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Location Addresses and Zip Codes
- -------- -----------------------
- --------------------------------------------------------------------------------
Beachwood, OH 23297-99 Commerce Park Road, 44122
- --------------------------------------------------------------------------------
Conewago Township, PA 101 E. Kindig Lane, 17331
- --------------------------------------------------------------------------------
Hanover, PA 340 Poplar Street, 17331
Baltimore Street, 17331
- --------------------------------------------------------------------------------
Kenosha, WI 7700 120th Avenue, 53142
- --------------------------------------------------------------------------------
La Crosse, WI (a) 455 Park Plaza Drive, 54601
(b) 2929 Airport Road, 54603
301 Sky Harbor Drive, 54603
2809 Losey Boulevard, 54601
- --------------------------------------------------------------------------------
Los Angeles, CA 9000-9006 Santa Monica Boulevard
- --------------------------------------------------------------------------------
Madison, WI 4050 University Avenue, 53705
- --------------------------------------------------------------------------------
Mayfield Heights, OH 5876 Mayfield Road, 44124
- --------------------------------------------------------------------------------
McLean, VA 7916 Tysons Corner Center, 22102
- --------------------------------------------------------------------------------
Oshkosh, WI 901 South Main Street, 54901
- --------------------------------------------------------------------------------
Roanoke, VA (1) 5022 Hollins Road, 24019
- --------------------------------------------------------------------------------
San Francisco, CA 135 Post Street, 94108
- --------------------------------------------------------------------------------
San Diego, CA 9369 Dowdy Drive, 92121
3964 Fifth Avenue, 92103
741 "F" Street, 92101
- --------------------------------------------------------------------------------
Weehawken, NJ 1500 Harbor Boulevard, 07087
- --------------------------------------------------------------------------------
</TABLE>
(1) The One Avery Row facility in Roanoke is not currently in use by Tweeds,
Inc. and an attempt is being made to sublease the facility and sell the
interest in the Partnership that owns it.
-9-
<PAGE> 63
EXHIBIT D
TO
12th AMENDMENT TO LOAN AND SECURITY AGREEMENT
Guarantors
Chief Executive Offices, Principal Places of Business,
Locations and Types of Collateral
<TABLE>
<CAPTION>
============================================================================================================================
Location of Chief Places of
Company Executive Office Business Location of Collateral Types of Collateral
- ------- ---------------- -------- ---------------------- -------------------
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aegis Ventures, Inc. (1)
- ----------------------------------------------------------------------------------------------------------------------------
Aegis Retail Corporation (2) Roanoke, VA Roanoke, VA Roanoke, VA Documents
Instruments
Inventory
Lease
Equipment
Fixtures
- ----------------------------------------------------------------------------------------------------------------------------
Aegis Safety Holdings, Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ Stock
- ----------------------------------------------------------------------------------------------------------------------------
American Down & Textile Company La Crosse, WI La Crosse, WI La Crosse, WI Accounts
Equipment
Fixtures
General Intangibles
Inventory
Documents
Instruments
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 64
<TABLE>
<CAPTION>
============================================================================================================================
Location of Chief Places of
Company Executive Office Business Location of Collateral Types of Collateral
- ------- ---------------- -------- ---------------------- -------------------
============================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Brawn Wholesale Corp. (3) San Diego, CA
- ----------------------------------------------------------------------------------------------------------------------------
Company Store Holdings, Inc. (4) Weehawken, NJ Weehawken, NJ Weehawken, NJ Stock
General Intangibles
Accounts
- ----------------------------------------------------------------------------------------------------------------------------
D.M. Advertising, Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ Lease
Hanover, PA Fixtures
Roanoke, VA Equipment
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE> 65
<TABLE>
<CAPTION>
============================================================================================================================
Location of Chief Places of
Company Executive Office Business Location of Collateral Types of Collateral
- ------- ---------------- -------- ---------------------- -------------------
============================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gump's Holdings, Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ Stock
General Intangibles
- ----------------------------------------------------------------------------------------------------------------------------
Gump's Catalog, Inc. (5)
- ----------------------------------------------------------------------------------------------------------------------------
Hanover Finance Corporation (6)
- ----------------------------------------------------------------------------------------------------------------------------
Hanover Home Fashions Group, LLC (7) Weehawken, NJ Roanoke, VA Weehawken, NJ Equipment
LaCrosse, WI Ownership Interests
Roanoke, VA Fixtures
- ----------------------------------------------------------------------------------------------------------------------------
Hanover Ventures, Inc. (8) Weehawken, NJ
- ----------------------------------------------------------------------------------------------------------------------------
Hanover Women's Apparel, LLC (9) Weehawken, NJ Weehawken, NJ Weehawken, NJ Ownership Interests
- ----------------------------------------------------------------------------------------------------------------------------
Hanover List Management Inc. (10)
- ----------------------------------------------------------------------------------------------------------------------------
Hanover Casuals, Inc. (11)
- ----------------------------------------------------------------------------------------------------------------------------
Hanover Catalog Holdings, Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ General Intangibles
- ----------------------------------------------------------------------------------------------------------------------------
Hanover Direct, Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ Accounts
Stock
General Intangibles
Documents
Instruments
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-3-
<PAGE> 66
<TABLE>
<CAPTION>
=============================================================================================================================
Location of Chief Places of
Company Executive Office Business Location of Collateral Types of Collateral
- ------- ---------------- -------- ---------------------- -------------------
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Keystone Fulfillment, Inc. Weehawken, NJ Weehawken, NJ Weehawken, NJ
- -----------------------------------------------------------------------------------------------------------------------------
LWI Retail, Inc. (12) Mayfield Heights, OH Mayfield Heights, OH Mayfield Heights, OH Accounts
Inventory
Lease
Fixtures
Equipment
Documents
Instruments
- -----------------------------------------------------------------------------------------------------------------------------
Scandia Down Corporation Weehawken, NJ Weehawken, NJ Weehawken, NJ Documents
General Intangibles
Instruments
- -----------------------------------------------------------------------------------------------------------------------------
The Company Office, Inc. La Crosse, WI La Crosse, WI La Crosse, WI Accounts
Fixtures
General Intangibles
Real Property
Documents
Instruments
- -----------------------------------------------------------------------------------------------------------------------------
The Company Factory, Inc. La Crosse, WI La Crosse, WI La Crosse, WI Accounts
Equipment
Fixtures
General Intangibles
Real Property
Documents
Instruments
Inventory
- -----------------------------------------------------------------------------------------------------------------------------
Tweeds of Vermont, Inc. (13)
- -----------------------------------------------------------------------------------------------------------------------------
York Fulfillment Company, Inc.(14)
=============================================================================================================================
</TABLE>
-4-
<PAGE> 67
<TABLE>
<CAPTION>
=============================================================================================================================
Location of Chief Places of
Company Executive Office Business Location of Collateral Types of Collateral
- ------- ---------------- -------- ---------------------- -------------------
=============================================================================================================================
<S> <C> <C> <C> <C>
</TABLE>
- --------------------------------------------------------------------------------
(1) Hanover Direct, Inc. intends to liquidate Aegis Ventures, Inc. The
corporation is inactive and has no assets.
(2) The McLean, Virginia store will be closed and vacated by September 30,
1998.
(3) Brawn Wholesale Corp. has been inactive since early 1998 and will be
dissolved by December 26, 1998.
(4) Company Store Holdings, Inc. is to merge with Tweeds, Inc., the name of
the surviving company is to be changed to Hanover Holding Corp.
(5) Hanover Direct, Inc. intends to liquidate Gump's Catalog, Inc. The
corporation is inactive and has no assets.
(6) Hanover Direct, Inc. intends to liquidate Hanover Finance Corporation.
(7) Hanover Home Fashions, LLC is a newly formed entity which, following
consummation of the transactions contemplated by the 12th Amendment to
Loan and Security Agreement, will own the primary ownership interests in
Domestications, LLC and Hanover Company Store, LLC.
(8) Hanover Direct, Inc. intends to dissolve Hanover Ventures, Inc.
(9) Hanover Women's Apparel, LLC is a newly formed entity which, following
consummation of the transactions contemplated by the 12th Amendment to
Loan and Security Agreement, will own the primary ownership interests in
Tweeds, LLC and Silhouettes, LLC.
(10) Hanover Direct, Inc. intends to liquidate Hanover List Management, Inc.
The corporation is inactive and has no assets.
(11) Hanover Direct, Inc. intends to liquidate Hanover Casuals, Inc. The
corporation is inactive and has no assets.
(12) LWI Retail, Inc. is to merge with and into LWI Holdings, Inc.
(13) Hanover Direct, Inc. intends to liquidate Tweeds of Vermont, Inc. The
corporation is inactive and has no assets.
(14) Hanover Direct, Inc. intends to liquidate York Fulfillment Company, Inc.
The corporation is inactive and has no assets.
-5-
<PAGE> 68
Mailing Addresses
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Location Addresses and Zip Codes
- -------- -----------------------
- --------------------------------------------------------------------------------
Beachwood, OH 23297-99 Commerce Park Road, 44122
- --------------------------------------------------------------------------------
Conewago Township, PA 101 E. Kindig Lane, 17331
- --------------------------------------------------------------------------------
Hanover, PA 340 Poplar Street, 17331
Baltimore Street, 17331
- --------------------------------------------------------------------------------
Kenosha, WI 7700 120th Avenue, 53142
- --------------------------------------------------------------------------------
La Crosse, WI (a) 455 Park Plaza Drive, 54601
(b) 2929 Airport Road, 54603
301 Sky Harbor Drive, 54603
2809 Losey Boulevard, 54601
- --------------------------------------------------------------------------------
Los Angeles, CA 9000-9006 Santa Monica Boulevard
- --------------------------------------------------------------------------------
Madison, WI 4050 University Avenue, 53705
- --------------------------------------------------------------------------------
Mayfield Heights, OH 5876 Mayfield Road, 44124
- --------------------------------------------------------------------------------
McLean, VA 7916 Tysons Corner Center, 22102
- --------------------------------------------------------------------------------
Oshkosh, WI 901 South Main Street, 54901
- --------------------------------------------------------------------------------
Roanoke, VA (1) 5022 Hollins Road, 24019
- --------------------------------------------------------------------------------
San Francisco, CA 135 Post Street, 94108
- --------------------------------------------------------------------------------
San Diego, CA 9369 Dowdy Drive, 92121
3964 Fifth Avenue, 92103
741 "F" Street, 92101
- --------------------------------------------------------------------------------
Weehawken, NJ 1500 Harbor Boulevard, 07087
- --------------------------------------------------------------------------------
</TABLE>
(1) The One Avery Row facility in Roanoke is not currently in use by Tweeds,
Inc. and an attempt is being made to sublease the facility and sell the
interest in the Partnership that owns it.
-6-
<PAGE> 1
Exhibit 10.74
THIRTEENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIRTEENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT, dated as of September
30, 1998, by and among CONGRESS FINANCIAL CORPORATION, a Delaware corporation,
successor by merger to Congress Financial Corporation, a California corporation
("Lender"), HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania corporation
("HDPI"), BRAWN OF CALIFORNIA, INC., a California corporation ("Brawn"), GUMP'S
BY MAIL, INC., a Delaware corporation ("GBM"), GUMP'S CORP., a California
corporation ("Gump's"), HANOVER HOLDING CORP., a Delaware corporation, successor
by merger of The Company Store, Inc. with and into Tweeds, Inc. ("HH Corp."),
LWI HOLDINGS, INC., a Delaware corporation ("LWI"), AEGIS CATALOG CORPORATION, a
Delaware corporation ("Aegis"), HANOVER DIRECT VIRGINIA INC., a Delaware
corporation ("HDV"), HANOVER REALTY, INC., a Virginia corporation ("Hanover
Realty"), THE AUSTAD COMPANY, a South Dakota corporation ("Austad"), TWEEDS,
LLC, a Delaware limited liability company ("Tweeds LLC"), SILHOUETTES, LLC, a
Delaware limited liability company ("Silhouettes LLC"), HANOVER COMPANY STORE,
LLC, a Delaware limited liability company ("HCS LLC"), DOMESTICATIONS, LLC, a
Delaware limited liability company ("Domestications LLC"), COLONIAL GARDEN
KITCHENS, INC., a Delaware corporation ("Colonial Garden"; and together with
HDPI, Brawn, GBM, Gump's, HH Corp., LWI, Aegis, HDV, Hanover Realty, Tweeds LLC,
Silhouettes LLC, HCS LLC and Domestications LLC, each individually referred to
herein as a "Borrower" and collectively, "Borrowers"), and HANOVER DIRECT, INC.,
a Delaware corporation ("Hanover"), AEGIS RETAIL CORPORATION, a Delaware
corporation, AEGIS SAFETY HOLDINGS, INC., a Delaware corporation ("Aegis
Holdings"), AEGIS VENTURES, INC., a Delaware corporation ("Aegis Ventures"),
AMERICAN DOWN & TEXTILE COMPANY, a Wisconsin corporation, BRAWN WHOLESALE CORP.,
a California corporation ("Brawn Wholesale"), THE COMPANY STORE FACTORY, INC., a
Delaware corporation, successor by merger of The Company Factory, Inc., a
Wisconsin corporation, with and into The Company Store Factory, Inc. ("TCS
Factory"), THE COMPANY OFFICE, INC., a Delaware corporation, successor by merger
to The Company Office, Inc., a Wisconsin corporation ("TCS Office"), COMPANY
STORE HOLDINGS, INC., a Delaware corporation ("CSHI"), D.M. ADVERTISING, INC., a
New Jersey corporation, GUMP'S CATALOG, INC., a Delaware corporation, GUMP'S
HOLDINGS, INC., a Delaware corporation, HANOVER CASUALS, INC., a Delaware
corporation ("Hanover Casuals"), HANOVER CATALOG HOLDINGS, INC., a Delaware
corporation ("Hanover Catalog"), HANOVER FINANCE CORPORATION, a Delaware
corporation ("HFC"), HANOVER LIST MANAGEMENT INC., a New Jersey corporation,
HANOVER VENTURES, INC., a Delaware corporation, LWI RETAIL, INC., an Ohio
corporation, SCANDIA DOWN CORPORATION, a Delaware corporation ("Scandia"),
AUSTAD HOLDINGS, INC., a Delaware corporation ("Austad Holdings"), YORK
FULFILLMENT COMPANY, INC., a Pennsylvania corporation ("York Fulfillment"), and
TWEEDS OF VERMONT, INC., a Delaware corporation, HANOVER HOME
FASHIONS GROUP, LLC, a Delaware limited liability company ("HHFG
<PAGE> 2
LLC"), HANOVER WOMEN'S APPAREL, LLC, a Delaware limited liability company ("HWA
LLC"), and KEYSTONE FULFILLMENT, INC., a Delaware corporation ("Keystone") (each
individually a "Guarantor" and collectively, "Guarantors").
W I T N E S S E T H:
WHEREAS, Borrowers, Guarantors and Lender are parties to the Loan and
Security Agreement, dated November 14, 1995, as amended by the First Amendment
to Loan and Security Agreement, dated February 22, 1996, the Second Amendment to
Loan and Security Agreement, dated April 16, 1996 (the "Second Amendment to Loan
Agreement"), the Third Amendment to Loan and Security Agreement, dated May 24,
1996, the Fourth Amendment to Loan and Security Agreement, dated May 31, 1996,
the Fifth Amendment to Loan and Security Agreement, dated September 11, 1996,
the Sixth Amendment to Loan and Security Agreement, dated as of December 5,
1996, the Seventh Amendment to Loan and Security Agreement, dated as of December
18, 1996, the Eighth Amendment to Loan and Security Agreement, dated as of March
26, 1997, the Ninth Amendment to Loan and Security Agreement, dated as of April
18, 1997, the Tenth Amendment to Loan and Security Agreement, dated as of
October 31, 1997, the Eleventh Amendment to Loan and Security Agreement, dated
as of March 25, 1998, and the Twelfth Amendment, dated as of September __, 1998,
(as so amended, the "Loan Agreement"), pursuant to which Lender has made loans
and advances to Borrowers; and
WHEREAS, Borrowers and Guarantors have requested that Lender make a term
loan to TCS Factory in the original principal amount of $2,000,000 and a term
loan to TCS Office in the original principal amount of $700,000; and
WHEREAS, the parties to the Loan Agreement desire to enter into this
Thirteenth Amendment to Loan and Security Agreement (this "Amendment") to
evidence and effectuate such amendments and agreements, to the extent and
subject to the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and covenants set forth
herein and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. Definitions.
(a) Additional Definitions. As used herein or in any of the other
Financing Agreements, the following terms shall have the meanings given to them
below, and the Loan Agreement shall be deemed and is hereby amended to include,
in addition and not in limitation, the following definitions:
-2-
<PAGE> 3
(i) "TCS Factory Lease" shall mean the Lease, dated as of
August 26, 1993, between Company Store Holdings, Inc., f/k/a TCSA, Inc., and TCS
Factory with respect to the Real Property covered by the Mortgage made by TCS
Factory to Lender, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
(ii) "TCS Factory Term Loan" shall mean the Obligations at any
time outstanding in respect of the Term Loan to be made by Lender to TCS Factory
pursuant to Section 2(a) hereof.
(iii) "TCS Factory Term Note" shall mean the Term Promissory
Note, dated of even date herewith, made by TCS Factory payable to the order of
Lender in the original principal amount of $2,000,000, as such note now exists
or may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced.
(iv) "TCS Office Lease" shall mean the Lease, dated as of
August 26, 1993, between Company Store Holdings, Inc., f/k/a TCSA, Inc., and TCS
Office with respect to the Real Property covered by the Mortgage made by TCS
Office to Lender, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
(v) "TCS Office Term Loan" shall mean the Obligations at any
time outstanding in respect of the Term Loan to be made by Lender to TCS Office
pursuant to Section 2(b) hereof.
(vi) "TCS Office Term Note" shall mean the Term Promissory
Note, dated of even date herewith, made by TCS Office payable to the order of
Lender in the original principal amount of $700,000, as such note now exists or
may hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
(b) Amendments to Definitions.
(i) Mortgages. Section 1.86 of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:
"1.86 "Mortgages" shall mean, individually and collectively,
each of the following (as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, restated or
replaced): (a) the Open-End Fee and Leasehold Mortgage and Security
Agreement, dated as of November 14, 1995, by HDPI in favor of Lender
with respect to the Real Property and related assets of HDPI located
in Hanover, Pennsylvania, as amended by the Mortgage Modification
-3-
<PAGE> 4
Agreement, dated as of June 26, 1998, between Lender and HDPI, (b)
the Deed of Trust, Assignment and Security Agreement, dated as of
November 14, 1995, by Hanover Realty in favor of Lender with respect
to the Real Property and related assets of Hanover Realty in
Roanoke, Virginia, as amended by Amendment No. 1 to Deed of Trust,
Assignment and Security Agreement, dated as of June 26, 1998,
between Lender and Hanover Realty, (c) the Mortgage and Security
Agreement, dated as of September __, 1998, by TCS Factory in favor
of Lender with respect to the Real Property and related assets of
TCS Factory located at 2929 Airport Road, La Crosse, Wisconsin, and
(d) the Mortgage and Security Agreement, dated as of September __,
1998, by TCS Office in favor of Lender with respect to the Real
Property and related assets of TCS Office located at 455 Park Plaza
Drive, La Crosse, Wisconsin."
(ii) Real Property.
(A) Section 4.1(vi) of the Loan Agreement is hereby
deleted and the following substituted therefor "(vi) [Intentionally Deleted];
and".
(B) Section 1.111 of the Loan Agreement shall be deemed
deleted in its entirety and replaced with the following:
"1.111 "Real Property" shall mean all now owned and hereafter
acquired real property of Borrowers, together with all buildings,
structures, and other improvements located thereon and all licenses,
easements and appurtenances relating thereto, wherever located,
including without limitation, the real property, leasehold interests
and related assets more particularly described in the Mortgages,
located in Hanover, Pennsylvania, Roanoke, Virginia, and La Crosse,
Wisconsin."
(iii) Reference Bank. All references to the term "Reference
Bank" in the Loan Agreement and the other Financing Agreements shall be deemed
and each such reference is hereby amended to mean First Union National Bank, or
such other bank as Lender may from time to time designate.
(iv) Term Loan Borrowers. All references to the "Term Loan
Borrowers" herein and in the Loan Agreement and the other Financing Agreements
shall mean, individually and collectively, HDPI, Hanover Realty, TCS Factory and
TCS Office.
(v) Term Loans. All references to the "Term Loans" herein and
in the Loan Agreement and the other Financing Agreements shall mean,
individually and collectively, the
-4-
<PAGE> 5
Obligations evidenced by the Restated HDPI Term Note, the Restated Hanover
Realty Term Note, the TCS Factory Term Note and the TCS Office Term Note.
2. TCS Factory Term Loan; TCS Office Term Loan.
(a) Subject to and upon the terms and conditions contained herein
and in the other Financing Agreements, Lender shall, contemporaneously herewith,
make a term loan to TCS Factory in the principal amount of Two Million Dollars
($2,000,000) (the "TCS Factory Term Loan"). The TCS Factory Term Loan is (a)
evidenced by the TCS Factory Term Note in such original principal amount duly
executed and delivered by TCS Factory to Lender concurrently herewith; (b) to be
repaid, together with interest and other amounts, in accordance with this
Agreement, the TCS Factory Term Note, and the other Financing Agreements; and
(c) secured by all of the Collateral.
(b) Subject to and upon the terms and conditions contained herein
and in the other Financing Agreements, Lender shall, contemporaneously herewith,
make a term loan to TCS Office in the principal amount of Seven Hundred Thousand
Dollars ($700,000) (the "TCS Office Term Loan"). The TCS Office Term Loan is (a)
evidenced by the TCS Office Note in such original principal amount duly executed
and delivered by TCS Office to Lender concurrently herewith; (b) to be repaid,
together with interest and other amounts, in accordance with this Agreement, the
TCS Office Term Note, and the other Financing Agreements; and (c) secured by all
of the Collateral.
(c) Each of TCS Office and TCS Factory hereby irrevocably authorizes
and directs Lender to disburse the proceeds of the TCS Office Term Loan and the
TCS Factory Term Loan to the respective Revolving Loan Borrowers in the
respective amounts set forth on Exhibit A attached hereto to repay or to
partially repay the outstanding amounts of intercompany loans owed by each of
TCS Office and TCS Factory, respectively, to such Revolving Loan Borrowers in
the amounts set forth on Exhibit A (each such disbursement, an "Intercompany
Loan Repayment Amount"). Each such Revolving Loan Borrower shall, in turn, treat
such disbursements by Lender of such Intercompany Loan Repayment Amounts as a
payment or partial payment of the outstanding amount of intercompany loans owed
by TCS Office or TCS Factory, as the case may be, to each such Revolving Loan
Borrower. Each such Revolving Loan Borrower hereby irrevocable authorizes and
directs Lender to then apply each such Intercompany Loan Repayment Amount to the
respective Revolving Loan account of each such Revolving Loan Borrower for
application to the then outstanding Obligations of each such Revolving Loan
Borrower to Lender in respect of Revolving Loans. Each such Revolving Loan
Borrower hereby acknowledges the right of Lender to charge principal, interest,
fees and other obligations of TCS
-5-
<PAGE> 6
Office and TCS Factory as Term Loan Borrowers in respect of the TCS Office Term
Loan and the TCS Factory Term Loan to the Revolving Loan account of such
Revolving Loan Borrower under Section 2.9(f) of the Loan Agreement.
3. Acknowledgment by Guarantors. Guarantors hereby acknowledge, confirm
and agree that their Guarantees guaranteeing the payment and performance of all
Obligations of Borrowers are in full force and effect as of the date hereof, and
the "Obligations" (as such term is defined in the Guarantees) shall, without
limitation, extend to and cover the TCS Factory Term Loan and the TCS Office
Term Loan.
4. Representations, Warranties and Covenants. Borrowers and Guarantors
represent, warrant and covenant with and to Lender as follows, which
representations, warranties and covenants are continuing and shall survive the
execution and delivery hereof, the truth and accuracy of, or compliance with
each, together with the representations, warranties and covenants in the other
Financing Agreements, being a condition of the effectiveness of this Amendment
and a continuing condition of the making or providing of any Revolving Loans or
Letter of Credit Accommodations by Lender to Borrowers:
(a) This Amendment and each other agreement or instrument to be
executed and delivered by each of the Borrowers and Guarantors, as the case may
be, hereunder have been duly authorized, executed and delivered by all necessary
action on the part of each of the Borrowers and Guarantors which is a party
hereto and thereto, and is in full force and effect as of the date hereof, and
the agreements and obligations of each of the Borrowers and Guarantors, as the
case may be, contained herein and therein constitute legal, valid and binding
obligations of each of Borrowers and Guarantors, as the case may be, enforceable
against them in accordance with their terms.
(b) Neither the execution, delivery or performance of this Amendment
or any of the agreements, documents or instruments to be delivered pursuant to
this Agreement (i) has violated or shall violate any Federal or State securities
laws or any other law or regulation or any order or decree of any court or
governmental instrumentality in any respect applicable to Borrowers or
Guarantors, or (ii) does or shall conflict with or result in the breach of, or
constitute a default in any respect under any mortgage, deed of trust, security
agreement, agreement or instrument to which any of Borrowers or Guarantors is a
party or may be bound, or (iii) shall violate any provision of the Certificates
of Incorporation or By-Laws of Borrowers or Guarantors that are corporations or
any provisions of the Certificates of Formation or Operating Agreements of
Borrowers or Guarantors.
-6-
<PAGE> 7
(c) No action of, or filing with, or consent of any governmental or
public body or authority, other than the recording of the Mortgages and the UCC
Fixture Filings executed and delivered to Lender pursuant to this Amendment, and
no approval or consent of any other party, is required to authorize, or is
otherwise required in connection with, the execution, delivery and performance
of this Amendment and each other agreement or instrument to be executed and
delivered pursuant to this Amendment.
(d) All of the representations and warranties set forth in the Loan
Agreement, as amended hereby, and in the other Financing Agreements, are true
and correct in all material respects after giving effect to the provisions of
this Amendment, except to the extent any such representation or warranty is made
as of a specified date, in which case such representation or warranty shall have
been true and correct as of such date.
(e) Except as set forth on Exhibit B hereto, which sets forth
certain of Borrowers obligations with respect to the Real Property of TCS Office
and TCS Factory located in La Crosse, Wisconsin, and the time periods and other
requirements for compliance therewith, Borrowers and Guarantors are in
compliance with all obligations in respect of environmental matters as provided
by the Financing Agreements.
(f) As soon as available, but in any event by no later than January
15, 1999, TCS Factory shall deliver, or cause to be delivered to Lender, a
release by the City of La Crosse with respect to the Purchase Contract covering
the parcel of Real Property subject to the Mortgage made by TCS Factory in favor
of Lender.
(g) After giving effect to the provisions of this Amendment, no
Event of Default or Incipient Default exists or has occurred and is continuing.
5. Conditions Precedent. Concurrently with the execution hereof (except to
the extent otherwise indicated below), and as a further condition to the
effectiveness of this Amendment and the agreement of Lender to the modifications
and amendments set forth in this Amendment:
(a) Borrowers and Guarantors shall have delivered to Lender an
original of this Amendment, duly authorized, executed and delivered by each of
Borrowers and Guarantors;
(b) Each of Borrowers and Guarantors shall have delivered to Lender,
in form and substance satisfactory to Lender, each of the following agreements,
documents or instruments to which it is a party, duly authorized, executed and
delivered:
-7-
<PAGE> 8
(i) an original of each of the TCS Factory Term Note and the
TCS Office Term Note;
(ii) an original Guarantee and Waiver, dated of even date
herewith, by the Borrowers, other than TCS Office in favor of Lender with
respect to the Obligations of TCS Office to Lender;
(iii) an original Guarantee and Waiver, dated of even date
herewith, by Borrowers, other than TCS Factory, in favor of Lender with respect
to the Obligations of TCS Factory to Lender;
(iv) an original Guarantee and Waiver, dated of even date
herewith, by Guarantors, other than Borrowers and Hanover, in favor of Lender
with respect to the Obligations of TCS Office and TCS Factory to Lender;
(v) an original Guarantee and Waiver, dated of even date
herewith, by Hanover, in favor of Lender with respect to the Obligations of TCS
Office and TCS Factory to Lender;
(vi) an original Mortgage and Security Agreement, dated of
even date herewith, by TCS Factory in favor of Lender with respect to the Real
Property of TCS Factory securing the Guarantor Obligations and the other
Obligations of TCS Factory, including, without limitation, the TCS Factory Term
Loan, up to the Maximum Credit;
(vii) an original Mortgage and Security Agreement, dated of
even date herewith, by TCS Office in favor of Lender with respect to the Real
Property of TCS Office securing the Guarantor Obligations and other Obligations
of TCS Office, including, without limitation, the TCS Office Term Loan, up to
the Maximum Credit;
(viii) an original UCC Fixture Filing between TCS Office, as
debtor, and Lender, as secured party, for filing with the Clerk of La Crosse
County, Wisconsin;
(ix) an original UCC Fixture Filing between TCS Factory, as
debtor, and Lender, as secured party, for filing with the Clerk of La Crosse
County, Wisconsin;
(x) an agreement or agreements, in form and substance
acceptable to Lender (A) assigning the TCS Factory Lease to HH Corp., (B)
amending certain provisions of the TCS Factory Lease, and (C) subordinating any
interest of the lessee in the Real Property covered by the TCS Factory Lease to
the interest of Lender in the Real Property covered by the Mortgage made by TCS
Factory to Lender; together with memorandum(s) or amendment to any existing
memorandums with respect to such
-8-
<PAGE> 9
agreement(s), in form acceptable for recording with the Clerk of La Crosse
County, Wisconsin;
(xi) an agreement or agreements, in form and substance
acceptable to Lender (A) assigning the TCS Office Lease to HH Corp., (B)
amending certain provisions of the TCS Office Lease, and (C) subordinating any
interest of the lessee in the Real Property covered by the TCS Factory Lease to
the interest of Lender in the Real Property covered by the Mortgage made by TCS
Factory to Lender; together with memorandum(s) or amendments to any existing
memorandums with respect to such agreement(s), in form acceptable for recording
with the Clerk of La Crosse County, Wisconsin;
(c) Lender shall have received evidence that all prior encumbrances
upon the Real Property subject to the Mortgages made by TCS Factory and TCS
Office in favor of Lender have been satisfied and discharged and have been
delivered to Lender, in form and substance satisfactory to Lender and a title
insurance company acceptable to Lender (the "Title Company"), including, without
limitation, the release of any liens of the State of Wisconsin Investment Board
with respect to the Real Property and any other assets of TCS Factory and the
release of any liens of Prudential Interfunding Corp with respect to the Real
Property and any other assets of TCS Office;
(d) Lender shall have received a certificate of occupancy with
respect to each improved parcel of Real Property subject to the Mortgages made
by TCS Factory and TCS Office in favor of Lender, together with other evidence
satisfactory to Lender of final municipal approval for completion of any
improvements on such Real Property and the legal occupancy thereof by TCS
Factory, TCS Office and the tenant under the amended lease agreements referred
to in Sections 5(b)(x) and (xi) hereof;
(e) Lender shall have received a full ALTA (highest standard)
as-built survey by a licensed surveyor with respect to each parcel of Real
Property subject to the Mortgages made by TCS Factory and TCS Office in favor of
Lender, certified to Lender and the Title Company, according to a certification
satisfactory in form and substance to Lender and the Title Company, showing the
current location of all improvements, setbacks, easements, rights of way and
other matters affecting title to or use of such property;
(f) Lender shall have received updated evidence of casualty
insurance and loss payee endorsements required pursuant to the Loan Agreement
and under the other Financing Agreements, in form and substance satisfactory to
Lender, together with certificates of insurance policies and/or endorsements
naming Lender as mortgagee, loss payee and additional insured, as applicable;
-9-
<PAGE> 10
(g) Lender shall have received, in form and substance satisfactory
to Lender, Secretary's Certificates of Directors' Resolutions with Shareholders'
Consent evidencing the adoption and subsistence of corporate resolutions
approving the execution, delivery and performance by those Borrowers and
Guarantors that are corporations and Manager Certificates and Company
Resolutions evidencing the adaption and subsistence of company resolutions
approving the execution, delivery and performance by those Borrowers and
Guarantors that are limited liability companies of this Amendment and the
agreements, documents and instruments to be delivered pursuant to this
Amendment;
(h) Lender shall have received an appraisal, in form and substance
satisfactory to Lender, prepared by an appraiser and in form, scope and
methodology, satisfactory to Lender, addressed to Lender or upon which Lender is
expressly permitted to rely, with respect to the Real Property of TCS Office and
TCS Factory;
(i) Lender shall have received updated environmental audits of the
owned real property of TCS Factory and of TCS Office conducted by an independent
environmental engineering firm acceptable to Lender, and in form, scope and
methodology satisfactory to Lender, addressed to Lender or upon which Lender is
expressly permitted to rely, confirming to the satisfaction of Lender and its
environmental consultant, which consultant shall review such updated audits and
any follow-up work requested by such consultant at Borrowers' expense, that (i)
each of TCS Factory and TCS Office are in compliance with all material
applicable Environmental Laws and (ii) the absence of any material environmental
problems;
(j) Lender shall have received, in form and substance satisfactory
to Lender, a valid and effective title insurance policy issued by the Title
Company (i) insuring the priority, amount and sufficiency of the Mortgages made
by TCS Factory and TCS Office, (ii) insuring against matters that would be
disclosed by surveys and (iii) containing any legally available endorsements,
assurances or affirmative coverage requested by Lender for protection of its
interests;
(k) Lender shall have received an opinion(s) of counsel to Borrowers
and Guarantors with respect to this Amendment, the Mortgages made by each of TCS
Office and TCS Factory and the transactions and agreements and other instruments
contemplated by this Amendment, and such other matters as Lender shall
reasonably require, in form and substance and satisfactory to Lender;
(l) each of Borrowers and Guarantors shall deliver, or cause to be
delivered, to Lender a true and correct copy of each consent, waiver or approval
with respect to this Amendment or any of the instruments or agreements executed
and delivered pursuant
-10-
<PAGE> 11
to this Amendment, that any Borrower or Guarantor obtains from any other Person,
and which such consent, approval or waiver shall be in form and substance
acceptable to Lender; and
(m) UCC, tax and judgment searches against TCS Office and TCS
Factory with the Wisconsin Secretary of State and the Clerk of La Crosse County,
Wisconsin showing no financing statements or other liens of record against
either TCS Office or TCS Factory except in favor of Lender and except as
otherwise permitted under the Loan Agreement.
6. Effect of this Amendment. This Amendment constitutes the entire
agreement of the parties with respect to the subject matter hereof, and
supersedes all prior oral or written communications, memoranda, proposals,
negotiations, discussions, term sheets and commitments with respect to the
subject matter hereof. Except as expressly provided herein, no other changes or
modifications to the Loan Agreement or any of the other Financing Agreements, or
waivers of or consents under any provisions of any of the foregoing, are
intended or implied by this Amendment, and in all other respects the Financing
Agreements are hereby specifically ratified, restated and confirmed by all
parties hereto as of the effective date hereof. To the extent that any provision
of the Loan Agreement or any of the other Financing Agreements conflicts with
any provision of this Amendment, the provision of this Amendment shall control.
7. Further Assurances. Borrowers and Guarantors shall execute and deliver
such additional documents and take such additional action as may be reasonably
requested by Lender to effectuate the provisions and purposes of this Amendment.
8. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the internal laws of the State of New York (without giving effect to
principles of conflict of laws).
9. Binding Effect. This Amendment shall be binding upon and inure to the
benefit of each of the parties hereto and their respective successors and
assigns.
10. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed on the day and year first written.
CONGRESS FINANCIAL CORPORATION
By: /s/ Janet S. Hart
-------------------------------------
Title: 1st VP
----------------------------------
HANOVER DIRECT PENNSYLVANIA, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
BRAWN OF CALIFORNIA, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
GUMP'S BY MAIL, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
GUMP'S CORP.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
HANOVER HOLDING CORP.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
LWI HOLDINGS, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
-12-
<PAGE> 13
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
AEGIS CATALOG CORPORATION
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
HANOVER DIRECT VIRGINIA INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
HANOVER REALTY, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
THE AUSTAD COMPANY
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
TWEEDS, LLC
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
SILHOUETTES, LLC
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
HANOVER COMPANY STORE, LLC
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
-13-
<PAGE> 14
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
DOMESTICATIONS, LLC
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
COLONIAL GARDEN KITCHENS, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
THE COMPANY STORE FACTORY, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
THE COMPANY OFFICE, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
By their signatures below, the
undersigned Guarantors acknowledge and
agree to be bound by the applicable
provisions of this Amendment:
HANOVER DIRECT, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
AEGIS RETAIL CORPORATION
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
-14-
<PAGE> 15
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
AEGIS SAFETY HOLDINGS, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
AEGIS VENTURES, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
AMERICAN DOWN & TEXTILE COMPANY
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
BRAWN WHOLESALE CORP.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
COMPANY STORE HOLDINGS, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
D.M. ADVERTISING, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
GUMP'S CATALOG, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
-15-
<PAGE> 16
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
GUMP'S HOLDINGS, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
HANOVER CASUALS, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
HANOVER CATALOG HOLDINGS, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
HANOVER FINANCE CORPORATION
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
HANOVER LIST MANAGEMENT INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
HANOVER VENTURES, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
LWI RETAIL, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
-16-
<PAGE> 17
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
SCANDIA DOWN CORPORATION
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
TWEEDS OF VERMONT, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
YORK FULFILLMENT COMPANY, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
AUSTAD HOLDINGS, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
HANOVER HOME FASHIONS GROUP, LLC
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
HANOVER WOMEN'S APPAREL, LLC
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
KEYSTONE FULFILLMENT, INC.
By: /s/ William C. Kingsford
-------------------------------------
Title: VP
----------------------------------
-17-
<PAGE> 18
EXHIBIT A
To Thirteenth Amendment To Loan and Security Agreement
Intercompany Loans Owed By The Company Store Factory, Inc.
<TABLE>
<CAPTION>
Revolving Loan Outstanding Amount Intercompany Loan
Borrower that is of Intercompany Repayment Amount
now payee under Loans
loan made to The
Company Store
Factory, Inc.
<S> <C> <C>
Domestications,
LLC* $2,000,000 Full Amount of The
Company Store
Factory, Inc. Term
Advance
</TABLE>
Intercompany Loans Owed By The Company Office, Inc.
<TABLE>
<CAPTION>
Revolving Loan Outstanding Amount Intercompany Loan
Borrower that is of Intercompany Repayment Amount
now payee under Loans
loan made to The
Company Office,
Inc.
<S> <C> <C>
Domestications, $700,000 Full Amount of The
LLC* Company Office,
Inc. Term Advance
</TABLE>
* Hanover Direct Virginia Inc. originally made the loans set forth above to The
Company Store Factory, Inc. and The Company Store Office, Inc., respectively. In
connection with Phase I of the Hanover 1998 Reorganization and the transfer of
certain assets and liabilities from Hanover Direct Virginia Inc. to
Domestications, LLC, the right to repayment of both such loans was transferred
to Domestications, LLC.
<PAGE> 19
EXHIBIT B
TO
THIRTEENTH AMENDMENT TO
LOAN AND SECURITY AGREEMENT
Environmental Matters with respect to Certain Real Property
Located at 455 Park Plaza Drive, La Crosse, Wisconsin
As soon as available, but in any event, by no later than February 15,
1999, TCS Office shall furnish to Lender, in form and substance satisfactory to
Lender, (a) evidence that the thirty-five (35) gallon drum of waste oil on or at
the Real Property of TCS Office located at 455 Park Plaza Drive, La Crosse,
Wisconsin (the "TCS Office Real Property"), has been stored in a manner to
reduce the possibility of leakage, spillage or other contamination of soil, and
(b) evidence that the Wisconsin Department of Natural Resources has issued a
letter or stating that the 2,000 gallon underground storage tank located at the
TCS Office Real Property and any contamination related thereto has been
sufficiently remediated so that the site and TCS Office comply with all
Wisconsin Environmental Laws and that no further remediation or other action
with respect to the site is necessary (the "UST La Crosse, Wisconsin
Remediation").
In addition to, and not in limitation of, the foregoing, pending the
completion of the UST La Crosse, Wisconsin Remediation, upon the earlier of (i)
February 15, 1999 (the "UST Remediation Date"), or (ii) the existence or
occurrence and continuance of an Event of Default or Incipient Default, Lender
may, without limiting Lender's other rights and remedies under the Loan
Agreement and the other Financing Agreements, in its sole discretion, establish
a reserve against the availability of Revolving Loans in an amount, as
determined by Lender, not to exceed $225,000; provided, that, if TCS Office has
not completed the UST La Crosse, Wisconsin Remediation by February 15, 1999,
Lender agrees to extend the UST Remediation Date to such later date beyond
February 15, 1999, as Lender may determine in its good faith discretion and set
forth in writing, so long as, during the period between September 30, 1998 and
February 15, 1999 (and at all times thereafter through the extended UST
Remediation Date, if the UST Remediation Date is so extended by Lender), TCS
Office uses, and continues to use its best efforts to effect the UST La Crosse,
Wisconsin Remediation, as determined by Lender in good faith.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
COMPANY INCORPORATION
- ------- -------------
<S> <C>
American Down & Textile Company............................. Wisconsin
Brawn of California, Inc. .................................. California
Company Store Holdings, Inc................................. Delaware
Gump's By Mail, Inc......................................... Delaware
Gump's Corp................................................. California
Hanover Direct Pennsylvania, Inc. .......................... Pennsylvania
Hanover Direct Virginia, Inc. .............................. Delaware
LWI Holdings, Inc........................................... Delaware
Scandia Down Corporation.................................... Delaware
Hanover Holding Corp. ...................................... Delaware
Gump's, Holdings, Inc. ..................................... Delaware
D.M. Advertising, Inc. ..................................... New Jersey
Hanover Realty, Inc. ....................................... Virginia
The Company Store Factory, Inc.............................. Delaware
The Company Office, Inc. ................................... Delaware
Austad Holdings, Inc........................................ Delaware
The Austad Company.......................................... South Dakota
Colonial Garden Kitchens, Inc............................... Delaware
Keystone Fulfillment, Inc................................... Delaware
Silhouettes, LLC............................................ Delaware
Tweeds, LLC................................................. Delaware
Hanover Women's Apparel, LLC................................ Delaware
Hanover Home Fashion Group, LLC............................. Delaware
Domestications, LLC......................................... Delaware
Hanover Company Store, LLC.................................. Delaware
The Horn & Hardart Company, Inc............................. New York
Aegis Catalog Corporation................................... Delaware
Aegis Retail Corporation.................................... Delaware
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into The Horn & Hardart Company's
(predecessor to Hanover Direct, Inc.) previously filed Registration Statement
File Nos. 33-66394, 33-58760, 33-58756, 33-58758, 33-52687, 33-52059, 33-52061,
333-3871, 333-13817, 2-94286 and 2-92383. It should be noted that we have not
audited any financial statements of the company subsequent to the date of our
report.
ARTHUR ANDERSEN LLP
New York, New York
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER
DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AND
STATEMENTS OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 26, 1998 AND IS
QUALIFIED IN IT ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> DEC-26-1998
<CASH> 12,207
<SECURITIES> 0
<RECEIVABLES> 25,281
<ALLOWANCES> (2,544)
<INVENTORY> 62,322
<CURRENT-ASSETS> 137,999
<PP&E> 87,967
<DEPRECIATION> (37,884)
<TOTAL-ASSETS> 218,870
<CURRENT-LIABILITIES> 94,070
<BONDS> 37,288
6,128
0
<COMMON> 140,524
<OTHER-SE> (80,182)
<TOTAL-LIABILITY-AND-EQUITY> 218,870
<SALES> 546,114
<TOTAL-REVENUES> 546,114
<CGS> 343,554
<TOTAL-COSTS> 562,921
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,278
<INTEREST-EXPENSE> 7,778
<INCOME-PRETAX> (24,585)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> (25,585)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,585)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
