- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K10-K/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002
COMMISSION FILE NUMBER 1-12082
------------------------
HANOVER DIRECT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
115 RIVER ROAD, BUILDING 10, EDGEWATER, NEW JERSEY
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
13-0853260
(IRS EMPLOYER IDENTIFICATION NO.)
07020
(ZIP CODE)
(201) 863-7300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
COMMON STOCK, $.66 2/3 PAR VALUE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]
As of June 28, 2002, the last business day of the registrant's most
recently completed second fiscal quarter, the aggregate market value of the
voting and non-voting common equity held by non-affiliates of the registrant was
$17,443,928 (based on the closing price of the Common Stock on the American
Stock Exchange on June 28, 2002 of $0.25 per share; 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 20, 2003, the registrant had 138,315,800 shares of Common Stock
outstanding (excluding treasury shares).
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement to be filed by the Company
pursuant to Regulation 14A is incorporated into items 11, 12 and 13 of Part III
of this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXPLANATORY NOTE
This Amendment No. 1 to our Annual Report on Form 10-K for the year ended
December 28, 2002, as originally filed on March 25, 2003, is being filed to
amend and reflect the restatement of our Consolidated Balance Sheets as of
December 28, 2002 and December 29, 2001 in order to comply with EITF Issue No.
95-22, "Balance Sheet Classification of Borrowings Outstanding under Revolving
Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock
Box Arrangement" ("EITF 95-22"). We have re-examined the provisions of our
credit facility and, based on EITF 95-22 and certain provisions in the credit
agreement, we are required to reclassify our revolving credit facility from
long-term to short-term debt, though the existing revolving loan facility does
not mature until January 31, 2007. As a result, we reclassified $8.8 million and
$13.5 million as of December 28, 2002 and December 29, 2001, respectively, from
long-term debt to short-term debt and capital lease obligations. See Note 6 and
Note 21 of Notes to Consolidated Financial Statements for further discussion.
Each item of the Annual Report on Form 10-K as filed on March 25, 2003 that was
affected by the restatement has been amended and restated. No attempt has been
made in this Form 10-K/A to modify or update other disclosures as presented in
the original Form 10-K except as required to reflect the effects of the
restatement.
Part I -- Financing. The working capital and current ratios for the years
ended December 28, 2002 and December 29, 2001 were restated to $0.6 million,
1.01, and $7.4 million, 1.08, respectively, from $9.4 million, 1.12 and $20.9
million, 1.26, respectively, as originally reported.
Part II -- Item 6. Selected Financial Data -- Working capital was restated
for fiscal years 2002, 2001, 2000 and 1999 to $0.6 million, $7.4 million, $1.1
million and $12.8 million, respectively, from $9.4 million, $20.9 million, $16.8
million and $17.99 million, as originally reported.
Part II -- Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations-Liquidity and Capital
Resources-Amendments to Congress Loan and Security Agreement has been updated to
provide disclosure concerning the reclassification of the Company's revolving
loan facility pursuant to EITF 95-22.
Part II -- Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations-Liquidity and Capital
Resources-Restated that, of the aggregate borrowings of $25.1 million, $12.6
million is classified as short-term and $12.5 million is classified as
long-term, from $3.8 million classified as short-term and $21.3 million
classified as long-term, as originally reported.
Part II -- Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations-Liquidity and Capital
Resources-The working capital and current ratios for the years ended December
28, 2002 and December 29, 2001 were restated to $0.6 million and 1.01, and $7.4
million and 1.08, respectively, from $9.4 million and 1.12, and $20.9 million
and 1.26, respectively, as originally reported, and restated the short-term
borrowings of $3.8 million to $12.6 million and restated long-term borrowings of
$21.3 million to $12.5 million.
Part II -- Item 8. Financial Statements and Supplementary Data-auditors'
opinion updated to reflect restatement.
Part II -- Item 8. Financial Statements and Supplementary Data - A summary
of the effects of the restatement on our Consolidated Balance Sheets as of
December 28, 2002 and December 29, 2001 follows:
DECEMBER 28, 2002 DECEMBER 29, 2001
------------------------ ------------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
--------------------------------------------------
(IN THOUSANDS)
Short-term debt and capital lease obligations.... $ 3,802 $ 12,621 $ 3,162 $ 16,685
Total current liabilities........................ $ 78,848 $ 87,667 $ 79,785 $ 93,308
Long-term debt................................... $ 21,327 $ 12,508 $ 26,548 $ 13,025
Total non-current liabilities.................... $ 27,714 $ 18,895 $ 36,781 $ 23,258
See Note 21 of Notes to Consolidated Financial Statements for further
discussion.
Part II -- Item 8. Financial Statements and Supplementary Data-restated
footnote 6-Restated aggregate annual principal payments required on debt
instruments as follows: 2003-$12.6 million and 2004-$12.5 million from 2003-$3.8
million and 2004-$21.3 million, as originally reported.
HANOVER DIRECT, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002
INDEX
PAGE
----
PART I
ITEM 1. Business.................................................... 2
General................................................... 2
Direct Commerce........................................... 2
Business-to-Business...................................... 7
Credit Management......................................... 8
Financing................................................. 8
Additional Investments.................................... 10
Employees................................................. 13
Seasonality............................................... 13
Competition............................................... 14
Trademarks................................................ 14
Government Regulation..................................... 14
Listing Information....................................... 15
Web site Access to Information............................ 15
ITEM 2. Properties.................................................. 15
ITEM 3. Legal Proceedings........................................... 17
ITEM 4. Submission of Matters to a Vote of Security Holders......... 21
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 22
ITEM 6. Selected Financial Data..................................... 23
ITEM 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations............... 24
Results of Operations..................................... 24
Liquidity and Capital Resources........................... 28
Uses of Estimates and Other Critical Accounting
Policies............................................... 32
New Accounting Pronouncements............................. 34
Off-Balance Sheet Arrangements............................ 34
Forward Looking Statements................................ 34
Cautionary Statements..................................... 35
ITEM 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 37
ITEM 8. Financial Statements and Supplementary Data................. 38
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 8486
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 8587
ITEM 11. Executive Compensation...................................... 8991
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 8991
ITEM 13. Certain Relationships and Related Transactions.............. 8991
ITEM 14. Controls and Procedures..................................... 8991
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 9092
Signatures.................................................. 92
Certifications.............................................. 9394
Exhibit Index............................................... 95
PART I
ITEM 1. BUSINESS
GENERAL
Hanover Direct, Inc. (the "Company") provides quality, branded merchandise
through a portfolio of catalogs and e-commerce platforms to consumers, as well
as a comprehensive range of Internet, e-commerce and fulfillment services to
businesses.
The Company's direct commerce operations comprise its catalog and Web site
portfolio of home fashions, apparel and gift categories including during 2002
Domestications, The Company Store, Scandia Down, Silhouettes, International
Male, Undergear and Gump's By Mail. Each brand can be accessed on the Internet
individually by name. In addition, the Company owns Gump's, a retail store based
in San Francisco, California. In 2002, the Company integrated its The Company
Store and Domestications divisions, and also completed the integration of the
Gump's store and Gump's By Mail catalog divisions.
The Company's business-to-business operations comprise the third party
fulfillment business of Keystone Internet Services, LLC (formerly Keystone
Internet Services, Inc.), the Company's third party, end-to-end, fulfillment,
logistics and e-care provider.
The Company is incorporated in Delaware and its executive offices are
located at 115 River Road, Edgewater, New Jersey 07020. The Company's telephone
number is (201) 863-7300. 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. Regan Partners, L.P. and Basil P. Regan own
approximately 28.0% of the Company's outstanding common stock. Richemont Finance
S.A. ("Richemont"), a Luxembourg company, owns approximately 21.3% of the
Company's outstanding common stock and all of the Company's Class B Preferred
Stock. Richemont is an affiliate of Compagnie Financiere Richemont, A.G., a
Swiss-based publicly traded luxury goods company.
DIRECT COMMERCE
General. The Company is a leading specialty direct marketer with a diverse
portfolio of branded home fashions, men's and women's apparel and gift products
marketed via direct mail-order catalogs and connected Internet Web sites. The
Company's catalog titles are organized into four categories -- The Company Store
Group, and the Women's Apparel, Men's Apparel and Gift categories -- each
consisting of one or more catalog/online titles. All of these categories utilize
central purchasing and inventory management functions and the Company's common
systems platform, telemarketing, fulfillment, distribution and administrative
functions. During 2002, the Company mailed approximately 191.2 million catalogs
(including certain catalogs relating to businesses of the Company that were
discontinued), answered more than 7.3 million customer service/order calls and
processed and shipped 6.8 million packages to customers.
On June 29, 2001, the Company sold certain assets and liabilities of its
Improvements business to HSN, a division of USA Networks, Inc.'s Interactive
Group for approximately $33.0 million. In conjunction with the sale, the
Company's Keystone Internet Services, Inc. (now Keystone Internet Services, LLC)
subsidiary agreed to provide telemarketing and fulfillment services for the
Improvements business under a service agreement with the buyer for a period of
three years.
The asset purchase agreement between the Company and HSN provides for a
reduction in the sale price if the performance of the Improvements business in
the 2001 fiscal year fails to achieve a targeted EBITDA level as defined in the
agreement. The business achieved the targeted EBITDA level so no reduction in
the sale price was required. In addition, if Keystone Internet Services, Inc.
fails to perform its obligations during the first two years of the services
contract, the purchaser can receive a reduction in the original purchase price
of up to $2.0 million. An escrow fund of $3.0 million, which was withheld from
the original proceeds of the sale of approximately $33.0 million, was
established for a period of two years under the terms of an escrow agreement
between LWI Holdings, Inc., HSN and The Chase Manhattan Bank as a result of
these contingencies. The balance in the escrow fund at December 29, 2001 was
$2.6 million. During fiscal year 2002,
2
the Company recognized approximately $0.6 million of the deferred gain
consistent with the terms of the escrow agreement. Proceeds of approximately
$0.3 million relating to the deferred gain were received on each of July 2, 2002
and December 30, 2002. As of December 28, 2002, the balance in the escrow fund
was approximately $2.0 million, and no claims had been made thereunder.
The Company reviews its portfolio of catalogs as well as new opportunities
to acquire or develop catalogs from time to time. In 2002, the Company did not
discontinue any of its print catalogs. In 2002, the Company discontinued certain
businesses, including the Encore catalog website. As the Company discontinued
mailing the Encore print catalog in 2001, the Encore business is now deemed a
terminated business.
During 2002, the Company integrated its The Company Store and
Domestications divisions, and also completed the integration of the Gump's store
and Gump's By Mail catalog divisions. In 2002, the Company closed a
telemarketing center and a product storage facility both located in San Diego,
California, and consolidated a portion of the Company's Hanover, Pennsylvania
fulfillment operations into its Roanoke, Virginia facility. The Company intends
to close its Kindig Lane facility in Hanover, Pennsylvania and move its
remaining operations there to the Company's facility in Roanoke, Virginia by
March 31, 2003. The move has been completed with the exception that the Company
is removing certain equipment.
Each of the Company's specialty catalogs targets distinct market segments
offering a focused assortment of merchandise designed to meet the needs and
preferences of its target customers. Through market research and ongoing testing
of new products and concepts, each brand group determines each catalog's own
merchandise strategy, including appropriate price points, mailing plans and
presentation of its products. The Company is continuing its development of
exclusive or private label products for a number of its catalogs, including
Domestications, The Company Store, Silhouettes, International Male and
Undergear, to further enhance the brand identity of the catalogs. During 2002,
the Company sought to rely on its existing long-term customer relationships to
grow its existing brands and to extend the categories of merchandise sold by its
existing brands. Silhouettes expanded its offerings in intimates, footwear and
swimwear, Domestications expanded its offerings of home accessories, Gump's San
Francisco launched a Baby Gump's boutique and plans were made to emphasize
several new categories of merchandise. Gump's also implemented a strategy for
unifying the merchandise offering in all categories across all channels.
The Company's specialty catalogs typically range in size from approximately
24 to 96 pages with five to twenty-four 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 that is responsible for the designs, layout, copy, feel and theme
of the book. Generally, the initial sourcing of new merchandise for a catalog
begins two to four months before the catalog is mailed. The Company has created
commerce-enabled Web sites for each of its catalogs which offers all of the
catalog's merchandise and, in every case, more extensive offerings than any
single issue of a print catalog; takes catalog requests; and accepts orders for
not only Web site merchandise but also from any print catalog already mailed.
The following is a description of the Company's catalogs in each of the
Company's four categories:
The Company Store Group:
Domestications is a leading home fashions catalog offering affordable
luxury for every room in the home for today's value-oriented and style-conscious
consumer.
The Company Store is an upscale home fashions catalog focused on high
quality down products and other private label and branded home furnishings.
Scandia Down is a nationally known retailer specializing in luxury down
products and home fashions.
Women's Apparel:
Silhouettes is a leading fashion catalog offering large size women upscale
apparel and accessories.
3
Men's Apparel:
International Male offers contemporary men's fashions and accessories at
reasonable prices.
Undergear is a leader in fashionable and functional men's underwear,
workout wear and active wear.
Gift:
Gump's By Mail and Gump's San Francisco are luxury sources for discerning
customers of jewelry, gifts and home furnishings, as well as market leaders in
offering Asian inspired products.
Catalog Sales. Net sales, including postage and handling, through the
Company's catalogs was $343.7 million for the fiscal year ended December 28,
2002, a decrease of $51.8 million or 13.1% excluding sales from the Improvements
division that was sold on June 29, 2001. Overall circulation for continuing
business in fiscal year 2002 decreased by 9.0% in fiscal 2002 primarily stemming
from the Company's efforts to reduce unprofitable circulation.
Internet Sales. The Internet as a source of new customers continues to
grow in importance. Net sales, including postage and handling, through the
Internet improved to $87.3 million for the fiscal year ended December 28, 2002,
an increase of $20.4 million or 30.4%, over Internet sales in the prior fiscal
year, excluding sales from the Improvements division that was sold on June 29,
2001. As of December 28, 2002, Internet sales had reached 20.3% of brand sales
(total revenues less third party fulfillment sales and membership programs). The
Company maintains an active presence on the Internet by having a
commerce-enabled Web site for each of its catalogs which offers all of the
catalog's merchandise and, in every case, more extensive offerings than any
single issue of a print catalog; takes catalog requests, and accepts orders for
not only Web site merchandise but also from any print catalog already mailed.
The Web sites for each brand are promoted within each catalog, in traditional
print media advertising, in TV commercials, and on third party Web sites.
During November 2002, Amazon.com began to offer Silhouettes, International
Male and Undergear merchandise within Amazon.com's Apparel & Accessories store
under a multi-year strategic alliance between the Company and Amazon.com. All
orders resulting from this alliance are electronically transferred to and
fulfilled by the Company. During the first quarter of 2003, Gump's jewelry and
Company Kids apparel merchandise will join Silhouettes, International Male and
Undergear within Amazon.com's Apparel & Accessories store.
The Company utilizes marketing opportunities available to it by posting its
catalog merchandise and accepting orders on third party Web sites, for which it
is charged a commission. In addition to the arrangements with Amazon.com
described above, third party Web site advertising arrangements entered into by
the Company include partnerships with Yahoo, ArtSelect, CatalogCity, e-centives,
Inktomi, Google, Overture, DealTime, Linkshare and GiftCertificates.com.
Buyers' Clubs. In March 1999, the Company, through a newly formed
subsidiary, started up and promoted a discount buyers' club to consumers known
as "The Shopper's Edge." In exchange for an up-front membership fee, the
Shopper's Edge program enabled members to purchase a wide assortment of
merchandise at discounts that were not available through traditional retail
channels. Effective December 1999, the Company sold its interest in The
Shopper's Edge subsidiary to FAR Services, LLC, an unrelated third party, for a
nominal fair value based upon an independent appraisal.
In January 2001, the Company terminated its Agreement with FAR Services and
ceased the offering of memberships in The Shopper's Edge to its customers.
Members continued to have the ability to have their memberships automatically
renewed and billed unless canceled by the member. The last renewals of
memberships were processed in October 2001 by mutual agreement between the
Company and FAR Services as a result of the terms of the then-pending settlement
agreement between the Federal Trade Commission and Ira Smolev, the owner of FAR
Services. For the purpose of monitoring and processing refunds for the Company's
customers, the Company remained in its position as bookkeeper for the club
during 2001. The Company will continue to perform the function of bookkeeper
until April 2003, or the period of eighteen months beyond the time the last
member was renewed, since members are due refunds for cancellations which
4
might occur at any time during an annual membership and surety bonds secured by
letters of credit obtained with funds held by the bookkeeper are in place in six
states, and must remain in place for six months beyond the last date of any
membership.
In March 2001, the Company entered into a five-year marketing services
agreement with MemberWorks, Incorporated under which the Company's catalogs
market and offer a variety of MemberWorks membership programs for a wide variety
of goods and services to the Company's catalog customers when they call to place
an order. To the extent that the Company achieves a certain acceptance rate by
reading scripts to its customers, the Company is guaranteed a certain revenue
stream dependent upon the actual number of offers made. To the extent that the
program performs better than a pre-designated level, the Company will receive a
higher level of revenue than its guaranteed minimum. MemberWorks has the
exclusive rights to first up-sell position on all merchandise order calls made
to the Company, after any cross-sells which the catalogs may make for their own
primary (or catalog-based) products, but before any offer for one of the
Company's pre-existing catalog-based membership clubs. The catalog company may
choose not to read an up-sell script on all inbound order calls only due to
business necessities. Initially, prospective members participate in a 30-day
trial period that, unless canceled, is automatically converted into a full
membership term, which is one year in duration. Memberships are automatically
renewed at the end of each year unless canceled by the member. In early 2002,
the Company tested the offer of membership terms that were one month in
duration. Memberships are automatically renewed and billed at the end of each
month unless canceled by the member. The test was short and was discontinued but
there remain some Company customers who are members of a MemberWorks program on
a month-to-month membership term.
In December 2002, the Company entered into an agreement for Internet
marketing with MemberWorks Incorporated under which the Company may conduct
marketing of MemberWorks membership programs to its Web site customers. It is
the intention of the Company to test the marketing of MemberWorks programs on
one Company Web site at first and evaluate conversion rates before making the
decision to expand the marketing to other Company Web sites or to terminate the
agreement for Internet marketing. On the Internet, the Company will offer
MemberWorks programs to customers immediately upon a customer reaching the order
confirmation page after placing an order. MemberWorks will pay for the initial
work required by the Company to design and implement the technology that will be
required to conduct Internet marketing of MemberWorks programs on the first
Company Web site. The Company's revenue share for offers accepted will be by a
calculation similar to that under the master MemberWorks agreement for telephone
promotion except that offers to customers of the Company's Web sites will not be
counted for purposes of determining the guaranteed minimums under the master
MemberWorks agreement.
Customers may purchase memberships in a number of the Company's proprietary
buyers' club programs for an annual fee. In addition to receiving commission
revenue related to its solicitation of the MemberWorks membership programs, the
Company also receives commission revenue from sales of Magazine Direct magazine
subscription programs on inbound order calls. For the MemberWorks program, the
Company is guaranteed a revenue stream dependent upon the actual number of
offers made. To the extent that the program performs better than a
pre-designated level, the Company will receive a higher level of revenue than
its guaranteed minimum. Revenue is recognized monthly based on the number of
acceptances received using a formula that has been contractually agreed upon by
the Company and MemberWorks. The commission revenue recognized by the Company
for the Magazine Direct magazine program is on a per-solicitation basis
according to the number of solicitations made, with additional revenue
recognized if the customer accepts the solicitation. In the second quarter of
2003, the Company will cease the offer of the Magazine Direct magazine program
on inbound order calls for the time being. The Company is considering new
opportunities to offer new and different goods and services to its customers on
inbound order calls from time to time, with the Company receiving commission
revenue related to its solicitations.
Marketing and Database Management. The Company maintains a proprietary
customer list currently containing approximately 6.3 million names of customers
who have purchased from one of the Company's catalogs or Internet Web sites
within the past 36 months. Approximately 2.6 million of the names on the list
represent customers who have made purchases from at least one of the Company's
brands within the last 12 months. The list contains name, gender, residence and
historical transaction data. This database is
5
selectively enhanced with demographic, socioeconomic, lifestyle and purchase
behavior overlays from other sources. The Company also maintains a proprietary
list of e-mail addresses totaling approximately 1.7 million addresses.
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 Company utilizes name lists rented from other mailers and compilers as
a primary source of new customers for the Company's catalogs. 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. Other sources of new customers
include traditional print space advertisements and promotional inserts in
outbound merchandise packages.
On the Internet, the main sources of the Company's new customers are
through the brands' affiliate programs, through search engines, and a variety of
contractual Internet partnerships. An additional source of the Company's
internet business is derived from print catalog mailings to prospective
customers.
During 2002, the Company expanded its relationship with Experian Marketing
Solutions, Inc. ("Experian"), under which Experian will act as the Company's
list cleaning and processing agent for all list usage purposes, to assist the
Company with its goal of reducing unprofitable circulation.
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. 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 phone service costs (both inbound and
outbound calls) are typically contracted for a two to three-year period. In the
fourth quarter of 1999, the Company entered into a two-year call center service
agreement with MCI Worldcom and in the fourth quarter of 2001, the Company
revised its agreement with MCI WorldCom to provide for a two-and-a-half-year
extension expiring during April 2004. Under the revised agreement, the Company
obtained a reduction in the rate it had been paying pursuant to the agreement
entered into in 1999. In connection with the revised agreement, the Company
agreed to guarantee minimum billing levels in the amount of $6.1 million for the
31 month service period and the Company has met and anticipates that it will
continue to meet such targets in the normal course of business. The Company has
contracted for additional services, some of which are redundant, from other
service providers in an effort to mitigate the possible effects of MCI
WorldCom's bankruptcy filing on the Company's service.
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 2002, paper costs
approximated 5.0% of the Company's net revenues. The Company experienced a 14.4%
decrease in paper prices during 2002. 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.
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
6
sales. Additionally, the Company sells excess inventory through special sale
catalogs, sales/liquidation postings in brand Web sites, e-auctions, its outlet
stores and to jobbers.
The Company acquires products for resale in its catalogs from numerous
domestic and foreign vendors. No single third party source supplied more than
10% of the Company's products in 2002. 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.
The Company receives approximately 68.2% of its orders through its
toll-free telephone service, which offers customer access seven days per week,
24 hours per day.
Telemarketing and Distribution. The management information systems used by
the Company are discussed below. 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 16.4% of the Company's
net revenues in 2002. The USPS implemented postage rate increases ranging from
13.5% for Priority Mail to 7.3% for Standard Mail effective June 30, 2002. These
increases did not have a material adverse effect on the Company's 2002 results
of operations. The Company mitigates the impact of postage rate increases by
utilizing lower rate structures by automatically weighing each parcel and
sorting and trucking packages to a number of USPS drop points throughout the
country. The Company also utilizes United Parcel Service and other delivery
services. In 2002, the Company's contractual rates with United Parcel Service
remained the same as in 2001. United Parcel Service increased its rates by 3.5%
in January 2003 but the Company does not expect this increase to have a material
adverse effect on its results of operations. The Company examines alternative
shipping services with competitive rate structures from time to time.
BUSINESS-TO-BUSINESS
General. The Company, through Keystone Internet Services, LLC
("Keystone"), provides back-end e-commerce services to a roster of Internet
players. Keystone's services range from fulfillment and e-care to platform
logistics products. Keystone also services the logistical, IT and fulfillment
needs of the Company's catalog operations. Keystone comprises the Company's
telemarketing, fulfillment and distribution functions as well as its
proprietary, fully integrated systems platform internally known as Pegasus. That
system is described under "Management Information Systems" below. Other assets
as of December 28, 2002 include three warehouse fulfillment centers, one leased
temporary storage facility totaling approximately 1.1 million square feet, and
two telemarketing/e-care centers and one satellite call center with over 670
agent positions. On February 28, 2002, the Company closed its telemarketing
facility in San Diego, California, which had 100 agent positions.
Telemarketing. The Company has created a telephone network to link its
three primary telemarketing facilities in Hanover, Pennsylvania, York,
Pennsylvania and LaCrosse, Wisconsin. On February 28, 2002, the Company closed
its telemarketing facility in 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. In the fourth quarter of 2001, the Company extended its call
center services agreement with MCI WorldCom to provide that it would terminate
during April 2004. The Company has contracted for additional services, some of
which are redundant, from other service providers in an effort to mitigate the
possible effects of MCI WorldCom's bankruptcy filing on the Company's service.
See "Direct Commerce -- Purchasing."
The Company trains its telemarketing service representatives to be
courteous, efficient and knowledgeable about the Company's products and those of
its third party customers. 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.
7
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 uses these facilities
to handle merchandise distribution for its catalogs as well as its third party
e-tail clients. See "Properties."
Management Information Systems. All of the Company's catalogs are part of
its integrated mail order and catalog system operating on its mid-range computer
systems. Additionally, its fulfillment centers are part of the Company's
warehouse management system. The Company's systems have been designed to meet
its requirements as a high volume publisher of multiple catalogs. The Company is
continuing to devote resources to improving its systems.
The Company's software system is an on-line, real-time system, which is
used in managing all phases of the Company's operations and 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 management information
systems are designed to permit the Company to achieve efficiencies in the way
its financial, merchandising, inventory, telemarketing, fulfillment and
accounting functions are performed.
Keystone Internet Services. Launched in 1998, Keystone initially serviced
the needs of other direct marketers without back-end fulfillment resources.
Keystone currently offers e-commerce solutions and services to a customer base
of brand name manufacturers and retailers who lack the end-to-end systems needed
to enter e-commerce quickly, easily and affordably.
Keystone offers its client base of six third party clients as of December
28, 2002, including HSN with respect to its Improvements business, the resources
needed on the "front-end" ranging from Web site creation and management to
Internet marketing to multi-channel marketing promotions to structured
financing. "Front-end" logistical services provided by Keystone include
telemarketing and e-care. Keystone can take orders off the Web and answer
e-mails as well as handle order processing, credit card transaction processing,
customer database management and systems programming and interface support. On
the "back-end," Keystone offers services including fulfillment, order
management, inventory management and facility management. All of this can be
done using the Company's proprietary Pegasus multi-channel, multi-title platform
described above.
CREDIT MANAGEMENT
Several of the Company's catalogs, including Domestications, International
Male, Silhouettes and Gump's By Mail, offer their own private label credit
cards. In 1999, the Company entered into a new three-year account purchase and
credit card marketing and services agreement with Capital One Services, Inc. and
Capital One Bank under which Capital One provides for the sale and servicing of
accounts receivable originating from the Company's private label credit card
program. The Company and Capital One have terminated their agreement effective
the second quarter of 2003. The Company continues its search for a more
economical provider of private label credit card services.
FINANCING
Congress Credit Facility. The Company's credit facility with Congress
Financial Corporation ("Congress") provides the Company with a maximum credit
line, subject to certain limitations, of up to $82.5 million (the "Congress
Credit Facility"). The Congress Credit Facility, as amended, expires on January
31, 2004 and comprises a revolving loan facility, a $17.5 million Tranche A Term
Loan and a $8.4 million Tranche B Term Loan. Total cumulative borrowings,
however, are subject to limitations based upon specified percentages of eligible
receivables and eligible inventory, and the Company is required to maintain $3.0
million of excess credit availability at all times. The Congress Credit
Facility, as amended, is secured by all of the assets of the Company and places
restrictions on the incurrence of additional indebtedness and on the payment of
common stock dividends.
8
As of December 28, 2002, the Company had $25.1 million of borrowings
outstanding under the amended Congress Credit Facility comprising $8.8 million
under the Revolving Loan Facility, $8.5 million under the Tranche A Term Loan,
and $7.8 million under the Tranche B Term Loan. The Company may draw upon the
amended Congress Credit Facility to fund working capital requirements as needed.
In November 2001, the Company amended the Congress Credit Facility to waive
a default that resulted from the calculation of the EBITDA covenant requirement
and revised the definition of EBITDA to include the net income derived from the
sale of the Kindig Lane Property and the assets of the Improvements business. In
addition, the amendment required a reserve of $500,000 against the availability
under the Congress Credit Facility's borrowing terms and a fee of $500,000.
In March 2002, the Company amended the Congress Credit Facility to change
the definition of Consolidated Net Worth such that, effective July 1, 2002, to
the extent that the goodwill or intangible assets of the Company and its
subsidiaries are impaired under the provisions of Statement of Financial
Accounting Standards No. 142, such write-off of assets would not be considered a
reduction of total assets for the purposes of computing Consolidated Net Worth.
The covenants relating to consolidated net working capital, consolidated net
worth and EBITDA and certain non-cash charges were also amended. In addition,
the amendment required a fee of $100,000.
On August 16, 2002, the Company amended the Congress Credit Facility to (i)
extend the term of the Tranche B Term Loan to January 31, 2004, (ii) increase by
$3,500,000 the borrowing reflected by the Tranche B Term Note to $8,410,714, and
(iii) make certain related technical amendments to the Congress Credit Facility.
The amendment required the payment of fees in the amount of $410,000.
In December 2002, the Company amended the Congress Credit Facility to amend
the definition of "Consolidated Net Income," "Consolidated Net Worth" and
"Consolidated Working Capital" to make certain adjustments thereto, depending on
the results of the Kaul litigation, to permit the payment to Richemont of
certain United States withholding taxes payable to Richemont in connection with
the Series B Preferred Stock, and to change certain borrowing sublimits. The
consolidated working capital, consolidated net worth and EBITDA covenants were
also established through the end of the term of the facility, and certain
technical amendments relating to the reorganization of certain of the Company's
subsidiaries were made. The amendment required the payment of fees in the amount
of $110,000.
In February 2003, the Company amended the Congress Credit Facility to amend
the existing change in control Event of Default. The existing change in control
Event of Default under the Congress Credit Facility is based upon NAR Group
Limited, a former shareholder of the Company, ceasing to be the direct or
indirect beneficial owner of a sufficient number of issued and outstanding
shares of capital stock of the Company on a fully diluted basis to elect a
majority of the members of the Company's Board of Directors. This was replaced
during February 2003 with a new change in control Event of Default, which is
patterned on the Change In Control concepts in the Company's various Key
Executive Compensation Continuation Plans. The new Event of Default would be
triggered by certain transfers of assets, certain liquidations or dissolutions,
the acquisition by a person or group (other than a Permitted Holder, as defined)
of a majority of the total outstanding voting stock of the Company, and certain
changes in the composition of the Company's Board of Directors.
Richemont Transaction; Series A and B Participating Preferred Stock. On
August 24, 2000, the Company issued 1.4 million shares of preferred stock
designated as Series A Cumulative Participating Preferred Stock (the "Series A
Preferred Stock") to Richemont for $70.0 million. The Series A Preferred Stock
is described below under "Additional Investments." The Company has filed a
certificate in Delaware eliminating the Series A Preferred Stock from its
certificate of incorporation. On December 19, 2001, the Company consummated a
transaction with Richemont (the "Richemont Transaction") in which the Company
repurchased from Richemont all of the outstanding shares of the Series A
Preferred Stock and 74,098,769 shares of the common stock of the Company held by
Richemont in return for the issuance to Richemont of 1,622,111 shares of newly
created Series B Participating Preferred Stock (the "Series B Preferred Stock")
and the reimbursement of expenses of $1 million to Richemont. The Richemont
Transaction was made pursuant to an Agreement (the "Richemont Agreement"), dated
as of December 19, 2001, between the Company and Richemont. Richemont agreed, as
part of the Richemont Transaction, to
9
forego any claim it had to the accrued but unpaid dividends on the Series A
Preferred Stock. As part of the Richemont Transaction, the Company (i) released
Richemont, the individuals appointed by Richemont to the Board of Directors of
the Company and certain of their respective affiliates and representatives
(collectively, the "Richemont Group") from any claims by or in the right of the
Company against any member of the Richemont Group that arise out of Richemont's
acts or omissions as a stockholder of or lender to the Company or the acts or
omissions of any Richemont board designee in his capacity as such and (ii)
entered into an Indemnification Agreement (the "Indemnification Agreement") with
Richemont pursuant to which the Company agreed to indemnify each member of the
Richemont Group from any losses suffered as a result of any third party claim
that is based upon Richemont's acts as a stockholder of or lender to the Company
or the acts or omissions of any Richemont board designee in his capacity as
such. The Indemnification Agreement is not limited as to term and does not
include any limitations on maximum future payments thereunder. The terms of the
Series B Preferred Stock are described below under "Additional Investments."
General. At December 28, 2002, the Company had $0.8 million in cash and
cash equivalents compared with $1.1 million at December 29, 2001. Working
capital and current ratios at December 28, 2002 were $9.4$0.6 million and 1.121.01 to 1
versus $20.9$7.4 million and 1.261.08 to 1 at December 29, 2001. Total cumulative
borrowings, including financing under capital lease obligations, as of December
28, 2002, aggregated $25.1 million, $21.3$12.5 million of which is classified as
long-term. Remaining availability under the Congress Credit Facility as of
December 28, 2002 was $18.2 million. There were nominal capital commitments
(less than $0.1 million) at December 28, 2002.
ADDITIONAL INVESTMENTS
Series B Participating Preferred Stock. On December 24, 2001, as part of
the Richemont Transaction, the Company issued and sold 1,622,111 shares of
preferred stock designated as Series B Preferred Stock, par value $0.01 per
share, in a private placement to Richemont.
In the event of the liquidation, dissolution or winding up of the Company,
the holders of the Series B Preferred Stock are entitled to a liquidation
preference (the "Liquidation Preference"), which was initially $47.36 per share.
During each period set forth in the table below, the Liquidation Preference
shall equal the amount set forth opposite such period:
LIQUIDATION PREFERENCE
PERIOD PER SHARE TOTAL VALUE
- ------ ---------------------- ---------------
March 1, 2002 - May 31, 2002...................... $49.15 $ 79,726,755.65
June 1, 2002 - August 31, 2002.................... $51.31 $ 83,230,515.41
September 1, 2002 - November 30, 2002............. $53.89 $ 87,415,561.79
December 1, 2002 - February 28, 2003.............. $56.95 $ 92,379,221.45
March 1, 2003 - May 31, 2003...................... $60.54 $ 98,202,599.94
June 1, 2003 - August 31, 2003.................... $64.74 $105,015,466.14
September 1, 2003 - November 30, 2003............. $69.64 $112,963,810.04
December 1, 2003 - February 29, 2004.............. $72.25 $117,197,519.75
March 1, 2004 - May 31, 2004...................... $74.96 $121,593,440.56
June 1, 2004 - August 31, 2004.................... $77.77 $126,151,572.47
September 1, 2004 - November 30, 2004............. $80.69 $130,888,136,59
December 1, 2004 - February 28, 2005.............. $83.72 $135,803,132.92
March 1, 2005 - May 31, 2005...................... $86.85 $140,880,340.35
June 1, 2005 - August 23, 2005.................... $90.11 $146,168,422.21
As a result, beginning November 30, 2003, the aggregate Liquidation
Preference of the Series B Preferred Stock will be effectively equal to the
aggregate liquidation preference of the Class A Preferred Stock previously held
by Richemont. For each increase in liquidation preference, the Company will
reflect the
10
change as an increase in the Series B Preferred Stock with a corresponding
reduction in additional paid-in capital. Such accretion will be recorded as a
reduction of net income available to common shareholders.
The holders of the Series B Preferred Stock are entitled to ten votes per
share on any matter on which the common stock votes. In addition, in the event
that the Company defaults in its obligations under the Richemont Agreement, the
Certificate of Designations of the Series B Preferred Stock or its agreements
with Congress, or in the event that the Company fails to redeem at least 811,056
shares of Series B Preferred Stock by August 31, 2003, then the holders of the
Series B Preferred Stock, voting as a class, shall be entitled to elect two
members to the Board of Directors of the Company.
Dividends on the Series B Preferred Stock are required to be paid whenever
a dividend is declared on the common stock. The amount of any dividend on the
Series B Preferred Stock shall be determined by multiplying (i) the amount
obtained by dividing the amount of the dividend on the common stock by the then
current fair market value of a share of common stock and (ii) the Liquidation
Preference of the Series B Preferred Stock.
The Series B Preferred Stock must be redeemed by the Company on August 23,
2005 consistent with the requirement of the Delaware General Corporation Law.
The Company may redeem all or less than all of the then outstanding shares of
Series B Preferred Stock at any time prior to that date. At the option of the
holders thereof, the Company must redeem the Series B Preferred Stock upon a
Change of Control or upon the consummation of an Asset Disposition or Equity
Sale (all as defined in the Certificate of Designations of the Series B
Preferred Stock). The redemption price for the Series B Preferred Stock upon a
Change of Control or upon the consummation of an Asset Disposition or Equity
Sale is the then applicable Liquidation Preference of the Series B Preferred
Stock plus the amount of any declared but unpaid dividends on the Series B
Preferred Stock. The Company's obligation to redeem the Series B Preferred Stock
upon an Asset Disposition or an Equity Sale is subject to the satisfaction of
certain conditions set forth in the Certificate of Designations.
The Certificate of Designations of the Series B Preferred Stock provides
that, for so long as Richemont is the holder of at least 25% of the then
outstanding shares of Series B Preferred Stock, it shall be entitled to appoint
a non-voting observer to attend all meetings of the Board of Directors and any
committees thereof.
Pursuant to the terms of the Certificate of Designations of the Series B
Preferred Stock, the Company's obligation to pay dividends on or redeem the
Series B Preferred Stock is subject to its compliance with its agreements with
Congress. The Congress Credit Facility requires that the proceeds from certain
asset sales by the Company be paid to Congress before any such proceeds are used
to redeem the Series B Preferred Stock.
During autumn 2002, Company management conducted a strategic review of the
Company's business and operations. As part of such review, Company management
considered the Company's obligations under the Richemont Agreement and the
Company's prospects and options for redemption of the Series B Preferred Shares
issued to Richemont pursuant thereto in accordance with the Richemont Agreement
terms. The review took into account the results of the Company's strategic
business realignment program in 2001 and 2002, the relative strengths and
weaknesses of the Company's competitive position and the economic and business
climate, including the depressed business environment for mergers and
acquisitions.
As a result of this review, Company management and the Company's Board of
Directors have concluded that it is unlikely that the Company will be able to
accumulate sufficient capital, surplus, or other assets under Delaware corporate
law or to obtain sufficient debt financing to either:
1. Redeem at least 811,056 shares of the Series B Preferred Stock by
August 31, 2003, as allowed for by the Richemont Agreement, thereby
resulting in the occurrence of a "Voting Trigger" which will allow
Richemont to have the option of electing two members to the Company's Board
of Directors; or
2. Redeem all of the shares of Series B Preferred Stock by August 31,
2005, as required by the Richemont Agreement, thereby obligating the
Company to take all measures permitted under the Delaware General
Corporation Law to increase the amount of its capital and surplus legally
available to
11
redeem the Series B Preferred Shares, without a material improvement in
either the business environment for mergers and acquisitions or other
factors, unforeseeable at the time.
Management believes that the Company has sufficient liquidity and
availability under its credit agreement to fund its planned operations through
at least January 31, 2004. Management will be required to successfully
renegotiate the renewal of the Congress Credit Facility or successfully replace
the facility with another institution. The unlikelihood that the Company will be
able to redeem the Series B Preferred Shares is not expected to limit the
ability of the Company to use current and future net earnings or cash flow to
satisfy its obligations to creditors and vendors. In addition, the redemption
price of the Series B Preferred Stock does not accrete after August 31, 2005.
Company management met with representatives of Richemont on October 30,
2002 and outlined the results of management's strategic review in the context of
the Company's obligations to Richemont under the Richemont Agreement, and
discussed an alternative to the method for the redemption of the Series B
Preferred Shares. Under this alternative proposal, that the Company had
previously presented to Richemont, the Company would exchange two business
divisions, Silhouettes and Gump's, for all of Richemont's Series B Preferred
Shares (the "Proposal").
Pursuant to the terms of the Richemont Agreement, the redemption value of
the Series B Preferred Shares as of the date of the Proposal was $87 million.
Management based the Proposal terms on a valuation of Silhouettes and Gump's
using the valuation multiple employed in USA Network's June 2001 purchase of the
Company's Improvements business division. The Proposal also included a
willingness on the part of the Company to provide continued fulfillment services
for Silhouettes and Gump's on terms to be negotiated. On November 18, 2002, a
representative of Richemont confirmed in writing to the Company that Richemont
rejected the Proposal. Representatives of Richemont have indicated that it has
no interest in the proffered assets and disputes their valuation implied in the
Company's Proposal.
The Company will continue to explore all reasonable opportunities to redeem
and retire the Series B Preferred Stock.
For Federal income tax purposes, the increases in the Liquidation
Preference of the Series B Preferred Stock are considered distributions, by the
Company to Richemont, deemed made on the commencement dates of the quarterly
increases, as discussed above. These distributions may be taxable dividends to
Richemont, provided the Company has accumulated or current earnings and profits
("E&P") for each year in which the distributions are deemed to be made. Under
the terms of the Richemont Transaction, the Company is obligated to reimburse
Richemont for any U.S. income tax incurred pursuant to the Richemont
Transaction. Based on the Company's past income tax filings and its current
income tax position, the Company has an E&P deficit as of December 28, 2002.
Accordingly, the Company has not incurred a tax reimbursement obligation for
year 2002. The Company must have current E&P in years 2003, 2004 or 2005 to
incur a tax reimbursement obligation from the scheduled increases in Liquidation
Preference. If the Company does not have current E&P in one of those years, no
tax reimbursement obligation would exist for that particular year. The Company
does not have the ability to project the exact future tax reimbursement
obligation, however, it has estimated the potential obligation to be in the
range of $0 to $23.1 million.
Series A Cumulative Participating Preferred Stock. On August 24, 2000, the
Company issued and sold 1.4 million shares of preferred stock designated as
Series A Cumulative Participating Preferred Stock in a private placement (not
involving the use of underwriters or other placement agents) to Richemont, which
then owned approximately 47.9% of the Company's outstanding common stock, for an
aggregate purchase price of $70.0 million in cash. There were no underwriting
discounts or commissions related to such sale. The rights of the holders of the
Company's common stock were limited or qualified by such issuance and sale.
The Series A Preferred Stock had a par value of $0.01 per share, and a
liquidation preference of $50.00 per share, and was recorded net of issuance
costs of $2.3 million. The issuance costs were to be accreted as a dividend over
a five-year period ending on the mandatory redemption date. Dividends are
cumulative and accrue at an annual rate of 15%, or $7.50 per share, and are
payable quarterly either in cash or in-kind through the issuance of additional
Series A Preferred Stock. Cash dividend payments were required for dividend
12
payment dates occurring after February 1, 2004. As of December 30, 2000, the
Company accreted dividends of $3.8 million, and reserved 75,498 additional
shares of Series A Preferred Stock for the payment of such dividend. In-kind
dividends and issuance cost accretion are charged against additional paid-in
capital, with a corresponding increase in the carrying amount of the Series A
Preferred Stock. Cash dividends were also reflected as a charge to additional
paid-in capital, however, no adjustment to the carrying amount of the Series A
Preferred Stock was made. The Series A Preferred Stock was generally non-voting,
except if dividends have been in arrears and unpaid for four quarterly periods,
whether or not consecutive. The holder of the Series A Preferred Stock would
then have the exclusive right to elect two directors of the Company until such
time as all such cumulative dividends accumulated on the Series A Preferred
Stock have been paid in full. Furthermore, the holder of the Series A Preferred
Stock was entitled to receive additional participating dividends in the event
any dividends are declared or paid on, or any other distribution is made with
respect to, the common stock of the Company. The additional dividends would be
equal to 6150% of the amount of the dividends or distributions payable in
respect of one share of common stock. In the event of a liquidation or
dissolution of the Company, the holder of the Series A Preferred Stock would be
paid an amount equal to $50.00 per share of Series A Preferred Stock plus the
amount of any accrued and unpaid dividends, before any payments to other
stockholders.
The Company could redeem the Series A Preferred Stock in whole at any time
and the holder of the Series A Preferred Stock could elect to cause the Company
to redeem all or any of such holder's Series A Preferred Stock under certain
circumstances involving a change of control, asset disposition or equity sale.
Mandatory redemption of the Series A Preferred Stock by the Company was required
on August 23, 2005 (the "Final Redemption Date") at a redemption price of $50.00
per share of Series A Preferred Stock plus the amount of any accrued and unpaid
dividends. If, at the Final Redemption Date, the Company did not have sufficient
capital and surplus legally available to redeem all the outstanding shares of
the Series A Preferred Stock, the Company would be required to take all measures
permitted under the Delaware General Corporation Law to increase the amount of
its capital and surplus legally available and to redeem as many shares of the
Series A Preferred Stock as it may legally redeem. Thereafter, as funds become
available, the Company would be required to redeem as many additional shares of
the Series A Preferred Stock as it legally can, until it has redeemed all
remaining outstanding shares of the Series A Preferred Stock.
On December 19, 2001, as part of the Richemont Transaction, the Company
repurchased from Richemont all of the outstanding shares of the Series A
Preferred Stock. Richemont agreed, as part of the transaction, to forego any
claim it had to the accrued but unpaid dividends on the Series A Preferred
Stock. The Company has filed a certificate in Delaware eliminating the Series A
Preferred Stock from its certificate of incorporation.
EMPLOYEES
As of December 28, 2002, the Company employed approximately 1,830 people on
a full-time basis and approximately 291 people on a part-time basis. The number
of part-time employees at December 28, 2002 reflects a temporary increase in
headcount necessary to fill the seasonal increase in orders during the holiday
season. Approximately 226 of the Company's employees at one of its subsidiaries
are represented by a union. The Company entered into a new agreement with The
Union of Needletrades, Industrial and Textile Employees (UNITE!) in March 2003,
which expires on February 26, 2006. The Company believes its relations with its
employees are good.
During the fiscal year ended December 28, 2002, the Company eliminated a
total of approximately 301 FTE positions, including approximately 12 positions
at or above the level of director, which included open positions that were
eliminated. The Company made prospective payments to separated employees either
weekly or bi-weekly, based upon each person's previous payment schedule.
SEASONALITY
The Company does not consider its business seasonal. The revenues and
business for the Company are proportionally consistent for each quarter during a
fiscal year. The percentage of annual revenues for the first,
13
second, third and fourth quarters recognized by the Company were as follows:
2002 -- 23.9%, 24.9%, 23.2% and 28.0%; 2001 -- 27.1%, 25.1%, 22.1% and 25.7%;
and 2000 -- 21.6%, 23.8%, 23.3% and 31.3%.
COMPETITION
The Company believes that the principal bases upon which it competes in its
direct commerce business are quality, value, service, proprietary product
offerings, catalog design, web site design, convenience, speed 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 such as JC Penney, Spiegel and Pottery Barn, among catalogs,
and JC Penney, Target, Bed, Bath & Beyond and Bloomingdale's, among brick and
mortar stores. Competitors also exist in each of the Company's catalog specialty
areas of women's apparel, home fashions, men's apparel and gifts such as J.Crew
and Jockey in the men's apparel category and Linen Source, Pottery Barn and
BrylaneHome in the home fashions category. The Gump's store in San Francisco
competes with Neiman Marcus, Tiffany, Horchow, Williams Sonoma and Crate &
Barrel. A number of the Company's competitors have substantially greater
financial, distribution and marketing resources than the Company.
The Company is maintaining an active e-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 e-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 grew in 2002. In addition, the Company has
entered into third party Web site advertising arrangements, including with
Amazon.com, as described above under "Direct Commerce -- Internet Sales." The
Company believes in the future of the Internet and online commerce, including
the marketing opportunities arising from this medium, and has directed part of
its marketing focus, resources and manpower to that end. The Company has
recently expanded its arrangements with Amazon.com.
The Company believes that the principal bases upon which it competes in its
business-to-business sector are value, service, flexibility, scalability,
convenience and efficiency. The Company's third party fulfillment business
competes with Clientlogic and NewRoads, amongst others. A number of the
Company's competitors have substantially greater financial, distribution and
marketing resources than the Company.
TRADEMARKS
Each of the Company's catalogs has its own federally registered trademarks
that are owned by The Company Store Group, LLC and its subsidiaries. The Company
Store Group, LLC and its subsidiaries also own numerous trademarks, copyrights
and service marks on logos, products and catalog offerings. The Company and its
subsidiaries also have protected various trademarks internationally. The Company
and its subsidiaries vigorously protect such marks.
GOVERNMENT REGULATION
The Company is subject to Federal Trade Commission regulations governing
its advertising and trade practices, Consumer Product Safety Commission
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.
14
LISTING INFORMATION
By letter dated May 2, 2001, the American Stock Exchange (the "Exchange")
notified the Company that it was below certain of the Exchange's continued
listing guidelines set forth in the Exchange's Company Guide. The Exchange
instituted a review of the Company's eligibility for continuing listing of the
Company's common stock on the Exchange. On January 17, 2002, the Company
received a letter dated January 9, 2002 from the Exchange confirming that the
American Stock Exchange determined to continue the Company's listing on the
Exchange pending quarterly reviews of the Company's compliance with the steps of
its strategic business realignment program. This determination was made subject
to the Company's favorable progress in satisfying the Exchange's guidelines for
continued listing and to the Exchange's periodic review of the Company's
Securities and Exchange Commission and other filings.
On November 11, 2002, the Company received a letter dated November 8, 2002
from the Exchange updating its position regarding the Company's compliance with
certain of the Exchange's continued listing standards as set forth in Part 10 of
the Exchange's Company Guide. Although the Company had been making favorable
progress in satisfying the Exchange's guidelines for continued listing based on
its compliance with the steps of its strategic business realignment program
shared with the Exchange in 2001 and updated in 2002, the Exchange informed the
Company that it had now become strictly subject to the procedures and
requirements of Part 10 of the Company Guide. Specifically, the Company must not
fall below the requirements of: (i) Section 1003(a)(i) with shareholders' equity
of less than $2,000,000 and losses from continuing operations and/or net losses
in two out of its three most recent fiscal years; (ii) Section 1003(a)(ii) with
shareholders' equity of less than $4,000,000 and losses from continuing
operations and/or net losses in three out of its four most recent fiscal years;
and (iii) Section 1003(a)(iii) with shareholders' equity of less than $6,000,000
and losses from continuing operations and/or net losses in its five most recent
fiscal years. The Exchange requested that the Company submit a plan to the
Exchange by December 11, 2002, advising the Exchange of action it has taken, or
will take, that would bring it into compliance with the continued listing
standards by December 28, 2003. The Company submitted a plan to the Exchange on
December 11, 2002 in an effort to maintain the listing of the Company's common
stock on the Exchange.
On January 28, 2003, the Company received a letter from the Exchange
confirming that, as of the date of the letter, the Company had evidenced
compliance with the requirements necessary for continued listing on the
Exchange. Such compliance resulted from a recent rule change by the Exchange
approved by the Securities and Exchange Commission related to continued listing
on the basis of compliance with total market capitalization or total assets and
revenues standards as alternatives to shareholders' equity standards such as the
requirement for each listed company to maintain $15 million in public float. The
letter is subject to changes in the American Stock Exchange Rules that might
supersede the letter or require the Exchange to re-evaluate its position.
WEB SITE ACCESS TO INFORMATION
The Company's internet address is www.hanoverdirect.com.
The Company recently began to make available free of charge on or through
its web site its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. Prior thereto, the Company
voluntarily provided electronic or paper copies of its filings free of charge
upon request, which it will continue to do.
ITEM 2. PROPERTIES
The Company's subsidiaries own and operate the following properties:
- A 775,000 square foot warehouse and fulfillment facility located in
Roanoke, Virginia,
- A 48,000 square foot administration and telemarketing facility located in
LaCrosse, Wisconsin, and
15
- A 150,000 square foot home fashion manufacturing facility located in
LaCrosse, Wisconsin used to produce down filled comforters for sale under
"The Company Store" and "Scandia Down" brand names.
Each of these properties is subject to a mortgage in favor of the Company's
lender, Congress Financial Corporation.
In addition, the Company or its subsidiaries lease the following
properties:
- An 85,000 square foot building formerly used as corporate headquarters
and administrative offices located in Weehawken, New Jersey under a
15-year lease expiring in May 2005, of which approximately 37,000 square
feet are occupied by the Company, approximately 18,000 square feet are
subleased, and the remaining 30,000 square feet are available for
sublease,
- A 30,000 square foot corporate headquarters and administration offices
located in Edgewater, New Jersey under a lease expiring in May 2005, of
which approximately 16,000 square feet is occupied by the Company,
approximately 2,600 square feet are subleased, and the remaining 11,400
square feet are available for sublease,
- Seven properties currently or formerly used as outlet stores located in
California, Pennsylvania and Wisconsin having approximately 68,000 square
feet of space in the aggregate, with leases running through December
2005. The two retail stores in California have been closed, as to which
the Company currently subleases 6,200 square feet and holds for sublease
approximately 5,000 square feet,
- A 64,000 square foot retail and office facility which includes the Gump's
retail store in San Francisco, California under two leases that expire
during April 2010, of which approximately 37,000 square feet are occupied
by the Company, approximately 20,000 square feet are subleased, and the
remaining 7,000 square feet, together with an additional 10,250 square
feet for which the current sublease expires during July 2003, are
available for sublease,
- A 185,000 square foot warehouse and fulfillment facility located in
LaCrosse, Wisconsin under a lease expiring in December 2003, and
- A 123,000 square foot telemarketing, customer service and administrative
facility located in Hanover, Pennsylvania, under a lease that was
extended during 2002 and that now expires on December 31, 2004.
Additionally, the Company utilizes a temporary storage facility of 72,000
square feet under a lease expiring September 30, 2004 in Roanoke, Virginia to
house merchandise during the holiday selling period and leases an additional
satellite telemarketing facility in York, Pennsylvania under a lease expiring
July 31, 2006. The Company also leases a 34,000 square foot facility used for
storage under a lease expiring August 31, 2004 in La Crosse, Wisconsin. In
addition, the Company leases a 30,000 square foot satellite administration
facility in San Diego, California under a lease expiring April 2005. On February
28, 2002, the Company terminated the telemarketing operations conducted at such
facility. Currently, the Company occupies approximately 16,000 square feet,
approximately 5,000 square feet are subleased, and the remaining 9,000 square
feet are available for sublease.
On May 3, 2001, the Company sold its 277,500 square foot warehouse and
fulfillment facility in Hanover, Pennsylvania (the "Kindig Lane Property") and
certain equipment located therein for $4.7 million to an unrelated third party.
The Company has continued to use the Kindig Lane Property under a month-to-month
lease agreement with the third party, and will continue to lease a portion of
the Kindig Lane Property on a month-to-month basis until April 4, 2003.
Effective March 1, 2003, the Company has transitioned a portion of the
fulfillment operations from the leased Kindig Lane Property to its owned
facility in Roanoke, Virginia.
During 2002, the Company entered into an agreement with the landlord and
the sublandlord to terminate its sublease of the Company's closed 497,200 square
foot warehouse and telemarketing facility located in Maumelle, Arkansas. The
agreement provided for the payment by the Company to the sublandlord of
$1,600,000, plus taxes through April 30, 2002 in the amount of $198,000. The
Company made all of the
16
payments during May 2002. Upon the satisfaction by the Company of all of its
obligations under the agreement, the sublease terminated and the Company was
released from all further obligations under the sublease. The Company's
previously established reserves for Maumelle, Arkansas were adequate based upon
the terms of the final settlement agreement.
ITEM 3. LEGAL PROCEEDINGS
A class action lawsuit was commenced on March 3, 2000 entitled Edwin L.
Martin v. Hanover Direct, Inc. and John Does 1 through 10, bearing case no.
CJ2000-177 in the State Court of Oklahoma (District Court in and for Sequoyah
County). Plaintiff commenced the action on behalf of himself and a class of
persons who have at any time purchased a product from the Company and paid for
an "insurance charge." The complaint sets forth claims for breach of contract,
unjust enrichment, recovery of money paid absent consideration, fraud and a
claim under the New Jersey Consumer Fraud Act. The complaint alleges that the
Company charges its customers for delivery insurance even though, among other
things, the Company's common carriers already provide insurance and the
insurance charge provides no benefit to the Company's customers. Plaintiff also
seeks a declaratory judgment as to the validity of the delivery insurance. The
damages sought are (i) an order directing the Company to return to the plaintiff
and class members the "unlawful revenue" derived from the insurance charges,
(ii) declaring the rights of the parties, (iii) permanently enjoining the
Company from imposing the insurance charge, (iv) awarding threefold damages of
less than $75,000 per plaintiff and per class member, and (v) attorneys' fees
and costs. On April 12, 2001, the Court held a hearing on plaintiff's class
certification motion. Subsequent to the April 12, 2001 hearing on plaintiff's
class certification motion, plaintiff filed a motion to amend the definition of
the class. On July 23, 2001, plaintiff's class certification motion was granted,
defining the class as "All persons in the United States who are customers of any
catalog or catalog company owned by Hanover Direct, Inc. and who have at any
time purchased a product from such company and paid money which was designated
to be an 'insurance' charge." On August 21, 2001, the Company filed an appeal of
the order with the Oklahoma Supreme Court and subsequently moved to stay
proceedings in the district court pending resolution of the appeal. The appeal
has been fully briefed. At a subsequent status hearing, the parties agreed that
issues pertaining to notice to the class would be stayed pending resolution of
the appeal, that certain other issues would be subject to limited discovery, and
that the issue of a stay for any remaining issues would be resolved if and when
such issues arise. Oral argument on the appeal, if scheduled, is not expected
until the first half of 2003. The Company believes it has defenses against the
claims and plans to conduct a vigorous defense of this action.
On August 15, 2001, the Company was served with a summons and four-count
complaint filed in Superior Court for the City and County of San Francisco,
California, entitled Teichman v. Hanover Direct, Inc., Hanover Brands, Inc.,
Hanover Direct Virginia, Inc., and Does 1-100. The complaint was filed by a
California resident, seeking damages and other relief for herself and a class of
all others similarly situated, arising out of the insurance fee charged by
catalogs and internet sites operated by subsidiaries of the Company. Defendants,
including the Company, have filed motions to dismiss based on a lack of personal
jurisdiction over them. In January 2002, plaintiff sought leave to name six
additional entities: International Male, Domestications Kitchen & Garden,
Silhouettes, Hanover Company Store, Kitchen & Home, and Domestications as co-
defendants. On March 12, 2002, the Company was served with the First Amended
Complaint in which plaintiff named as defendants the Company, Hanover Brands,
Hanover Direct Virginia, LWI Holdings, Hanover Company Store, Kitchen and Home,
and Silhouettes. On April 15, 2002, the Company filed a Motion to Stay the
Teichman action in favor of the previously filed Martin action and also filed a
Motion to quash service of summons for lack of personal jurisdiction on behalf
of defendants Hanover Direct, Inc., Hanover Brands, Inc. and Hanover Direct
Virginia, Inc. On May 14, 2002, the Court (1) granted the Company's Motion to
quash service on behalf of Hanover Direct, Hanover Brands, and Hanover Direct
Virginia, leaving only LWI Holdings, Hanover Company Store, Kitchen & Home, and
Silhouettes, as defendants, and (2) granted the Company's Motion to Stay the
action in favor of the previously filed Oklahoma action, so nothing will proceed
on this case against the remaining entities until the Oklahoma case is decided.
The Company believes it has defenses against the claims. The Company plans to
conduct a vigorous defense of this action.
17
A class action lawsuit was commenced on February 13, 2002 entitled Jacq
Wilson, suing on behalf of himself, all others similarly situated, and the
general public v. Brawn of California, Inc. dba International Male and
Undergear, and Does 1-100 ("Brawn") in the Superior Court of the State of
California, City and County of San Francisco. Does 1-100 are internet and
catalog direct marketers offering a selection of men's clothing, sundries, and
shoes who advertise within California and nationwide. The complaint alleges that
for at least four years, members of the class have been charged an unlawful,
unfair, and fraudulent insurance fee and tax on orders sent to them by Brawn;
that Brawn was engaged in untrue, deceptive and misleading advertising in that
it was not lawfully required or permitted to collect insurance, tax and sales
tax from customers in California; and that Brawn has engaged in acts of unfair
competition under the state's Business and Professions Code. Plaintiff and the
class seek (i) restitution and disgorgement of all monies wrongfully collected
and earned by Brawn, including interest and other gains made on account of these
practices, including reimbursement in the amount of the insurance, tax and sales
tax collected unlawfully, together with interest, (ii) an order enjoining Brawn
from charging customers insurance and tax on its order forms and/or from
charging tax on the delivery, shipping and insurance charges, (iii) an order
directing Brawn to notify the California State Board of Equalization of the
failure to pay the correct amount of tax to the state and to take appropriate
steps to provide the state with the information needed for audit, and (iv)
compensatory damages, attorneys' fees, pre-judgment interest, and costs of the
suit. The claims of the individually named plaintiff and for each member of the
class amount to less than $75,000. On April 15, 2002, the Company filed a Motion
to Stay the Wilson action in favor of the previously filed Martin action. On May
14, 2002, the Court heard the argument in the Company's Motion to Stay the
action in favor of the Oklahoma action, denying the motion. In October 2002, the
Court granted the Company's motion for leave to amend the answer. Discovery is
proceeding. A mandatory settlement conference has been scheduled for April 4,
2003 and trial is currently scheduled for April 14, 2003. The Company plans to
conduct a vigorous defense of this action.
A class action lawsuit was commenced on February 20, 2002 entitled Argonaut
Consumer Rights Advocates Inc., suing on behalf of the General Public v. Gump's
By Mail, Inc. ("Gump's"), and Does 1-100 in the Superior Court of the State of
California, City and County of San Francisco. The plaintiff is a non-profit
public benefit corporation suing under the California Business and Profession
Code. Does 1-100 would include persons whose activities include the direct sale
of tangible personal property to California consumers including the type of
merchandise that Gump's -- the store and the catalog -- sell, by telephone, mail
order, and sales through the web sites www.gumpsbymail.com and www.gumps.com.
The complaint alleges that for at least four years members of the class have
been charged an unlawful, unfair, and fraudulent tax and "sales tax" on their
orders in violation of California law and court decisions, including the state
Revenue and Taxation Code, Civil Code, and the California Board of Equalization;
that Gump's engages in unfair business practices; that Gump's engaged in untrue
and misleading advertising in that it was not lawfully required to collect tax
and sales tax from customers in California; is not lawfully required or
permitted to add tax and sales tax on separately stated shipping or delivery
charges to California consumers; and that it does not add the appropriate or
applicable or specific correct tax or sales tax to its orders. Plaintiff and the
class seek (i) restitution of all tax and sales tax charged by Gump's on each
transaction and/or restitution of tax and sales tax charged on the shipping
charges; (ii) an order enjoining Gump's from charging customers for tax on
orders or from charging tax on the shipping charges; and (iii) attorneys' fees,
pre-judgment interest on the sums refunded, and costs of the suit. On April 15,
2002, the Company filed an Answer and Separate Affirmative Defenses to the
complaint, generally denying the allegations of the complaint and each and every
cause of action alleged, and denying that plaintiff has been damaged or is
entitled to any relief whatsoever. On September 19, 2002, the Company filed a
motion for leave to file an amended answer, containing several additional
affirmative defenses based on the proposition that the proper defendant in this
litigation (if any) is the California State Board of Equalization, not the
Company, and that plaintiff failed to exhaust its administrative remedies prior
to filing suit. That motion was granted. At the request of the plaintiff, this
case was dismissed with prejudice by the court on March 17, 2003.
A class action lawsuit was commenced on March 5, 2002 entitled Argonaut
Consumer Rights Advocates Inc., suing on behalf of the General Public v.
Domestications LLC, and Does 1-100 ("Domestications") in the Superior Court of
the State of California, City and County of San Francisco. The plaintiff is a
non-profit public benefit corporation suing under the California Business and
Profession Code. Does 1-100 would include
18
persons responsible for the conduct alleged in the complaint, including the
direct sale of tangible personal property to California consumers including the
type of merchandise that Domestications sells, by telephone, mail order, and
sales through the web site www.domestications.com. The plaintiff claims that for
at least four years members of the class have been charged an unlawful, unfair,
and fraudulent tax and sales tax for different rates and amounts on the catalog
and internet orders on the total amount of goods, tax and sales tax on shipping
charges, which are not subject to tax or sales tax under California law, in
violation of California law and court decisions, including the state Revenue and
Taxation Code, Civil Code, and the California Board of Equalization; that
Domestications engages in unfair business practices; and that Domestications
engaged in untrue and misleading advertising in that it was not lawfully
required to collect tax and sales tax from customers in California. Plaintiff
and the class seek (i) restitution of all sums, interest and other gains made on
account of these practices; (ii) prejudgment interest on all sums wrongfully
collected; (iii) an order enjoining Domestications from charging customers for
tax on their orders and/or from charging tax on the shipping charges; and (iv)
attorneys' fees and costs of the suit. The Company filed an Answer and Separate
Affirmative Defenses to the Complaint, generally denying the allegations of the
Complaint and each and every cause of action alleged, and denying that plaintiff
has been damaged or is entitled to any relief whatsoever. Discovery is now
proceeding. On September 19, 2002, the Company filed a motion for leave to file
an amended answer, containing several additional affirmative defenses based on
the proposition that the proper defendant in this litigation (if any) is the
California State Board of Equalization, not the Company, and that plaintiff
failed to exhaust its administrative remedies prior to filing suit. That motion
was granted. On February 28, 2003, the Company filed a notice of motion and
memorandum of points and authorities in support of its motion for summary
judgment setting forth that Plaintiff's claims are without merit and incorrect
as a matter of law. At the request of the plaintiff, this case was dismissed
with prejudice by the court on March 17, 2003.
A class action lawsuit was commenced on October 28, 2002 entitled John
Morris, individually and on behalf of all other persons & entities similarly
situated v. Hanover Direct, Inc., and Hanover Brands, Inc. (referred to here as
"Hanover"), No. L 8830-02 in the Superior Court of New Jersey, Bergen
County -- Law Division. The plaintiff brings the action individually and on
behalf of a class of all persons and entities in New Jersey who purchased
merchandise from Hanover within six years prior to filing of the lawsuit and
continuing to the date of judgment. On the basis of a purchase made by plaintiff
in August, 2002 of certain clothing from Hanover (which was from a men's
division catalog, the only ones which retained the insurance line item in 2002),
Plaintiff claims that for at least six years, Hanover maintained a policy and
practice of adding a charge for "insurance" to the orders it received and
concealed and failed to disclose its policy with respect to all class members.
Plaintiff claims that Hanover's conduct was (i) in violation of the New Jersey
Consumer Fraud Act, as otherwise deceptive, misleading and unconscionable; (ii)
such as to constitute Unjust Enrichment of Hanover at the expense and to the
detriment of plaintiff and the class; and (iii) unconscionable per se under the
Uniform Commercial Code for contracts related to the sale of goods. Plaintiff
and the class seek damages equal to the amount of all insurance charges,
interest thereon, treble and punitive damages, injunctive relief, costs and
reasonable attorneys fees, and such other relief as may be just, necessary, and
appropriate. On December 13, 2002, the Company filed a Motion to Stay the Morris
action in favor of the previously filed Martin action. Plaintiff then filed an
Amended Complaint adding International Male as a defendant. The Company's
response to the Amended Complaint was filed on February 5, 2003. Plaintiff's
response brief was filed March 17, 2003, and the Company's reply brief is due on
March 31, 2003. Hearing on the motion to stay is expected to take place on April
4, 2003. The Company plans to conduct a vigorous defense of this action.
On June 28, 2001, Rakesh K. Kaul, the Company's former President and Chief
Executive Officer, filed a five-count complaint (the "Complaint") in New York
State Court against the Company, seeking damages and other relief arising out of
his separation of employment from the Company, including severance payments of
$2,531,352 plus the cost of employee benefits, attorneys' fees and costs
incurred in connection with the enforcement of his rights under his employment
agreement with the Company, payment of $298,650 for 13 weeks of accrued and
unused vacation, damages in the amount of $3,583,800, or, in the alternative, a
declaratory judgment from the court that he is entitled to all change of control
benefits under the "Hanover Direct, Inc. Thirty-Six Month Salary Continuation
Plan," and damages in the amount of $1,396,066 or 19
$850,000 due to the Company's
purported breach of the terms of the "Long-Term Incentive Plan for Rakesh
19
K. Kaul" by failing to pay him a "tandem bonus" he alleges was due and payable
to him within the 30 days following his resignation. The Company removed the
case to the U.S. District Court for the Southern District of New York on July
25, 2001. Mr. Kaul filed an Amended Complaint ("Amended Complaint") in the U.S.
District Court for the Southern District of New York on September 18, 2001. The
Amended Complaint repeats many of the claims made in the original Complaint and
adds ERISA claims. On October 11, 2001, the Company filed its Answer, Defenses
and Counterclaims to the Amended Complaint, denying liability under each and
every of Mr. Kaul's causes of action, challenging all substantive assertions,
raising several defenses and stating nine counterclaims against Mr. Kaul. The
counterclaims include (1) breach of contract; (2) breach of the Non-Competition
and Confidentiality Agreement with the Company; (3) breach of fiduciary duty;
(4) unfair competition; and (5) unjust enrichment. The Company seeks damages,
including, without limitation, the $341,803 in severance pay and car allowance
Mr. Kaul received following his resignation, $412,336 for amounts paid to Mr.
Kaul for car allowance and related benefits, the cost of a long-term disability
policy, and certain payments made to personal attorneys and consultants retained
by Mr. Kaul during his employment, $43,847 for certain services the Company
provided and certain expenses the Company incurred, relating to the renovation
and leasing of office space occupied by Mr. Kaul's spouse at 115 River Road,
Edgewater, New Jersey, the Company's current headquarters, $211,729 on a tax
loan to Mr. Kaul outstanding since 1997 and interest, compensatory and punitive
damages and attorneys' fees. The case is pending. The discovery period has
closed, the Company has moved to amend its counterclaims, and the parties have
each moved for summary judgment. The Company seeks summary judgment: dismissing
Mr. Kaul's claim for severance under his employment agreement on the ground that
he failed to provide the Company with a general release of, among other things,
claims for change of control benefits; dismissing Mr. Kaul's claim for
attorneys' fees on the grounds that they are not authorized under his employment
agreement; dismissing Mr. Kaul's claims related to change in control benefits
based on an administrative decision that he is not entitled to continued
participation in the plan or to future benefits thereunder; dismissing Mr.
Kaul's claim for a tandem bonus payment on the ground that no payment is owing;
dismissing Mr. Kaul's claim for vacation payments based on Company policy
regarding carry over vacation; and seeking judgment on the Company's
counterclaim for unjust enrichment based on Mr. Kaul's failure to pay under a
tax note. Mr. Kaul seeks summary judgment: dismissing the Company's defenses and
counterclaims relating to a release on the grounds that he tendered a release or
that the Company is estopped from requiring him to do so; the Company's defenses
and counterclaims relating to his alleged violations of his non-compete and
confidentiality obligations on the grounds that he did not breach the
obligations as defined in the agreement; and the Company's claims based on his
alleged breach of fiduciary duty, including those based on his monthly car
allowance payments and the leased space to his wife, on the grounds that he was
entitled to the car payments and did not involve himself in or make
misrepresentations in connection with the leased space. The Company has
concurrently moved to amend its Answer and Counterclaims to state a claim that
it had cause for terminating Mr. Kaul's employment based on, among other things,
after acquired evidence that Mr. Kaul received a monthly car allowance and other
benefits totaling $412,336 that had not been authorized by the Company's Board
of Directors and that his wife's lease and related expense was not properly
authorized by the Company's Board of Directors, and to clarify or amend the
scope of the Company's counterclaims for reimbursement. The briefing on the
motions is completed and the parties are awaiting the decision of the Court. No
trial date has been set. It is too early to determine the potential outcome,
which could have a material impact on the Company's results of operations when
resolved in a future period.
In June 1994, a complaint was filed in the Supreme Court of the State of
New York, County of New York, by Donald Schupak, the former President, CEO and
Chairman of the Board of Directors of The Horn & Hardart Company, the corporate
predecessor to the Company, against the Company and Alan Grant Quasha. The
complaint asserted claims for alleged breaches of an agreement dated February
25, 1992 between Mr. Schupak and the Company (the "Agreement"), and for alleged
tortious interference with the Agreement by Mr. Quasha. Mr. Schupak sought
compensatory damages in an amount, which is estimated to be not more than
$400,000, and punitive damages in the amount of $10 million; applicable
interest, incidental and consequential damages, plus costs and disbursements,
the expenses of the litigation and reasonable attorneys' fees. In addition,
based on the alleged breaches of the Agreement by the Company, Mr. Schupak
sought a 20
"parachute" payment of approximately $3 million under an earlier
agreement with the Company that he
20
allegedly had waived in consideration of the Company's performance of its
obligations under the Agreement. The Company filed an answer to the complaint on
September 7, 1994. Discovery then commenced and documents were exchanged. Each
of the parties filed a motion for summary judgment at the end of 1995, and both
motions were denied in the spring of 1996. In April 1996, due to health problems
then being experienced by Mr. Schupak, the Court ordered that the case be marked
"off calendar" until plaintiff recovered and was able to proceed with the
litigation. In September 2002, more than six years later, Mr. Schupak filed a
motion to restore the case to the Court's calendar. The Company filed papers in
opposition to the motion on October 10, 2002, asserting that the motion should
be denied on the ground that plaintiff failed to timely comply with the terms of
the Court's order concerning restoration and, alternatively, on the ground of
laches. The plaintiff filed reply papers on November 4, 2002. On November 20,
2002, the court denied Schupak's motion to restore the case to the calendar as
"unnecessary and moot" on the ground that the case had been improperly marked
off calendar in the first instance, ruled that the case therefore remained
"active," and fixed a trial date of March 4, 2003. On January 27, 2003, the
parties reached agreement fully and finally settling all of Schupak's claims in
consideration of a payment by the Company and the exchange of mutual general
releases.
The Company was named as one of 88 defendants in a patent infringement
complaint filed on November 23, 2001 by the Lemelson Medical, Education &
Research Foundation, Limited Partnership (the "Lemelson Foundation"). The
complaint, filed in the U.S. District Court in Arizona, was not served on the
Company until March 2002. In the complaint, the Lemelson Foundation accuses the
named defendants of infringing seven U.S. patents which allegedly cover
"automatic identification" technology through the defendants' use of methods for
scanning production markings such as bar codes. The Company received a letter
dated November 27, 2001 from attorneys for the Lemelson Foundation notifying the
Company of the complaint and offering a license. The Court entered a stay of the
case on March 20, 2002, requested by the Lemelson Foundation, pending the
outcome of a related case in Nevada being fought by bar code manufacturers. The
trial in the Nevada case began on November 18, 2002 and ended on January 17,
2003. The parties in the Nevada case are now required to submit post trial
briefs on or before May 16, 2003, and a decision is expected two months or more
thereafter. The Order for the stay in the Lemelson case provides that the
Company need not answer the complaint, although it has the option to do so. The
Company has been invited to join a common interest/joint-defense group
consisting of defendants named in the complaint as well as in other actions
brought by the Lemelson Foundation. The Company is currently in the process of
analyzing the merits of the issues raised by the complaint, notifying vendors of
its receipt of the complaint and letter, evaluating the merits of joining the
joint-defense group, and having discussions with attorneys for the Lemelson
Foundation regarding the license offer. A preliminary estimate of the royalties
and attorneys' fees which the Company may pay if it decides to accept the
license offer from the Lemelson Foundation range from about $125,000 to
$400,000. The Company has decided to gather further information, but will not
agree to a settlement at this time, and thus, has not established a reserve.
In early March 2003, the Company learned that one of its business units had
engaged in certain travel transactions that may have constituted violations
under the provisions of U.S. government regulations promulgated pursuant to 50
U.S.C. App. 1-44, which proscribe certain transactions related to travel to
certain countries. See Note 19 to the Company's Consolidated Financial
Statements.
See also Note 17 of Notes to Consolidated Financial Statements for the
years ended December 28, 2002, December 29, 2001 and December 30, 2000 elsewhere
herein.
In addition, 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 these 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.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the American Stock Exchange under the
symbol "HNV." The following table sets forth, for the periods shown, the high
and low sale prices of the Company's common stock as reported on the American
Stock Exchange Composite Tape. As of March 20, 2003, the Company had 138,315,800
shares of common stock outstanding (net of treasury shares). Of these,
29,446,888 shares were held directly or indirectly by Richemont, 38,778,350
shares were held by Basil P. Regan or Regan Partners L.P., and 57,174 shares
were held by other directors and officers of the Company. As a result,
70,033,388 shares of common stock were held by public shareholders. There were
approximately 3,650 holders of record of common stock.
HIGH LOW
----- -----
FISCAL 2002
First Quarter (Dec. 30, 2001 to March 30, 2002)........... $0.52 $0.36
Second Quarter (March 31, 2002 to June 29, 2002).......... $0.44 $0.23
Third Quarter (June 30, 2002 to Sept. 28, 2002)........... $0.34 $0.19
Fourth Quarter (Sept. 29, 2002 to Dec. 28, 2002).......... $0.28 $0.18
FISCAL 2001
First Quarter (Dec. 31, 2000 to March 31, 2001)........... $0.56 $0.28
Second Quarter (April 1, 2001 to June 30, 2001)........... $0.34 $0.12
Third Quarter (July 1, 2001 to Sept. 29, 2001)............ $0.37 $0.17
Fourth Quarter (Sept. 30, 2001 to Dec. 29, 2001).......... $0.35 $0.24
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.
22
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for each of the fiscal
years indicated:
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Net Revenues............................ $457,644 $532,165 $603,014 $549,852 $546,114
Special charges (credit)................ 4,398 11,277 19,126 144 (485)
Loss from operations.................... (432) (23,965) (70,552) (13,756) (16,807)
Gain on sale of Improvements business... (570) (23,240) -- -- --
Gain on sale of Kindig Lane Property.... -- (1,529) -- -- --
Gain on sale of The Shopper's Edge...... -- -- -- (4,343) --
Gain on sale of Austad's................ -- -- -- (967) --
Income (loss) before interest and income
taxes................................. 138 804 (70,552) (8,446) (16,807)
Interest expense, net................... 5,477 6,529 10,083 7,338 7,778
Net loss................................ (9,130) (5,845) (80,800) (16,314) (25,595)
Preferred stock dividends and
accretion............................. 15,556 10,745 4,015 634 578
-------- -------- -------- -------- --------
Net loss applicable to common
stockholders.......................... $(24,686) $(16,590) $(84,815) $(16,948) $(26,163)
-------- -------- -------- -------- --------
PER SHARE:
Net loss per common share -- basic and
diluted............................... $ (.18) $ (.08) $ (.40) $ (.08) $ (.13)
-------- -------- -------- -------- --------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (IN THOUSANDS):
Basic................................... 138,280 210,536 213,252 210,719 206,508
-------- -------- -------- -------- --------
Diluted................................. 138,280 210,536 213,252 210,719 206,508
-------- -------- -------- -------- --------
Diluted................................. 138,280 210,536 213,252 210,719 206,508
-------- -------- -------- -------- --------
AS RESTATED AS RESTATED AS RESTATED AS RESTATED
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
BALANCE SHEET DATA (END OF PERIOD):
Working capital (1)....................................... $ 9,439620 $ 20,9357,412 $ 16,8351,123 $ 17,99012,788 $ 43,929
Total assets (1)............................................. 140,100 157,661 203,019 191,419 218,870
Total debt (1)................................................. 25,129 29,710 39,036 42,835 58,859
Redeemable Series A Preferred
Stock.....Stock.............................. -- -- 71,628 -- --
Redeemable Series B Preferred
Stock.....Stock.............................. 92,379 76,823 -- -- --
Shareholders' (deficiency) equity.......equity.... (58,841) (35,728) (24,452) 53,865 66,470
- ---------------
(1) The amount for 1998 includes both a receivable and an obligation under
receivables financing of $18,998, pursuant to SFAS No. 125.
There were no cash dividends declared on the Common Stock in any of the periods
presented.
See Note 21 of Notes to Consolidated Financial Statements for more
information regarding the restatements.
See notes to Consolidated Financial Statements.
23
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):
FISCAL YEAR
2002 2001 2000
----- ----------- -----
Net revenues............................................. 100.0% 100.0% 100.0%
Cost of sales and operating expenses..................... 63.5 63.8 67.2
Write-down of inventory of discontinued catalogs......... -- -- 0.3
Special charges.......................................... 0.9 2.1 3.2
Selling expenses......................................... 23.0 26.5 25.4
General and administrative expenses...................... 11.4 10.7 14.1
Depreciation and amortization............................ 1.2 1.4 1.5
Gain on sale of Improvements Catalog..................... (0.1) (4.4) --
Gain on sale of Kindig Lane Property..................... -- (0.3) --
Income (loss) before interest and income taxes........... 0.1 0.2 (11.7)
Interest expense, net.................................... 1.2 1.2 1.7
Provision for deferred federal income taxes.............. 0.8 -- --
Provision for state income taxes......................... -- -- --
Net loss................................................. (2.0)% (1.1)% (13.4)%
RESULTS OF OPERATIONS
2002 COMPARED WITH 2001
Net Loss. The Company reported a net loss of $9.1 million or $.18 per
share for the year ended December 28, 2002 compared with a net loss of $5.8
million or $.08 per share for the comparable period in the fiscal year 2001. The
per share amounts were calculated after deducting preferred dividends and
accretion of $15.6 million and $10.7 million in fiscal years 2002 and 2001,
respectively. The weighted average number of shares of common stock outstanding
was 138,280,196 and 210,535,959 for the fiscal years ended December 28, 2002 and
December 29, 2001, respectively. This decrease in weighted average shares was
pursuant to the terms of the Richemont Transaction consummated on December 19,
2001 (see Notes 7 and 8 to the Company's Consolidated Financial Statements). The
increased loss of $3.3 million resulted from the recording of $24.8 million in
gains during fiscal year 2001 related to the sale of the Company's Improvements
business and the Kindig Lane Property and a $3.7 million reduction to the
carrying value of the deferred tax asset in fiscal year 2002. This deferred tax
asset adjustment was based on a reassessment of the Company's ability to utilize
certain net operating losses prior to their expiration. The impact of the
deferred tax asset adjustment was mitigated by cost reductions, primarily in
selling expenses.
Net Revenues. Net revenues decreased $74.6 million or 14.0% for the year
ended December 28, 2002 to $457.6 million from $532.2 million for a comparable
period in 2001. This decrease was due in part to the sale of the Improvements
business on June 29, 2001, which accounted for $34.1 million of the reduction.
The discontinuance of the Domestications Kitchen & Garden, Kitchen & Home,
Encore and Turiya catalogs contributed an additional $6.4 million to the
reduction. Revenues for continuing businesses in fiscal year 2002 decreased by
$34.1 million or 6.9%. Overall circulation for the continuing businesses
decreased by 9.0% from the prior year with almost all of the decrease in the
continuing revenues stemming from efforts to reduce unprofitable circulation.
Internet sales have now reached 20.3% of combined internet and catalog revenues
for the Company's four categories and have improved by $20.4 million or 30.4% to
$87.3 million from $66.9 million in 2001, excluding sales from the Improvements
business that was sold during 2001.
Cost of Sales and Operating Expenses. Cost of sales and operating expenses
decreased to 63.5% of net revenues for the year ended December 28, 2002 as
compared with 63.8% of net revenues for the comparable period in 2001. The
slight decrease over the prior year was due to the reduction of fixed costs
incurred
24
primarily by the Company's fulfillment operations. While substantial reductions
were realized during 2001, costs as a percentage of net revenues held constant
in most areas except for fulfillment, which continued to decline as the on-going
implementation of the Company's strategic business realignment program
continued. Total merchandise cost, as a percent of net revenues, held constant
with the prior year.
Special Charges. In December 2000, the Company began a strategic business
realignment program that resulted in the recording of special charges for
severance, facility exit costs and fixed asset write-offs. Special charges
recorded in fiscal years 2002, 2001, and 2000 relating to the strategic business
realignment program were $4.4 million, $11.3 million, and $19.1 million,
respectively. The actions related to the strategic business realignment program
were taken in an effort to direct the Company's resources primarily towards a
return to profitability.
In the first quarter of 2002, special charges relating to the strategic
business realignment program were recorded in the amount of $0.2 million. These
charges consisted primarily of severance costs related to the elimination of an
additional 10 FTE positions and costs associated with the Company's decision to
close a product storage facility located in San Diego, California. In September
2002, the Company continued to execute this plan through the integration of The
Company Store and Domestications divisions. As a result of the continued actions
needed to execute these plans, during the third quarter of 2002, an additional
$1.5 million of special charges was recorded. Of this amount, $1.3 million
consisted of additional facility exit costs resulting primarily from the
integration of The Company Store and Domestications divisions, causing
management to reassess its plan to consolidate its office space at the corporate
offices in New Jersey. The additional $0.2 million consisted of further
severance costs for an individual relating to the Company's strategic business
realignment program.
In the fourth quarter of 2002, special charges totaling $2.7 million were
recorded. Of this amount, $1.5 million was related to severance costs, including
$1.2 million for two of the Company's senior management members, $0.2 million
associated with the consolidation of a portion of the Company's Hanover,
Pennsylvania fulfillment operations into its Roanoke, Virginia facility, and
$0.1 million of additional severance costs and adjustments pertaining to the
Company's previous strategic business realignment initiatives. The remaining
$1.2 million consisted primarily of a $0.4 million credit reflecting the
reduction of the deferred rental liabilities applicable to the portions of the
facilities previously included in the Company's strategic business realignment
program and a $1.6 million charge in order to properly reflect the current
marketability of such facilities in the rental markets.
Selling Expenses. Selling expenses decreased to 23.0% of net revenues for
the year ended December 28, 2002 from 26.5% for the comparable period in 2001,
primarily due to a shift in focus resulting in the elimination of mailing to
unprofitable circulation lists. In addition to lower circulation, favorable
paper prices were obtained, which have also contributed to the decline in
selling expenses over the prior year.
General and Administrative Expenses. General and administrative expenses
decreased by $4.5 million in 2002 over the prior year. The reductions reflect
the elimination of a significant number of FTE positions across all departments,
which began late in 2000 as part of the Company's strategic business realignment
program and have continued through December 28, 2002. This reduction was
achieved even after absorbing in excess of $3.5 million in costs associated with
the Company's litigation defense against Rakesh Kaul and the Company's
litigation defense and settlement against Donald Schupak during 2002. As a
percentage of net revenues, general and administrative expenses rose to 11.4% in
2002 from 10.7% for the comparable period in 2001. The total increase was
attributable to the expense incurred by the Company to defend and settle
litigation brought by Donald Schupak, and the expense incurred by the Company to
defend itself against litigation brought by Rakesh Kaul.
Depreciation and Amortization. Depreciation and amortization decreased to
1.2% of net revenues for the year ended December 28, 2002 from 1.4% for the
comparable period in 2001. The decrease was primarily due to capital
expenditures that have become fully amortized and the elimination of goodwill
amortization resulting from the implementation of SFAS 142 at the beginning of
fiscal 2002.
25
Loss from Operations. The Company's loss from operations decreased $23.6
million to $0.4 million for the year ended December 28, 2002 from a loss of
$24.0 million for the comparable period in 2001.
Gain on Sale of the Improvements Business. During fiscal 2002, the Company
recognized approximately $0.6 million of deferred gain consistent with the terms
of the escrow agreement relating to the Improvements sale. The recognition of
additional gain of up to approximately $2.0 million has been deferred until the
contingencies described in the escrow agreement expire, which will occur no
later than the middle of the 2003 fiscal year. As of December 28, 2002, no
claims had been made against the escrow.
Interest Expense, Net. Interest expense, net for the year ended December
28, 2002 decreased $1.1 million to $5.5 million and is attributable to lower
average borrowings over the last nine months of 2002 coupled with a reduction in
interest rates. This reduction is partially offset by an increase in the
amortization of deferred financing costs relating to the Company's amendments to
the Congress Credit Facility.
Income Taxes. For year ended December 28, 2002, the Company reduced the
carrying value of its deferred tax asset. This deferred tax asset adjustment was
based on a reassessment of the Company's ability to utilize certain net
operating losses prior to their expiration.
EBITDA COMPARISON SCHEDULE
The following table reflects the view utilized by Company management to
monitor the business (in thousands):
FISCAL YEAR
2002 2001 2000
------- ----------- --------
INCOME (LOSS) BEFORE INTEREST & TAXES....................... $ 138 $ 804 $(70,552)
Add: Depreciation and amortization.......................... 5,650 7,430 9,090
------- -------- --------
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION & AMORTIZATION
(EBITDA).................................................. 5,788 8,234 (61,462)
Add: Stock option amortization expense...................... 1,332 1,841 5,175
------- -------- --------
EBITDA AS DEFINED FOR DEBT COVENANT......................... 7,120 10,075 (56,287)
Less: Gain on sale of Improvements business................. (570) (23,240) --
Less: Gain on sale of Kindig Lane Facility.................. -- (1,529) --
Add: Special charges........................................ 4,398 11,277 19,126
Add: Write-down inventory of discontinued catalogs.......... -- -- 2,048
Add: Extraordinary litigation
Kaul litigation........................................... 2,871 -- 5,212
Shupack litigation........................................ 636 -- --
------- -------- --------
COMPARATIVE EBITDA.......................................... $14,455 $ (3,417) $(29,901)
======= ======== ========
Management believes that Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA) offers a useful tool in addition to traditional GAAP tools
to measure operational cash flow. Management utilizes comparative EBITDA to
evaluate the Company's performance independent of other factors such as gain on
sale of businesses, special charges and litigation expenses as reflected in the
table above.
2001 COMPARED WITH 2000
Net Loss. The Company reported a net loss of $5.8 million or $.08 per
share for the fiscal year ended December 29, 2001 compared with a net loss of
$80.8 million or $.40 per share for the fiscal year ended December 30, 2000. The
per share amounts were calculated after deducting preferred dividends and
accretion 26
of $10.7 million in 2001 and $4.0 million in 2000. As part of a
transaction consummated with Richemont in
26
December 2001 (see Notes 7 and 8 to the Company's Consolidated Financial
Statements), Richemont agreed to forego any claim that it had to accrued but
unpaid dividends on the Series A Preferred Stock in exchange for the issuance of
Series B Preferred Stock. This transaction resulted in a decrease in
shareholders' deficiency of $5.6 million. The weighted average number of shares
outstanding was 210,535,959 and 213,251,945 for 2001 and 2000, respectively.
This decrease in weighted average shares was due to the conversion of 1,530,000
issued common shares into treasury shares.
Compared with the comparable period in 2000, the $75.0 million decrease in
net loss was primarily due to:
i. gain on sale of the Improvements business;
ii. gain on sale of the Kindig Lane Property;
iii. decreased special charges related to the Company's strategic
business realignment program;
iv. decreased cost of sales and operating expenses;
v. decreased general and administrative expenses; and
vi. a reduction in interest expense.
Net Revenues. Net revenues decreased $70.8 million (11.7%) for the year
ended December 29, 2001 to $532.2 million from $603.0 million for the comparable
period in 2000. This decrease was in part due to the sale of the Improvements
business on June 29, 2001, which accounted for $27.6 million of the reduction in
revenues in 2001. An additional portion of the drop in revenues amounting to
$7.8 million is attributed to the Company's decision to scale back on its third
party business by focusing only on profitable operations. The discontinuance of
the Domestications Kitchen & Garden, Encore, Kitchen & Home and Turiya catalogs
contributed $21.2 million to the reduction of net revenues in 2001. The balance
of the net revenues decrease can be attributable to softness in demand related
to both the International Male and Gump's brands.
Cost of Sales and Operating Expenses. Cost of sales and operating expenses
decreased to 63.8% of net revenues for the year ended December 29, 2001 as
compared to 67.2% of net revenues for the comparable period in 2000. This change
is partially due to an increase in the amount of direct import merchandise,
which has a favorable impact on merchandise cost as a percent of net revenues
and accounted for 0.8% of the percentage drop. The balance of the reduction of
3.4% of costs as a percentage of net revenues can be primarily attributed to the
significant reduction in operating costs that have resulted from actions taken
in connection with the Company's strategic business realignment program. The
largest reductions occurred in the areas of fixed costs associated with the
Company's fulfillment centers and information systems. These reductions in
costs, however, were partially offset by higher postage costs as a percent of
net revenues.
Special Charges. In December 2000, the Company developed a plan to
strategically realign the business and direct the Company's resources primarily
towards growth in Hanover Brands while at the same time reducing costs in all
areas of the business and eliminating investment activities that had not
generated sufficient revenues to produce profitable returns. As a result of
actions needed to execute this plan, the Company recorded a special charge of
$19.1 million in fiscal 2000 to cover costs related to severance, facility exit
costs and fixed asset write-offs. In fiscal year 2001, the Company took
additional actions towards implementing the strategic business realignment
program that included:
- The sale of the Kindig Lane Property;
- The closing of the San Diego Telemarketing Center;
- Reduction of full-time equivalent positions across all business units;
and
- Relocation of certain operating and administrative functions from its
office facility in Weehawken, New Jersey to Edgewater, New Jersey.
27
These additional actions resulted in special charges of $11.3 million to
cover costs related to severance, facility exit costs and fixed asset
write-offs.
27
Selling Expenses. Selling expenses increased to 26.5% of revenues for the
year ended December 29, 2001 from 25.4% for the comparable period in 2000
primarily due to the under-performance of catalog mailings during the second
quarter period.
General and Administrative Expenses. General and Administrative expenses
decreased by $28.2 million in 2001 which accounted for a significant portion of
the Company's reduction in its net loss for the year. As a percentage of net
revenues, general and administrative expenses dropped to 10.7% in 2001 from a
high of 14.1% experienced in 2000. The reduction in costs is primarily
attributable to the elimination of a significant number of FTE positions across
all departments which began late in 2000 as part of the Company's strategic
business realignment program and continued throughout the year 2001. Although
the reductions in general and administrative costs occurred throughout all
overhead areas, the largest reduction in the amount of approximately $8.6
million can be attributed to the decision to eliminate the erizon investment
activities and the related overhead established to support them.
Depreciation and Amortization. Depreciation and amortization decreased to
1.4% of net revenues for the year ended December 29, 2001 from 1.5% for the
comparable period in 2000. The decrease is a result of the complete amortization
of a major computer system in the year 2000 as well as the write-down of fixed
assets in connection with the Company's strategic business realignment program
in the year 2001.
Loss from Operations. The Company's loss from operations decreased by
$46.6 million to $24.0 million for the year ended December 29, 2001 from a loss
of $70.6 million for the year ended December 30, 2000.
Gain on Sale of the Improvements Business and the Kindig Lane
Property. The combined gain on sales of the Improvements business and the
Kindig Lane Property represented 4.7% of net revenues for the year ended
December 29, 2001 and accounted for $24.8 million of the reduction in the
Company's net loss for the year. The Company recognized a $23.2 million net gain
on the sale of the Improvements business in the second quarter of 2001, which
represents the excess of the net proceeds from the sale over the net assets
acquired by HSN, the goodwill associated with the Improvements business and
expenses related to the transaction. The Company realized a net gain on the sale
of the Kindig Lane Property of approximately $1.5 million, which included the
sale price net of selling expenses in excess of the net book value of assets
sold.
Interest Expense, Net. Interest expense, net decreased $3.6 million to
$6.5 million which is attributable to lower average borrowings over the last
nine months of 2001 coupled with a reduction in interest rates.
Income Taxes. The income tax provision for the year ended December 29,
2001 was consistent with the provision in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities. For the year ended December 28,
2002, net cash provided by operating activities was $4.7 million. Decreases,
primarily in accounts receivable, prepaid catalog costs, and inventory,
contributed to positive cash flow from operating activities. This positive cash
flow was partially offset by funds being used to reduce accounts payable and
other long-term liabilities. Net losses, when adjusted for depreciation,
amortization and other non-cash items, resulted in an additional $2.7 million of
operating cash provided for the period.
Net cash provided by investing activities. For the year ended December 28,
2002, net cash provided by investing activities was $0.1 million. This was
primarily due to $0.6 million of proceeds received relating to the deferred gain
associated with the sale of the Improvements business and $0.2 million of
proceeds received from disposals of property and equipment resulting from the
termination of the sublease at the Company's warehouse and telemarketing
facility located in Maumelle, Arkansas. These proceeds were offset by $0.7
million of capital expenditures, consisting primarily of upgrades in equipment
located at the Roanoke, Virginia distribution center and various computer
software applications.
28
Net cash used in financing activities. For the year ended December 28,
2002, net cash used in financing activities was $5.1 million. Payments to reduce
both Congress Tranche A and Tranche B Term Loan facilities were $3.3 million and
payments of the Congress Revolving Loan facility were $4.7 million. In addition,
the
28
Company paid $0.7 million in fees to amend the Congress Credit Facility (see
Note 6 to the Company's Consolidated Financial Statements) and $0.1 million in
capital lease payments. These payments were partially offset by additional
borrowings of $3.5 million made under the amended Congress Tranche B Term Loan
facility.
Congress Credit Facility. On March 24, 2000, the Company amended its
credit facility with Congress to provide the Company with a maximum credit line,
subject to certain limitations, of up to $82.5 million. The Congress Credit
Facility, as amended, expires on January 31, 2004 and comprises a revolving loan
facility, a $17.5 million Tranche A Term Loan and a $8.4 million Tranche B Term
Loan. Total cumulative borrowings under the Congress Credit Facility, however,
are subject to limitations based upon specified percentages of eligible
receivables and eligible inventory, and the Company is required to maintain $3.0
million of excess credit availability at all times. The Congress Credit
Facility, as amended, is secured by all the assets of the Company and places
restrictions on the incurrence of additional indebtedness and on the payment of
common stock dividends.
Under the Congress Credit Facility, the Company is required to maintain
minimum net worth, working capital, and EBITDA as defined throughout the terms
of the agreement. In March 2002, the Company amended the Congress Credit
Facility to amend the definition of Consolidated Net Worth such that, effective
July 1, 2002, to the extent that any goodwill or intangible assets of the
Company and its subsidiaries were deemed to be impaired under the provisions of
SFAS 142, such write-off of assets would not be considered a reduction of total
assets for the purposes of computing consolidated net worth. The Company
obtained the services of an independent appraisal firm during the second quarter
ended June 29, 2002 to evaluate whether there had been any goodwill transition
impairment. The results of the appraisal indicated no goodwill transition
impairment based upon the requirements set forth in SFAS 142. The covenants
relating to consolidated net working capital, consolidated net worth and EBITDA
and certain non-cash charges were also amended. The amendment required the
payment of a fee of $100,000 by the Company.
On August 16, 2002, the Company amended the Congress Credit Facility to (i)
extend the term of the Tranche B Term Loan to January 31, 2004, (ii) increase by
$3,500,000 the borrowing reflected by the Tranche B Term Note to $8,410,714, and
(iii) make certain related technical amendments to the Congress Credit Facility.
The amendment required the payment of fees in the amount of $410,000 by the
Company.
In December 2002, the Company amended the Congress Credit Facility to
change the definition of "Consolidated Net Income," "Consolidated Net Worth" and
"Consolidated Working Capital" to make certain adjustments thereto, depending on
the results of the Kaul litigation, to permit the payment to Richemont of
certain United States withholding taxes payable to Richemont in connection with
the Series B Preferred Stock, and to change certain borrowing sublimits. The
consolidated working capital, consolidated net worth and EBITDA covenants were
also established through the end of the term of the facility, and certain
technical amendments relating to the reorganization of certain of the Company's
subsidiaries were made. The amendment required the payment of fees in the amount
of $110,000.
In February 2003, the Company amended the Congress Credit Facility to amend
the existing change in control Event of Default. The existing change in control
Event of Default under the Congress Credit Facility is based upon NAR Group
Limited, a former shareholder of the Company, ceasing to be the direct or
indirect beneficial owner of a sufficient number of issued and outstanding
shares of capital stock of the Company on a fully diluted basis to elect a
majority of the members of the Company's Board of Directors. This was replaced
during February 2003 with a new change in control Event of Default, which is
patterned on the Change In Control concepts in the Company's various Key
Executive Compensation Continuation Plans. The new Event of Default would be
triggered by certain transfers of assets, certain liquidations or dissolutions,
the acquisition by a person or group (other than a Permitted Holder, as defined)
of a majority of the total outstanding voting stock of the Company, and certain
changes in the composition of the Company's Board of Directors.
The Company has re-examined the provisions of the Congress Credit Facility
and, based on EITF 95-22 and certain provisions in the credit agreement, the
Company is required to reclassify its revolving loan facility from long-term to
short-term debt, though the existing credit facility does not mature until
January 31, 2007.
29
As a result, the Company reclassified $8.8 million and $13.5 million as of
December 28, 2002 and December 29, 2001, respectively, from long-term debt to
short-term debt and capital lease obligations.
As of December 28, 2002, the Company had $25.1 million of cumulative
borrowings outstanding under the Congress Credit Facility, comprising $8.8
million under the Revolving Loan Facility,revolving loan facility, bearing an interest rate of 4.75%,
$8.5 million under the Tranche A Term Loan, bearing an interest rate of 5.0%,
and $7.8 million under the Tranche B Term Loan, bearing an interest rate of
13.0%. Of the aggregate borrowings $3.8of $25.1 million, $12.6 million is classified
as short-term with $21.3while $12.5 million is classified as long-term on the Company's
Consolidated Balance Sheet. As of December 29, 2001, the Company had $29.6
million of borrowings outstanding under the Congress Credit Facility comprising
$13.5 million under the revolving loan facility, bearing an interest rate of
5.25%, and $10.5 million, bearing an interest rate of 5.50%, and $5.6 million,
bearing an interest rate of 13.00%, of Tranche A Term Loans and Tranche B Term
Loans, respectively.
Achievement of the Company's strategic business realignment program is
critical to the maintenance of adequate liquidity, as is compliance with the
terms and provisions of the Congress Credit Facility and the Company's ability
to operate effectively during the 2003 fiscal year. In the event of a softer
than expected economic climate, management has available several courses of
action to maintain liquidity and help maintain compliance with financial
covenants, including selective reductions in catalog circulation, additional
expense reductions and sales of non-core assets.
Series B Cumulative Participating Preferred Stock. During autumn 2002,
Company management conducted a strategic review of the Company's business and
operations. As part of such review, Company management considered the Company's
obligations under the Richemont Agreement and the Company's prospects and
options for redemption of the Series B Preferred Shares issued to Richemont
pursuant thereto in accordance with the Richemont Agreement terms. The review
took into account the results of the Company's strategic business realignment
program in 2001 and 2002, the relative strengths and weaknesses of the Company's
competitive position and the economic and business climate, including the
depressed business environment for mergers and acquisitions.
As a result of this review, Company management and the Company's Board of
Directors have concluded that it is unlikely that the Company will be able to
accumulate sufficient capital, surplus, or other assets under Delaware corporate
law or to obtain sufficient debt financing to either:
1. Redeem at least 811,056 shares of the Series B Preferred Stock by
August 31, 2003, as allowed for by the Richemont Agreement, thereby
resulting in the occurrence of a "Voting Trigger" which will allow
Richemont to have the option of electing two members to the Company's Board
of Directors; or
2. Redeem all of the shares of Series B Preferred Stock by August 31,
2005, as required by the Richemont Agreement, thereby obligating the
Company to take all measures permitted under the Delaware General
Corporation Law to increase the amount of its capital and surplus legally
available to redeem the Series B Preferred Shares, without a material
improvement in either the business environment for mergers and acquisitions
or other factors, unforeseeable at the time.
Management believes that the Company has sufficient liquidity and
availability under its credit agreement to fund its planned operations through
at least January 31, 2004. Management will be required to successfully
renegotiate the renewal of the Congress Credit Facility or successfully replace
the facility with another institution. The unlikelihood that the Company will be
able to redeem the Series B Preferred Shares is not expected to limit the
ability of the Company to use current and future net earnings or cash flow to
satisfy its obligations to creditors and vendors. In addition, the redemption
price of the Series B Preferred Stock does not accrete after August 31, 2005.
Sale of the Improvements Business. On June 29, 2001, the Company sold
certain assets and liabilities of its Improvements business to HSN, a division
of USA Networks, Inc.'s Interactive Group, for approximately $33.0 million. In
conjunction with the sale, the Company's Keystone Internet Services, Inc.
subsidiary (now Keystone Internet Services, LLC) agreed to provide telemarketing
and fulfillment services for the Improvements business under a services
agreement with the buyer for a period of three years.
30
The asset purchase agreement between the Company and HSN provides that if
Keystone Internet Services, Inc. fails to perform its obligations during the
first two years of the services contract, the purchaser can receive a reduction
in the original purchase price of up to $2.0 million. An escrow fund of $3.0
million,
30
which was withheld from the original proceeds of the sale, has been
established for a period of two years under the terms of an escrow agreement
between LWI Holdings, Inc., HSN and The Chase Manhattan Bank as a result of
these contingencies. The balance in the escrow fund at December 29, 2001 was
$2.6 million. As of December 28, 2002, the balance in the escrow fund was $2.0
million, and there were no claims against the escrow.
The Company recognized a net gain on the sale of approximately $23.2
million in fiscal year 2001, which represents the excess of the net proceeds
from the sale over the net assets assumed by HSN, the goodwill associated with
the Improvements business and expenses related to the transaction. During fiscal
year 2002, the Company recognized approximately $0.6 million of the deferred
gain consistent with the terms of the escrow agreement. Proceeds of
approximately $0.3 million relating to the deferred gain were received on each
of July 2, 2002 and December 30, 2002. The recognition of an additional gain of
up to approximately $2.0 million has been deferred until the contingencies
described above expire, which will occur no later than the middle of the 2003
fiscal year.
American Stock Exchange Notification. By letter dated May 2, 2001, the
American Stock Exchange notified the Company that it was below certain of the
Exchange's continued listing guidelines set forth in the Exchange's Company
Guide. The Exchange instituted a review of the Company's eligibility for
continuing listing of the Company's common stock on the Exchange. On January 17,
2002, the Company received a letter dated January 9, 2002 from the Exchange
confirming that the American Stock Exchange determined to continue the Company's
listing on the Exchange pending quarterly reviews of the Company's compliance
with the steps of its strategic business realignment program. This determination
was made subject to the Company's favorable progress in satisfying the
Exchange's guidelines for continued listing and to the Exchange's periodic
review of the Company's Securities and Exchange Commission and other filings.
On November 11, 2002, the Company received a letter dated November 8, 2002
from the Exchange updating its position regarding the Company's compliance with
certain of the Exchange's continued listing standards as set forth in Part 10 of
the Exchange's Company Guide. Although the Company had been making favorable
progress in satisfying the Exchange's guidelines for continued listing based on
its compliance with the steps of its strategic business realignment program
shared with the Exchange in 2001 and updated in 2002, the Exchange informed the
Company that it had now become strictly subject to the procedures and
requirements of Part 10 of the Company Guide. Specifically, the Company must not
fall below the requirements of: (i) Section 1003(a)(i) with shareholders' equity
of less than $2,000,000 and losses from continuing operations and/or net losses
in two out of its three most recent fiscal years; (ii) Section 1003(a)(ii) with
shareholders' equity of less than $4,000,000 and losses from continuing
operations and/or net losses in three out of its four most recent fiscal years;
and (iii) Section 1003(a)(iii) with shareholders' equity of less than $6,000,000
and losses from continuing operations and/or net losses in its five most recent
fiscal years. The Exchange requested that the Company submit a plan to the
Exchange by December 11, 2002, advising the Exchange of action it has taken, or
will take, that would bring it into compliance with the continued listing
standards by December 28, 2003. The Company submitted a plan to the Exchange on
December 11, 2002 in an effort to maintain the listing of the Company's common
stock on the Exchange.
On January 28, 2003, the Company received a letter from the Exchange
confirming that, as of the date of the letter, the Company had evidenced
compliance with the requirements necessary for continued listing on the
Exchange. Such compliance resulted from a recent rule change by the Exchange
approved by the Securities and Exchange Commission related to continued listing
on the basis of compliance with total market capitalization or total assets and
revenues standards as alternatives to shareholders' equity standards such as the
requirement for each listed company to maintain $15 million in public float. The
letter is subject to changes in the American Stock Exchange Rules that might
supersede the letter or require the Exchange to re-evaluate its position.
31
General. At December 28, 2002, the Company had $0.8 million in cash and
cash equivalents, compared with $1.1 million at December 29, 2001. Working
capital and current ratios at December 28, 2002 were $9.4$0.6 million and 1.121.01 to 1
versus $20.9$7.4 million and 1.261.08 to 1 at December 29, 2001. Total cumulative
31
borrowings, including financing under capital lease obligations, as of December
28, 2002, aggregated $25.1 million, $21.3of which $12.6 million of whichis classified as
short-term and $12.5 million is classified as long-term. Remaining availability
under the Congress Revolving Loan Facility as of December 28, 2002 was $18.2
million. There were nominal capital commitments (less than $0.1 million) at
December 28, 2002.
On March 22, 2002, the Postal Rate Commission approved a settlement that
allowed postal rates to increase an average of 7.7% on June 30, 2002. The
Company had anticipated this action in its 2002 planning process and has been
accommodating the increased cost as part of its normal business operations. The
Company has implemented cost conservation measures, such as reduced paper
weights and trim size changes, as a way of mitigating such cost increases.
Management believes that the Company has sufficient liquidity and
availability under its credit agreement to fund its planned operations through
at least January 31, 2004. Management will be required to successfully
renegotiate the renewal of the Congress Credit Facility or successfully replace
the facility with another institution on or prior to that date. Achievement of
the cost saving and other objectives of the Company's strategic business
realignment program is critical to the maintenance of adequate liquidity as is
compliance with the terms and provisions of the Congress Credit Facility as
mentioned in Note 6, Long-Term Debt, to the Consolidated Financial Statements.
USE OF ESTIMATES AND OTHER CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenues and expenses
during the period. Significant accounting policies employed by the Company,
including the use of estimates, are presented in the Notes to Consolidated
Financial Statements.
On April 30, 2002, the Securities and Exchange Commission issued a proposed
rule to improve the financial statement disclosure of accounting estimates and
critical accounting policies used by companies in the presentation of their
financial condition, changes in financial condition or results of operations.
Critical accounting policies are those that are most important to the portrayal
of the Company's financial condition and results of operations, and require
management's most difficult, subjective or complex judgments, as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. The Company's most critical accounting policies, discussed below,
pertain to revenue recognition, inventory valuation, catalog costs, reserves
related to the Company's strategic business realignment program and the
Company's deferred tax asset. Actual results could differ from estimates used in
employing the critical accounting policies, although the Company does not
believe that any differences would materially affect its financial condition or
results of operations.
Revenue Recognition -- The Company's revenue recognition policy includes
the use of estimates of the future amount of returns to be received on the
current period's sales. These estimates of future returns are determined using
historical measures including the amount of time between the shipment of a
product and its return (return lag -- rounded up to the nearest whole week), the
overall rate of return, and the average product margin associated with the
returned products. Returns estimates are calculated for each catalog brand and
are used to determine each individual brand's returns reserve. The Company's
total returns reserve at the end of the fiscal years 2002, 2001 and 2000 was
$1.9 million, $2.8 million and $3.4 million, respectively. Net Revenues and Cost
of Sales and Operating Expenses on the Company's Consolidated Statements of
Income (Loss), as well as Accrued Liabilities on the Consolidated Balance
Sheets, are impacted by the returns reserve calculations.
Inventory Valuation -- The Company's inventory valuation policy includes
the use of estimates regarding the future amount of inventory that will be
liquidated at a price less than the cost of the merchandise (obsolescence
reserve), and the amount of freight-in expense associated with the inventory
on-hand
32
(capitalized freight). These amounts are included in total inventory recorded on
the Company's Consolidated Balance Sheets. The Company's obsolescence reserve is
determined using the estimated amount of overstock inventory that will need to
be sold below cost and an estimate of the method of liquidating this merchandise
32
(each method generates a different level of cost recovery). The estimated amount
of overstock inventory is determined using current and historical sales trends
for each category of inventory as well as the content of future catalog offers
that will be produced by the Company. An estimate of the percentage of
freight-in expense associated with each dollar of inventory on-hand is used in
calculating the amount of freight expense to include in the Company's inventory
value. Different percentage estimates are developed for inventory purchased from
foreign and domestic sources. The estimates used to determine the Company's
inventory valuation affect the balance of Inventory on the Company's
Consolidated Balance Sheets and Cost of Sales and Operating Expenses on the
Company's Consolidated Statements of Income (Loss).
Catalog Costs -- An estimate of the future sales dollars to be generated
from each individual catalog drop is used in the Company's catalog costs policy.
The estimate of future sales is calculated for each catalog drop using
historical trends for similar catalog drops mailed in prior periods as well as
the overall current sales trend for the catalog brand. This estimate is compared
with the actual sales generated-to-date for the catalog drop to determine the
percentage of total catalog costs to be classified as prepaid on the Company's
Balance Sheet. Prepaid Catalog Costs on the Consolidated Balance Sheets and
Selling Expenses on the Consolidated Statements of Income (Loss) are affected by
these estimates.
Reserves related to the Company's strategic business realignment program
and other Accrued Liabilities -- The reserves established by the Company related
to its strategic business realignment program include estimates primarily
associated with the potential subleasing of leased properties which have been
vacated by the Company. The properties which have available space for subleasing
as of December 28, 2002 include the corporate headquarters and administrative
offices located in Weehawken, New Jersey and Edgewater, New Jersey; the retail
and office facility which includes the Gump's retail store in San Francisco,
California; the telemarketing and administrative facility located in San Diego,
California; and the retail store facility in Los Angeles, California. The
overall reserves for leased properties that have been vacated by the Company are
developed using estimates that include the potential ability to sublet leased
but unoccupied properties, the length of time needed to obtain suitable tenants
and the amount of rent to be received for the sublet. Real estate broker
representations regarding current and future market conditions are sometimes
used in estimating these items. Current Accrued Liabilities and Other
Non-Current Liabilities on the Company's Consolidated Balance Sheets and Special
Charges on the Company's Consolidated Statements of Income (Loss) are impacted
by these estimates.
The most significant estimates involved in evaluating the Company's Accrued
Liabilities are used in the determination of the Rakesh Kaul litigation accrual.
In calculating this accrual, the Company has used estimates including the
likelihood that this case will reach the trial stage, the legal expenses
associated with continuing this legal action, the ultimate outcome of the case,
and the amounts to be awarded if the outcome is not in the Company's favor.
These estimates have been developed and approved by the Company's Senior
Management. Accrued Liabilities on the Consolidated Balance Sheets and General
and Administrative Expenses on the Consolidated Statements of Income (Loss) are
affected by these estimates.
Reserves related to employee health and welfare claims -- The Company
maintains a self-insurance program related to losses and liabilities associated
with employee health and welfare claims. Stop-loss coverage is held on both an
aggregate and individual claim basis; thereby, limiting the amount of losses the
Company will experience. Losses are accrued based upon estimates of the
aggregate liability for claims incurred using the Company's experience patterns.
General and Administrative Expenses on the Consolidated Statement of Income
(Loss) and Accrued liabilities on the Consolidated Balance Sheet are affected by
these estimates.
Deferred Tax Asset -- In determining the Company's net deferred tax asset,
projections concerning the future utilization of the Company's net operating
loss carryforwards are employed. These projections involve evaluations of the
Company's future operating plans and ability to generate taxable income, as well
as future economic conditions and the Company's future competitive environment.
For the year ended December 28,
33
2002, the carrying value of the deferred tax asset was adjusted based on a
reassessment of the Company's ability to utilize certain net operating losses
prior to their expiration. The change in the Company's projections and the
effect on the Company's 2002 fiscal year-end financial statements is presented
in the Notes to
33
Consolidated Financial Statements (Note 13). The Deferred Tax
Asset and Deferred Tax Liability on the Company's Consolidated Balance Sheets
and the Provision for Deferred Federal Income Taxes on the Company's
Consolidated Statements of Income (Loss) are impacted by these projections.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146 nullifies
Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"). FAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred whereas, under EITF 94-3, the liability was
recognized at the commitment date to an exit plan. The Company is required to
adopt the provisions of FAS 146 effective for exit or disposal activities
initiated after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure -- An Amendment of SFAS No. 123" ("FAS
148"). FAS 148 provides alternative methods of transition for a voluntary change
to the fair value-based method of accounting for stock-based employee
compensation. Since 1996, the Company has accounted for its stock-based
compensation to employees using the fair value-based methodology under SFAS No.
123, thus there has been no effect on the Company's results of operations or
financial position. In addition, FAS 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has concluded they are in compliance with these required prominent disclosures.
In January 2003, the Securities and Exchange Commission issued a new
disclosure regulation, "Conditions for Use of Non-GAAP Financial Measures"
("Regulation G"), which is effective for all public disclosures and filings made
after March 28, 2003. Regulation G requires public companies that disclose or
release information containing financial measures that are not in accordance
with generally accepted accounting principles ("GAAP") to include in the
disclosure or release a presentation of the most directly comparable GAAP
financial measure and a reconciliation of the disclosed non-GAAP financial
measure to the most directly comparable GAAP financial measure. The Company will
be adopting Regulation G in fiscal 2003 and is currently evaluating the impact
of this adoption on its financial disclosures.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has entered into no "off-balance sheet arrangements" within the
meaning of the Securities Exchange Act of 1934, as amended, and the rules
thereunder other than operating leases, which are in the normal course of
business.
FORWARD-LOOKING STATEMENTS
The following statements constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995:
"Management believes that the Company has sufficient liquidity and
availability under its credit agreement to fund its planned operations through
at least January 31, 2004."
"The unlikelihood that the Company will be able to redeem the Series B
Preferred Shares is not expected to limit the ability of the Company to use
current and future net earnings or cash flow to satisfy its obligations to
creditors and vendors."
34
CAUTIONARY STATEMENTS
The following material identifies important factors that could cause actual
results to differ materially from those expressed in the forward-looking
statements identified above and in any other forward-looking statements
contained elsewhere herein:
- The recent general deterioration in economic conditions in the United
States leading to reduced consumer confidence, reduced disposable income
and increased competitive activity and the business failure of companies
in the retail, catalog and direct marketing industries. Such economic
conditions leading to a reduction in consumer spending generally and
in-home fashions specifically, and leading to a reduction in consumer
spending specifically with reference to other types of merchandise the
Company offers in its catalogs or over the Internet, or which are offered
by the Company's third party fulfillment clients.
- Customer response to the Company's merchandise offerings and circulation
changes; effects of shifting patterns of e-commerce versus catalog
purchases; costs associated with printing and mailing catalogs and
fulfilling orders; effects of potential slowdowns or other disruptions in
postal service; dependence on customers' seasonal buying patterns; and
fluctuations in foreign currency exchange rates. The ability of the
Company to reduce unprofitable circulation and to effectively manage its
customer lists.
- The ability of the Company to achieve projected levels of sales and the
ability of the Company to reduce costs commensurately with sales
projections. Increases in postage, printing and paper prices and/or the
inability of the Company to reduce expenses generally as required for
profitability and/or increase prices of the Company's merchandise to
offset expense increases.
- The failure of the Internet generally to achieve the projections for it
with respect to growth of e-commerce or otherwise, and the failure of the
Company to increase Internet sales. The success of the Amazon.com
venture. The imposition of regulatory, tax or other requirements with
respect to Internet sales. Actual or perceived technological difficulties
or security issues with respect to conducting e-commerce over the
Internet generally or through the Company's Web sites or those of its
third party fulfillment clients specifically.
- The ability of the Company to attract and retain management and employees
generally and specifically with the requisite experience in e-commerce,
Internet and direct marketing businesses. The ability of employees of the
Company who have been promoted as a result of the Company's strategic
business realignment program to perform the responsibilities of their new
positions.
- The recent general deterioration in economic conditions in the United
States leading to key vendors and suppliers reducing or withdrawing trade
credit to companies in the retail, catalog and direct marketing
industries. The risk that key vendors or suppliers may reduce or withdraw
trade credit to the Company, convert the Company to a cash basis or
otherwise change credit terms, or require the Company to provide letters
of credit or cash deposits to support its purchase of inventory,
increasing the Company's cost of capital and impacting the Company's
ability to obtain merchandise in a timely manner. The ability of the
Company to find alternative vendors and suppliers on competitive terms if
vendors or suppliers who exist cease doing business with the Company.
- The inability of the Company to timely obtain and distribute merchandise,
leading to an increase in backorders and cancellations.
- Defaults under the Congress Credit Facility, or inadequacy of available
borrowings thereunder, reducing or impairing the Company's ability to
obtain letters of credit or other credit to support its purchase of
inventory and support normal operations, impacting the Company's ability
to obtain, market and sell merchandise in a timely manner.
- Continued compliance by the Company with and the enforcement by Congress
of financial and other covenants and limitations contained in the
Congress Credit Facility, including net worth, net working capital,
capital expenditure and EBITDA covenants, and limitations based upon
specified percentages of eligible receivables and eligible inventory, and
the requirement that the Company maintain
35
$3.0 million of excess credit availability at all times, affecting the
ability of the Company to continue to make borrowings under the Congress
Credit Facility.
- Continuation of the Company's history of operating losses, and the
incidence of costs associated with the Company's strategic business
realignment program, resulting in the Company failing to comply with
certain financial and other covenants contained in the Congress Credit
Facility, including net worth, net working capital, capital expenditure
and EBITDA covenants and the ability of the Company to obtain waivers
from Congress in the event that future internal and/or external events
result in performance which results in noncompliance by the Company with
the terms of the Congress Credit Facility requiring remediation.
- The ability of the Company to complete the Company's strategic business
realignment program, including the integration of the Domestications and
The Company Store divisions and the integration of the Gump's(R) store
and the Gump's By Mail(R) catalog divisions, within the time periods
anticipated by the Company. The ability of the Company to realize the
aggregate cost savings and other objectives anticipated in connection
with the strategic business realignment program, or within the time
periods anticipated therefor. The aggregate costs of effecting the
strategic business realignment program may be greater than the amounts
anticipated by the Company.
- The ability of the Company to maintain advance rates under the Congress
Credit Facility that are at least as favorable as those obtained in the
past due to market conditions affecting the value of the inventory which
is periodically re-appraised in order to re-set such advance rates.
- Inability of the Company to timely replace its existing private label
credit card agreement, and to transition its existing credit card
customers to a new private label credit card issuer.
- The ability of the Company to dispose of assets related to its third
party fulfillment business, to the extent not transferred to other
facilities.
- The ability of the Company to extend the term of the Congress Credit
Facility beyond January 31, 2004, its scheduled expiration date, or
obtain other credit facilities on the expiration of the Congress Credit
Facility on terms at least as favorable as those under the Congress
Credit Facility.
- The initiation by the Company of additional cost cutting and
restructuring initiatives, the costs associated therewith, and the
ability of the Company to timely realize any savings anticipated in
connection therewith.
- The ability of the Company to maintain insurance coverage required in
order to operate its businesses and as required by the Congress Credit
Facility. The ability of the Company to obtain certain types of
insurance, including directors' and officers' liability insurance, or to
accept reduced policy limits or coverage, or to incur substantially
increased costs to obtain the same or similar coverage, due to recently
enacted and proposed changes to laws and regulations affecting public
companies, including the provisions of the Sarbanes-Oxley Act of 2002 and
rules of the Securities and Exchange Commission thereunder.
- The inability of the Company to access the capital markets due to market
conditions generally, including a lowering of the market valuation of
companies in the direct marketing and retail businesses, and the
Company's business situation specifically.
- The inability of the Company to sell non-core assets due to market
conditions or otherwise.
- The Company's dependence up to August 24, 2000 on Richemont and its
affiliates for financial support and the fact that they are not under any
obligation ever to provide any additional support in the future.
- The ability of the Company to redeem the Series B Preferred Stock
currently held by Richemont on a timely basis, or at all.
- The ability of the Company to maintain the listing of its Common Stock on
the American Stock Exchange.
36
- The continued willingness of customers to place and receive mail orders
in light of worries about bio-terrorism.
- The ability of the Company to sublease, terminate or renegotiate the
leases of its vacant facilities in Weehawken, New Jersey and other
locations.
- The ability of the Company to evaluate and implement the requirements of
the Sarbanes-Oxley Act of 2002 and the rules of the Securities and
Exchange Commission thereunder, as well as proposed changes to listing
standards by the American Stock Exchange, in a cost effective manner.
- The ability of the Company to achieve cross channel synergies, create
successful affiliate programs, effect profitable brand extensions or
establish popular loyalty and buyers' club programs.
- Uncertainty in the U.S. economy and decreases in consumer confidence
leading to a slowdown in economic growth and spending resulting from the
invasion of Iraq, which may result in future acts of terror. Such
activities, either domestically or internationally, may affect the
economy and consumer confidence and spending within the United States and
adversely affect the Company's business.
- The inability of the Company to continue to source goods from foreign
sources, particularly India and Pakistan, as a result of a war with Iraq
or otherwise leading to increased costs of sales.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATES: The Company's exposure to market risk relates to interest
rate fluctuations for borrowings under the Congress revolving credit facility
and its term financing facility, which bear interest at variable rates. At
December 28, 2002, outstanding principal balances under these facilities subject
to variable rates of interest were approximately $17.3 million. If interest
rates were to increase by one percent from current levels, the resulting
increase in interest expense, based upon the amount outstanding at December 28,
2002, would be approximately $0.17 million on an annual basis.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hanover Direct, Inc.:
We have audited the accompanying consolidated balance sheet of Hanover
Direct, Inc. as of December 28, 2002 and the related consolidated statements of
income (loss), shareholders' deficiency, and cash flows for the year then ended.
In connection with our audit of the consolidated financial statements, we also
have audited the financial statement schedule for the year ended December 28,
2002 as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audit. The 2001 and 2000 financial statements and financial statement schedule
of Hanover Direct, Inc. as listed in the accompanying index were audited by
other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements and financial statement
schedule in their report dated March 16, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hanover
Direct, Inc. as of December 28, 2002 and the results of its operations and its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule for the year ended December 28, 2002, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As described in Note 21, the Company's consolidated balance sheets as of
December 28, 2002 have been restated to classify certain debt as current. As
discussed above, the 2001 financial statements of Hanover Direct, Inc. were
audited by other auditors who have ceased operations. As described in Note 21,
these financial statements have been amended to reflect the restatement of the
consolidated balance sheet as of December 29, 2001 in order to classify certain
debt as current. We have audited the adjustments that were applied to restate
the December 29, 2001 balance sheet. In our opinion, such adjustments are
appropriate and have been properly applied. However, we were not engaged to
audit, review or apply any procedures to the 2001 financial statements of
Hanover Direct, Inc. other than with respect to such adjustments and,
accordingly, we do not express an opinion or any other form of assurance on the
2001 financial statements taken as a whole.
As discussed in Note 1 to the consolidated financial statements, Hanover
Direct, Inc. in 2002 adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets."
KPMG LLP
New York, New York
March 25, 2003, except as to
note 21, which is as of
April 2, 2004
38
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) as of December 29, 2001 and December 30,
2000, and the related consolidated statements of income (loss), shareholder's
equity (deficit) and cash flows for each of the three fiscal years in the period
ended December 29, 2001. These consolidated financial statements and schedule
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 auditing standards generally
accepted in the United States. 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 29, 2001 and December 30, 2000 and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended December 29, 2001 in conformity with accounting
principles generally accepted in the United States.
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
March 16, 2002
THIS IS A COPY OF A REPORT ISSUED BY ARTHUR ANDERSEN LLP, OUR FORMER INDEPENDENT
AUDITORS, AS OF THE DATE INDICATED ABOVE, AND HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN LLP SINCE THAT DATE.
39
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 28, 2002 AND DECEMBER 29, 2001
AS RESTATED
---------------------------
DECEMBER 28, DECEMBER 29,
2002 2001
------------ ------------
(IN THOUSANDS OF DOLLARS,
EXCEPT SHARE AMOUNTS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 785 $ 1,121
Accounts receivable, net of allowance for doubtful
accounts of $1,560 in 2002 and $2,117 in 2001........... 16,945 19,456
Inventories............................................... 53,131 59,223
Prepaid catalog costs..................................... 13,459 14,620
Deferred tax asset, net................................... -- 3,300
Other current assets...................................... 3,967 3,000
--------- ---------
Total Current Assets.................................... 88,287 100,720
--------- ---------
PROPERTY AND EQUIPMENT, AT COST:
Land...................................................... 4,395 4,509
Buildings and building improvements....................... 18,205 18,205
Leasehold improvements.................................... 9,915 12,466
Furniture, fixtures and equipment......................... 56,094 59,287
--------- ---------
88,609 94,467
Accumulated depreciation and amortization................. (59,376) (60,235)
--------- ---------
Property and equipment, net............................... 29,233 34,232
--------- ---------
Goodwill, net............................................. 9,278 9,278
Deferred tax asset, net................................... 12,400 11,700
Other assets.............................................. 902 1,731
--------- ---------
Total Assets............................................ $ 140,100 $ 157,661
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-termShort-term debt and capital lease obligations.............................................obligations............. $ 3,80212,621 $ 3,16216,685
Accounts payable.......................................... 42,873 46,348
Accrued liabilities....................................... 26,351 25,132
Customer prepayments and credits.......................... 4,722 5,143
Deferred tax liability.................................... 1,100 --
--------- ---------
Total Current Liabilities............................... 78,848 79,78587,667 93,308
--------- ---------
NON-CURRENT LIABILITIES:
Long-term debt............................................ 21,327 26,54812,508 13,025
Other..................................................... 6,387 10,233
--------- ---------
Total Non-current Liabilities........................... 27,714 36,78118,895 23,258
--------- ---------
Total Liabilities....................................... 106,562 116,566
--------- ---------
SERIES B REDEEMABLE PREFERRED STOCK, authorized, issued and
outstanding, 1,622,111 shares at December 28, 2002 and
December 29, 2001......................................... 92,379 76,823
--------- ---------
SHAREHOLDERS' DEFICIENCY:
Common Stock, $.66 2/3 par value, authorized 300,000,000
shares; 140,436,729 shares issued and outstanding at
December 28, 2002 and 140,336,729 shares issued and
outstanding at December 29, 2001........................ 93,625 93,558
Capital in excess of par value.............................. 337,507 351,558
Accumulated deficiency...................................... (486,627) (477,497)
--------- ---------
(55,495) (32,381)
Less:
Treasury stock, at cost (2,120,929 shares at December 28,
2002 and 2,100,929 shares at December 29, 2001)........... (2,996) (2,942)
Notes receivable from sale of Common Stock.................. (350) (405)
--------- ---------
Total Shareholders' Deficiency.......................... (58,841) (35,728)
--------- ---------
Total Liabilities and Shareholders' Deficiency.......... $ 140,100 $ 157,661
========= =========
See notes to Consolidated Financial Statements.
3940
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS OF DOLLARS, EXCEPT
PER SHARE AMOUNTS)
NET REVENUES................................................ $457,644 $532,165 $603,014
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of sales and operating expenses...................... 290,531 339,556 404,959
Write-down of inventory of discontinued catalogs.......... -- -- 2,048
Special charges........................................... 4,398 11,277 19,126
Selling expenses.......................................... 105,239 141,140 153,462
General and administrative expenses....................... 52,258 56,727 84,881
Depreciation and amortization............................. 5,650 7,430 9,090
-------- -------- --------
458,076 556,130 673,566
-------- -------- --------
LOSS FROM OPERATIONS........................................ (432) (23,965) (70,552)
Gain on sale of Improvements.............................. (570) (23,240) --
Gain on sale of Kindig Lane Property...................... -- (1,529) --
-------- -------- --------
INCOME (LOSS) BEFORE INTEREST AND INCOME TAXES.............. 138 804 (70,552)
Interest expense, net..................................... 5,477 6,529 10,083
-------- -------- --------
LOSS BEFORE INCOME TAXES.................................... (5,339) (5,725) (80,635)
Provision for deferred federal income taxes............... 3,700 -- --
Provision for state income taxes.......................... 91 120 165
-------- -------- --------
NET LOSS AND COMPREHENSIVE LOSS............................. (9,130) (5,845) (80,800)
Preferred stock dividends................................. 15,556 10,745 4,015
-------- -------- --------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS.................. $(24,686) $(16,590) $(84,815)
======== ======== ========
NET LOSS PER COMMON SHARE:
Net loss per common share -- basic and diluted............ $ (.18) $ (.08) $ (.40)
======== ======== ========
Weighted average common shares outstanding -- basic and
diluted (thousands).................................... 138,280 210,536 213,252
======== ======== ========
See notes to Consolidated Financial Statements.
4041
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000
2002 2001 2000
------- -------- --------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(9,130) $ (5,845) $(80,800)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization, including deferred
fees.................................................. 7,203 8,112 11,271
Provision for doubtful accounts......................... 304 91 4,947
Special charges......................................... 18 3,254 19,126
Deferred tax asset...................................... 3,700
Write-down of inventory of discontinued catalogs........ -- -- 2,048
Gain on the sale of Improvements........................ (570) (23,240) --
Gain on the sale of Kindig Lane Property................ -- (1,529) --
Gain on the sale of property and equipment.............. (167) -- --
Compensation expense related to stock options........... 1,332 1,841 5,175
Changes in assets and liabilities
Accounts receivable..................................... 2,207 7,398 (3,363)
Inventories............................................. 6,092 7,077 (16,844)
Prepaid catalog costs................................... 1,161 4,456 (2,779)
Accounts payable........................................ (3,475) (12,818) 4,309
Accrued liabilities..................................... 1,219 (11,117) 2,119
Customer prepayments and credits........................ (421) (300) 1,180
Other, net.............................................. (4,814) 1,400 1,803
------- -------- --------
Net cash provided (used) by operating activities.......... 4,659 (21,220) (51,808)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment.................. (639) (1,627) (14,581)
Proceeds from sale of Improvements...................... 570 30,036 --
Proceeds from sale of Kindig Lane Property.............. -- 4,671 --
Proceeds from disposal of property and equipment........ 169 -- --
Proceeds from sale Blue Ridge Associates................ -- -- 988
------- -------- --------
Net cash provided (used) by investing activities.......... 100 33,080 (13,593)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under Congress revolving loan
facility.............................................. (4,704) (2,189) 12,810
Borrowings under Congress Tranche A term loan
facility.............................................. -- -- 5,200
Borrowings under Congress Tranche B term loan
facility.............................................. 3,500 -- 7,500
Payments under Congress Tranche A term loan facility.... (1,991) (5,208) (2,074)
Payments under Congress Tranche B term loan facility.... (1,314) (1,069) (806)
Payments of 7.5% convertible debentures................. -- (751) --
Payments of long-term debt and capital lease
obligations........................................... (104) (90) (24,130)
Net proceeds from issuance of preferred stock........... -- -- 67,700
Payment of debt issuance costs.......................... (722) (3,095) (2,770)
Payment of preferred stock dividends.................... -- -- (920)
Proceeds from issuance of common stock.................. 25 -- 847
Series B Preferred Stock transaction cost adjustment.... 215 -- --
Other, net.............................................. -- (28) 886
------- -------- --------
Net cash (used) provided by financing activities.......... (5,095) (12,430) 64,243
------- -------- --------
Net decrease in cash and cash equivalents................. (336) (570) (1,158)
Cash and cash equivalents at the beginning of the year.... 1,121 1,691 2,849
------- -------- --------
Cash and cash equivalents at the end of the year.......... $ 785 $ 1,121 $ 1,691
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest................................................ $ 3,405 $ 5,286 $ 7,723
Income taxes............................................ $ 193 $ 150 $ 414
Non-cash investing and financing activities:
Series B Preferred Stock redemption price increase...... $15,556 $ -- $ --
Redemption of Series B Preferred Stock.................. $ -- $ -- $ 6,350
Stock dividend and accretion Series A Cumulative
Participating Preferred Stock......................... $ -- $ 10,745 $ 3,927
Redemption of Series A Cumulative Participating
Preferred Stock and Accrued Stock Dividends........... $ -- $ 82,390 $ --
Issuance of Series B Preferred Stock.................... $ -- $ 76,823 $ --
Tandem share expirations................................ $ 55 $ 719 $ 394
Capital lease obligations............................... $ 32 $ 9 $ --
See notes to Consolidated Financial Statements.
4142
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000
PREFERRED STOCK
SERIES B COMMON STOCK
CONVERTIBLE $.66 2/3 PER VALUE CAPITAL
---------------- ------------------ IN EXCESS OF ACCUM.
SHARES AMOUNT SHARES AMOUNT PAR VALUE (DEFICIT)
------ ------- ------- -------- ------------ ---------
(IN THOUSANDS OF DOLLARS AND SHARES)
BALANCE AT DECEMBER 25, 1999....... 635 $ 6,318 211,520 $141,013 $301,088 $(390,763)
==== ======= ======= ======== ======== =========
Net loss applicable to common
shareholders..................... (84,815)
Preferred stock accretion.......... 32 (152) 152
Preferred stock dividend........... (3,775) 3,775
Stock options granted.............. 5,175
Cash received for Tandem
receivable.......................
Tandem note write-down.............
Issuance of Common Stock for
employee stock plan.............. 713 476 371
Tandem share expirations...........
Conversion to Common Stock......... (635) (6,350) 2,192 1,462 4,888
---- ------- ------- -------- -------- ---------
BALANCE AT DECEMBER 30, 2000....... -- $ -- 214,425 $142,951 $307,595 $(471,651)
==== ======= ======= ======== ======== =========
Net loss applicable to common
shareholders..................... (16,590)
Preferred stock accretion.......... (2,129) 2,129
Preferred stock dividend........... (8,615) 8,615
Stock options granted.............. 1,841
Issuance of Common Stock for
employee stock plan.............. 10 7 (5)
Tandem share expirations...........
Retirement of Treasury Shares......
Preferred stock issuance costs..... (2,095)
Conversion to Preferred Stock...... (74,098) (49,400) 54,966
---- ------- ------- -------- -------- ---------
BALANCE AT DECEMBER 29, 2001....... -- $ -- 140,337 $ 93,558 $351,558 $(477,497)
==== ======= ======= ======== ======== =========
Net loss applicable to common
shareholders..................... (24,686)
Series B preferred stock
liquidation preference accrual... (15,556) 15,556
Stock options granted.............. 1,332
Issuance of Common Stock for
employee stock plan.............. 100 67 (42)
Tandem share expirations...........
Series B preferred stock issuance
cost adjustment.................. 215
---- ------- ------- -------- -------- ---------
BALANCE AT DECEMBER 28, 2002....... -- $ -- 140,437 $ 93,625 $337,507 $(486,627)
==== ======= ======= ======== ======== =========
NOTES
RECEIVABLE
TREASURY STOCK FROM SALE
---------------- OF COMMON
SHARES AMOUNT STOCK TOTAL
------ ------- ---------- --------
(IN THOUSANDS OF DOLLARS AND SHARES)
BALANCE AT DECEMBER 25, 1999....... (652) $(1,829) $(1,962) $ 53,865
====== ======= ======= ========
Net loss applicable to common
shareholders..................... (84,815)
Preferred stock accretion.......... 32
Preferred stock dividend........... --
Stock options granted.............. 5,175
Cash received for Tandem
receivable....................... 10 10
Tandem note write-down............. 434 434
Issuance of Common Stock for
employee stock plan.............. 847
Tandem share expirations........... (77) (394) 394 --
Conversion to Common Stock......... --
------ ------- ------- --------
BALANCE AT DECEMBER 30, 2000....... (729) $(2,223) $(1,124) $(24,452)
====== ======= ======= ========
Net loss applicable to common
shareholders..................... (16,590)
Preferred stock accretion.......... --
Preferred stock dividend........... --
Stock options granted.............. 1,841
Issuance of Common Stock for
employee stock plan.............. 2
Tandem share expirations........... (1,530) (719) 719 --
Retirement of Treasury Shares...... 158 -- --
Preferred stock issuance costs..... (2,095)
Conversion to Preferred Stock...... 5,566
------ ------- ------- --------
BALANCE AT DECEMBER 29, 2001....... (2,101) $(2,942) $ (405) $(35,728)
====== ======= ======= ========
Net loss applicable to common
shareholders..................... (24,686)
Series B preferred stock
liquidation preference accrual... --
Stock options granted.............. 1,332
Issuance of Common Stock for
employee stock plan.............. 25
Tandem share expirations........... (20) (54) 54 --
Series B preferred stock issuance
cost adjustment.................. 1 216
------ ------- ------- --------
BALANCE AT DECEMBER 28, 2002....... (2,121) $(2,996) $ (350) $(58,841)
====== ======= ======= ========
See notes to Consolidated Financial Statements.
4243
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001 AND DECEMBER 30, 2000
1. BACKGROUND OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Hanover Direct, Inc., a Delaware corporation (the
"Company"), is a specialty direct marketer, that markets a diverse portfolio of
branded home fashions, men's and women's apparel, and gift products, through
mail-order catalogs and connected Internet Web sites directly to the consumer
("direct commerce"). In addition, the Company continues to service existing
third party clients with business-to-business (B-to-B) e-commerce transaction
services. These services include a full range of order processing, customer
care, customer information, and shipping and distribution services.
The Company utilizes a fully integrated system and operations support
platform initially developed to manage the Company's wide variety of
catalog/Internet product offerings. This infrastructure is being utilized by the
aforementioned B-to-B e-commerce transaction services on behalf of third party
clients. Due to the strategic business realignment effective December 30, 2000
pursuant to SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (Note 10), the Company began to report results for the
consolidated operations of Hanover Direct, Inc. as one segment commencing with
the fiscal year 2001.
Basis of Presentation -- The consolidated financial statements include all
subsidiaries of the Company, and all intercompany transactions and balances have
been eliminated. 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. Certain
prior year amounts have been reclassified to conform to the current year's
presentation.
Fiscal Year -- The Company operates on a 52 or 53-week fiscal year, ending
on the last Saturday in December. The years ended December 28, 2002 and December
29, 2001 were reported as 52-week years. The year ended December 30, 2000 was a
53-week year. Had fiscal 2000 been a 52-week year, the total revenue would have
decreased by $5.2 million, net income would have decreased by $0.2 million and
net loss per common share would not have changed.
Cash and Cash Equivalents -- Cash includes cash equivalents consisting of
highly liquid investments with an original maturity of ninety days or less.
Inventories -- Inventories consist principally of merchandise held for
resale and are stated at the lower of cost or market. Cost, which is determined
using the first-in, first-out (FIFO) method, includes the cost of the product as
well as freight-in charges. 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. The Company utilizes various liquidation vehicles to dispose of aged
catalog inventory including special sales catalogs, sales sections in other
catalogs, sales sections on the Company's Internet Web sites, and liquidations
through off-price merchants. Such inventory is written down to its net
realizable value, if the expected proceeds of disposal are less than the cost of
the merchandise.
Prepaid Catalog Costs -- Prepaid catalog costs consist of direct response
advertising costs related to catalog production and mailing. In accordance with
SOP 93-7, "Reporting on Advertising Costs," these costs are deferred and
amortized as selling expenses over the estimated period in which the sales
related to such advertising are generated. Total catalog expense was $104.1
million, $139.2 million and $150.4 million for fiscal years 2002, 2001 and 2000,
respectively.
Depreciation and Amortization -- Depreciation and amortization of property
and equipment is computed 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 estimated useful
lives or the terms of the related leases, whichever is shorter. Repairs and
maintenance are expensed as incurred.
4344
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill, Net -- In July 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill
and intangible assets with indefinite lives are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have indefinite
lives will continue to be amortized over their useful lives (but with no maximum
life). Prior to the adoption of SFAS 142, the excess of cost over the net assets
of acquired businesses was amortized on a straight-line basis over periods of up
to forty years.
Goodwill relates to the International Male and the Gump's brands and the
net balance at December 28, 2002 is $9.3 million. The Company adopted SFAS 142
effective January 1, 2002 and, as a result, the quarters ended March 30, 2002,
June 29, 2002, and September 28, 2002 did not include an amortization charge for
goodwill. The Company obtained the services of an independent appraisal firm
during the second quarter ended June 29, 2002 to evaluate whether there was any
goodwill impairment upon adoption of SFAS 142. The results of the appraisal
indicated no goodwill transition impairment based upon the requirements set
forth in SFAS 142.
If the provisions under SFAS 142 had been implemented for the years ended
December 29, 2001 and December 30, 2000 and the Company had not included an
amortization charge for goodwill, the Company's net loss would have decreased as
follows (in thousands of dollars, except per share amounts):
DECEMBER 29, DECEMBER 30,
2001 2000
------------ ------------
Net loss................................................ $(5,845) $(80,800)
Exclusion of goodwill amortization per SFAS 142......... 430 521
------- --------
Net loss under provisions of SFAS 142................... $(5,415) $(80,279)
======= ========
Net loss per share under provisions of SFAS
142 -- basic and diluted................................ $ (.08) $ (.40)
======= ========
Impairment of Long-lived Assets -- In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-lived Assets," the Company reviews long-lived assets, other
than goodwill, for impairment whenever events indicate that the carrying amount
of such assets may not be fully recoverable. The Company performs non-discounted
cash flow analyses to determine if impairment exists. If impairment is
determined to exist, any related impairment loss is calculated based on fair
value, which is generally based on discounted future cash flows. Impairment
losses on assets to be disposed, if any, are based on the estimated proceeds to
be received, less costs of disposal.
Reserves related to the Company's strategic business realignment
program -- Reserves have been established for leased properties vacated by the
Company and currently subleased or available for sublease. For leases with
remaining terms of greater than one year, the Company records charges on a
discounted basis to reflect the present value of such costs to be incurred.
Properties for which reserves have been recorded include portions of the
corporate headquarters and administrative offices located in Weehawken, New
Jersey and in Edgewater, New Jersey; the Gump's retail store located in San
Francisco, California; the telemarketing and administration facility in San
Diego, California; and the retail store facility located in Los Angeles,
California.
Reserves related to employee health and welfare claims -- The Company
maintains a self-insurance program related to losses and liabilities associated
with employee health and welfare claims. Stop-loss coverage is held on both an
aggregate and individual claim basis; thereby, limiting the amount of losses the
Company will experience. Losses are accrued based upon estimates of the
aggregate liability for claims incurred using the Company's experience patterns.
General and Administrative Expenses on the Consolidated Statement of Income
(Loss) and Accrued liabilities on the Consolidated Balance Sheet are affected by
these estimates.
4445
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation -- The Company accounts for its stock-based
compensation to employees using the fair value-based methodology under SFAS No.
123, "Accounting for Stock-Based Compensation."
Income Taxes -- The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and
liability approach for financial accounting and reporting of income taxes. The
provision for income taxes is based on income after adjustment for those
temporary and permanent items that are not considered in the determination of
taxable income. The gross deferred tax asset is the total tax benefit available
from net operating loss carryovers and reversals of temporary differences. A
valuation allowance is calculated, based on the Company's projections of its
future taxable income, to establish the amount of deferred tax asset that the
Company is expected to utilize on a "more-likely-than-not" basis. The valuation
of the Company's deferred tax asset was changed in 2002 based on a reassessment
of the Company's ability to utilize certain net operating losses prior to their
expiration.
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 for fiscal
years 2002, 2001 and 2000 was 138,280,196, 210,535,959 and 213,251,945 shares,
respectively. Diluted earnings per share equals basic earnings per share as the
dilutive calculation for preferred stock and stock options would have an
anti-dilutive impact as a result of the net losses incurred during fiscal years
2002, 2001 and 2000. The number of potentially dilutive securities excluded from
the calculation of diluted earnings per share were 2,541,843, 978,253, and
2,678,492 common share equivalents that represent options to purchase common
stock in each of the three fiscal years 2002, 2001 and 2000, respectively.
Revenue Recognition --
-- Direct Commerce: The Company recognizes revenue, net of estimated
returns, upon shipment of merchandise to customers. Postage and handling charges
billed to customers are also recognized as revenue upon shipment of related
merchandise. The Company accrues for expected future returns at the time of sale
based upon a combination of historical and current trends.
-- Membership Services: Customers may purchase memberships in a number of
the Company's Buyers' Club programs for an annual fee. The Company defers
revenue recognition for membership fees received in its Buyers' Club programs
until the cancellation period ends. Thereafter, revenue is recognized on a
monthly basis over the remaining membership period. The Company also receives
commission revenue related to its solicitation of the MemberWorks membership
programs and Magazine Direct magazine subscription programs. For the
MemberWorks, the Company is guaranteed a revenue stream dependent upon the
actual number of offers made. To the extent that the program performs better
than a pre-designated level, the Company will receive a higher level of revenue
than its guaranteed minimum. Revenue is recognized monthly based on the number
of acceptances received using a formula that has been contractually agreed upon
by the Company and MemberWorks. The commission revenue recognized by the Company
for the Magazine Direct magazine program is on a per-solicitation basis
according to the number of solicitations made, with additional revenue
recognized if the customer accepts the solicitation. Collectively, the amount of
revenues the Company recorded from these sources was $5.1 million or 1.1% of net
revenues, $4.8 million or 0.9% of net revenues, and $0.9 million or 0.2% of net
revenues for fiscal years 2002, 2001 and 2000, respectively. In the second
quarter of 2003, the Company will cease the offer of the Magazine Direct
magazine program for the time being. The Company is considering new
opportunities to offer new and different goods and services to its customers on
inbound order calls from time to time, with the Company receiving commission
revenue related to its solicitations.
-- B-to-B Services: Revenues from the Company's e-commerce transaction
services are recognized as the related services are provided. Customers are
charged on an activity unit basis, which applies a contractually specified rate
according to the type of transaction service performed. Revenues recorded from
the Company's 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B-to-B services were $20.1 million or 4.4% of net revenues, $22.2
million or 4.2% of net revenues, and $29.8 million or 4.9% of net revenues for
fiscal years 2002, 2001 and 2000, respectively.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments -- The carrying amounts for cash and
cash equivalents, accounts receivable, accounts payable and the current portion
of long-termshort-term debt
and capital lease obligations approximate fair value due to the short maturities
of these instruments. Additionally, the current value of long-term debt also
approximates fair value, as this debt bears interest at prevailing market rates.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146 nullifies
Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"). FAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred whereas, under EITF 94-3, the liability was
recognized at the commitment date to an exit plan. The Company is required to
adopt the provisions of FAS 146 effective for exit or disposal activities
initiated after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure -- An Amendment of SFAS No. 123" ("FAS
148"). FAS 148 provides alternative methods of transition for a voluntary change
to the fair value-based method of accounting for stock-based employee
compensation. Since 1996, the Company has accounted for its stock-based
compensation to employees using the fair value-based methodology under SFAS No.
123, thus there has been no effect on the Company's results of operations or
financial position. In addition, FAS 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has concluded it is in compliance with these required prominent disclosures.
In January 2003, the Securities and Exchange Commission issued a new
disclosure regulation, "Conditions for Use of Non-GAAP Financial Measures"
("Regulation G") which is effective for all public disclosures and filings made
after March 28, 2003. Regulation G requires public companies that disclose or
release information containing financial measures that are not in accordance
with generally accepted accounting principles ("GAAP") to include in the
disclosure or release, a presentation of the most directly comparable GAAP
financial measure and a reconciliation of the disclosed non-GAAP financial
measure to the most directly comparable GAAP financial measure. The Company will
be adopting Regulation G in fiscal 2003 and is currently evaluating the impact
of this adoption on its financial disclosures.
2. DIVESTITURES
During 2001, the Company sold the following businesses and assets:
Sale of the Improvements Business: On June 29, 2001, the Company sold
certain assets and liabilities of its Improvements business to HSN, a division
of USA Networks, Inc.'s Interactive Group, for approximately $33.0 million. In
conjunction with the sale, the Company's Keystone Internet Services, Inc.
subsidiary (now Keystone Internet Services, LLC) agreed to provide telemarketing
and fulfillment services for the Improvements business under a services
agreement with the buyer for a period of three years.
The asset purchase agreement between the Company and HSN provides that if
Keystone Internet Services, Inc. fails to perform its obligations during the
first two years of the services contract, the purchaser can receive a reduction
in the original purchase price of up to $2.0 million. An escrow fund of $3.0
million, which was withheld from the original proceeds of the sale, has been
established for a period of two years under the terms of an escrow agreement
between LWI Holdings, Inc., HSN and The Chase Manhattan Bank as a result of
these contingencies. The balance in the escrow fund at December 29, 2001 was
$2.6 million. As of 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 28, 2002, the balance in the escrow fund was $2.0
million, and there were no claims against the escrow.
The Company recognized a net gain on the sale of approximately $23.2
million, net of a non-cash goodwill charge of $6.1 million, in the second
quarter of 2001, which represents the excess of the net proceeds
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from the sale over the net assets acquired by HSN, the goodwill associated with
the Improvements business and expenses related to the transaction. During fiscal
2002, the Company recognized approximately $0.6 million of the deferred gain
consistent with the terms of the escrow agreement. Proceeds related to the
deferred gain were received on July 2, 2002 and December 30, 2002 for $0.3
million and $0.3 million, respectively. The recognition of the additional gain
of up to approximately $2.0 million has been deferred until the contingencies
described above expire, which will occur no later than the middle of the 2003
fiscal year.
Sale of Kindig Lane Property: On May 3, 2001, as part of the Company's
strategic business realignment program, the Company sold its fulfillment
warehouse in Hanover, Pennsylvania (the "Kindig Lane Property") and certain
equipment located therein for $4.7 million to an unrelated third party.
Substantially all of the net proceeds of the sale were paid to Congress,
pursuant to the terms of the Congress Credit Facility, and applied to a partial
repayment of the Tranche A Term Loan made to Hanover Direct Pennsylvania, Inc.,
an affiliate of the Company, and to a partial repayment of the indebtedness
under the Congress Credit Facility. The Company realized a net gain on the sale
of approximately $1.5 million, which included the sale price net of selling
expenses in excess of the net book value of assets sold. The Company has
continued to use the Kindig Lane Property under a lease agreement with the third
party, and will lease a portion of the Kindig Lane Property until April 4, 2003.
Effective March 1, 2003, the Company has transitioned a portion of the
fulfillment operations from the leased Kindig Lane Property to its own facility
in Roanoke, Virginia.
During 1999, the Company sold the following businesses and assets.
Transactions related to these sales impact the fiscal years 2002, 2001 and 2000,
which are presented:
The Shopper's Edge: In March 1999, the Company, through a newly formed
subsidiary, established and promoted a discount buyers' club to consumers known
as "The Shopper's Edge." In exchange for an up-front membership fee, the
Shopper's Edge program enabled members to purchase a wide assortment of
merchandise at discounts that were not available through traditional retail
channels. Initially, prospective members participated in a 45-day trial period
that, unless canceled, was automatically converted into a full membership term,
which was one year in duration. Memberships were automatically renewed at the
end of each term unless canceled by the member. Effective December 1999, the
Company sold its interest in the Shopper's Edge subsidiary to an unrelated third
party for a nominal fair value based upon an independent appraisal. The Company
entered into a solicitation services agreement with the purchaser whereby the
Company provided solicitation services for the program and received commissions
for member acceptances based on a fixed fee per member basis, adjusted for
cancellation rates on a prospective basis. For the fiscal years ended 2002, 2001
and 2000, the Company received approximately $0.4 million, $2.5 million and $5.0
million of fee revenue, respectively, for solicitation services provided.
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 an apparel distribution center in Roanoke, Virginia. The remaining
50% interest is held by an unrelated third party. This investment is accounted
for under the equity method of accounting. The Company's investment in Blue
Ridge was approximately $0.8 million at December 25, 1999. In December 1996, the
Company consolidated the fulfillment and telemarketing activities handled at
this facility into its home fashion distribution facility in Roanoke, Virginia,
and attempted to sublease the vacated space. In April 1999, the Company sublet
the vacated premises to an unrelated third party for a five-year period expiring
in April 2004. In February 2000, the Company sold its partnership interest in
Blue Ridge to the holder of the other 50% for $0.8 million, which approximated
the Company's carrying value of the investment.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SPECIAL CHARGES
In December 2000, the Company began a strategic business realignment
program that resulted in the recording of special charges for severance,
facility exit costs and fixed asset write-offs. Special charges recorded in
fiscal years 2002, 2001 and 2000 relating to the strategic business realignment
program were $4.4 million, $11.3 million and $19.1 million, respectively. The
actions related to the strategic business
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
realignment program were taken in an effort to direct the Company's resources
primarily towards a loss reduction strategy and return to profitability.
For fiscal year 2000, the $19.1 million of special charges consisted of
severance ($5.0 million), facility exit costs ($5.9 million) and fixed asset
write-offs ($8.2 million, of which $7.2 million is non-cash) related to the
Company's previously announced strategic business realignment program which
included (1) the elimination of approximately 285 full-time equivalent ("FTE")
positions across all its business units; (2) the closure of the Company's Always
in Style business; (3) the discontinuance by Hanover Brands of the under-
performing Turiya, Kitchen & Home and Domestications Kitchen & Garden catalogs
while incorporating some of the product offerings within continuing catalogs;
(4) the termination by Hanover Brands of its marketing agreement with Compagnie
de la Chine; (5) the closure by Hanover Brands of certain retail outlets and a
satellite facility in New Jersey; (6) the closure of its leased fulfillment and
telemarketing facility in Maumelle, Arkansas; and (7) the immediate cessation of
the operations of Desius LLC.
Such actions were taken in an effort to direct the Company's resources
primarily towards continued profitable growth in Hanover Brands while reducing
costs in all areas of the business and eliminating investment activities that
had not yet generated sufficient revenue to produce profitable returns. The
Company intended to consolidate the Maumelle operations within its remaining
facilities and to provide the bulk of its fulfillment services for third party
clients of its Keystone Internet Services, Inc. ("Keystone") subsidiary within
its existing operations. The consolidation of Keystone's activities in other
facilities was intended to provide a better opportunity to focus resources,
particularly customer service support, on clients to service their needs.
For 2001, the $11.3 million of special charges were related to the
strategic business realignment program that was initiated at the end of 2000 and
consisted of severance ($4.2 million), facility exit costs ($3.8 million) and
asset write-offs ($3.3 million, all of which is non-cash).
In December 2001, the Company made a decision as part of the continuing
implementation of the strategic business realignment program, to close its San
Diego telemarketing center in the first quarter of 2002. Accordingly, severance
costs include $0.3 million for associates of the telemarketing center whose jobs
were eliminated as a result. In addition severance costs recorded for the year
include $0.4 million for associates of the Kindig Lane Property whose jobs were
eliminated as a result of the sale of the facility in May 2001. The remainder of
the severance charges recorded in 2001, which amounted to $3.5 million,
represents the elimination of 442 FTE positions across all divisions of the
Company's business as part of the strategic business realignment program. In
October 2001, the Company determined it was more cost effective to relocate
certain of its operating and administrative functions from the first floor of
its facility in Weehawken, New Jersey to a previously closed space in Edgewater,
New Jersey and attempted to sublet the space vacated in Weehawken, New Jersey.
This amendment of the original plan resulted in an additional charge of $0.8
million for facility exit costs and a charge of $0.6 million for the write-off
of fixed assets related to the Weehawken location. In addition, special charges
totaling $0.2 million were recorded, primarily related to loan forgiveness of
certain of the severed associates.
In addition, the exit of the Maumelle and Kindig Lane buildings, as well as
the closing of the San Diego telemarketing center, resulted in special charges
of $3.7 million in addition to the aforementioned severance costs. The charges
related to the exit of the Maumelle facility included a $1.1 million addition to
the estimated loss on the lease provision and a $1.9 million fixed asset
write-down. The exit charges for the Kindig Lane Property building consisted of
a $0.5 million write-off for the impairment in value of the fixed assets located
in 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that facility. Finally, the costs associated with closing the San Diego
telemarketing center included a write-down for the fixed assets of $0.1 million,
and a lease provision for the facility of $0.1 million.
The special charges recorded in 2001 also included $1.8 million to revise
estimated losses provided for sublease arrangements in connection with a retail
outlet store in San Diego that was previously closed and office facilities
located in San Francisco, California. The Company reduced its estimated loss on
the San Diego store lease by $0.4 million reflecting the locating of a subtenant
quicker than originally expected. This
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was more than offset by the charge required for anticipated losses on sublease
arrangements for the San Francisco office space resulting from declining market
values in that area of the country.
In May 2002, the Company entered into an agreement with the landlord and
the sublandlord to terminate its sublease of the Company's closed 497,200 square
foot warehouse and telemarketing facility located in Maumelle, Arkansas. The
agreement provided for the payment by the Company to the sublandlord of $1.6
million plus taxes through April 30, 2002 in the amount of $0.2 million. The
Company made all of the payments in four weekly installments between May 2, 2002
and May 24, 2002. Upon the satisfaction by the Company of all of its obligations
under the agreement, the sublease terminated and the Company was released from
all further obligations under the sublease. The Company's previously established
reserves for Maumelle, Arkansas were adequate based upon the terms of the final
settlement agreement.
In the first quarter of 2002, special charges relating to the strategic
business realignment program were recorded in the amount of $0.2 million. These
charges consisted primarily of severance costs related to the elimination of an
additional 10 FTE positions and costs associated with the Company's decision to
close a product storage facility located in San Diego, California. In September
2002, the Company continued to execute this program through the integration of
its The Company Store and Domestications divisions. As a result of the continued
actions needed to execute these plans, during the third quarter of 2002, an
additional $1.5 million of special charges were recorded. Of this amount, $1.3
million consisted of additional facility exit costs resulting primarily from the
integration of The Company Store and Domestications divisions, causing
management to reassess its plan to consolidate its office space utilization at
the corporate offices in New Jersey. The additional $0.2 million consisted of
further severance costs for an individual relating to the Company's strategic
business realignment program.
In the fourth quarter of 2002, special charges totaling $2.7 million were
recorded. Of this amount, $1.5 million was for severance costs, including $1.2
million for two of the Company's senior management members, $0.2 million was
associated with the elimination of 32 FTE positions in the Company's Hanover,
Pennsylvania fulfillment operation as a result of its consolidation into the
Company's Roanoke, Virginia facility in March 2003, and $0.1 million was for
additional severance costs and adjustments pertaining to the Company's previous
strategic business realignment initiatives. The remaining $1.2 million consisted
primarily of a $0.4 million credit reflecting the reduction of the deferred
rental liabilities applicable to the portions of the facilities previously
included in the Company's strategic business realignment program, and a $1.6
million charge in order to properly reflect the current marketability of such
facilities in the rental markets.
At December 28, 2002 and December 30, 2001, liabilities of $3.3 million and
$7.3 million, respectively, were included within Accrued Liabilities, and
liabilities of $4.7 million and $3.8 million, respectively, were 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
included within
Other Non-Current Liabilities. These liabilities relate to future payments in
connection with the Company's strategic business realignment program and consist
of the following (in thousands):
SEVERANCE & REAL ESTATE INFORMATION
PERSONNEL LEASE & TECHNOLOGY
COSTS EXIT COSTS LEASES TOTAL
----------- ----------- ----------- -------
Balance at December 29, 1999.............. $ -- $ 2,299 $ -- $ 2,299
2000 Expenses............................. 5,073 5,862 1,043 11,978
Paid in 2000.............................. (651) (603) -- (1,254)
------- ------- ------ -------
Balance at December 30, 2000.............. 4,422 7,558 1,043 13,023
2001 Expenses............................. 4,135 3,828 -- 7,963
Paid in 2001.............................. (6,011) (3,249) (670) (9,930)
------- ------- ------ -------
Balance at December 29, 2001.............. 2,546 8,137 373 11,056
2002 Expenses............................. 1,817 2,952 -- 4,769
Paid in 2002.............................. (2,911) (4,672) (210) (7,793)
------- ------- ------ -------
Balance at December 28, 2002.............. $ 1,452 $ 6,417 $ 163 $ 8,032
======= ======= ====== =======
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the liability related to Real Estate Lease and Exit Costs, by
location, as of the end of 2002 and 2001, is as follows (in thousands):
DECEMBER 28, DECEMBER 29,
2002 2001
------------ ------------
Gumps facility, San Francisco, CA........................... $3,349 $3,014
Corporate facility, Weehawken, NJ........................... 2,325 2,248
Corporate facility, Edgewater, NJ........................... 439 --
Administrative and telemarketing facility, San Diego, CA.... 179 123
Retail store facilities, Los Angeles and San Diego, CA...... 125 451
Fulfillment facility, Maumelle, AK.......................... -- 2,301
------ ------
Total Lease and Exit Cost Liability......................... $6,417 $8,137
====== ======
4. WRITE-DOWN OF INVENTORY OF DISCONTINUED CATALOGS
In the fourth quarter of 2000, the Company made a decision to discontinue
three catalog brands, Domestications Kitchen & Garden, Turiya and Kitchen &
Home. These catalog brands generated revenues of $0.0 million, $4.7 million, and
$18.4 million in 2002, 2001 and 2000, respectively. In 2000, the Company
recorded provisions of approximately $2.0 million related to the write-down of
inventory associated with these catalogs to their net realizable value based
upon the planned liquidation of such inventory, and $0.7 million related to the
acceleration of the amortization of prepaid catalog costs associated with the
discontinuance of these catalogs' operations based upon their estimated
realizability relative to the wind-down plan in 2001. At December 28, 2002,
there was no inventory remaining for these catalog brands.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
DECEMBER 28, DECEMBER 29,
2002 2001
------------ ------------
Special charges............................................. $ 3,327 $ 7,291
Reserve for future sales returns............................ 1,888 2,764
Compensation and benefits................................... 11,614 8,456
Income and other taxes...................................... 1,003 1,098
Litigation and other........................................ 8,519 5,523
------- -------
Total.................................................. $26,351 $25,132
======= =======
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debtDebt consists of the following (in thousands):
AS RESTATED
---------------------------
DECEMBER 28, DECEMBER 29,
2002 2001
------------ ------------
Congress Credit Facility.................................... $25,090 $29,599
Obligations under capital leases............................ 39 111facility -- Term loans............................. $12,479 $13,016
Capital lease obligations................................... 29 9
------- -------
25,129 29,710
Less: current portion..................................... 3,802 3,162Long-term debt............................................ $12,508 $13,025
Congress facility:
Term loans -- Current portion............................. $ 3,792 $ 3,060
Revolver.................................................. 8,819 13,523
Capital lease obligations -- Current portion................ 10 102
------- -------
Total.................................................. $21,327 $26,548Short-term debt........................................ $12,621 $16,685
------- -------
Total debt............................................. $25,129 $29,710
======= =======
RevolvingChanges to Congress Credit Facility -- On December 28, 2002, the Company's
credit facility (the "Congress Credit Facility") with Congress Financial
Corporation ("Congress") contained a maximum credit line, subject to certain
limitations, of up to $82.5 million. The Congress Credit Facility, as amended,
expires on January 31, 2004 and comprises a revolving loan facility, a $17.5
million Tranche A Term Loan, and a $8.4 million Tranche B Term Loan. Total
cumulative borrowings under the Congress Credit Facility are subject to
limitations based upon specified percentages of eligible receivables and
eligible inventory, and the Company is required to maintain $3.0 million of
excess credit availability at all times. The Congress Credit Facility is secured
by all of the assets of the Company and places restrictions on the incurrence of
additional indebtedness and on the payment of common stock dividends. Management
will be required to successfully renegotiate the renewal of the Congress Credit
Facility or successfully replace the facility with another institution.
Under the Congress Credit Facility, the Company is required to maintain
minimum net worth, working capital and EBITDA as defined throughout the terms of
the agreement. As of December 28, 2002, the Company was in compliance with these
covenants.
In March 2002, the Company amended the Congress Credit Facility to amend
the definition of Consolidated Net Worth such that, effective July 1, 2002, to
the extent that any goodwill or intangible assets of the Company and its
subsidiaries were deemed to be impaired under the provisions of SFAS 142, such
write-off of assets would not be considered a reduction of total assets for the
purposes of computing consolidated net worth. The Company obtained the services
of an independent appraisal firm during the second quarter ended June 29, 2002
to evaluate whether there had been any goodwill transition impairment. The
results of the appraisal indicated no goodwill transition impairment based upon
the requirements set forth in SFAS 142. The covenants relating to consolidated
net working capital, consolidated net worth and EBITDA and certain non-cash
charges were also amended. The amendment required the payment of a fee of
$100,000 by the Company.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On August 16, 2002, the Company amended the Congress Credit Facility to (i)
extend the term of the Tranche B Term Loan to January 31, 2004, (ii) increase by
$3,500,000 the borrowing reflected by the Tranche B Term Note to $8,410,714, and
(iii) make certain related technical amendments to the Congress Credit Facility.
The amendment required the payment of fees in the amount of $410,000 by the
Company.
In December 2002, the Company amended the Congress Credit Facility to amend
the definitions of "Consolidated Net Income," "Consolidated Net Worth" and
"Consolidated Working Capital" to make certain adjustments thereto, depending on
the results of the Kaul litigation, to permit the payment to
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Richemont of certain United States withholding taxes payable to Richemont in
connection with the Series B Preferred Stock, and to change certain borrowing
sublimits. The consolidated working capital, consolidated net worth and EBITDA
covenants were also established through the end of the term of the facility, and
certain technical amendments relating to the reorganization of certain of the
Company's subsidiaries were made. The amendment required the payment of fees in
the amount of $110,000 by the Company.
In February 2003, the Company amended the Congress Credit Facility to amend
the existing change in control Event of Default. The existing change in control
Event of Default under the Congress Credit Facility is based upon NAR Group
Limited, a former shareholder of the Company, ceasing to be the direct or
indirect beneficial owner of a sufficient number of issued and outstanding
shares of capital stock of the Company on a fully diluted basis to elect a
majority of the members of the Company's Board of Directors. This was replaced
during February 2003 with a new change in control Event of Default, which is
patterned on the Change In Control concepts in the Company's various Key
Executive Compensation Continuation Plans. The new Event of Default would be
triggered by certain transfers of assets, certain liquidations or dissolutions,
the acquisition by a person or group (other than a Permitted Holder, as defined)
of a majority of the total outstanding voting stock of the Company, and certain
changes in the composition of the Company's Board of Directors.
The Company has re-examined the provisions of the Congress Credit Facility.
Based on the applicable accounting rules and certain provisions in the credit
agreement, the Company is required to reclassify its revolving loan facility
from long-term to short-term debt, though the existing credit facility does not
mature until January 31, 2007. As a result, the Company reclassified $8.8
million and $13.5 million as of December 28, 2002 and December 29, 2001,
respectively, from long-term debt to short-term debt and capital lease
obligations.
As of December 28, 2002, the Company had $25.1 million of cumulative
borrowings outstanding under the Congress Credit Facility, comprising $8.8
million under the Revolving Loan Facility,revolving loan facility, bearing an interest rate of 4.75%,
$8.5 million under the Tranche A Term Loan, bearing an interest rate of 5.0%,
and $7.8 million under the Tranche B Term Loan, bearing an interest rate of
13.0%. Of the aggregate borrowings, $3.8$12.6 million is classified as short-term
with $21.3 million classified as long-term on
the Company's Consolidated Balance Sheet. As of December 29, 2001, the Company
had $29.6 million of borrowings outstanding under the Congress Credit Facility
comprising $13.5 million under the revolving loan facility, bearing an interest
rate of 5.25%, and $10.5 million, bearing an interest rate of 5.50%, and $5.6
million, bearing an interest rate of 13.00%, of Tranche A Term Loans and Tranche
B Term Loans, respectively.
The revolving loan facility bears interest at prime plus 0.5% or Eurodollar
plus 2.5%, the Tranche A Term Loans bear interest at prime plus 0.75% or
Eurodollar plus 3.5%, and the Tranche B Term Loans bear interest at prime plus
4.25%, but in no event less than 13.0%.
Achievement of the Company's strategic business realignment program is
critical to the maintenance of adequate liquidity, as is compliance with the
terms and provisions of the Congress Credit Facility and the Company's ability
to operate effectively during the 2003 fiscal year. In the event of a softer
than expected economic climate, management has available several courses of
action to maintain liquidity and help maintain compliance with financial
covenants, including selective reductions in catalog circulation, additional
expense reductions and sales of non-core assets.
General -- At December 28, 2002, the aggregate annual principal payments
required on debt instruments are as follows (in thousands): 2003 -- $3,802;$12,621;
2004 -- $21,308;$12,489; 2005 -- $10; 2006 -- $5; and thereafter -- $4. Management will
be required to successfully renegotiate the renewal of the Congress Credit
Facility or successfully replace the facility with another institution.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SERIES A CUMULATIVE PARTICIPATING PREFERRED STOCK
On August 24, 2000, the Company issued 1.4 million shares of preferred
stock designated as Series A Cumulative Participating Preferred Stock (the
"Series A Preferred Stock") to Richemont, the then holder of approximately 47.9%
of the Company's Common Stock, for $70 million. The Series A Preferred Stock had
a par value of $0.01 per share and a liquidation preference of $50.00 per share
and was recorded net of issuance
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs of $2.3 million. The issuance costs were being accreted as an additional
dividend over a five-year period ending on the mandatory redemption date.
Dividends were cumulative and accrued at an annual rate of 15%, or $7.50 per
share, and were payable quarterly either in cash or in-kind through the issuance
of additional Series A Preferred Stock. Cash dividend payments were required for
dividend payment dates occurring after February 1, 2004. As of September 30,
2001, the Company accrued dividends of $12,389,700, and reserved 247,794
additional shares of Series A Preferred Stock for the payment of such dividends.
In-kind dividends and issuance cost accretion were charged against additional
paid-in capital, with a corresponding increase in the carrying amount of the
Series A Preferred Stock. Cash dividends were also reflected as a charge to
additional paid-in capital, however, no adjustment to the carrying amount of the
Series A Preferred Stock was made. The Series A Preferred Stock was generally
non-voting, except if dividends had been in arrears and unpaid for four
quarterly periods, whether or not consecutive. The holder of the Series A
Preferred Stock was entitled to receive additional participating dividends in
the event any dividends were declared or paid, or any other distribution was
made, with respect to the Common Stock of the Company. The additional dividends
would be equal to the applicable percentage of the amount of the dividends or
distributions payable in respect of one share of Common Stock. In the event of a
liquidation or dissolution of the Company, the holder of the Series A Preferred
Stock would be paid an amount equal to $50.00 per share of Series A Preferred
Stock plus the amount of any accrued and unpaid dividends, before any payments
to other shareholders.
The Company could redeem the Series A Preferred Stock in whole at any time
and the holder of the Series A Preferred Stock could elect to cause the Company
to redeem all or any of such holder's Series A Preferred Stock under certain
circumstances involving a change of control, asset disposition or equity sale.
Mandatory redemption of the Series A Preferred Stock by the Company was required
on August 23, 2005 (the "Final Redemption Date") at a redemption price of $50.00
per share of Series A Preferred Stock plus the amount of any accrued and unpaid
dividends.
On December 19, 2001, the Company consummated a transaction with Richemont
(the "Richemont Transaction"). In the Richemont Transaction, the Company
repurchased from Richemont all of the outstanding shares of the Series A
Preferred Stock and 74,098,769 shares of the Common Stock of the Company held by
Richemont in return for the issuance to Richemont of 1,622,111 shares of
newly-created Series B Participating Preferred Stock (the "Series B Preferred
Stock") and the reimbursement of expenses of $1 million to Richemont. Richemont
agreed, as part of the transaction, to forego any claim it had to the accrued
but unpaid dividends on the Series A Preferred Stock. The Richemont Transaction
was made pursuant to an Agreement (the "Agreement"), dated as of December 19,
2001, between the Company and Richemont. As part of the Richemont Transaction,
the Company (i) released Richemont, the individuals appointed by Richemont to
the Board of Directors of the Company and certain of their respective affiliates
and representatives (collectively, the "Richemont Group") from any claims by or
in the right of the Company against any member of the Richemont Group which
arise out of Richemont's acts or omissions as a stockholder of or lender to the
Company or the acts or omissions of any Richemont board designee in his capacity
as such and (ii) entered into an Indemnification Agreement (the "Indemnification
Agreement") with Richemont pursuant to which the Company agreed to indemnify
each member of the Richemont Group from any losses suffered as a result of any
third party claim which is based upon Richemont's acts as a stockholder of or
lender to the Company or the acts or omissions of any Richemont board designee
in his capacity as such. The Indemnification Agreement is not limited as to term
and does not include any limitations on maximum future payments thereunder. The
impact of the Richemont Transaction was to reflect the reduction of the Series A
Preferred Stock for the then carrying amount of $82.4 million and the issuance
of Series B Preferred Stock in the amount of $76.8 million which was equal to
the aggregate liquidation 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
preference of the Series B Preferred Stock on December
19, 2001. In addition, the par value of $49.4 million of the Common Stock
repurchased by the Company and subsequently retired was reflected as a reduction
of Common Stock, with an offsetting increase to capital in excess of par value.
The Company recorded a net decrease in shareholders' deficiency of $5.6 million
as a result of the Richemont Transaction.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The shares of the Series A Preferred Stock that were repurchased from
Richemont represented all of the outstanding shares of such series. The Company
has filed a certificate in Delaware eliminating the Series A Preferred Stock
from its certificate of incorporation.
8. SERIES B CUMULATIVE PARTICIPATING PREFERRED STOCK
On December 19, 2001, as part of the Richemont Transaction, the Company
issued to Richemont 1,622,111 shares of Series B Participating Preferred Stock.
The Series B Preferred Stock has a par value of $0.01 per share.
The holders of the Series B Preferred Stock are entitled to ten votes per
share on any matter on which the Common Stock votes. In addition, in the event
that the Company defaults on its obligations arising in connection with the
Richemont Transaction, the Certificate of Designations of the Series B Preferred
Stock or its agreements with Congress, or in the event that the Company fails to
redeem at least 811,056 shares of Series B Preferred Stock by August 31, 2003,
then the holders of the Series B Preferred Stock, voting as a class, shall be
entitled to elect two members to the Board of Directors of the Company.
In the event of the liquidation, dissolution or winding up of the Company,
the holders of the Series B Preferred Stock are entitled to a liquidation
preference (the "Liquidation Preference"), which was initially $47.36 per share.
During each period set forth in the table below, the Liquidation Preference
shall equal the amount set forth opposite such period:
LIQUIDATION
PREFERENCE
PERIOD PER SHARE TOTAL VALUE
- ------ ----------- ---------------
March 1, 2002 -- May 31, 2002............................ $49.15 $ 79,726,755.65
June 1, 2002 -- August 31, 2002.......................... $51.31 $ 83,230,515.41
September 1, 2002 - November 30, 2002.................... $53.89 $ 87,415,561.79
December 1, 2002 -- February 28, 2003.................... $56.95 $ 92,379,221.45
March 1, 2003 -- May 31, 2003............................ $60.54 $ 98,202,599.94
June 1, 2003 -- August 31, 2003.......................... $64.74 $105,015,466.14
September 1, 2003 -- November 30, 2003................... $69.64 $112,963,810.04
December 1, 2003 -- February 29, 2004.................... $72.25 $117,197,519.75
March 1, 2004 -- May 31, 2004............................ $74.96 $121,593,440.56
June 1, 2004 -- August 31, 2004.......................... $77.77 $126,151,572.47
September 1, 2004 -- November 30, 2004................... $80.69 $130,888,136.59
December 1, 2004 -- February 28, 2005.................... $83.72 $135,803,132.92
March 1, 2005 -- May 31, 2005............................ $86.85 $140,880,340.35
June 1, 2005 -- August 23, 2005.......................... $90.11 $146,168,422.21
As a result, beginning November 30, 2003, the aggregate Liquidation
Preference of the Series B Preferred Stock will be effectively equal to the
aggregate liquidation preference of the Class A Preferred Stock previously held
by Richemont (See Note 7). For each increase in liquidation preference, the
Company will reflect the change as an increase in the Series B Preferred Stock
with a corresponding reduction in capital in excess of par value. Such accretion
will be recorded as a reduction of net income available to common shareholders.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Dividends on the Series B Preferred Stock are required to be paid whenever
a dividend is declared on the Common Stock. The amount of any dividend on the
Series B Preferred Stock shall be determined by multiplying (i) the amount
obtained by dividing the amount of the dividend on the Common Stock by the then
current fair market value of a share of Common Stock and (ii) the Liquidation
Preference of the Series B Preferred Stock.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Series B Preferred Stock must be redeemed by the Company on August 23,
2005 consistent with Delaware General Corporation Law. The Company may redeem
all or less than all of the then outstanding shares of Series B Preferred Stock
at any time prior to that date. At the option of the holders thereof, the
Company must redeem the Series B Preferred Stock upon a Change of Control or
upon the consummation of an Asset Disposition or Equity Sale (all as defined in
the Certificate of Designations of the Series B Preferred Stock). The redemption
price for the Series B Preferred Stock upon a Change of Control or upon the
consummation of an Asset Disposition or Equity Sale is the then applicable
Liquidation Preference of the Series B Preferred Stock plus the amount of any
declared but unpaid dividends on the Series B Preferred Stock. The Company's
obligation to redeem the Series B Preferred Stock upon an Asset Disposition or
an Equity Sale is subject to the satisfaction of certain conditions set forth in
the Certificate of Designations of the Series B Preferred Stock.
The Certificate of Designations of the Series B Preferred Stock provides
that, for so long as Richemont is the holder of at least 25% of the then
outstanding shares of Series B Preferred Stock, it shall be entitled to appoint
a non-voting observer to attend all meetings of the Board of Directors and any
committees thereof. To date, Richemont has not appointed such an observer.
Pursuant to the terms of the Certificate of Designations of the Series B
Preferred Stock, the Company's obligation to pay dividends on or redeem the
Series B Preferred Stock is subject to its compliance with its agreements with
Congress.
During autumn 2002, Company management conducted a strategic review of the
Company's business and operations. As part of such review, Company management
considered the Company's obligations under the Richemont Agreement and the
Company's prospects and options for redemption of the Series B Preferred Shares
issued to Richemont pursuant thereto in accordance with the Richemont Agreement
terms. The review took into account the results of the Company's strategic
business realignment program in 2001 and 2002, the relative strengths and
weaknesses of the Company's competitive position and the economic and business
climate, including the depressed business environment for mergers and
acquisitions.
As a result of this review, Company management and the Company's Board of
Directors have concluded that it is unlikely that the Company will be able to
accumulate sufficient capital, surplus, or other assets under Delaware corporate
law or to obtain sufficient debt financing to either:
1. Redeem at least 811,056 shares of the Series B Preferred Stock by
August 31, 2003, as allowed for by the Richemont Agreement, thereby
resulting in the occurrence of a "Voting Trigger" which will allow
Richemont to have the option of electing two members to the Company's Board
of Directors; or
2. Redeem all of the shares of Series B Preferred Stock by August 31,
2005, as required by the Richemont Agreement, thereby obligating the
Company to take all measures permitted under the Delaware General
Corporation Law to increase the amount of its capital and surplus legally
available to redeem the Series B Preferred Shares, without a material
improvement in either the business environment for mergers and acquisitions
or other factors, unforeseeable at the time.
Management believes that the Company has sufficient liquidity and
availability under its credit agreement to fund its planned operations through
at least January 31, 2004. The unlikelihood that the Company will be able to
redeem the Series B Preferred Shares is not expected to limit the ability of the
Company to use current and future net earnings or cash flow to satisfy its
obligations to creditors and vendors. In addition, the redemption price of the
Series B Preferred Stock does not accrete after August 31, 2005.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company management met with representatives of Richemont on October 30,
2002 and outlined the results of management's strategic review in the context of
the Company's obligations to Richemont under the Richemont Agreement, and
discussed an alternative to the method for the redemption of the Series B
Preferred Shares. Under this alternative proposal, that the Company had
previously presented to Richemont, the Company would exchange two business
divisions, Silhouettes and Gump's, for all of Richemont's Series B Preferred
Shares (the "Proposal").
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to the terms of the Richemont Agreement, the redemption value of
the Series B Preferred Shares as of the date of the Proposal was $87 million.
Management based the Proposal terms on a valuation of Silhouettes and Gump's
using the valuation multiple employed in USA Network's June 2001 purchase of the
Company's Improvements business division. The Proposal also included a
willingness on the part of the Company to provide continued fulfillment services
for Silhouettes and Gump's on terms to be negotiated. On November 18, 2002, a
representative of Richemont confirmed in writing to the Company that Richemont
rejected the Proposal. Representatives of Richemont have indicated that it has
no interest in the proffered assets and disputes their valuation implied in the
Company's Proposal.
The Company will continue to explore all reasonable opportunities to redeem
and retire the Series B Preferred Stock.
For Federal income tax purposes, the increases in the Liquidation
Preference of the Series B Preferred Stock are considered distributions, by the
Company to Richemont, deemed made on the commencement dates of the quarterly
increases, as discussed above. These distributions may be taxable dividends to
Richemont, provided the Company has accumulated or current earnings and profits
("E&P") for each year in which the distributions are deemed to be made. Under
the terms of the Richemont Transaction, the Company is obligated to reimburse
Richemont for any U.S. income tax incurred pursuant to the Richemont
Transaction. Based on the Company's past income tax filings and its current
income tax position, the Company has an E&P deficit as of December 28, 2002.
Accordingly, the Company has not incurred a tax reimbursement obligation for
year 2002. The Company must have current E&P in years 2003, 2004 or 2005 to
incur a tax reimbursement obligation from the scheduled increases in Liquidation
Preference. If the Company does not have current E&P in one of those years, no
tax reimbursement obligation would exist for that particular year. The Company
does not have the ability to project the exact future tax reimbursement
obligation, however, it has estimated the potential obligation to be in the
range of $0 to $23.1 million.
9. CAPITAL STOCK
Richemont Transaction -- On December 19, 2001, as part of the Richemont
Transaction, the Company repurchased from Richemont 74,098,759 shares of the
Common Stock of the Company held by Richemont. As part of the transaction,
Richemont revoked the proxy that it then held to vote 4,289,000 shares of Common
Stock, which were owned by a third party.
General -- At December 28, 2002 and December 29, 2001, there were
140,436,729 and 140,336,729 shares of Common Stock issued and outstanding (net
of treasury shares), respectively. Additionally, an aggregate of 14,650,270
shares of Common Stock were reserved for issuance pursuant to the exercise of
outstanding options at December 28, 2002.
Treasury stock consisted of 2,120,929 and 2,100,929 shares of Common Stock
at December 28, 2002 and December 29, 2001, respectively. During fiscal year
2002 and 2001, the Company retained 20,000 and 1,530,000 shares, respectively,
of outstanding Common Stock held in escrow on behalf of certain participants in
the Company's Executive Equity Incentive Plan whose rights, under the terms of
the plan, expired during 2002 and 2001.
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.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SEGMENT REPORTING
In prior years the Company reported two separate operating and reporting
segments: direct commerce and business-to-business ("B-to-B") e-commerce
transaction services. In conjunction with the Company's previously announced
strategic business realignment program, the Company has (1) terminated an
intercompany services agreement effective December 30, 2000, (2) ceased the
Desius LLC business operations and (3) closed the leased fulfillment and
telemarketing facility in Maumelle, Arkansas. As a result of these
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
actions, the Company's business-to-business revenues from fiscal 2001 and beyond
are expected to be reduced and for the foreseeable future will be limited to
third party clients serviced by Keystone Internet Services, LLC. Taken in
conjunction with the Company's announced intention to direct resources primarily
towards growth in core brands, these actions have caused the Company, pursuant
to SFAS 131, to report results for the consolidated operations of Hanover
Direct, Inc. as one segment commencing in fiscal year 2001.
11. CHANGES IN MANAGEMENT AND EMPLOYMENT
Shull Employment Agreement. Effective December 5, 2000, Thomas C. Shull,
Meridian Ventures, LLC, a limited liability company controlled by Mr. Shull
("Meridian"), and the Company entered into a Services Agreement (the "December
2000 Services Agreement"). The December 2000 Services Agreement was replaced by
a subsequent services agreement, dated as of August 1, 2001 (the "August 2001
Services Agreement"), among Mr. Shull, Meridian and the Company, and a Services
Agreement, dated as of December 14, 2001 (the "2001 Services Agreement"), among
Mr. Shull, Meridian, and the Company. The 2001 Services Agreement was replaced
effective September 1, 2002 by an Employment Agreement between Mr. Shull and the
Company, dated as of September 1, 2002, as amended by Amendment No. 1 thereto
dated as of September 1, 2002 (as amended, the "2002 Employment Agreement"),
pursuant to which Mr. Shull is employed by the Company as its President and
Chief Executive Officer, as described below.
The term of the 2002 Employment Agreement began on September 1, 2002 and
will terminate on September 30, 2004 (the "Shull Employment Agreement Term").
Under the 2002 Employment Agreement, Mr. Shull is to receive from the
Company base compensation equal to $900,000 per annum, payable at the rate of
$75,000 per month ("Base Compensation"). Mr. Shull is to be provided with
participation in the Company's employee benefit plans, including but not limited
to the Company's Key Executive Eighteen Month Compensation Continuation Plan
(the "Change of Control Plan") and its transaction bonus program. The Company is
also to reimburse Mr. Shull for his reasonable out-of-pocket expenses incurred
in connection with his employment by the Company.
Under the 2002 Employment Agreement, the Company paid the remaining unpaid
$300,000 of Mr. Shull's fiscal 2001 bonus under the Company's 2001 Management
Incentive Plan in December 2002. Mr. Shull shall receive the same bonus amount
for fiscal 2002 under the Company's 2002 Management Incentive Plan as all other
Level 8 participants (as defined in such plan) receive under such plan for such
period, subject to all of the terms and conditions applicable generally to Level
8 participants thereunder. Mr. Shull shall earn annual bonuses for fiscal 2003
and 2004 under such plans as the Company's Compensation Committee may approve in
a manner consistent with bonuses awarded to other senior executives under such
plans.
Under the 2002 Employment Agreement, the Company made two installment
payments in September and November to satisfy the obligation of $450,000 to Mr.
Shull previously due to be paid to Meridian on June 30, 2002. In addition, the
Company has agreed to make two equal lump sum cash payments of $225,000 each to
Mr. Shull on March 31, 2003 and September 30, 2004, provided the 2002 Employment
Agreement has not terminated due to Willful Misconduct (as defined in the 2002
Employment Agreement) or material breach thereof by Mr. Shull, or Mr. Shull's
death or permanent disability. Such payments shall be made notwithstanding any
other termination of the Employment Agreement on or prior to such date or as a
result of another event constituting a Change of Control.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the 2002 Employment Agreement, upon the closing of any transaction
which constitutes a "change of control" thereunder, provided that Mr. Shull is
then employed by the Company, the Company will be required to make a lump sum
cash payment to Mr. Shull on the date of such closing pursuant to the Change of
Control Plan, the Company's transaction bonus program and the Company's
Management Incentive Plans for the applicable fiscal year. Any such lump sum
payment would be in lieu of (i) any cash payment under the 2002 Employment
Agreement as a result of a termination thereof upon the first day after the
acquisition of the Company (whether by merger or the acquisition of all of its
outstanding capital stock) or
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the tenth day after the sale or any series of sales since April 27, 2001
involving an aggregate of 50% or more of the market value of the Company's
assets (for this purpose under the 2002 Employment Agreement, such 50% amount
shall be deemed to be $107.6 million), and (ii) the aggregate amount of Base
Compensation to which Mr. Shull would have otherwise been entitled through the
end of the Shull Employment Agreement Term.
Under the 2002 Employment Agreement, additional amounts are payable to Mr.
Shull by the Company under certain circumstances upon the termination of the
2002 Employment Agreement. If the termination is on account of the expiration of
the 2002 Employment Agreement Term, Mr. Shull shall be entitled to receive such
amount of bonus as may be payable pursuant to the Company's applicable bonus
plan as well as employee benefits such as accrued vacation and insurance in
accordance with the Company's customary practice. If the termination is on
account of the Company's material breach of the 2002 Employment Agreement or the
Company's termination of the 2002 Employment Agreement where there has been no
Willful Misconduct (as defined in the 2002 Employment Agreement) or material
breach thereof by Mr. Shull, Mr. Shull shall be entitled to receive (i) a lump
sum payment equal to the aggregate amount of Base Compensation to which he would
have otherwise been entitled through the end of the 2002 Employment Agreement
Term (not to exceed 18 months of such Base Compensation), plus (ii) such
additional amount, if any, in severance pay which, when combined with the amount
payable pursuant to clause (i) equals 18 months of Base Compensation and such
amount of bonus as may be payable pursuant to the Company's 2002 Management
Incentive Plan or other bonus plan, as applicable (based upon the termination
date and the terms and conditions of the applicable bonus plan), as described in
paragraph 4(b), as well as such amounts as may be unpaid under the second
preceding paragraph and employee benefits such as accrued vacation and insurance
in accordance with the Company's customary practice. If the termination is on
account of the acquisition of the Company (whether by merger or the acquisition
of all of its outstanding capital stock) or the sale or any series of sales
since April 27, 2001 involving an aggregate of 50% or more of the market value
of the Company's assets (for this purpose under the 2002 Employment Agreement,
such 50% amount shall be deemed to be $107.6 million) and the amount realized in
the transaction is less than $0.50 per common share (or the equivalent of $0.50
per common share), and if and only if the Change of Control Plan shall not then
be in effect, Mr. Shull shall be entitled to receive a lump sum payment equal to
the aggregate amount of Base Compensation to which he would have otherwise been
entitled through the end of the Shull Employment Agreement Term. If the
termination is on account of the acquisition of the Company (whether by merger
or the acquisition of all of its outstanding capital stock) or the sale or any
series of sales since April 27, 2001 involving an aggregate of 50% or more of
the market value of the Company's assets (for this purpose under the 2002
Employment Agreement, such 50% amount shall be deemed to be $107.6 million) and
the amount realized in the transaction equals or exceeds $0.50 per common share
(or the equivalent of $0.50 per common share), and if and only if the Change of
Control Plan shall not then be in effect, Mr. Shull shall be entitled to receive
a lump sum payment equal to the greater of the Base Compensation to which he
would have otherwise been entitled through the end of the Shull Employment
Agreement Term or $1,000,000. If the termination is on account of an acquisition
or sale of the Company (whether by merger or the acquisition of all of its
outstanding capital stock) or the sale or any series of sales since April 27,
2001 involving an aggregate of 50% or more of the market value of the Company's
assets (for this purpose under the 2002 Employment Agreement, such 50% amount
shall be deemed to be $107.6 million) and the Change of Control Plan shall then
be in effect, Mr. Shull shall only be entitled to receive his benefit under the
Change of Control Plan.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the 2002 Employment Agreement, the Company is required to maintain
directors' and officers' liability insurance for Mr. Shull during the 2002
Employment Agreement Term. The Company is also required to indemnify Mr. Shull
in certain circumstances.
Amended Thomas C. Shull Stock Option Award Agreements. During December
2000, the Company entered into a stock option agreement with Thomas C. Shull to
evidence the grant to Mr. Shull of an option to purchase 2.7 million shares of
the Company's common stock (the "Shull 2000 Stock Option Agreement"). Effective
as of September 1, 2002, the Company has amended the Shull 2000 Stock Option
Agreement to
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) extend the final expiration date for the stock option under the Shull 2000
Stock Option Agreement to June 30, 2005, and (ii) replace all references therein
to the December 2000 Services Agreement with references to the 2002 Employment
Agreement.
During December 2001, the Company entered into a stock option agreement
with Mr. Shull to evidence the grant to Mr. Shull of an option to purchase
500,000 shares of the Company's common stock under the Company's 2000 Management
Stock Option Plan (the "Shull 2001 Stock Option Agreement"). Effective as of
September 1, 2002, the Company has amended the Shull 2001 Stock Option Agreement
to (i) provide that any shares purchased by Mr. Shull under the Shull 2001 Stock
Option Agreement would not be saleable until September 30, 2004, and (ii)
replace all references therein to the 2001 Services Agreement with references to
the 2002 Employment Agreement.
Amended Thomas C. Shull Transaction Bonus Letter. During May 2001, Thomas
C. Shull entered into a letter agreement with the Company (the "Shull
Transaction Bonus Letter") under which he would be paid a bonus on the
occurrence of certain transactions involving the sale of certain of the
Company's businesses. Effective as of September 1, 2002, the Company has amended
the Shull Transaction Bonus Letter to (i) increase the amount of Shull's agreed
to base salary for purposes of the transaction bonus payable thereunder from
$600,000 to $900,000, and (ii) replace all references therein to the December
2000 Services Agreement with references to the 2002 Employment Agreement.
Issuance of Stock Options. On August 8, 2002, the Company issued options
to purchase 3,750,000 shares of the Company's Common Stock to certain Management
Incentive Plan ("MIP") Level 7 and 8 employees, including various executive
officers, at a price of $0.24 per share under the Company's 2000 Management
Stock Option Plan. In addition, on August 8, 2002, the Company authorized the
President to grant options to purchase up to an aggregate of 1,045,000 and
1,366,000 shares of the Company's Common Stock to certain MIP Level 4 and MIP
Level 5 and 6 employees, respectively, at a price of $0.24 per share under the
Company's 2000 Management Stock Option Plan.
On October 2, 2002, the Company issued options to purchase 600,000 shares
of the Company's Common Stock to an Executive Vice President at a price of $0.27
per share under the Company's 2000 Management Stock Option Plan.
Charles F. Messina. During September 2002, Charles F. Messina resigned as
Executive Vice President, Chief Administrative Officer and Secretary of the
Company. In connection with such resignation, the Company and Mr. Messina
entered into a severance agreement dated September 30, 2002 providing for cash
payments of $884,500 and other benefits that were accrued in the fourth quarter
of 2002.
Brian C. Harriss. Brian C. Harriss was appointed Executive Vice
President -- Human Resources and Legal and Secretary of the Company effective
December 2, 2002. Prior to January 2002, Mr. Harriss had served the Company as
Executive Vice President and Chief Financial Officer. In connection with such
appointment, Mr. Harriss and the Company have terminated a severance agreement
entered into during January 2002 at the time of Mr. Harriss's resignation from
the Company, and Mr. Harriss has waived his rights to certain payments under
such severance agreement.
Other Executives. In October 2002, the Company entered into arrangements
with Edward M. Lambert, Brian C. Harriss and Michael D. Contino (the
"Compensation Continuation Agreements") pursuant to which it agreed to provide
eighteen months of severance pay, COBRA reimbursement and Exec-U-Care plan
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
coverage in the event their employment with the Company is terminated either by
the Company "For Cause" or by them "For Good Reason" (as such terms are
defined).
On November 6, 2002, the Company entered into an arrangement with Frank
Lengers pursuant to which it agreed to provide twelve months of severance pay,
COBRA reimbursement and Exec-U-Care plan coverage in the event his employment
with the Company is terminated either by the Company "For Cause" or by Mr.
Lengers "For Good Reason" (as such terms are defined).
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Hanover Direct, Inc. Key Executive Eighteen-Month Compensation Continuation
Plan. Effective April 27, 2001, the Company terminated the Hanover Direct, Inc.
Key Executive Thirty-Six Month Compensation Continuation Plan and the Hanover
Direct, Inc. Key Executive Twenty-Four Month Compensation Plan. Effective April
27, 2001, the Company established the Hanover Direct, Inc. Key Executive
Eighteen Month Compensation Continuation Plan (the "Executive Plan") for its
Chief Executive Officer, corporate executive vice presidents, corporate senior
vice presidents, strategic unit presidents, and other employees selected by its
Chief Executive Officer. The purpose of the Executive Plan is to attract and
retain key management personnel by reducing uncertainty and providing greater
personal security in the event of a Change of Control. For purposes of the
Executive Plan, a "Change of Control" will occur: (i) when any person becomes,
through an acquisition, the beneficial owner of shares of the Company having at
least 50% of the total number of votes that may be cast for the election of
directors of the Company (the "Voting Shares"); provided, however, that the
following acquisitions shall not constitute a Change of Control: (a) if a person
owns less than 50% of the voting power of the Company and that person's
ownership increases above 50% solely by virtue of an acquisition of stock by the
Company, then no Change of Control will have occurred, unless and until that
person subsequently acquires one or more additional shares representing voting
power of the Company; or (b) any acquisition by a person who as of the date of
the establishment of the Executive Plan owned at least 33% of the Voting Shares;
(ii)(a) notwithstanding the foregoing, a Change of Control will occur when the
shareholders of the Company approve any of the following (each, a
"Transaction"): (I) any reorganization, merger, consolidation or other business
combination of the Company; (II) any sale of 50% or more of the market value of
the Company's assets (for this purpose, 50% is deemed to be $107.6 million; or
(III) a complete liquidation or dissolution of the Company; (b) notwithstanding
(ii)(a), shareholder approval of either of the following types of Transactions
will not give rise to a Change of Control: (I) a Transaction involving only the
Company and one or more of its subsidiaries; or (II) a Transaction immediately
following which the shareholders of the Company immediately prior to the
Transaction continue to have a majority of the voting power in the resulting
entity; (iii) when, within any 24 month period, persons who were directors of
the Company (each, a "Director") immediately before the beginning of such period
(the "Incumbent Directors") cease (for any reason other than death or
disability) to constitute at least a majority of the Board of Directors or the
board of directors of any successor to the Company (For purposes of (iii), any
Director who was not a Director as of the effective date of the Executive Plan
will be deemed to be an Incumbent Director if such Director was elected to the
Board of Directors by, or on the recommendation of, or with the approval of, at
least a majority of the members of the Board of Directors or the nominating
committee who, at the time of the vote, qualified as Incumbent Directors either
actually or by prior operation of (iii), and any persons (and their successors
from time to time) who are designated by a holder of 33% or more of the Voting
Shares to stand for election and serve as Directors in lieu of other such
designees serving as Directors on the effective date of the Executive Plan shall
be considered Incumbent Directors. Notwithstanding the foregoing, any director
elected to the Board of Directors to avoid or settle a threatened or actual
proxy contest shall not, under any circumstances, be deemed to be an Incumbent
Director); or (iv) when the Company sells, assigns or transfers more than 50% of
its interest in, or the assets of, one or more of its subsidiaries (each, a
"Sold Subsidiary" and, collectively, the "Sold Subsidiaries"); provided,
however, that such a sale, assignment or transfer will constitute a Change of
Control only for: (a) the Executive Plan participants who are employees of that
Sold Subsidiary; and (b) the Executive Plan participants who are employees of a
direct or indirect parent company of one or more Sold Subsidiaries, and then
only if: (I) the gross assets of such parent company's Sold Subsidiaries
constitute more than 50% of the gross assets of such parent company (calculated
on a consolidated basis with the direct and indirect subsidiaries of such parent
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
company and with reference to the most recent balance sheets of the Sold
Subsidiaries and the parent company); (II) the property, plant and equipment of
such parent company's Sold Subsidiaries constitute more than 50% of the
property, plant and equipment of such parent company (calculated on a
consolidated basis with the direct and indirect subsidiaries of such parent
company and with reference to the most recent balance sheets of the Sold
Subsidiaries and the parent company); or (III) in the case of a publicly-traded
parent company, the ratio (as of the date a binding agreement for the sale is
entered) of (x) the capitalization (based on the sale price) of such parent
company's Sold Subsidiaries, to (y) the market capitalization of such
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
parent company, is greater than 0.50. (For purposes of (iv), a Transaction shall
be deemed to involve the sale of more than 50% of a company's assets if: (a) the
gross assets being sold constitute more than 50% of the gross assets of the
Company as stated on the most recent balance sheet of the Company; (b) the
property, plant and equipment being sold constitute more than 50% of the
property, plant and equipment of the Company as stated on the most recent
balance sheet of the Company; or (c) in the case of a publicly-traded company,
the ratio (as of the date a binding agreement for the sale is entered) of (x)
the capitalization (based on the sale price) of the division, subsidiary or
business unit being sold, to (y) the market capitalization of the Company, is
greater than 0.50. For purposes of this (iv), no Change of Control will be
deemed to have occurred if, immediately following a sale, assignment or transfer
by the Company of more than 50% of its interest in, or the assets of, a Sold
Subsidiary, any shareholder of the Company owning 33% or more of the voting
power of the Company immediately prior to such transactions, owns no less than
the equivalent percentage of the voting power of the Sold Subsidiary.)
Under the Executive Plan, an Executive Plan participant shall be entitled
to Change of Control Benefits under the Executive Plan solely if there occurs a
Change of Control and thereafter the Company terminates his/her employment other
than For Cause (as defined in the Executive Plan) or the participant voluntarily
terminates his/her employment with the Company For Good Reason (as defined in
the Executive Plan), in either case, solely during the 2-year period immediately
following the Change of Control. A participant will not be entitled to Change of
Control Benefits under the Executive Plan if: (i) he/she voluntarily terminates
his/her employment with the Company or has his/her employment with the Company
terminated by the Company, in either case, prior to a Change of Control, (ii)
he/she voluntarily terminates employment with the Company following a Change of
Control but other than For Good Reason, (iii) he/she is terminated by the
Company following a Change of Control For Cause, (iv) has his/her employment
with the Company terminated solely on account of his/her death, (v) he/she
voluntarily or involuntarily terminates his/her employment with the Company
following a Change of Control as a result of his/her Disability (as defined in
the Executive Plan), or (vi) his/her employment with the Company is terminated
by the Company upon or following a Change of Control but where he/she receives
an offer of comparable employment, regardless of whether the participant accepts
the offer of comparable employment.
The Change of Control Benefits under the Executive Plan are as follows: (i)
an amount equal to 18 months of the participant's annualized base salary; (ii)
an amount equal to the product of 18 multiplied by the applicable monthly
premium that would be charged by the Company for COBRA continuation coverage for
the participant, the participant's spouse and the dependents of the participant
under the Company's group health plan in which the participant was participating
and with the coverage elected by the participant, in each case immediately prior
to the time of the participant's termination of employment with the Company;
(iii) an amount equal to 18 months of the participant's car allowance then in
effect as of the date of the termination of the participant's employment with
the Company; and (iv) an amount equal to the cost of 12 months of
executive-level outplacement services at a major outplacement services firm.
Transaction Bonus Letters. During May 2001, each of Charles F. Messina,
Thomas C. Shull, Jeffrey Potts, Brian C. Harriss and Michael D. Contino, and
during November 2002, each of Edward M. Lambert and Brian C. Harriss (each, a
"Participant") entered into a letter agreement with the Company (a "Transaction
Bonus Letter") under which the Participant would be paid a bonus on the
occurrence of certain transactions involving the sale of certain of the
Company's businesses. In addition, Mr. Shull is a party to a "Letter Agreement"
with the Company, dated April 30, 2001, pursuant to which, following the
termination of the 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 2000 Services Agreement, in the event he is
terminated without cause during any period of his continued employment as the
Chief Executive Officer of the Company, he shall be paid one year of his annual
base salary (the "Shull Termination Payment"). Effective June 1, 2001, the
Company amended the Executive Plan to provide that, notwithstanding anything to
the contrary contained in the Executive Plan, Section 10.2 of the Executive Plan
shall not be effective with respect to the payment of (i) a Participant's
"Transaction Bonuses," and/or (ii) the Shull Termination Payment. The payment of
any such "Transaction Bonus" to any of the Participants, and/or the payment of
the Shull Termination Payment, shall be paid in
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
addition to, and not in lieu of, any Change of Control Benefit payable to any
Participant or Mr. Shull pursuant to the terms of the Executive Plan. In
conjunction with his resignation as Executive Vice President and Chief Financial
Officer, Mr. Harris has released any claims that he may have against the Company
under his Transaction Bonus Letter. The remaining Transaction Bonus Letters,
other than the Transaction Bonus Letter with Mr. Potts and Mr. Messina, remain
in effect.
Letter Agreement with Mr. Shull and Meridian. -- On April 30, 2001, Mr.
Shull, Meridian and the Company entered into a letter agreement (the "Letter
Agreement") specifying Mr. Shull's rights under the Executive Plan, which are
discussed above. Under the Letter Agreement, Mr. Shull and Meridian agreed that,
so long as the Executive Plan is in effect and Mr. Shull is a Participant
thereunder, Meridian and Mr. Shull will accept the Change in Control Benefits
provided for in the Executive Plan in lieu of the compensation contemplated by
the December 2000 Services Agreement between them (which benefits amounts will
not be offset against the December 2000 flat fee provided for in the December
2000 Services Agreement and shall be payable at such times and in such amounts
as provided in the Executive Plan rather than in a lump sum payable within five
business days after the termination date of the December 2000 Services Agreement
as contemplated by the December 2000 Services Agreement). For purposes of the
change in control benefits under the Executive Plan and the Letter Agreement,
Mr. Shull's annualized base salary is $600,000. In addition to the benefits
provided by the December 2000 Services Agreement, Mr. Shull and those persons
named in the December 2000 Services Agreement shall also be entitled to the
optional cash out of stock options as provided in the Executive Plan. Under the
Letter Agreement, Mr. Shull is also entitled to payment of one year annual base
salary in the event he is terminated without cause during any period of his
continued employment as the Chief Executive Officer of the Company following the
termination of the December 2000 Services Agreement. The participation and
benefits to which Mr. Shull is entitled under the Executive Plan shall also
survive the termination of the December 2000 Services Agreement pursuant to the
terms thereof in the event that Mr. Shull is still employed as the Chief
Executive Officer of the Company and is a Participant under the Executive Plan.
Should the Executive Plan no longer be in effect or Mr. Shull no longer be a
Participant thereunder, Meridian and Mr. Shull shall continue to be entitled to
the compensation contemplated by the December 2000 Services Agreement. The
Letter Agreement was superseded by the 2002 Employment Agreement.
Hanover Direct, Inc. Directors Change of Control Plan. -- Effective May 3,
2001, the Company's Board of Directors established the Hanover Direct, Inc.
Directors Change of Control Plan (the "Directors Plan") for all Directors of the
Company except for (i) any Director who is also an employee of the Company for
purposes of the Federal Insurance Contributions Act; or (ii) any persons (and
their successors from time to time) who are designated by a holder of
thirty-three percent (33%) or more of the Voting Shares to stand for election
and serve as a Director. For purposes of the Directors Plan, a "Change of
Control" will occur upon the occurrence of any of the events specified in item
(i), (ii) or (iii) of the definition of "Change in Control" under the Executive
Plan, as discussed above.
A participant in the Directors Plan shall be entitled to receive a Change
of Control Payment under the Directors Plan if there occurs a Change of Control
and he/she is a Director on the effective date of such Change of Control. A
Change of Control Payment under the Directors Plan shall be an amount equal to
the greater of (i) $40,000 or (ii) 150% of the sum of the annual retainer fee,
meeting fees and per diem fees paid to a Director for his/her service on the
Board of Directors of the Company during the 12-month period immediately
preceding the effective date of the Change of Control.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002 Directors' Option Plan. Effective January 1, 2002, the 2002 Stock
Option Plan for Directors was amended to increase the annual service award for
Directors who are not employees of the Company from 25,000 to 35,000 options to
purchase shares of Common Stock.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EMPLOYEE BENEFIT PLANS
The Company maintains several defined contribution (401-k) plans that are
available to all employees of the Company and provide employees with the option
of investing in the Company's Common Stock. The Company matches a percentage of
employee contributions to the plans up to $10,000. Matching contributions for
all plans were $0.5 million, $0.6 million and $0.8 million for fiscal years
2002, 2001 and 2000, respectively.
13. INCOME TAXES
At December 28, 2002, the Company had net operating loss carry forwards
("NOLs") totaling $368.6 million, which expire as follows: 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, 2018 -- $24.8 million, 2019 -- $19.6 million,
2020 -- $60.0 million, 2021 -- $8.6 million and 2022 -- $12.0 million. The
Company's available NOL for tax purposes consists of $74.1 million of NOL
subject to a $4.0 million annual limitation under Section 382 of the Internal
Revenue Code of 1986 and $294.5 million of NOL not subject to a limitation. The
unused portion of the $4.0 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, "Accounting for Income Taxes," 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." Based upon
the Company's assessment of numerous factors, including its future operating
plans, management has reduced its estimate of the NOL that it believes the
Company will be able to utilize. For the year ended December 28, 2002, the
carrying value of the deferred tax asset was adjusted based on a reassessment of
the Company's ability to utilize certain net operating losses prior to their
expiration. Accordingly, management has reduced the net deferred tax asset to
$11.3 million (net of a valuation allowance of $128.0 million and the $1.1
million deferred tax liability), as of December 28, 2002, from $15.0 million
(net of a valuation allowance of $121.6 million), as of December 29, 2001 via a
$3.7 million deferred Federal income tax provision. Management believes that the
$12.4 million deferred tax asset (excluding the $1.1 million deferred tax
liability) represents a "more-likely-than-not" estimate of the future
utilization of the NOL and the reversal of temporary differences. Management
will continue to routinely evaluate the likelihood of future profits and the
necessity of future adjustments to the deferred tax asset valuation allowance.
Realization of the future tax benefits is dependent on the Company's
ability to generate taxable income within the carry forward 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 $3.7 million of deferred
income tax for 2002, and zero for fiscal 2001 and 2000. The Company's provision
for state income taxes was $0.1 million in 2002, $0.1 million in 2001, and $0.2
million in 2000.
6364
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's net loss for financial statement purposes
to taxable loss for the years ended December 28, 2002, December 29, 2001 and
December 30, 2000 is as follows (in thousands):
YEAR ENDING
-----------------------------
2002 2001 2000
-------- ------- --------
Loss before income taxes.................................... $ (5,339) $(5,725) $(80,635)
Differences between income before taxes for financial
statement purposes and taxable income:
State income taxes.......................................... (91) (120) (165)
Permanent differences....................................... 4,248 1,986 7,484
Net change in temporary differences......................... (10,844) (4,737) 13,360
-------- ------- --------
Taxable loss................................................ $(12,026) $(8,596) $(59,956)
======== ======= ========
The components of the net deferred tax asset at December 28, 2002 are as
follows (in millions):
NON-
CURRENT CURRENT TOTAL
------- ------- ------
DEFERRED TAX ASSETS
Federal tax NOL and business tax credit carry forwards...... $ 1.7 $127.5 $129.2
Allowance for doubtful accounts............................. 0.5 -- 0.5
Inventories................................................. 0.2 -- 0.2
Property and equipment...................................... -- 4.1 4.1
Mailing lists and trademarks................................ -- 0.3 0.3
Accrued liabilities......................................... 4.3 0.7 5.0
Customer prepayments and credits............................ 1.6 -- 1.6
Deferred gain on sale of Improvements catalog............... 0.7 -- 0.7
Deferred credits............................................ -- 1.5 1.5
Other....................................................... 0.4 -- 0.4
----- ------ ------
Total....................................................... 9.4 134.1 143.5
Valuation allowance......................................... 7.6 120.4 128.0
----- ------ ------
Deferred tax asset, net of valuation allowance.............. 1.8 13.7 15.5
DEFERRED TAX LIABILITIES
Prepaid catalog costs....................................... (2.9) -- (2.9)
Excess of net assets of acquired business................... -- (1.3) (1.3)
----- ------ ------
Total....................................................... (2.9) (1.3) (4.2)
----- ------ ------
Net deferred tax (liability) asset.......................... $(1.1) $ 12.4 $ 11.3
===== ====== ======
The Company has established a valuation allowance for a portion of the
deferred tax asset due to the limitation on the utilization of the NOL and the
Company's estimate of the future utilization of the NOL.
6465
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Tax expense for each of the three fiscal years presented differs from the
amount computed by applying the Federal statutory tax rate due to the following:
2002 2001 2000
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
LOSS LOSS LOSS
---------- ---------- ----------
Tax benefit at Federal statutory rate....................... (35.0)% (35.0)% (35.0)%
State and local taxes, net of Federal benefit............... 1.1 0.5 0.1
Permanent differences:
$1 million salary limit and stock option compensation..... 23.9 3.4 1.8
Other permanent differences............................... 4.0 0.8 1.4
Change in valuation allowance............................... 77.0 31.1 31.9
----- ----- -----
Tax benefit at effective tax rate........................... 71.0% 0.8% 0.2%
===== ===== =====
14. LEASES
Certain leases to which the Company is a party provide for payment of real
estate taxes and common area maintenance by the Company. Most leases are
accounted for as operating leases and include various renewal options with
specified minimum rentals. Rental expense for operating leases related to
continuing operations, net of sublease income, was as follows (in thousands):
YEAR ENDED
--------------------------
2002 2001 2000
------ ------- -------
Minimum rentals by lease type:
Land and building......................................... $4,682 $ 6,030 $ 8,363
Computer equipment........................................ 3,516 4,510 4,987
Plant, office and other................................... 446 500 460
------ ------- -------
Minimum rentals............................................. $8,644 $11,040 $13,810
Sublease income............................................. (53) (22) (13)
------ ------- -------
Net minimum rentals......................................... $8,591 $11,018 $13,797
====== ======= =======
6566
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under non-cancelable operating and capital
leases relating to continuing operations that have initial or remaining terms in
excess of one year and which extend to 2010, together with the present value of
the net minimum lease payments as of December 28, 2002, are as follows (in
thousands):
OPERATING CAPITAL TOTAL
YEAR ENDING LEASES LEASES LEASES
- ----------- --------- ------- -------
2003...................................................... $ 6,709 $13 $ 6,722
2004...................................................... 4,682 12 4,694
2005...................................................... 2,513 8 2,521
2006...................................................... 1,756 8 1,764
2007...................................................... 1,668 5 1,673
Thereafter (extending to 2010)............................ 3,614 0 3,614
------- --- -------
Total minimum lease payments...................... $20,942 $46 $20,988
======= =======
Less amount representing interest(a)...................... 7
---
Present value of minimum lease payments................... $39
===
- ---------------
(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.
Future minimum lease payments under non-cancelable operating leases by
lease type as of December 28, 2002, are as follows (in thousands):
LAND PLANT,
AND COMPUTER OFFICE AND
YEAR ENDING BUILDINGS EQUIPMENT OTHER TOTAL
- ----------- --------- --------- ---------- -------
2003............................................... $ 4,622 $1,787 $300 $ 6,709
2004............................................... 3,900 590 192 4,682
2005............................................... 2,393 43 77 2,513
2006............................................... 1,748 -- 8 1,756
2007............................................... 1,668 -- -- 1,668
Thereafter......................................... 3,614 -- -- 3,614
------- ------ ---- -------
Total minimum lease payments............... $17,945 $2,420 $577 $20,942
======= ====== ==== =======
The Company has established reserves for certain future minimum lease
payments under noncancelable operating leases due to restructuring of business
operations related to such leases. The future commitments under such leases, net
of related sublease income under noncancelable subleases, are as follows (in
thousands):
MINIMUM
LEASE SUBLEASE NET LEASE
YEAR ENDING COMMITMENTS INCOME COMMITMENTS
- ----------- ----------- -------- -----------
2003.................................................... $ 3,260 $(1,232) $2,028
2004.................................................... 2,971 (984) 1,987
2005.................................................... 1,612 (431) 1,181
2006.................................................... 1,002 (196) 806
2007.................................................... 1,002 (120) 882
Thereafter.............................................. 2,172 (259) 1,913
------- ------- ------
Total minimum lease payments.................... $12,019 $(3,222) $8,797
======= ======= ======
6667
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The future minimum lease payments under non-cancelable leases that remain
from the Company's discontinued restaurant operations as of December 28, 2002
are as follows (in thousands):
MINIMUM
LEASE SUBLEASE
YEAR ENDING PAYMENTS INCOME
- ----------- -------- --------
2003...................................................... $ 476 $ (419)
2004...................................................... 476 (416)
2005...................................................... 381 (341)
2006...................................................... 72 (87)
------ -------
Total minimum lease payments...................... $1,405 $(1,263)
====== =======
15. STOCK-BASED COMPENSATION PLANS
The Company has established several stock-based compensation plans for the
benefit of its officers and employees. As discussed in the Summary of
Significant Accounting Policies (Note 1), the Company applies the
fair-value-based methodology of SFAS No. 123 and, accordingly, has recorded
stock compensation expense of $1.3 million, $1.8 million and $5.2 million for
fiscal 2002, 2001 and 2000, respectively. The effects of applying SFAS No. 123
for recognizing compensation costs are not indicative of future amounts. The
information below details each of the Company's stock compensation plans,
including any changes during the years presented.
1999 Stock Option Plan for Directors -- During August 1999, the Board of
Directors adopted the 1999 Stock Option Plan for Directors providing stock
options to purchase shares of Common Stock of the Company to certain eligible
directors who were neither employees of the Company nor non-resident aliens (the
"Directors' Option Plan"). The Directors' Option Plan was ratified by the
Company's shareholders at the 2000 Annual Meeting of Shareholders. The Company
may issue stock options to purchase up to 700,000 shares of Common Stock to
eligible directors at an exercise price equal to the fair market value as of the
date of grant. An eligible director shall receive a stock option grant to
purchase 50,000 shares of Common Stock as of the effective date of his/her
initial appointment or election to the Board of Directors. Furthermore, on each
Award Date, defined as August 4, 2000 or August 3, 2001, eligible directors were
granted stock options to purchase an additional 10,000 shares of Common Stock.
Stock options granted have terms of 10 years and shall vest and become
exercisable over three (3) years from the date of grant; however, in the event
of a change in control, options shall vest and become exercisable immediately.
Payment for shares purchased upon exercise of options shall be in cash or stock
of the Company.
6768
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options outstanding, granted and the weighted average exercise prices under
the Directors' Option Plan are as follows:
1999 STOCK OPTION PLAN FOR DIRECTORS
2002 2001 2000
------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- --------- -------- --------- --------
Options outstanding, beginning
of period.................... 370,000 $1.78 420,000 $2.13 -- $ --
Granted................... 50,000 .38 80,000 .30 540,000 2.15
Exercised................. -- -- -- -- -- --
Forfeited................. -- -- (130,000) 1.98 (120,000) 2.25
-------- --------- ---------
Options outstanding, end of
period....................... 420,000 $1.62 370,000 $1.78 420,000 $2.13
======== ===== ========= ===== ========= =====
Options exercisable, end of
period....................... 316,667 $2.02 253,332 $2.15 116,667 $2.35
======== ===== ========= ===== ========= =====
Weighted average fair value of
options granted.............. $ .29 $ .22 $ 1.07
======== ========= =========
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model. The weighted average assumptions
for grants in fiscal 2002 and 2001 under the Directors' Option Plan were as
follows: risk-free interest rate of 4.70% and 4.88%, expected volatility of
89.28% and 83.93%, expected life of six years, and no expected dividends.
The following table summarizes information about stock options outstanding
at December 28, 2002 under the Directors' Option Plan:
1999 STOCK OPTION PLAN FOR DIRECTORS
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ----------- --------
$0.20.......................... 20,000 8.6 $0.20 6,667 $0.20
$0.36.......................... 50,000 8.6 $0.36 16,667 $0.36
$0.38.......................... 50,000 9.0 $0.38 -- $0.38
$1.00.......................... 50,000 3.9 $1.00 43,333 $1.00
$2.35.......................... 250,000 3.5 $2.35 250,000 $2.35
------- -------
420,000 5.0 $1.62 316,667 $2.02
======= === ===== ======= =====
2002 Stock Option Plan for Directors -- During 2002, the Board of Directors
adopted the 2002 Stock Option Plan for Directors providing stock options to
purchase shares of Common Stock of the Company to certain non-employee directors
(the "2002 Directors' Option Plan"). The 2002 Directors' Option Plan was
ratified by the Company's shareholders at the 2002 Annual Meeting of
Shareholders and was amended during November 2002. The Company may issue stock
options to purchase up to 500,000 shares of Common Stock to eligible directors
at an exercise price equal to the fair market value as of the date of grant. An
eligible director shall receive a stock option grant to purchase 50,000 shares
of Common Stock as of the effective date of his/her initial appointment or
election to the Board of Directors. On each Award Date, defined as August 2,
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002, August 1, 2003, or August 3, 2004, eligible directors are to be granted
stock options to purchase
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
additional shares of Common Stock. On August 2, 2002, each eligible director was
granted stock options to purchase an additional 25,000 shares of Common Stock.
For the August 1, 2003 and August 3, 2004 Award Dates, each eligible director is
to be granted stock options to purchase an additional 35,000 shares of Common
Stock. Stock options granted have terms of 10 years and shall vest and become
exercisable over three (3) years from the date of grant; however, in the event
of a change in control, options shall vest and become exercisable immediately.
Payment for shares purchased upon exercise of options shall be in cash or stock
of the Company.
Options outstanding, granted and the weighted average exercise prices under
the 2002 Directors' Option Plan are as follows:
2002 STOCK OPTION PLAN FOR DIRECTORS
2002
-------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
Options outstanding, beginning of period.................... -- $ --
Granted................................................ 100,000 .23
Exercised.............................................. -- --
Forfeited.............................................. -- --
--------
Options outstanding, end of period.......................... 100,000 $.23
======== ====
Options exercisable, end of period.......................... -- $ --
======== ====
Weighted average fair value of options granted.............. $ .16
========
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model. The weighted average assumptions
for grants in fiscal 2002 under the 2002 Directors' Option Plan were as follows:
risk-free interest rate of 3.76%, expected volatility of 89.36%, expected life
of six years, and no expected dividends.
The following table summarizes information about stock options outstanding
at December 28, 2002 under the 2002 Directors' Option Plan:
2002 STOCK OPTION PLAN FOR DIRECTORS
OPTIONS OUTSTANDING
-------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- -------- ----------- --------
$.23........................... 100,000 9.6 $.23 -- $.23
------- ----
100,000 9.6 $.23 -- $.23
======= === ==== ==== ====
1993 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 the Company's shareholders at the
1993 Annual Meeting of Shareholders. The Incentive Plan encouraged executives to
acquire and retain a significant ownership stake in the Company. Under the
Incentive Plan, executives were given an opportunity to purchase shares of
Common Stock with up to 80% of the purchase price financed with a six-year full
recourse Company loan, which bore interest at the mid-term applicable federal
rate as determined by the Internal Revenue Service. The Incentive Plan
participants purchased shares of Common Stock at prices ranging from $0.69 to
$4.94, with the Company accepting notes bearing interest at rates 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ranging from
5.00% to 7.75%. For each share of stock an employee purchased, he/she received
stock options
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to acquire two additional shares of Common Stock, up to a maximum of 250,000
shares in the aggregate. The stock options, which were granted by the
Compensation Committee of the Board of Directors, vested after three years and
expired after six years. On December 31, 1996, the Incentive Plan was terminated
in accordance with its terms, and no additional Common Stock was purchased or
stock options granted. As of December 29, 2001, no stock options remained
outstanding or exercisable related to the Incentive Plan.
Changes in options outstanding, expressed in numbers of shares, for the
Incentive Plan for 2000 and 2001 are as follows:
1993 EXECUTIVE EQUITY INCENTIVE PLAN
2001 2000
------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- -------- --------
Options outstanding, beginning of period........... 80,000 $1.72 454,000 $1.13
Exercised.......................................... -- -- (274,000) 1.00
Forfeited.......................................... (80,000) 1.72 (100,000) 1.00
------- --------
Options outstanding, end of period................. -- -- 80,000 $1.72
======= ===== ======== =====
Options exercisable, end of period................. -- -- 80,000 $1.72
======= ===== ======== =====
Changes to the notes receivable principal balances related to the Incentive
Plan are as follows:
2002 2001 2000
-------- -------- ---------
Notes Receivable balance, beginning of period............... $313,400 $324,400 $ 655,500
Payments.................................................... -- -- (9,600)
Forfeitures................................................. (44,000) (11,000) (321,500)
-------- -------- ---------
Notes Receivable balance, end of period..................... $269,400 $313,400 $ 324,400
======== ======== =========
Collateral was held in escrow on behalf of each participant, encompassing
20,000 shares, 20,000 shares, and 80,000 shares of the Company's Common Stock in
fiscal years 2002, 2001, and 2000, respectively. This collateral was transferred
to and retained by the Company in satisfaction of the aforementioned promissory
notes, which were no longer required to be settled. The Company recorded these
shares as treasury stock. Furthermore, the related participants forfeited their
initial 20% cash down payment, which was required for entry into the Incentive
Plan.
Management Stock Option Plans -- The Company approved for issuance to
employees 20,000,000 shares of the Company's Common Stock pursuant to the
Company's 2000 Management Stock Option Plan and 7,000,000 shares of the
Company's Common Stock pursuant the Company's 1996 Stock Option Plan. Under both
plans, the option exercise price is equal to the fair market value as of the
date of grant. However, for stock options granted to an employee owning more
than 10% of the total combined voting power of all classes of Company stock, the
exercise price is equal to 110% of the fair market value of the Company's Common
Stock as of the grant date. Stock options granted to an individual employee
under the 2000 Management Stock Option Plan may not exceed 1,000,000 shares of
the Company's Common Stock. Stock options granted to an individual employee
under the 1996 Stock Option Plan may not exceed 500,000 shares of the Company's
Common Stock and may be performance-based. All options granted must be
specifically identified as incentive stock options or non-qualified stock
options, as defined in the Internal Revenue Code. Furthermore, 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 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
limitation is exceeded, the option
shall be treated as a non-qualified stock option. Stock options may be
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
For both the 1996 and 2000 management Stock Option Plans, options
outstanding, granted and the weighted average exercise prices are as follows:
1996 AND 2000 MANAGEMENT STOCK OPTION PLANS
2002 2001 2000
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------- ----------- -------- ----------- --------
Options outstanding,
beginning of
period............. 3,962,778 $2.46 9,240,947 $2.41 5,927,984 $1.99
Granted......... 6,761,000 .24 30,000 .20 5,459,000 2.71
Exercised....... -- -- (10,000) .20 (414,537) 1.10
Forfeited....... (1,493,508) 2.60 (5,298,169) 2.36 (1,731,500) 2.26
----------- ----------- -----------
Options outstanding,
end of period...... 9,230,270 $ .81 3,962,778 $2.46 9,240,947 $2.41
=========== ===== =========== ===== =========== =====
Options exercisable,
end of period...... 1,913,270 $2.18 2,406,362 $2.12 3,235,167 $1.82
=========== ===== =========== ===== =========== =====
Weighted average fair
value of options
granted............ $ .18 $ .15 $ 1.60
=========== =========== ===========
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model. The weighted average assumptions
for grants in fiscal 2002, 2001 and 2000 are as follows: risk-free interest rate
of 3.81%, 4.96% and 5.60%, respectively, expected volatility of 89.58%, 83.93%
and 56.85%, respectively, expected lives of six years for fiscal years 2002,
2001 and 2000, and no expected dividends.
The following table summarizes information about stock options outstanding
at December 28, 2002 under both the 1996 and 2000 management Stock Option Plans:
1996 AND 2000 MANAGEMENT STOCK OPTION PLANS
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
$ .20 to $1.01.............. 7,379,107 9.0 $ .30 598,107 $ .92
$1.43 to $1.75.............. 243,332 2.2 $1.49 230,832 $1.48
$2.37 to $2.94.............. 219,000 4.2 $2.47 199,500 $2.45
$3.00 to $3.50.............. 1,388,831 5.8 $3.17 884,831 $3.16
--------- ----- ---------
9,230,270 8.2 $ .81 1,913,270 $2.18
========= === ===== ========= =====
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Chief Executive Officer Stock Option Plans -- Stock-based plans were
granted in 1996 for the benefit of Rakesh K. Kaul, the former Chief Executive
Officer of the Company (the "CEO"). In each of the plans,
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Company's
1996 Rights Offering.
On December 5, 2000, the CEO resigned, resulting in the right to exercise
the outstanding options for 12 months thereafter. No options were exercised by
the CEO on or before December 5, 2001. There were no options outstanding and
exercisable under these plans as of December 28, 2002.
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 was subject to anti-dilution 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. Due to the resignation of the CEO in December 2000,
1,510,000 Tandem Plan shares of Common Stock were transferred and, to date, the
Company has treated the transfers as satisfying a promissory note of
approximately $0.7 million owed by the CEO to the Company. The Company recorded
these shares as treasury stock. There were no options outstanding and
exercisable under the Tandem Plan at December 28, 2002.
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
were 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. Due to the resignation of the CEO on
December 5, 2000 and the absence of an exercise of the outstanding options for
12 months thereafter, the options were forfeited on December 5, 2001. No options
were outstanding and exercisable under the Performance Plan at December 28,
2002.
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 six years beginning August 23, 1996, the date of the closing of the
1996 Rights Offering. Due to the resignation of the CEO on December 5, 2000 and
the absence of an exercise of the outstanding options for 12 months thereafter,
the options were forfeited on December 5, 2001. No options were outstanding and
exercisable under the Closing Price Plan at December 28, 2002.
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 Group Limited ("NAR") in
1996. The option is subject to anti-dilution provisions and due to the Company's
1996 Rights Offering was adjusted to 377,500 option shares. The options expire
six years from the date of grant and vest after one year. Due to the resignation
of the CEO on December 5, 2000 and the absence of an exercise of the outstanding
options for 12 months thereafter, the options were forfeited on December 5,
2001. No options were outstanding and exercisable under the Six Year Plan at
December 28, 2002.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 in 1996. The option
is subject to anti-dilution provisions and due to the Company's 1996
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rights Offering was adjusted to 377,500 option shares. The options expire seven
years from the date of grant and vest after two years. Due to the resignation of
the CEO on December 5, 2000 and the absence of an exercise of the outstanding
options for 12 months thereafter, the options were forfeited on December 5,
2001. No options were outstanding and exercisable under the Seven Year Plan at
December 28, 2002.
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 in 1996. The option
is subject to anti-dilution provisions and due to the Company's 1996 Rights
Offering was adjusted to 377,500 option shares. The options expire eight years
from the date of grant and vest after three years. Due to the resignation of the
CEO on December 5, 2000 and the absence of an exercise of the outstanding
options for 12 months thereafter, the options were forfeited on December 5,
2001. No options were outstanding and exercisable under the Eight Year Plan at
December 28, 2002.
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 in 1996. The option
was subject to anti-dilution provisions and due to the Company's 1996 Rights
Offering was adjusted to 377,500 option shares. The options expire nine years
from the date of grant and vest after four years. Due to the resignation of the
CEO on December 5, 2000 and the absence of an exercise of the outstanding
options for 12 months thereafter, the options were forfeited on December 5,
2001. No options were outstanding and exercisable under the Nine Year Plan at
December 28, 2002.
For the combined CEO Stock Option Plans, options outstanding, granted and
the weighted average exercise prices are as follows:
CEO STOCK OPTION PLANS
2002 2001 2000
----------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ---------- -------- --------- --------
Options outstanding,
beginning of period..... -- -- 7,530,000 $1.16 7,530,000 $1.16
Forfeited................. -- -- (7,530,000) -- -- --
---- ---------- ---------
Options outstanding,
end of period........... -- -- -- -- 7,530,000 $1.16
==== ==== ========== ===== ========= =====
Options exercisable,
end of period........... -- -- -- -- 7,040,000 $1.16
==== ==== ========== ===== ========= =====
An Executive Employment Agreement entered into by the Company and the CEO
on March 6, 2000 provided the CEO with the option to purchase 6% of the common
stock of erizon, Inc. at the estimated fair market value on the date of the
grant, which option was to vest in equal parts over a four-year period and to
expire ten years from the date of grant. The Company recorded no compensation
expense for the years ended December 28, 2002 and December 29, 2001, and $.8
million during the year ended December 30, 2000, related to this option grant.
The fair value of options at the date of grant was estimated to be $62,000 per
share based on the following assumptions: risk-free interest rate of 6.0%,
expected life of 4 years, expected volatility of 54.8%, and no expected
dividends.
As described more fully in Note 17, the Company is currently involved in
litigation with the CEO, regarding, among other issues, the amount of cash and
benefits to which the CEO may have been entitled, if 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
any, as a result of his
resignation on December 5, 2000. The litigation is in the summary judgement
phase; however, it is not certain at this time what the impact of his
resignation will have on all of the option plans described above.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER STOCK AWARDS
During 1997, the Company granted, and the Compensation Committee of the
Board of Directors 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 vested over three years and are due to expire in 2003. The options have
an exercise price of $0.75 and a remaining contractual life as of December 28,
2002 of 0.2 years. The fair value of the options at the date of grant was
estimated to be $0.52 based on the following weighted average assumptions:
risk-free interest rate of 6.48%, expected life of four years, expected
volatility of 59.40%, and no expected dividends. In June 2001, 809,000 options
that had not been exercised were forfeited by certain employees. As of December
28, 2002, there were no options outstanding and exercisable.
Meridian Options -- During December 2000, the Company granted, and the
Company's Board of Directors approved, options ("2000 Meridian Options") for the
purchase of an aggregate of 4,000,000 shares of Common Stock with an exercise
price of $0.25 per share. These options have been allocated as follows: Thomas
C. Shull, 2,700,000 shares; Paul Jen, 500,000 shares; John F. Shull, 500,000
shares; Evan M. Dudik, 200,000 shares; and Peter Schweinfurth, 100,000 shares.
In December 2001, an additional Services Agreement (the "2001 Services
Agreement") was entered into by the Company by and among Meridian, Mr. Shull,
and the Company. Under the 2001 Services Agreement, the 2000 Meridian Options
terminate in the event that the Services Agreement is terminated (i) the tenth
day after written notice by the Company to Meridian and Mr. Shull of material
breach of the Services Agreement by Meridian or Mr. Shull or willful misconduct
by Meridian or Mr. Shull, or (ii) upon the death or permanent disability of Mr.
Shull. The 2000 Meridian Options vested and became exercisable on December 4,
2001 for all 2000 Meridian Options, except one-half of Mr. Shull's 2000 Meridian
Options, which vested and became exercisable on June 30, 2002. Effective as of
September 1, 2002, the Company amended the stock option agreement with Mr. Shull
for his 2,700,000 2000 Meridian Stock Options to (i) extend the final expiration
date for such stock options to June 30, 2005, and (ii) replace all references
therein to the December 2000 Services Agreement with references to the
employment agreement between Mr. Shull and the Company, which became effective
on September 1, 2002.
The fair value of the 2000 Meridian Options was estimated to be $0.07 cents
per share at the date of grant based on the following assumptions: risk-free
interest rate of 6.0%, expected life of 1.5 years, expected volatility of 54.0%,
and no expected dividends.
During December 2001, the Company granted to Meridian, and the Company's
Board of Directors approved, options to Meridian ("2001 Meridian Options") for
the purchase of an additional 1,000,000 shares of Common Stock with an exercise
price of $0.30. These options have been allocated as follows: Thomas C. Shull,
500,000 shares; Edward M. Lambert, 300,000 shares; Paul Jen, 100,000 shares; and
John F. Shull, 100,000 shares. Under the 2001 Services Agreement, the 2001
Meridian Options granted terminate in the event that the 2001 Services Agreement
is terminated (i) the tenth day after written notice by the Company to Meridian
and Mr. Shull of material breach of the 2001 Services Agreement by Meridian or
Mr. Shull or willful misconduct by Meridian or Mr. Shull, or (ii) upon the death
or permanent disability of Mr. Shull. The 2001 Meridian Options will vest and
become exercisable on March 31, 2003. Effective as of September 1, 2002, the
Company amended the stock option agreement with Mr. Shull for his 500,000 2001
Meridian Options to (i) extend the final expiration date for such stock options
to June 30, 2005, and (ii) replace all references therein to the 2001 Services
Agreement with references to the 2002 Employment Agreement.
The fair value of the 2001 Meridian Options was estimated to be $0.16 cents
per share at the date of grant based on the following assumptions: risk-free
interest rate of 2.82%, expected life of 1.25 years, expected volatility of
129.73%, and no expected dividends.
7475
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options outstanding, granted and the weighted average exercise price under
the combined 2000 Meridian Options and the 2001 Meridian Options are as follows:
MERIDIAN OPTION PLANS
2002 2001 2000
-------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ---------- -------- ---------- --------
Options outstanding,
beginning of period........ 5,000,000 $.26 4,000,000 $.25 -- --
Granted................. -- -- 1,000,000 .30 4,000,000 $.25
Exercised............... (100,000) .25 -- -- -- --
Forfeited............... -- -- -- -- -- --
--------- ---------- ----------
Options outstanding, end of
period..................... 4,900,000 $.26 5,000,000 $.26 4,000,000 $.25
========= ==== ========== ==== ========== ====
Options exercisable, end of
period..................... 3,900,000 $.25 2,650,000 $.25 -- --
========= ==== ========== ==== ========== ====
Weighted average fair value
of options granted......... -- $ .16 $ .07
========= ========== ==========
The following table summarizes information about stock options outstanding
and exercisable at December 28, 2002 under the combined 2000 Meridian Options
and the 2001 Meridian Options:
MERIDIAN OPTION PLANS
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
$0.25.............................. 3,900,000 2.0 $.25 3,900,000 $.25
$0.30.............................. 1,000,000 3.3 $.30 -- --
--------- ---------
4,900,000 2.3 $.26 -- $.25
========= === ==== ========= ====
16. RELATED PARTY TRANSACTIONS
At December 28, 2002, Richemont Finance S.A. ("Richemont"), a Luxembourg
company, owned approximately 21.3% of the Company's Common Stock outstanding and
100% of the Company's Series B Preferred Stock through direct and indirect
ownership.
At December 28, 2002, current and former officers and executives of the
Company owed the Company approximately $0.3 million, excluding accrued interest,
under the 1993 Executive Equity Incentive Plan. These amounts due to the Company
bear interest at rates ranging from 5.54% to 7.75% and are due or will be due
during 2003.
On November 6, 2002, the Company entered into a Compensation Continuation
Agreement with Mr. Lengers. See Note 11.
During October 2002, the Company entered into the Compensation Continuation
Agreements with Mr. Lambert, Mr. Harriss and Mr. Contino. See Note 11.
7576
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During September 2002, the Company entered into a severance agreement with
Mr. Messina. See Note 11.
As of September 1, 2002, Mr. Shull and the Company entered into the 2002
Employment Agreement. See Note 11.
During January 2002, at the time of Mr. Harriss's resignation from the
Company as Executive Vice President and Chief Financial Officer, the Company and
Mr. Harriss entered into a severance agreement. In connection with Mr. Harriss's
appointment as Executive Vice President -- Human Resources and Legal and
Secretary of the Company effective December 2, 2002, Mr. Harriss waived his
rights to certain payments under such severance agreement.
17. COMMITMENTS AND CONTINGENCIES
A class action lawsuit was commenced on March 3, 2000 entitled Edwin L.
Martin v. Hanover Direct, Inc. and John Does 1 through 10, bearing case no.
CJ2000-177 in the State Court of Oklahoma (District Court in and for Sequoyah
County). Plaintiff commenced the action on behalf of himself and a class of
persons who have at any time purchased a product from the Company and paid for
an "insurance charge." The complaint sets forth claims for breach of contract,
unjust enrichment, recovery of money paid absent consideration, fraud and a
claim under the New Jersey Consumer Fraud Act. The complaint alleges that the
Company charges its customers for delivery insurance even though, among other
things, the Company's common carriers already provide insurance and the
insurance charge provides no benefit to the Company's customers. Plaintiff also
seeks a declaratory judgment as to the validity of the delivery insurance. The
damages sought are (i) an order directing the Company to return to the plaintiff
and class members the "unlawful revenue" derived from the insurance charges,
(ii) declaring the rights of the parties, (iii) permanently enjoining the
Company from imposing the insurance charge, (iv) awarding threefold damages of
less than $75,000 per plaintiff and per class member, and (v) attorneys' fees
and costs. On April 12, 2001, the Court held a hearing on plaintiff's class
certification motion. Subsequent to the April 12, 2001 hearing on plaintiff's
class certification motion, plaintiff filed a motion to amend the definition of
the class. On July 23, 2001, plaintiff's class certification motion was granted,
defining the class as "All persons in the United States who are customers of any
catalog or catalog company owned by Hanover Direct, Inc. and who have at any
time purchased a product from such company and paid money that was designated to
be an "insurance' charge." On August 21, 2001, the Company filed an appeal of
the order with the Oklahoma Supreme Court and subsequently moved to stay
proceedings in the district court pending resolution of the appeal. The appeal
has been fully briefed. At a subsequent status hearing, the parties agreed that
issues pertaining to notice to the class would be stayed pending resolution of
the appeal, that certain other issues would be subject to limited discovery, and
that the issue of a stay for any remaining issues would be resolved if and when
such issues arise. Oral argument on the appeal, if scheduled, is not expected
until the first half of 2003. The Company believes it has defenses against the
claims and plans to conduct a vigorous defense of this action.
On August 15, 2001, the Company was served with a summons and four-count
complaint filed in Superior Court for the City and County of San Francisco,
California, entitled Teichman v. Hanover Direct, Inc., Hanover Brands, Inc.,
Hanover Direct Virginia, Inc., and Does 1-100. The complaint was filed by a
California resident, seeking damages and other relief for herself and a class of
all others similarly situated, arising out of the insurance fee charged by
catalogs and internet sites operated by subsidiaries of the Company. Defendants,
including the Company, have filed motions to dismiss based on a lack of personal
jurisdiction over them. In January 2002, plaintiff sought leave to name six
additional entities: International Male, Domestications Kitchen & Garden,
Silhouettes, Hanover Company Store, Kitchen & Home, and Domestications as co-
defendants. On March 12, 2002, the Company was served with the First Amended
Complaint in which plaintiff named as defendants the Company, Hanover Brands,
Hanover Direct Virginia, LWI Holdings, Hanover Company Store, Kitchen and Home,
and Silhouettes. On April 15, 2002, the Company filed a Motion to Stay the
Teichman action in favor of the previously filed Martin action and also filed a
Motion to quash service of summons for lack of personal jurisdiction on behalf
of defendants Hanover Direct, Inc.,
7677
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Hanover Brands, Inc. and Hanover Direct Virginia, Inc. On May 14, 2002, the
Court (1) granted the Company's Motion to quash service on behalf of Hanover
Direct, Hanover Brands, and Hanover Direct Virginia, leaving only LWI Holdings,
Hanover Company Store, Kitchen & Home, and Silhouettes, as defendants, and (2)
granted the Company's Motion to Stay the action in favor of the previously filed
Oklahoma action, so nothing will proceed on this case against the remaining
entities until the Oklahoma case is decided. The Company believes it has
defenses against the claims. The Company plans to conduct a vigorous defense of
this action.
A class action lawsuit was commenced on February 13, 2002 entitled Jacq
Wilson, suing on behalf of himself, all others similarly situated, and the
general public v. Brawn of California, Inc. dba International Male and
Undergear, and Does 1-100 ("Brawn") in the Superior Court of the State of
California, City and County of San Francisco. Does 1-100 are internet and
catalog direct marketers offering a selection of men's clothing, sundries, and
shoes who advertise within California and nationwide. The complaint alleges that
for at least four years, members of the class have been charged an unlawful,
unfair, and fraudulent insurance fee and tax on orders sent to them by Brawn;
that Brawn was engaged in untrue, deceptive and misleading advertising in that
it was not lawfully required or permitted to collect insurance, tax and sales
tax from customers in California; and that Brawn has engaged in acts of unfair
competition under the state's Business and Professions Code. Plaintiff and the
class seek (i) restitution and disgorgement of all monies wrongfully collected
and earned by Brawn, including interest and other gains made on account of these
practices, including reimbursement in the amount of the insurance, tax and sales
tax collected unlawfully, together with interest, (ii) an order enjoining Brawn
from charging customers insurance and tax on its order forms and/or from
charging tax on the delivery, shipping and insurance charges, (iii) an order
directing Brawn to notify the California State Board of Equalization of the
failure to pay the correct amount of tax to the state and to take appropriate
steps to provide the state with the information needed for audit, and (iv)
compensatory damages, attorneys' fees, pre-judgment interest, and costs of the
suit. The claims of the individually named plaintiff and for each member of the
class amount to less than $75,000. On April 15, 2002, the Company filed a Motion
to Stay the Wilson action in favor of the previously filed Martin action. On May
14, 2002, the Court heard the argument in the Company's Motion to Stay the
action in favor of the Oklahoma action, denying the motion. In October 2002, the
Court granted the Company's motion for leave to amend the answer. Discovery is
proceeding. A mandatory settlement conference has been scheduled for April 4,
2003 and trial is currently scheduled for April 14, 2003. The Company plans to
conduct a vigorous defense of this action.
A class action lawsuit was commenced on February 20, 2002 entitled Argonaut
Consumer Rights Advocates Inc., suing on behalf of the General Public v. Gump's
By Mail, Inc. ("Gump's"), and Does 1-100 in the Superior Court of the State of
California, City and County of San Francisco. The plaintiff is a non-profit
public benefit corporation suing under the California Business and Profession
Code. Does 1-100 would include persons whose activities include the direct sale
of tangible personal property to California consumers including the type of
merchandise that Gump's -- the store and the catalog -- sell, by telephone, mail
order, and sales through the web sites www.gumpsbymail.com and www.gumps.com.
The complaint alleges that for at least four years members of the class have
been charged an unlawful, unfair, and fraudulent tax and "sales tax" on their
orders in violation of California law and court decisions, including the state
Revenue and Taxation Code, Civil Code, and the California Board of Equalization;
that Gump's engages in unfair business practices; that Gump's engaged in untrue
and misleading advertising in that it was not lawfully required to collect tax
and sales tax from customers in California; is not lawfully required or
permitted to add tax and sales tax on separately stated shipping or delivery
charges to California consumers; and that it does not add the appropriate or
applicable or specific correct tax or sales tax to its orders. Plaintiff and the
class seek (i) restitution of all tax and sales tax charged by Gump's on each
transaction and/or restitution of tax and sales tax charged on the shipping
charges; (ii) an order enjoining Gump's from charging customers for tax on
orders or from charging tax on the shipping charges; and (iii) attorneys' fees,
pre-judgment interest on the sums refunded, and costs of the suit. On April 15,
2002, the Company filed an Answer and Separate Affirmative Defenses to the
complaint, generally denying the allegations of the complaint and each and every
cause of action alleged, and denying that plaintiff has been damaged or is
entitled to any relief whatsoever. On September 19, 2002, the
7778
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company filed a motion for leave to file an amended answer, containing several
additional affirmative defenses based on the proposition that the proper
defendant in this litigation (if any) is the California State Board of
Equalization, not the Company, and that plaintiff failed to exhaust its
administrative remedies prior to filing suit. That motion was granted. At the
request of the plaintiff, this case was dismissed with prejudice by the court on
March 17, 2003.
A class action lawsuit was commenced on March 5, 2002 entitled Argonaut
Consumer Rights Advocates Inc., suing on behalf of the General Public v.
Domestications LLC, and Does 1-100 ("Domestications") in the Superior Court of
the State of California, City and County of San Francisco. The plaintiff is a
non-profit public benefit corporation suing under the California Business and
Profession Code. Does 1-100 would include persons responsible for the conduct
alleged in the complaint, including the direct sale of tangible personal
property to California consumers including the type of merchandise that
Domestications sells, by telephone, mail order, and sales through the web site
www.domestications.com. The plaintiff claims that for at least four years
members of the class have been charged an unlawful, unfair, and fraudulent tax
and sales tax for different rates and amounts on the catalog and internet orders
on the total amount of goods, tax and sales tax on shipping charges, which are
not subject to tax or sales tax under California law, in violation of California
law and court decisions, including the state Revenue and Taxation Code, Civil
Code, and the California Board of Equalization; that Domestications engages in
unfair business practices; and that Domestications engaged in untrue and
misleading advertising in that it was not lawfully required to collect tax and
sales tax from customers in California. Plaintiff and the class seek (i)
restitution of all sums, interest and other gains made on account of these
practices; (ii) prejudgment interest on all sums wrongfully collected; (iii) an
order enjoining Domestications from charging customers for tax on their orders
and/or from charging tax on the shipping charges; and (iv) attorneys' fees and
costs of the suit. The Company filed an Answer and Separate Affirmative Defenses
to the Complaint, generally denying the allegations of the Complaint and each
and every cause of action alleged, and denying that plaintiff has been damaged
or is entitled to any relief whatsoever. Discovery is now proceeding. On
September 19, 2002, the Company filed a motion for leave to file an amended
answer, containing several additional affirmative defenses based on the
proposition that the proper defendant in this litigation (if any) is the
California State Board of Equalization, not the Company, and that plaintiff
failed to exhaust its administrative remedies prior to filing suit. That motion
was granted. On February 28, 2003, the Company filed a notice of motion and
memorandum of points and authorities in support of its motion for summary
judgment setting forth that Plaintiff's claims are without merit and incorrect
as a matter of law. At the request of the plaintiff, this case was dismissed
with prejudice by the court on March 17, 2003.
A class action lawsuit was commenced on October 28, 2002 entitled John
Morris, individually and on behalf of all other persons & entities similarly
situated v. Hanover Direct, Inc., and Hanover Brands, Inc. (referred to here as
"Hanover"), No. L 8830-02 in the Superior Court of New Jersey, Bergen
County -- Law Division. The plaintiff brings the action individually and on
behalf of a class of all persons and entities in New Jersey who purchased
merchandise from Hanover within six years prior to filing of the lawsuit and
continuing to the date of judgment. On the basis of a purchase made by plaintiff
in August, 2002 of certain clothing from Hanover (which was from a men's
division catalog, the only ones which retained the insurance line item in 2002),
Plaintiff claims that for at least six years, Hanover maintained a policy and
practice of adding a charge for "insurance" to the orders it received and
concealed and failed to disclose its policy with respect to all class members.
Plaintiff claims that Hanover's conduct was (i) in violation of the New Jersey
Consumer Fraud Act, as otherwise deceptive, misleading and unconscionable; (ii)
such as to constitute Unjust Enrichment of Hanover at the expense and to the
detriment of plaintiff and the class; and (iii) unconscionable per se under the
Uniform Commercial Code for contracts related to the sale of goods. Plaintiff
and the class seek damages equal to the amount of all insurance charges,
interest thereon, treble and punitive damages, injunctive relief, costs and
reasonable attorneys' fees, and such other relief as may be just, necessary, and
appropriate. On December 13, 2002, the Company filed a Motion to Stay the Morris
action in favor of the previously filed Martin action. Plaintiff then filed an
Amended Complaint adding International Male as a defendant. The 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's
response to the Amended Complaint was filed on February 5, 2003. Plaintiff's
response brief was
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
filed March 17, 2003, and the Company's reply brief is due on March 31, 2003.
Hearing on the motion to stay is expected to take place on April 4, 2003. The
Company plans to conduct a vigorous defense of this action.
On June 28, 2001, Rakesh K. Kaul, the Company's former President and Chief
Executive Officer, filed a five-count complaint (the "Complaint") in New York
State Court against the Company, seeking damages and other relief arising out of
his separation of employment from the Company, including severance payments of
$2,531,352 plus the cost of employee benefits, attorneys' fees and costs
incurred in connection with the enforcement of his rights under his employment
agreement with the Company, payment of $298,650 for 13 weeks of accrued and
unused vacation, damages in the amount of $3,583,800, or, in the alternative, a
declaratory judgment from the court that he is entitled to all change of control
benefits under the "Hanover Direct, Inc. Thirty-Six Month Salary Continuation
Plan," and damages in the amount of $1,396,066 or $850,000 due to the Company's
purported breach of the terms of the "Long-Term Incentive Plan for Rakesh K.
Kaul" by failing to pay him a "tandem bonus" he alleges was due and payable to
him within the 30 days following his resignation. The Company removed the case
to the U.S. District Court for the Southern District of New York on July 25,
2001. Mr. Kaul filed an Amended Complaint ("Amended Complaint") in the U.S.
District Court for the Southern District of New York on September 18, 2001. The
Amended Complaint repeats many of the claims made in the original Complaint and
adds ERISA claims. On October 11, 2001, the Company filed its Answer, Defenses
and Counterclaims to the Amended Complaint, denying liability under each and
every of Mr. Kaul's causes of action, challenging all substantive assertions,
raising several defenses and stating nine counterclaims against Mr. Kaul. The
counterclaims include (1) breach of contract; (2) breach of the Non-Competition
and Confidentiality Agreement with the Company; (3) breach of fiduciary duty;
(4) unfair competition; and (5) unjust enrichment. The Company seeks damages,
including, without limitation, the $341,803 in severance pay and car allowance
Mr. Kaul received following his resignation, $412,336 for amounts paid to Mr.
Kaul for car allowance and related benefits, the cost of a long-term disability
policy, and certain payments made to personal attorneys and consultants retained
by Mr. Kaul during his employment, $43,847 for certain services the Company
provided and certain expenses the Company incurred, relating to the renovation
and leasing of office space occupied by Mr. Kaul's spouse at 115 River Road,
Edgewater, New Jersey, the Company's current headquarters, $211,729 on a tax
loan to Mr. Kaul outstanding since 1997 and interest, compensatory and punitive
damages and attorneys' fees. The case is pending. The discovery period has
closed, the Company has moved to amend its counterclaims, and the parties have
each moved for summary judgment. The Company seeks summary judgment: dismissing
Mr. Kaul's claim for severance under his employment agreement on the ground that
he failed to provide the Company with a general release of, among other things,
claims for change of control benefits; dismissing Mr. Kaul's claim for
attorneys' fees on the grounds that they are not authorized under his employment
agreement; dismissing Mr. Kaul's claims related to change in control benefits
based on an administrative decision that he is not entitled to continued
participation in the plan or to future benefits thereunder; dismissing Mr.
Kaul's claim for a tandem bonus payment on the ground that no payment is owing;
dismissing Mr. Kaul's claim for vacation payments based on Company policy
regarding carry over vacation; and seeking judgment on the Company's
counterclaim for unjust enrichment based on Mr. Kaul's failure to pay under a
tax note. Mr. Kaul seeks summary judgment: dismissing the Company's defenses and
counterclaims relating to a release on the grounds that he tendered a release or
that the Company is estopped from requiring him to do so; the Company's defenses
and counterclaims relating to his alleged violations of his non-compete and
confidentiality obligations on the grounds that he did not breach the
obligations as defined in the agreement; and the Company's claims based on his
alleged breach of fiduciary duty, including those based on his monthly car
allowance payments and the leased space to his wife, on the grounds that he was
entitled to the car payments and did not involve himself in or make
misrepresentations in connection with the leased space. The Company has
concurrently moved to amend its Answer and Counterclaims to state a claim that
it had cause for terminating Mr. Kaul's employment based on, among other things,
after acquired evidence that Mr. Kaul received a monthly car allowance and other
benefits totaling $412,336 that had not been authorized by the Company's Board
of Directors and that his wife's lease and related expense was not properly
authorized 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by the Company's Board of Directors, and to clarify or amend the
scope of the Company's counterclaims for
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reimbursement. The briefing on the motions is completed and the parties are
awaiting the decision of the Court. No trial date has been set. It is too early
to determine the potential outcome, which could have a material impact on the
Company's results of operations when resolved in a future period.
In June 1994, a complaint was filed in the Supreme Court of the State of
New York, County of New York, by Donald Schupak, the former President, CEO and
Chairman of the Board of Directors of The Horn & Hardart Company, the corporate
predecessor to the Company, against the Company and Alan Grant Quasha. The
complaint asserted claims for alleged breaches of an agreement dated February
25, 1992 between Mr. Schupak and the Company (the "Agreement"), and for alleged
tortious interference with the Agreement by Mr. Quasha. Mr. Schupak sought
compensatory damages in an amount, which was estimated to be not more than
$400,000, and punitive damages in the amount of $10 million; applicable
interest, incidental and consequential damages, plus costs and disbursements,
the expenses of the litigation and reasonable attorneys' fees. In addition,
based on the alleged breaches of the Agreement by the Company, Mr. Schupak
sought a "parachute" payment of approximately $3 million under an earlier
agreement with the Company that he allegedly had waived in consideration of the
Company's performance of its obligations under the Agreement. The Company filed
an answer to the complaint on September 7, 1994. Discovery then commenced and
documents were exchanged. Each of the parties filed a motion for summary
judgment at the end of 1995, and both motions were denied in the spring of 1996.
In April 1996, due to health problems then being experienced by Mr. Schupak, the
Court ordered that the case be marked "off calendar" until plaintiff recovered
and was able to proceed with the litigation. In September 2002, more than six
years later, Mr. Schupak filed a motion to restore the case to the Court's
calendar. The Company filed papers in opposition to the motion on October 10,
2002, asserting that the motion should be denied on the ground that plaintiff
failed to timely comply with the terms of the Court's order concerning
restoration and, alternatively, on the ground of laches. The plaintiff filed
reply papers on November 4, 2002. On November 20, 2002, the court denied
Schupak's motion to restore the case to the calendar as "unnecessary and moot"
on the ground that the case had been improperly marked off calendar in the first
instance, ruled that the case therefore remained "active," and fixed a trial
date of March 4, 2003. On January 27, 2003, the parties reached agreement fully
and finally settling all of Schupak's claims in consideration of a payment by
the Company and the exchange of mutual general releases.
The Company was named as one of 88 defendants in a patent infringement
complaint filed on November 23, 2001 by the Lemelson Medical, Education &
Research Foundation, Limited Partnership (the "Lemelson Foundation"). The
complaint, filed in the U.S. District Court in Arizona, was not served on the
Company until March 2002. In the complaint, the Lemelson Foundation accuses the
named defendants of infringing seven U.S. patents, which allegedly cover
"automatic identification" technology through the defendants' use of methods for
scanning production markings such as bar codes. The Company received a letter
dated November 27, 2001 from attorneys for the Lemelson Foundation notifying the
Company of the complaint and offering a license. The Court entered a stay of the
case on March 20, 2002, requested by the Lemelson Foundation, pending the
outcome of a related case in Nevada being fought by bar code manufacturers. The
trial in the Nevada case began on November 18, 2002 and ended on January 17,
2003. The parties in the Nevada case are now required to submit post trial
briefs on or before May 16, 2003, and a decision is expected two months or more
thereafter. The Order for the stay in the Lemelson case provides that the
Company need not answer the complaint, although it has the option to do so. The
Company has been invited to join a common interest/joint-defense group
consisting of defendants named in the complaint as well as in other actions
brought by the Lemelson Foundation. The Company is currently in the process of
analyzing the merits of the issues raised by the complaint, notifying vendors of
its receipt of the complaint and letter, evaluating the merits of joining the
joint-defense group, and having discussions with attorneys for the Lemelson
Foundation regarding the license offer. A preliminary estimate of the royalties
and attorneys' fees which the Company may pay if it decides to accept the
license offer from the Lemelson Foundation range from about $125,000 to
$400,000. The Company has decided to gather further information, but will not
agree to a settlement at this time, and thus, has not established a reserve.
8081
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In early March 2003, the Company learned that one of its business units had
engaged in certain travel transactions that may have constituted violations
under the provisions of U.S. government regulations promulgated pursuant to 50
U.S.C. App. 1-44, which proscribe certain transactions related to travel to
certain countries. See Note 19.
In addition, 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 these actions will not have a
material adverse effect on the Company's financial position or results of
operations.
18. AMERICAN STOCK EXCHANGE NOTIFICATION
By letter dated May 2, 2001, the American Stock Exchange (the "Exchange")
notified the Company that it was below certain of the Exchange's continued
listing guidelines set forth in the Exchange's Company Guide. The Exchange
instituted a review of the Company's eligibility for continuing listing of the
Company's common stock on the Exchange. On January 17, 2002, the Company
received a letter dated January 9, 2002 from the Exchange confirming that the
American Stock Exchange determined to continue the Company's listing on the
Exchange pending quarterly reviews of the Company's compliance with the steps of
its strategic business realignment program. This determination was made subject
to the Company's favorable progress in satisfying the Exchange's guidelines for
continued listing and to the Exchange's periodic review of the Company's
Securities and Exchange Commission and other filings.
On November 11, 2002, the Company received a letter dated November 8, 2002
from the Exchange updating its position regarding the Company's compliance with
certain of the Exchange's continued listing standards as set forth in Part 10 of
the Exchange's Company Guide. Although the Company had been making favorable
progress in satisfying the Exchange's guidelines for continued listing based on
its compliance with the steps of its strategic business realignment program
shared with the Exchange in 2001 and updated in 2002, the Exchange informed the
Company that it had now become strictly subject to the procedures and
requirements of Part 10 of the Company Guide. Specifically, the Company must not
fall below the requirements of: (i) Section 1003(a)(i) with shareholders' equity
of less than $2,000,000 and losses from continuing operations and/or net losses
in two out of its three most recent fiscal years; (ii) Section 1003(a)(ii) with
shareholders' equity of less than $4,000,000 and losses from continuing
operations and/or net losses in three out of its four most recent fiscal years;
and (iii) Section 1003(a)(iii) with shareholders' equity of less than $6,000,000
and losses from continuing operations and/or net losses in its five most recent
fiscal years. The Exchange requested that the Company submit a plan to the
Exchange by December 11, 2002, advising the Exchange of action it has taken, or
will take, that would bring it into compliance with the continued listing
standards by December 28, 2003. The Company submitted a plan to the Exchange on
December 11, 2002, in an effort to maintain the listing of the Company's common
stock on the Exchange.
On January 28, 2003, the Company received a letter from the Exchange
confirming that, as of the date of the letter, the Company had evidenced
compliance with the requirements necessary for continued listing on the
Exchange. Such compliance resulted from a recent rule change by the Exchange
approved by the Securities and Exchange Commission related to continued listing
on the basis of compliance with total market capitalization or total assets and
revenues standards as alternatives to shareholders' equity standards including
the requirement that each listed company maintain $ 15 million of public float.
The letter is subject to changes in the American Stock Exchange Rules that might
supersede the letter or require the Exchange to re-evaluate its position.
19. REGULATION 50 U.S.C. APP. 1-44 ISSUE
In early March 2003, the Company learned that one of its business units had
engaged in certain travel transactions that may have constituted violations
under the provisions of U.S. government regulations promulgated pursuant to 50
U.S.C. App. 1-44, which proscribe certain transactions related to travel to
certain
8182
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
countries. The Company immediately commenced an inquiry into the matter,
incurred resulting charges, made an initial voluntary disclosure to the
appropriate U.S. government agency under its program for such disclosures and
will submit to that agency a detailed report on the results of the inquiry. In
addition, the Company has taken steps to ensure that all of its business units
are acting in compliance with the travel and transaction restrictions and other
requirements of all applicable U.S. government programs. Although the Company is
uncertain of the extent of the penalties, if any, that may be imposed on it by
virtue of the transactions voluntarily disclosed, it does not currently believe
that any such penalties will have a material effect on its business or financial
condition.
20. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002
Net revenues....................................... $109,511 $113,852 $106,030 $128,251
(Loss) income before interest and income taxes..... (427) 3,232 (2,905) 238
Net (loss) income and comprehensive (loss)
income........................................... (1,810) 1,816 (4,212) (4,924)
Preferred stock dividends and accretion............ 2,904 3,503 4,185 4,964
Net loss applicable to common shareholders......... $ (4,714) $ (1,687) $ (8,397) $ (9,888)
======== ======== ======== ========
Net loss per share -- basic and diluted............ $ (0.04) $ (0.01) $ (0.06) $ (0.07)
======== ======== ======== ========
2001
Net revenues....................................... $144,294 $133,507 $117,431 $136,933
(Loss) income before interest and income taxes..... (5,806) 14,607 (5,325) (2,672)
Net (loss) income and comprehensive (loss)
income........................................... (7,642) 12,732 (6,806) (4,129)
Preferred stock dividends and accretion............ 2,880 2,984 3,092 1,789
Net (loss) income applicable to common
shareholders..................................... $(10,522) $ 9,748 $ (9,898) $ (5,918)
======== ======== ======== ========
Net (loss) income per share -- basic and diluted... $ (0.05) $ 0.05 $ (0.05) $ (0.03)
======== ======== ======== ========
8221. RESTATEMENT
The Company has re-examined the provisions of the Congress Credit Facility
and, based on EITF Issue No. 95-22, "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that Include Both a Subjective
Acceleration Clause and a Lock-Box Arrangement," and certain provisions in the
credit agreement, the Company is required to reclassify its revolving loan
facility from long-term to short-term debt, though the existing credit facility
does not mature until January 31, 2007. As a result, the Company reclassified
$8.8 million and $13.5 million as of December 28, 2002 and December 29, 2001,
respectively, from long-term debt to short-term debt and capital lease
obligations.
A summary of the effects of the restatement on our Consolidated Balance
Sheets as of December 28, 2002 and December 29, 2001 follows:
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 28, 2002 DECEMBER 29, 2001
--------------------- ---------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED REPORTED REPORTED REPORTED
---------- -------- ---------- --------
(IN THOUSANDS)
Short-term debt and capital lease
obligations.................................. $ 3,802 $ 12,621 $ 3,162 $ 16,685
Total current liabilities...................... $78,848 $ 87,667 $79,785 $ 93,308
Long-term debt................................. $21,327 $ 12,508 $26,548 $ 13,025
Total non-current liabilities.................. $27,714 $ 18,895 $36,781 $ 23,258
84
SCHEDULE II
HANOVER DIRECT, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 28, 2002, DECEMBER 29, 2001
AND DECEMBER 30, 2000
(IN THOUSANDS OF DOLLARS)
COLUMN C
--------
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
- --------------------------------- ---------- ---------------------------- ---------- ----------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) PERIOD
- ----------- ---------- ---------- -------------- ---------- ----------
2002:
Allowance for Doubtful Accounts
Receivable, Current............ $ 2,117 $ 304 $ 861(1) $ 1,560
Reserves for Discontinued
Operations..................... 737 40 455(2) 322
Special Charges Reserve.......... 11,056 4,769 7,793(3) 8,032
Reserves for Sales Returns....... 2,764 306 1,182(3) 1,888
Deferred Tax Asset Valuation
Allowance...................... 121,600 $ 6,400(4) 128,000
2001:
Allowance for Doubtful Accounts
Receivable, Current............ 5,668 91 3,642(1) 2,117
Reserves for Discontinued
Operations..................... 588 275 126(3) 737
Special Charges Reserve.......... 13,023 7,963 9,930(3) 11,056
Reserves for Sales Returns....... 3,371 2,692 3,299(3) 2,764
Deferred Tax Asset Valuation
Allowance...................... 123,900 (2,300)(5) 121,600
2000:
Allowance for Doubtful Accounts
Receivable, Current............ 3,912 4,947 3,191(1) 5,668
Reserves for Discontinued
Operations..................... 849 261(3) 588
Special Charges Reserve.......... 2,299 11,978 1,254(3) 13,023
Reserves for Sales Returns....... 4,680 6,101 7,410(3) 3,371
Deferred Tax Asset Valuation
Allowance...................... 97,500 26,400(5) 123,900
- ---------------
(1) Written-off.
(2) Utilization of reserves $(130) and reversal of reserves $(325).
(3) Utilization of reserves.
(4) $3,700 represents an increase in the valuation allowance charged to the
deferred income tax provision and the balance represents the net change in
the valuation allowance offset by the change in the gross deferred tax
asset.
(5) Represents the change in the valuation allowance offset by the change in the
gross deferred tax asset.
8385
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting and financial
disclosure.
The Board of Directors of the Company, upon recommendation of its Audit
Committee, ended the engagement of Arthur Andersen LLP ("Arthur Andersen") as
the Company's independent public accountants, effective after Arthur Andersen's
review of the Company's financial results for the fiscal quarter ended March 30,
2002 and the filing of this Quarterly Report on Form 10-Q for such quarter, and
authorized the engagement of KPMG LLP ("KPMG") to serve as the Company's
independent public accountants for the fiscal year ending December 28, 2002.
Arthur Andersen's report on the Company's 2001 financial statements was issued
on March 16, 2002, in conjunction with the filing of the Company's Annual Report
on Form 10-K for the fiscal year ended December 29, 2001.
8486
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
Directors hold office until the next annual meeting or until their
successors have been elected or until their earlier death, resignation,
retirement, disqualification or removal as provided in the Company's Certificate
of Incorporation and Bylaws. On January 10, 2002, the Board of Directors
announced the reduction of the number of Directors of the Company from six to
five. On January 10, 2002, the Board of Directors announced the appointment of
Thomas C. Shull as Chairman of the Company's Board of Directors and the election
of E. Pendleton James as a member of the Company's Board of Directors, each
filling the vacancies created by the resignation of Eloy Michotte and Alan
Grieve and each to serve until the Company's next Annual Shareholders Meeting.
On December 20, 2002, the Board of Directors announced the election of Robert H.
Masson as a member of the Company's Board of Directors effective January 1,
2003, filling the vacancy created by the resignation of J. David Hakman,
effective December 31, 2002.
DIRECTOR
NAME AGE TITLE AND OTHER INFORMATION SINCE
- ---- --- --------------------------- --------
Thomas C. Shull 51 Thomas C. Shull has been Chairman of the Company's 2000
Board of Directors since January 10, 2002 and a
member of the Board of Directors of the Company and
President and Chief Executive Officer of the Company
since December 5, 2000. In 1990, Mr. Shull co-founded
Meridian Ventures, a venture management and
turnaround firm presently based in Connecticut, and
has served as chief executive officer since its
inception. From 1997 to 1999, he served as President
and CEO of Barneys New York, a leading luxury
retailer, where he led them out of bankruptcy. From
1992 to 1994, Mr. Shull was Executive Vice President
of the R.H. Macy Company, Inc., where he was
responsible for human resources, information
technology, business development, strategic planning
and merchandise distribution and led the merger
negotiations with Federated Department Stores. Prior
to that, he served as a consultant with McKinsey &
Company and in the early 1980s as a member of the
National Security Council Staff in the Reagan White
House.
E. Pendleton James 73 E. Pendleton James has been a director of the Company 2002
since January 2002. Mr. James has over thirty years
experience in executive search and recently merged
his firm, Pendleton James Associates, with Whitehead
Mann. He currently serves on the Board of the
Citizens for Democracy Corps and is a Trustee for the
Center for the Study of the Presidency. Mr. James
served as an assistant to Presidents Nixon and
Reagan. He is a former member of the Board of
Directors of Comsat Corporation, the Metropolitan
Life Series Fund, the White House Fellows Commission,
the Ronald Reagan Foundation and the USO World Board
of Governors.
8587
DIRECTOR
NAME AGE TITLE AND OTHER INFORMATION SINCE
- ---- --- --------------------------- --------
Kenneth J. Krushel 50 Kenneth J. Krushel has been the Executive Vice 1999
President of Strategic and Business Development of
Blackboard Inc., a provider of e-education software
and commerce and access systems, since December 2000.
From October 1999 to December 2000, Mr. Krushel was
the Chairman and Chief Executive Officer of College
Enterprises, Inc. From 1996 to 1999, Mr. Krushel was
the Senior Vice President of Strategic Development
for NBC Corp. and from 1994 to 1996 was Senior Vice
President, Business Development, for King World
Productions. Formerly, Mr. Krushel was President and
Chief Operating Officer of Think Entertainment and
Vice-President of Programming and Marketing for
American Cablesystems. Mr. Krushel was elected a
director of the Company in May 1999.
Robert H. Masson 67 Robert H. Masson served as Senior Vice President, 2003
Finance and Administration and Vice President and
Chief Financial Officer of Parsons & Whittemore,
Inc., a global pulp and paper manufacturer, from May
1990 until his retirement June 30, 2002. Prior
thereto, Mr. Masson held various executive, financial
and treasury roles with The Ford Motor Company,
Knutson Construction Company, Ellerbe, PepsiCo, Inc.
and Combustion Engineering (now part of the ABB
Group). Mr. Masson was elected a director of the
Company effective January 1, 2003.
Basil P. Regan 62 Basil P. Regan has been the General Partner of Regan 2001
Partners, L.P., a limited partnership that invests
primarily in turnaround companies and special
situations, since December 1989. He has been
President of Regan Fund Management Ltd. since October
1995, which manages Regan Partners, L.P., Regan Fund
International, L.P. and Super Hedge Fund, L.P. From
1986 to 1989, Mr. Regan was Vice President and
Director of Equity Research of Reliance Group
Holdings. Mr. Regan was elected a director of the
Company in August 2001.
(b) Identification of Executive Officers
Pursuant to the Company's Bylaws, its officers are chosen annually by the
Board of Directors and hold office until their respective successors are chosen
and qualified.
Effective January 28, 2002, Edward M. Lambert was appointed to succeed
Brian C. Harriss as Executive Vice President and Chief Financial Officer of the
Company and Mr. Harriss was appointed as Executive Advisor to the Chairman of
the Company coincident with his resignation as Executive Vice President and
Chief Financial Officer of the Company.
During September 2002, Charles F. Messina resigned as Executive Vice
President, Chief Administrative Officer and Secretary of the Company.
Effective December 2, 2002, Brian C. Harriss was appointed Executive Vice
President -- Human Resources and Legal and Secretary of the Company.
8688
OFFICE HELD
NAME AGE TITLE AND OTHER INFORMATION SINCE
- ---- --- --------------------------- -----------
Thomas C. Shull 51 President and Chief Executive Officer and a member 2000
of the Board of Directors since December 5, 2000.
Chairman of the Board since January 10, 2002. In
1990, Mr. Shull co-founded Meridian Ventures, a
venture management and turnaround firm presently
based in Connecticut, and has served as chief
executive officer since its inception. From 1997 to
1999, he served as President and Chief Executive
Officer of Barneys New York, a leading luxury
retailer, where he led them out of bankruptcy. From
1992 to 1994, Mr. Shull was Executive Vice
President of the R.H. Macy Company, Inc., where he
was responsible for human resources, information
technology, business development, strategic
planning and merchandise distribution and led the
merger negotiations with Federated Department
Stores. Prior to that, he served as a consultant
with McKinsey & Company and in the early 1980s as a
member of the National Security Council Staff in
the Reagan White House.
Edward M. Lambert 42 Executive Vice President and Chief Financial 2002
Officer since January 28, 2002. From July 2001
until January 28, 2002, Mr. Lambert served as an
advisor to the Company. In 1990, Mr. Lambert
co-founded Meridian Ventures, a venture management
and turnaround firm presently based in Connecticut,
and served as a Managing Director until December
2000. From 1998 to 1999, he served as Chief
Financial Officer of Barneys New York, a leading
luxury retailer, and from 1993 to 1994, he served
as Executive Vice President of Applied Solar Energy
Corporation, a space systems manufacturer.
Michael D. Contino 42 Executive Vice President and Chief Operating 2001
Officer since April 25, 2001. Senior Vice President
and Chief Information Officer from December 1996 to
April 25, 2001 and President of Keystone Internet
Services, Inc. (now Keystone Internet Services,
LLC) since November 2000. Mr. Contino joined the
Company in 1995 as Director of Computer Operations
and Telecommunications. Prior to 1995, Mr. Contino
was the Senior Manager of IS Operations at New
Hampton, Inc., a subsidiary of Spiegel, Inc.
8789
OFFICE HELD
NAME AGE TITLE AND OTHER INFORMATION SINCE
- ---- --- --------------------------- -----------
Brian C. Harriss 54 Executive Vice President -- Human Resources and 2002
Legal and Secretary since December 2002. Executive
Advisor to the Chairman of the Company from January
28, 2002 to December 2002, and Executive Vice
President and Chief Financial Officer from June
1999 to January 28, 2002. From 1998 to 1999, Mr.
Harriss was a Managing Director of Dailey Capital
Management, LP, a venture capital fund, and Chief
Operating Officer of E-Bidding Inc., an Internet
e-commerce freight Web site. From 1997 to 1998, Mr.
Harriss served as the Vice President of Corporate
Development at the Reader's Digest Association,
Inc. From 1994 to 1996, Mr. Harriss was the Chief
Financial Officer of the Thompson Minwax Company.
Prior thereto, Mr. Harriss held various financial
positions with Cadbury Schweppes PLC, Tambrands,
Inc. and PepsiCo, Inc.
William C. Kingsford 56 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.
Frank J. Lengers 46 Vice President, Treasurer since October 2000. Mr. 2000
Lengers joined the Company in November 1988 as an
Internal Audit Manager. From 1990 to 1994, Mr.
Lengers served as Manager of Corporate Treasury
Operations. In 1994, he was promoted to Director of
Treasury Operations and in 1997 to Assistant
Treasurer, a position he held until October 2000.
Prior to joining the Company, Mr. Lengers held
various audit positions with R.H. Macy & Co. and
The Metropolitan Museum of Art.
Steven Lipner 54 Vice President, Taxation since October 2000. Mr. 2000
Lipner served as Director of Taxes from February
1984 to October 2000. Prior thereto, he served as
Director of Taxes at Avnet, Inc. and held various
positions in public accounting. He holds a license
as a Certified Public Accountant in New York.
(c) Audit Committee Financial Expert
The Company's Board of Directors has determined that the Company has at
least one "audit committee financial expert" serving on the Audit Committee of
the Board of Directors who is "independent" of management within the definition
of such term in the Securities Exchange Act of 1934, as amended, and the listing
requirements of the American Stock Exchange. Robert H. Masson, a member of the
Board of Directors and the Chairman of its Audit Committee, is the "audit
committee financial expert" serving on the Company's Audit Committee.
(d) Code of Ethics
The Company has adopted a code of ethics that applies to the Company's
principal executive officer, principal financial officer and principal
accounting officer and other persons performing similar functions. A copy of the
code of ethics has been filed as an Exhibit to this Annual Report on Form 10-K.
(e) Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires officers,
directors and beneficial owners of more than 10% of the Company's shares to file
reports with the Securities and Exchange Commission and the American Stock
Exchange. Based solely on a review of the reports and representations furnished
to the
8890
Company during the last fiscal year by such persons, the Company believes that
each of these persons is in compliance with all applicable filing requirements
except for Messrs. Kingsford, Lengers and Lipner, who each failed to file one
report in a timely fashion.
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 AND
RELATED STOCKHOLDER MATTERS
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.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this report, anAn evaluation was carried outperformed under the supervision and with the
participation of the Company's management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as such term is defined in Rules 13a-14c13a-15(e) and 15d-14(c)15d-15(e) under the
Securities Exchange Act of 1934, as amended). as of the end of the period covered
by this report. Based uponon that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the design and operation of the Company'sthese disclosure controls and procedures were
effective. No significant changes were madeThere has been no change in the Company's internal controlscontrol over
financial reporting during the Company's recent fiscal quarter that has
materially affected, or in other factors that could significantlyis reasonably likely to materially affect, these
controls subsequent to the date of the evaluation.
89Company's
internal control over financial reporting.
91
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
PAGE
NO.
----
1. Index to Financial Statements
Report of Independent Public Accountants -- Hanover Direct,
Inc. and
Subsidiaries Financial Statements........................... 38
Consolidated Balance Sheets as of December 28, 2002 and
December 29, 2001........................................... 3940
Consolidated Statements of Income (Loss) for the years ended
December 28, 2002, December 29, 2001 and December 30,
2000........................................................ 4041
Consolidated Statements of Cash Flows for the years ended
December 28, 2002, December 29, 2001 and December 30,
2000........................................................ 4142
Consolidated Statements of Shareholders' Deficiency for the
years ended December 28, 2002, December 29, 2001 and
December 30, 2000........................................... 4243
Notes to Consolidated Financial Statements for the years
ended December 28, 2002, December 29, 2001 and December 30,
2000........................................................ 4344
Supplementary Data:
Selected quarterly financial information (unaudited) for the
two fiscal years ended December 28, 2002 and December 29,
2001........................................................ 8283
2. Index to Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts for the
years ended December 28, 2002, December 29, 2001 and
December 30, 2000........................................... 8385
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 found after the
Signature page.
(b) Reports on Form 8-K:
1.1 Form 8-K, filed October 2, 2002 -- reporting pursuant to Item 5 of
such Form the appointment of Mr. Brian C. Harriss as Executive Vice
President -- Human Resources and Legal and Secretary of the Company,
effective December 2, 2002, and the resignation of Charles F.
Messina as Executive Vice President, Chief Administrative Officer
and Secretary of the Company, effective September 30, 2002.
1.2 Form 8-K, filed October 2, 2002 -- reporting pursuant to Item 5 of
such Form the integration of the Company's Domestications and The
Company Store divisions.
1.3 Form 8-K, filed October 30, 2002 -- reporting pursuant to Item 5 of
such Form that pursuant to a previously signed, ordinary course,
multi-year strategic alliance with Amazon.com, Amazon.com had begun
to offer Hanover Direct merchandise to some customers through a
preview site on Amazon.com.
1.4 Form 8-K, filed November 6, 2002 -- reporting pursuant to Item 5 of
such Form scheduling information regarding its conference call with
management to review the fiscal year 2002 third quarter and nine
months operating results.
1.5 Form 8-K, filed November 7, 2002 -- reporting pursuant to Item 5 of
such Form the issuance of two press releases announcing that,
pursuant to a previously signed, ordinary course, multi-
9092
year strategic alliance with Amazon.com, Amazon.com had begun to
offer the Company's merchandise to all its customers through the
formal launch of its Apparel & Accessories Store.
1.6 Form 8-K, filed November 7, 2002 -- reporting pursuant to Item 5 of
such Form scheduling information regarding its conference call with
management to review the fiscal year 2002 third quarter and
year-to-date operating results.
1.7 Form 8-K, filed November 8, 2002 -- reporting pursuant to Item 9 of
such Form a change to previous guidance given by the Company
regarding the anticipated level of its EBITDA and sales for its 2002
fiscal year to $7 million in EBITDA and $450 million in sales.
1.8 Form 8-K, filed November 8, 2002 -- reporting pursuant to Item 9 of
such Form the issuance of a press release announcing operating
results for the thirteen and thirty-nine weeks ended September 28,
2002.
1.9 Form 8-K, filed November 12, 2002 -- reporting pursuant to Item 9 of
such Form an unofficial transcript of its conference call with
management to review the fiscal year 2002 first half operating
results and a press release announcing operating results for the
thirteen and twenty-six weeks ended June 29, 2002.
1.10 Form 8-K, filed November 21, 2002 -- reporting pursuant to Item 5
of such Form the receipt by the Company of a letter from the
American Stock Exchange (the "Exchange") updating its position
regarding the Company's compliance with certain of the Exchange's
continued listing standards as set forth in Part 10 of the Amex
Company Guide.
1.11 Form 8-K, filed November 21, 2002 -- reporting pursuant to Item 5
of such Form the conclusion by the Company's management and Board
of Directors that it is unlikely that the Company will be able to
accumulate sufficient capital, surplus, or other assets under
Delaware corporate law or to obtain sufficient debt financing to
either redeem at least 811,056 shares of the Series B Preferred
Stock by August 31, 2003, or redeem all of the shares of Series B
Preferred Stock by August 31, 2005.
1.12 Form 8-K, filed December 30, 2002 -- reporting pursuant to Item 5
of such Form the election of Mr. Robert H. Masson as a member of
the Board of Directors of the Company effective January 1, 2003,
and the resignation of Mr. J. David Hakman as a member of the Board
of Directors of the Company effective December 31, 2002.
1.13 Form 8-K, filed January 29, 2003 -- reporting pursuant to Item 5 of
such Form the issuance of a press release announcing unaudited
revenue results for the fiscal year ended December 28, 2002 and the
expansion of the Company's brand offerings with Amazon.com during
the first quarter of 2003.
1.14 Form 8-K, filed January 30, 2003 -- reporting pursuant to Item 5 of
such Form the receipt of a letter from the American Stock Exchange
(the "Exchange") confirming that, as of the date of the letter, the
Company had evidenced compliance with the requirements necessary
for continued listing on the Exchange.
1.15 Form 8-K, filed March 20, 2003 -- reporting pursuant to Item 5 of
such Form scheduling information regarding its conference call with
management to review the fiscal year 2002 operating results.
9193
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 no. 1 to
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 25, 2003April 9, 2004 HANOVER DIRECT, INC.
(Registrant)
By: /s/ THOMAS C. SHULL
------------------------------------
Thomas C. Shull,
Chairman of the Board,
President and Chief Executive
Officer (On behalf of the registrant
and as principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment no. 1 to report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated and on the date
indicated below.
Principal Officers:
/s/ EDWARD M. LAMBERTCHARLES E. BLUE
- -----------------------------------------------------
Edward M. Lambert,
ExecutiveCharles E. Blue,
Senior Vice President and
Chief Financial Officer
(principal financial officer)
/s/ WILLIAM C. KINGSFORD
- -----------------------------------------------------
William C. Kingsford,
Vice President and
Corporate Controller
(principal accounting officer)
Board of Directors:
/s/ THOMAS C. SHULL
- -----------------------------------------------------
Thomas C. Shull, Director
/s/ ROBERT H. MASSON
- -----------------------------------------------------
Robert H. Masson, Director
/s/ BASIL P. REGAN
- -----------------------------------------------------
Basil P. Regan, Director
/s/ E. PENDLETON JAMESWILLIAM WACHTEL
- -----------------------------------------------------
E. Pendleton James,William Wachtel, Director
/s/ KENNETH J. KRUSHELA. DAVID BROWN
- -----------------------------------------------------
Kenneth J. Krushel,A. David Brown, Director
/s/ DONALD HECHT
- -----------------------------------------------------
Donald Hecht, Director
/s/ STUART FELDMAN
- -----------------------------------------------------
Stuart Feldman, Director
/s/ WAYNE P. GARTEN
- -----------------------------------------------------
Wayne P. Garten, Director
Date: March 25, 2003
92
CERTIFICATIONS
I, Edward M. Lambert, certify that:
1. I have reviewed this annual report on Form 10-K of Hanover Direct,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ EDWARD M. LAMBERT
--------------------------------------
Edward M. Lambert
Executive Vice President and
Chief Financial Officer
Date: March 25, 2003
93
CERTIFICATIONS
I, Thomas C. Shull, certify that:
1. I have reviewed this annual report on Form 10-K of Hanover Direct,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ THOMAS C. SHULL
--------------------------------------
Thomas C. Shull
President and Chief Executive Officer
Date: March 25, 2003April 9, 2004
94
EXHIBIT INDEX
EXHIBIT NUMBER
ITEM 601 OF
REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE
- -------------- -----------------------------------------------------------------------
2.1 Letter agreement, dated December 21, 1999, between the Company and FAR
Services, LLC. Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 25, 1999.
2.2 The Shopper's Edge, LLC Purchase Agreement, dated as of December 25,
1999, between Hanover Brands, Inc. and Far Services, LLC. Incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended December 25, 1999.
2.3 Asset Purchase Agreement, dated as of June 13, 2001, among the Company,
LWI Holdings, Inc., HSN LP, HSN Improvements, LLC and HSN Catalog
Services, Inc. Incorporated by reference to the Company's Current
Report on Form 8-K filed August 9, 2001.
2.4 Amendment No. 1, dated as of June 20, 2001, to the Asset Purchase
Agreement, dated as of June 13, 2001, among the Company, LWI Holdings,
Inc., HSN LP, HSN Improvements, LLC and HSN Catalog Services, Inc.
Incorporated by reference to the Company's Current Report on Form 8-K
filed August 9, 2001.
2.5 Agreement, dated as of December 19, 2001, between the Company and
Richemont. Incorporated by reference to the Company's Current Report on
Form 8-K filed December 20, 2001.
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 Certificate of Amendment to Certificate of Incorporation dated May 28,
1999. Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 25, 1999.
3.4 Certificate of Correction Filed to Correct a Certain Error in the
Restated Certificate of Incorporation dated August 26, 1999.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 25, 1999.
3.5 Certificate of Designations, Powers, Preferences and Rights of Series A
Cumulative Participating Preferred Stock. Incorporated by reference to
the Company's Current Report on Form 8-K filed August 30, 2000.
3.6 Certificate of Designations, Powers, Preferences and Rights of Series A
Cumulative Participating Preferred Stock. Incorporated by reference to
the Company's Current Report on Form 8-K filed August 30, 2000.
3.7 Certificate of the Designations, Powers, Preferences and Rights of
Series B Participating Preferred Stock. Incorporated by reference to
the Company's Current Report on Form 8-K filed December 20, 2001.
3.8 Certificate of Elimination of the Series A Cumulative Participating
Preferred Stock. Incorporated by reference to the Company's Current
Report on Form 8-K filed December 20, 2001.
3.9 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 Registration Rights Agreement between the Company and Richemont dated
as of August 23, 2000. Incorporated by reference to the Company's
Current Report on Form 8-K filed August 30, 2000.
95
EXHIBIT NUMBER
ITEM 601 OF
REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE
- -------------- -----------------------------------------------------------------------
10.1 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.
10.2 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.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 1996 Stock Option Plan, as amended. Incorporated by reference to the
Company's 1997 Proxy Statement.
10.9 1999 Stock Option Plan for Directors. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 25,
1999.
10.10 2000 Management Stock Option Plan. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 25,
1999.
10.11 2002 Stock Option Plan for Directors. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 29,
2001.
10.12 Amendment No. 1 to 2002 Stock Option Plan for Directors. FILED
HEREWITH.Incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended December 28, 2002.
10.13 Form of Stock Option Agreement under 2002 Stock Option Plan for
Directors. FILED HEREWITH.Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 28, 2002.
10.14 Hanover Direct, Inc. Key Executive Eighteen Month Compensation
Continuation Plan. Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2001.
10.15 Amendment No. 1 to the Hanover Direct, Inc. Key Executive Eighteen
Month Compensation Continuation Plan, dated as of June 1, 2001.
Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.
10.16 Amendment No. 2 to the Hanover Direct, Inc. Key Executive Eighteen
Month Compensation Continuation Plan, effective as of August 1, 2001.
Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 30, 2002.
10.17 Hanover Direct, Inc. Key Executive Twelve Month Compensation
Continuation Plan. Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2001.
96
EXHIBIT NUMBER
ITEM 601 OF
REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE
- -------------- -----------------------------------------------------------------------
10.18 Amendment No. 1 to the Hanover Direct, Inc. Key Executive Twelve Month
Compensation Continuation Plan, effective as of August 1, 2001.
Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 30, 2002.
10.19 Hanover Direct, Inc. Key Executive Six Month Compensation Continuation
Plan. Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2001.
10.20 Amendment No. 1 to the Hanover Direct, Inc. Key Executive Six Month
Compensation Continuation Plan, effective as of August 1, 2001.
Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 30, 2002.
10.21 Hanover Direct, Inc. Directors Change of Control Plan. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2001.
10.22 Amendment No. 1 to the Hanover Direct, Inc. Directors Change of Control
Plan, effective as of August 1, 2001. Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 30, 2002.
10.23 Loan and Security Agreement dated as of November 14, 1995 by and among
Congress Financial Corporation ("Congress"), HDPA, Brawn, Gump's by
Mail, 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.
10.24 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.
10.25 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 TAC.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
10.26 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 TAC. Incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended December 28, 1996.
10.27 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 TAC.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
10.28 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 TAC.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
97
EXHIBIT NUMBER
ITEM 601 OF
REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE
- -------------- -----------------------------------------------------------------------
10.29 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 TAC.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
10.30 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 TAC.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 1996.
10.31 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 TAC.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 26, 1998.
10.32 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 TAC.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 26, 1998.
10.33 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 TAC.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 26, 1998.
10.34 Eleventh Amendment to Loan and Security Agreement dated as of March 25,
1998 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 26, 1998.
10.35 Twelfth Amendment to Loan and Security Agreement dated as of September
30, 1998 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 25, 1999.
10.36 Thirteenth Amendment to Loan and Security Agreement dated as of
September 30, 1998 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 25, 1999.
10.37 Fourteenth Amendment to Loan and Security Agreement dated as of
February 28, 2000 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 25, 1999.
10.38 Fifteenth Amendment to Loan and Security Agreement dated as of March
24, 2000 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's,
LWI, HDVA, Hanover Realty, The Company Store Factory, Inc., The Company
Office, Inc., Keystone Internet Services, Inc., Tweeds, LLC,
Silhouettes, LLC, Hanover Company Store, LLC and Domestications, LLC.
Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 25, 2000.
98
EXHIBIT NUMBER
ITEM 601 OF
REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE
- -------------- -----------------------------------------------------------------------
10.39 Sixteenth Amendment to Loan and Security Agreement dated as of August
8, 2000 by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's,
LWI, HDVA, Hanover Realty, The Company Store Factory, Inc., The Company
Office, Inc., Keystone Internet Services, Inc., Tweeds, LLC,
Silhouettes, LLC, Hanover Company Store, LLC and Domestications, LLC.
Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 24, 2000.
10.40 Seventeenth Amendment to Loan and Security Agreement dated as of
January 5, 2001 by and among Congress, HDPA, Brawn, Gump's by Mail,
Gump's, LWI, HDVA, Hanover Realty, The Company Store Factory, Inc., The
Company Office, Inc., Keystone Internet Services, Inc., Tweeds, LLC,
Silhouettes, LLC, Hanover Company Store, LLC and Domestications, LLC.
Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 30, 2000.
10.41 Eighteenth Amendment to Loan and Security Agreement, dated as of
November 12, 2001, among Congress, HDPA, Brawn, Gump's by Mail, Gump's,
LWI, HDVA, Hanover Realty, The Company Store Factory, Inc., The Company
Office, Inc., Keystone Internet Services, Inc., Tweeds, LLC,
Silhouettes, LLC, Hanover Company Store, LLC and Domestications, LLC.
Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 29, 2001.
10.42 Nineteenth Amendment to Loan and Security Agreement, dated as of
December 18, 2001, by and among Congress, HDPA, Brawn, Gump's by Mail,
Gump's, LWI, HDVA, Hanover Realty, The Company Store Factory, Inc., The
Company Office, Inc., Keystone Internet Services, Inc., Tweeds, LLC,
Silhouettes, LLC, Hanover Company Store, LLC and Domestications, LLC.
Incorporated by reference to the Company's Current Report on Form 8-K
filed December 20, 2001.
10.43 Twentieth Amendment to Loan and Security Agreement, dated as of March
5, 2002, by and among Congress, HDPA, Brawn, Gump's by Mail, Gump's,
HDVA, Hanover Realty, The Company Store Factory, Inc., The Company
Office, Inc., Keystone Internet Services, Inc., Silhouettes, LLC,
Hanover Company Store, LLC and Domestications, LLC. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 29, 2001.
10.44 Twenty-first Amendment to Loan and Security Agreement, dated as of
March ,21, 2002, among Congress, HDPA, Brawn, Gump's by Mail, Gump's,
HDVA, Hanover Realty, The Company Store Factory, Inc., The Company
Office, Inc., Keystone Internet Services, Inc., Silhouettes, LLC,
Hanover Company Store, LLC and Domestications, LLC. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 29, 2001.
10.45 Twenty-second Amendment to Loan and Security Agreement, dated as of
August 16, 2002, among Congress, HDPA, Brawn, Gump's by Mail, Gump's,
HDVA, Hanover Realty, The Company Store Factory, Inc., The Company
Office, Inc., Silhouettes, LLC, Hanover Company Store, LLC,
Domestications, LLC and Keystone Internet Services, Inc. Incorporated
by reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 29, 2002.
99
EXHIBIT NUMBER
ITEM 601 OF
REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE
- -------------- -----------------------------------------------------------------------
10.46 Twenty-third Amendment to Loan and Security Agreement, dated as of
December 27, 2002, among Congress, HDPA, Brawn, Gump's by Mail, Gump's,
HDVA, Hanover Realty, The Company Store Factory, Inc., The Company
Office, Inc., Silhouettes, LLC, Hanover Company Store, LLC,
Domestications, LLC, Keystone Internet Services, Inc., Keystone
Internet Services, LLC and The Company Store Group, LLC. FILED
HEREWITH.Incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended December 28, 2002.
10.47 Twenty-fourth Amendment to Loan and Security Agreement, dated as of
February 28, 2003, among Congress, Brawn, Gump's by Mail, Gump's,
Hanover Realty, The Company Store Factory, Inc., The Company Office,
Inc., Silhouettes, LLC, Hanover Company Store, LLC, Domestications,
LLC, Keystone internet Services, LLC and The Company Store Group, LLC.
FILED HEREWITH.Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 28, 2002.
10.48 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.
10.49 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.
10.50 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.
10.51 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.
10.52 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.
10.52 Performance Price10.53 Six-Year Stock Option dated as of August 23, 1996 between the
CompanyNAR and
Rakesh K. Kaul. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 28, 1996.
10.53 Six-Year10.54 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.
10.54 Seven-Year10.55 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.
10.55 Eight-Year10.56 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.
10.56 Nine-Year Stock Option10.57 Account Purchase and Credit Card Marketing and Services Agreement,
dated as of August 23, 1996March 9, 1999, between NARthe Company and Rakesh K. Kaul.Capital One
Services, Inc. and Capital One Bank. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 28, 1996.
10.5725,
1999.
10.58 Addendum to Account Purchase and Credit Card Marketing and Services
Agreement, dated as of March 9,July 7, 1999, between the Company and Capital
One Services, Inc. and Capital One Bank. Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended December
25,
1999.
10.58 Addendum to Account Purchase and Credit Card Marketing and Services
Agreement, dated as of July 7, 1999, between the Company and Capital
One Services, Inc. and Capital One Bank. Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended December
29, 2001.
10.59 Employment Agreement dated as of March 6, 2000 between the Company and
Rakesh K. Kaul. Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 25, 2000.
100
EXHIBIT NUMBER
ITEM 601 OF
REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE
- -------------- -----------------------------------------------------------------------
10.60 Credit Agreement, dated as of March 24, 2000, by and among the Company,
HDPA, Brawn, Gump's By Mail, Gump's, LWI, HDVA, Keystone Internet
Services, Inc., Tweeds, LLC, Silhouettes, LLC, Hanover Company Store,
LLC, Domestications, LLC and Richemont. Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 25, 2000.
10.61 Subordination Agreement dated as of March 24, 2000, between Congress
and Richemont. Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 25, 2000.
10.62 Letter Agreement, dated as of March 24, 2000, between Richemont and
Congress. Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 25, 2000.
10.63 Amended and Restated Stock Option Agreement dated as of April 14, 2000
between the Company and Rakesh K. Kaul. Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 25, 2000.
10.64 Stock Option Agreement dated as of April 14, 2000 between erizon, Inc.
and Rakesh K. Kaul. Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 25,
2000.
10.65 Hanover Direct, Inc. Key Executive Thirty-Six Month Compensation
Continuation Plan. Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 25, 2000.
10.66 Hanover Direct, Inc. Key Executive Twenty-Four Month Compensation
Continuation Plan. Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 25, 2000.
10.67 Intercompany Services Agreement by and between erizon, Inc. and Hanover
Brands, Inc. Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 24, 2000.
10.68 Amendment to Intercompany Services Agreement by and between Hanover
Brands, Inc. and erizon, Inc. effective as of December 27, 2000.
Incorporated by reference to the Company's Current Report on Form 8-K
filed January 22, 2001.
10.69 Commitment Letter dated August 7, 2000 between the Company and
Richemont. Incorporated by reference to the Company's Current Report on
Form 8-K filed August 10, 2000.
10.70 Securities Purchase Agreement between the Company and Richemont dated
as of August 23, 2000. Incorporated by reference to the Company's
Current Report on Form 8-K filed August 30, 2000.
10.71 Services Agreement dated as of December 5, 2000 among Meridian
Ventures, LLC, Thomas C. Shull and the Company. Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 30, 2000.
10.72 Stock Option Agreement made as of December 5, 2000 by the Company in
favor of Thomas C. Shull. FILED HEREWITH.
10.73 Amendment No. 1 dated as of September 1, 2002 to Stock Option Agreement
between the Company and Thomas C. Shull. FILED HEREWITH.
10.74 First Amendment of Services Agreement made as of the 23rd day of April
2001, by and among the Company, Thomas C. Shull and Meridian Ventures,
LLC. Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2001.
101
EXHIBIT NUMBER
ITEM 601 OF
REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE
- -------------- -----------------------------------------------------------------------
10.75 Letter Agreement dated as of April 30, 2001 between the Company, Thomas
C. Shull and Meridian Ventures, LLC. Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2001.
10.76 Agreement dated May 14, 2001 between Hanover Direct, Inc. and Thomas C.
Shull. Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 29, 2001.
10.77 Amendment No. 1 to Agreement dated May 14, 2001 between Hanover Direct,
Inc. and Thomas C. Shull. Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 29,
2002.
10.78 Services Agreement dated as of August 1, 2001 by and among Meridian
Ventures, LLC, Thomas C. Shull and the Company. Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 29, 2001.
10.79 Services Agreement dated as of December 14, 2001 by and among Meridian
Ventures, LLC, Thomas C. Shull and the Company. Incorporated by
reference to the Company's Current Report on Form 8-K filed December
14, 2001.
10.80 Amendment No. 1 of Services Agreement made as of the 23rd day of April,
2002, by and among the Company, Thomas C. Shull and Meridian Ventures,
LLC. Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 30, 2002.
10.81 Stock Option Agreement made as of December 14, 2001 by the Company in
favor of Thomas C. Shull. FILED HEREWITH.
10.82 Amendment No. 1 dated as of September 1, 2002 to Stock Option Agreement
between the Company and Thomas C. Shull. FILED HEREWITH.
10.83 Employment Agreement dated as of September 1, 2002 between Thomas C.
Shull and the Company. Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 29,
2002.
10.84 Amendment No. 1 to Employment Agreement dated as of September 1, 2002
between Thomas C. Shull and the Company. Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 28, 2002.
10.85 Final form of letter agreement between the Company and certain Level 8
executive officers. Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
28, 2002.
10.86 Form of Transaction Bonus Letter. FILED HEREWITH.
10.87 Agreement, dated as of December 19, 2001, between the Company and
Richemont. Incorporated by reference to the Company's Current Report on
Form 8-K filed December 20, 2001.
10.88 Release, dated December 19, 2001, executed by the Company in favor of
Richemont and others. Incorporated by reference to the Company's
Current Report on Form 8-K filed December 20, 2001.
10.89 Indemnification Agreement, dated as of December 19, 2001 between the
Company and Richemont. Incorporated by reference to the Company's
Current Report on Form 8-K filed December 20, 2001.
10.90 Hanover Direct, Inc. Savings and Retirement Plan, as amended and
restated as of July 1, 1999. Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 29, 2001.
10.91 First Amendment to the Hanover Direct, Inc. Savings and Retirement
Plan, effective March 1, 2002. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 29, 2001.
102
EXHIBIT NUMBER
ITEM 601 OF
REGULATION S-K DESCRIPTION OF DOCUMENT AND INCORPORATION BY REFERENCE WHERE APPLICABLE
- -------------- -----------------------------------------------------------------------
10.92 Hanover Direct, Inc. and Subsidiaries Code of Ethics. FILED HEREWITH.
21.1 Subsidiaries of the Registrant. FILED HEREWITH.
23.1 Consent of Independent Public Accountants. FILED HEREWITH.
99.1 Certification signed by Thomas C. Shull. FILED HEREWITH.
99.2 Certification signed by Edward M. Lambert. FILED HEREWITH.
- ---------------
* Hanover Direct, Inc., a Delaware corporation, is the successor by merger to
The Horn & Hardart Company and The Hanover Companies.
103100