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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
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[ ] Confidential for the Use of the Commission Only (as permitted by Rule 14a-6(e)(2))14a-12
Hanover Direct Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than Registrant)HANOVER DIRECT, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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2
HANOVER DIRECT, INC.
1500 HARBOR BOULEVARD
WEEHAWKEN,115 RIVER ROAD, BUILDING 10
EDGEWATER, NEW JERSEY 0708707020
(201) 863-7300
NOTICE OF ANNUAL MEETING OF SHAREHOLDERSSTOCKHOLDERS
TO BE HELD ON MAY 4, 200015, 2003
Dear Shareholders:Stockholders:
We will hold the 20002003 Annual Meeting of ShareholdersStockholders of Hanover Direct,
Inc., a Delaware corporation (the "Company"), at the Hotel Intercontinental, 111
East 48th Street,Sheraton Suites on the
Hudson, 500 Harbor Boulevard, Weehawken, New York, New York 10017Jersey 07087 on Thursday, May 4, 200015,
2003 at 9:30 a.m., local time. The meeting's purpose is to:
1. Elect 125 directors;
2. RatifyDelegate to the 1999 Stock Option Plan for Directors;
3. Ratify the 2000 Management Stock Option Plan;
4. Ratify the 2000 Short-Term Incentive Plan for Rakesh K. Kaul;
5. Ratify the 2000 Long-Term Incentive Plan for Rakesh K. Kaul;
6. Ratify an amendment to and restatementAudit Committee of the Stock Option Agreement
dated August 23, 1996, as amended, with Rakesh K. Kaul forming a partBoard of the 1996 Long-Term Incentive Plan for Rakesh K. Kaul;
7. Ratify the selection of Arthur Andersen LLP asDirectors authority to
select the Company's independent auditors for the fiscal year ending
December 30, 2000;27, 2003 from amongst established national audit firms; and
8.3. Consider any other matters that are properly presented at the Annual
Meeting of Stockholders and any adjournment.
You may vote at the Annual Meeting of Stockholders if you were a Company shareholderholder of
the Company's Common Stock, par value $0.66 2/3 per share (the "Common Stock"),
or the Company's Series B Participating Preferred Stock, par value $0.01 per
share (the "Series B Preferred Stock" and, together with the Common Stock, the
"Voting Stock"), at the close of business on Wednesday, April 6, 2000.2, 2003.
Along with the attached Proxy Statement, we are also enclosing a copy of
the Company's 19992003 Annual Report to Shareholders,Stockholders, which includes our financial
statements.
All shareholdersstockholders of record of Voting Stock are cordially invited to attend.
Whether or not you expect to attend the Annual Meeting, please vote.
YouStockholders of record of the Company's Common Stock may vote yourtheir shares by
completing and returning the enclosed proxy card or you may vote via the Internet or
by telephone. Instructions for votingshareholders of Common Stock to vote via the
Internet or by telephone are onin the enclosed proxy card.Proxy Statement. Your proxy is
being solicited by the Board of Directors.
In accordance with Delaware corporate law, the Company will make available
for examination by any shareholderstockholder entitled to vote at the Annual Meeting, for
any purpose germane to the Annual Meeting, during ordinary business hours, for
at least 10 days prior to the Annual Meeting, at the offices of Brown Raysman
Millstein Felder & Steiner LLP, 120 West 45th Street,Hanover Direct,
Inc., 115 River Road, Edgewater, New York, New York 10036,Jersey 07020, a complete list of the
shareholdersstockholders entitled to vote at the Annual Meeting, arranged in alphabetical
order.
PLEASE VOTE -- YOUR VOTE IS IMPORTANT
Curt JohnsonLOGO
Brian C. Harriss
Secretary
April 17, 20007, 2003
3
HANOVER DIRECT, INC.
1500 HARBOR BOULEVARD
WEEHAWKEN,115 RIVER ROAD, BUILDING 10
EDGEWATER, NEW JERSEY 0708707020
(201) 863-7300
PROXY STATEMENT FOR THE 20002003 ANNUAL MEETING OF
SHAREHOLDERSSTOCKHOLDERS TO BE HELD ON MAY 4, 200015, 2003
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
ANNUAL MEETING: May 4, 2000 Hotel Intercontinental15, 2003 Sheraton Suites on the Hudson
9:30 a.m., local time 111 East 48th Street500 Harbor Boulevard
Weehawken, New York, New York 10017
RECORD DATE: Close of business on Thursday, April 6, 2000. If you were a
shareholder at that time of the Company's Common Stock, you
may vote at the Annual Meeting. Each share of Common Stock
is entitled to 1 vote. All shares of Common Stock will vote
together on all issues at the meeting. On the record date,
we had 214,021,998 shares of our Common Stock outstanding.
As of April 6, 2000, Richemont Finance S.A., a Luxembourg
company ("Richemont"), beneficially owned 102,790,657 shares
of Common Stock (approximately 48.2% of the outstanding
Common Stock). Additionally, Richemont holds an irrevocable
proxy from a third party to vote an additional 4,289,000
shares of Common Stock (approximately 2% of the outstanding
Common Stock) currently held by the third party.
MAILING DATE: On or about April 17, 2000.
AGENDA: 1. Elect 12 directors.
2. Ratify the 1999 Stock Option Plan for Directors.Jersey 07087
Close of business on Wednesday, April 2, 2003. If you were a holder at
RECORD DATE: that time of the Company's Common Stock or the Company's Series B
Preferred Stock, you may vote at the Annual Meeting. Each share of Common
Stock is entitled to one (1) vote. Each share of Series B Preferred Stock
is entitled to ten (10) votes. All shares of Common Stock and all shares
of Series B Preferred Stock will vote together on all issues at the
meeting. On the record date, we had 138,315,800 shares of our Common Stock
outstanding and 1,622,111 shares of Series B Preferred Stock outstanding.
As of the record date, Richemont Finance S.A., a Luxembourg company
("Richemont"), beneficially owned 29,446,888 shares of Common Stock
(approximately 21.3% of the outstanding Common Stock) and 1,622,111 shares
of Series B Preferred Stock, collectively representing approximately 29.6%
of the combined voting power of the Voting Stock. As of the record date,
Regan Partners, L.P. and Basil P. Regan owned 38,795,017 shares of Common
Stock (approximately 28.0% of the outstanding Common Stock).
MAILING DATE: On or about Monday, April 7, 2003.
AGENDA: 1. Elect 5 directors.
2. Delegate to the Audit Committee of the Board of Directors authority to
select the Company's independent auditors for the fiscal year ending
December 27, 2003 from amongst established national audit firms.
3. Ratify the 2000 Management Stock Option Plan.
4. Ratify the 2000 Short-Term Incentive Plan for Rakesh K.
Kaul.
5. Ratify the 2000 Long-Term Incentive Plan for Rakesh K.
Kaul.
6. Ratify an amendment to and restatement of the Stock
Option Agreement dated August 23, 1996, as amended, with
Rakesh K. Kaul forming a part of the 1996 Long-Term
Incentive Plan for Rakesh K. Kaul.
7. Ratify the selection of Arthur Andersen LLP as our
independent auditors for the fiscal year ending December
30, 2000.
8. Any other proper business.
VOTE REQUIRED: Proposal 1: The 12 nominees for director who receive the
Elect 12 directors most votes will be elected. So, if you do not
vote for a nominee, your vote will not count
either for or against the nominee.
4
Proposal 2: The affirmative vote of the holders of a
majorityElect 5 directors plurality of the Ratify the 1999combined voting power of all
shares of Voting Stock Option votes castvoted at the Annual
Meeting, whether in
Plan for Directors person or by proxy, whether
by mail, Internet or telephone, and voting
together as a single class, is required to ratifyelect
directors. Each share of Common Stock has one (1)
vote and each share of Series B Preferred Stock
has ten (10) votes. So, if you do not vote for a
nominee, your vote will not count either for or
against the plan.nominee.
Proposal 2: The affirmative vote of the holders of the
Selection of Auditors majority of the combined voting power of the
Voting Stock voted at the Annual Meeting, whether
in person or by proxy, and whether by mail,
Internet or telephone, is required to delegate
authority to the Audit Committee of the Board of
Directors with respect to the selection of the
auditors. Each share of Common Stock has one (1)
vote and each share of Series B Preferred Stock
has ten (10) votes. So, if you abstain from
voting, your vote will not count either for or
against the proposal.
Proposal 3:BROKER NON-VOTES: If your broker does not vote on either of the 2 proposals, it will have no
effect on the votes with respect to either of the 2 proposals.
Please vote; your vote is important. Prompt return of your proxy will help
PROXIES: reduce the costs of resolicitation. In addition, stockholders of record of
the Company's Common Stock can simplify their voting and reduce the
Company's costs by voting their shares of Common Stock via the Internet or
by telephone. The affirmativeInternet and telephone voting procedures are designed to
authenticate stockholders' identities, to allow stockholders of record of
the Company's Common Stock to vote their shares, and to confirm that their
instructions have been properly recorded. If your shares are held in the
name of a majoritybank or broker, the availability of Internet and telephone
voting will depend on the policies of the Ratifybank or broker. Therefore, it is
recommended that you follow the 2000 Management votes castvoting instructions on the form that you
receive. If you do not choose to vote via the Internet or by telephone,
please date, sign, and return the proxy card by mail.
Unless you tell us on the proxy card to vote differently, we will vote
signed returned proxies "FOR" the Board's nominees for directors and "FOR"
the ratification of the appointment of the auditors.
If any nominee cannot or will not serve as a director, your proxy will
vote in accordance with his or her best judgment. At the time we began
printing this proxy statement, we did not know of any matters that needed
to be acted upon at the Annual Meeting whetherother than those discussed in Stock Option Plan person or bythis
proxy whether by mail, Internet
or telephone, is requiredstatement. However, if any additional matters are presented to ratify the plan.
So, if you abstain from voting, your vote
will not count either for or against the
proposal.
Proposal 4: The affirmative vote of a majority of the
Ratify the 2000 Short-Term votes cast at the
Annual Meeting whetherfor action, your proxy will vote in Incentive Plan for Rakesh K. personaccordance with his or
her best judgment.
PROXIES SOLICITED The Board of Directors.
BY:
2
REVOKING YOUR PROXY: You may revoke your proxy or your vote via the Internet or by proxy whether by mail, Internet
Kaul or telephone
before it is required to ratifyvoted at the plan.
So,meeting. You may revoke any of the above if you
abstain from voting, youreither:
- deliver a signed, written revocation letter, dated later than this
proxy, to: Brian C. Harriss, Secretary, at Hanover Direct, Inc., 115 River
Road, Edgewater, New Jersey 07020;
- deliver another signed proxy, dated later than this proxy, to Mr.
Harriss, Secretary, at the address above, or vote will not count either foragain at a later date
via the Internet or against the
proposal.
Proposal 5: The affirmative vote ofagain at a majority of the
Ratify the 2000 Long-Term votes cast atlater date by telephone; or
- attend the Annual Meeting, whether in
Incentive Plan for Rakesh K. person or by proxy whether by mail, Internet
Kaul or telephone, is requiredinform Mr. Harriss, Secretary, of your desire
to ratify the plan.
So, if you abstain from voting, your vote
will not count either for or against the
proposal.
Proposal 6: The affirmative vote of a majority of the
Ratify the amendment to the votes cast at the Annual Meeting, whether in
Stock Option Agreement with person or by proxy whether by mail, Internet
Rakesh K. Kaul or telephone, is required to ratify the
amendment. So, if you abstain from voting,
your vote will not count either for or
against the proposal.
Proposal 7: The affirmative vote of a majority of the
Ratify Selection of Auditors votes cast at the Annual Meeting, whether in person or by another proxy, whetherand then vote in person or by
mail,another proxy at the Annual Meeting. Please note that attending the Annual
Meeting alone will not revoke your proxy or your vote via the Internet or
telephone, is required to ratify the
selection of the auditors. So, if you abstain
from voting, your voteby telephone.
The Company will not count either
for or against the proposal.
BROKER NON-VOTES: If your broker does not vote on any of the 7 proposals, it
will have no effect on the votes with respect to any of the
7 proposals.
PROXIES: Please vote; your vote is important. Prompt return of your
proxy will help reduce the costs of resolicitation. In
addition, as of this year, stockholders of record can
simplify their voting and reduce the Company's costs by
voting their shares via the Internet or by telephone. The
Internet and telephone voting procedures are designed to
authenticate stockholders' identities, to allow stockholders
to vote their shares, and to confirm that their instructions
have been properly recorded. If your shares are held in the
name of a bank or broker, the availability of Internet and
telephone voting will depend on the policies of the bank or
broker. Therefore, it is recommended that you follow the
voting instructions on the form that you receive. If you do
not choose to vote via the Internet or by telephone, please
date, sign, and return the proxy card by mail.
2
5
Unless you tell us on the proxy card to vote differently, we
will vote signed returned proxies "FOR" the Board's nominees
for directors, "FOR" the ratification of the 1999 Stock
Option Plan for Directors, "FOR" the ratification of the
2000 Management Stock Option Plan, "FOR" the ratification of
the 2000 Short-Term Incentive Plan for Rakesh K. Kaul, "FOR"
the ratification of the 2000 Long-Term Incentive Plan for
Rakesh K. Kaul, "FOR" the ratification of the amendment to
the Stock Option Agreement with Rakesh K. Kaul forming part
of the 1996 Long-Term Incentive Plan for Rakesh K. Kaul, and
"FOR" the ratification of the selection of the auditors.
If any nominee cannot or will not serve as a director, your
proxy will vote in accordance with his or her best judgment.
At the time we began printing this proxy statement, we did
not know of any matters that needed to be acted upon at the
Annual Meeting other than those discussed in this proxy
statement. However, if any additional matters are presented
to the Annual Meeting for action, your proxy will vote in
accordance with his or her best judgment.
PROXIES SOLICITED BY:
The Board of Directors.
REVOKING YOUR PROXY:You may revoke your proxy or your vote via the Internet or
by telephone before it is voted at the meeting. You may
revoke any of the above if you either:
- deliver a signed, written revocation letter, dated later
than this proxy, to: Curt Johnson, Secretary, at Hanover
Direct, Inc., 1500 Harbor Boulevard, Weehawken, New Jersey
07087;
- deliver another signed proxy, dated later than this proxy,
to Mr. Johnson, Secretary, at the address above, or vote
again at a later date via the Internet or vote again at a
later date by telephone; or
- attend the Annual Meeting, inform Mr. Johnson, Secretary,
of your desire to vote in person or by another proxy, and
then vote in person or by another proxy at the Annual
Meeting. Please note that attending the Annual Meeting
alone will not revoke your proxy or your vote via the
Internet or by telephone.
COST OF SOLICITATION:
The Company will pay all costs, estimated at $25,000pay all costs, estimated at $45,000 in the aggregate, of
COST OF soliciting these proxies. Although we are mailing these proxy materials,
SOLICITATION: our directors, officers and employees may also solicit proxies by
telephone, telegram, facsimile, mail, e-mail or personal contact. Such
persons will receive no additional compensation for such services, but the
Company may reimburse them for reasonable out-of-pocket expenses. We will
also furnish copies of solicitation materials to fiduciaries, custodians,
nominees and brokerage houses for forwarding to beneficial owners of
shares of Common Stock held in their names, and the Company will reimburse
them for reasonable out-of-pocket expenses. American Stock Transfer &
Trust Company, the Company's transfer agent, is assisting us in the
solicitation of proxies in connection with the Annual Meeting for no
additional fee.
YOUR COMMENTS: Your comments about any aspects of our business are welcome. You may use
the space provided on the proxy card for this purpose, if desired.
Although we may not respond on an individual basis, your comments help us
to measure your satisfaction and we may benefit from your suggestions.
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS:
Directors
Please see "Proposal 1 -- Election of Directors" for the names, ages and
business experience of each of the Company's directors, each of whom has been
nominated for election at the Annual Meeting.
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.
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6THOMAS C. SHULL...........
AGE 51 President and Chief Executive Officer and a member 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 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.........
AGE 42 Executive Vice President and Chief Financial 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........
AGE 42 Executive Vice President and Chief Operating 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.
BRIAN C. HARRISS..........
AGE 54 Executive Vice President -- Human Resources and 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......
AGE 56 Vice President and Corporate Controller since May
1997. Prior to May 1997, Mr. Kingsford was Vice
President and Chief Internal Auditor at
4
Melville Corporation. Mr. Kingsford filed a petition
under Chapter 13 of the United States Bankruptcy Code
during March 2001.
FRANK J. LENGERS..........
AGE 46 Vice President, Treasurer since October 2000. Mr.
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 Company, Inc.
and The Metropolitan Museum of Art.
STEVEN LIPNER.............
AGE 54 Vice President, Taxation since October 2000. Mr.
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.
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 the Company's most recent Annual
Report on Form 10-K for the fiscal year ended December 28, 2002.
5
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE COMPENSATION:
The following table shows salaries, bonuses, and long-term compensation
paid during the last three years for the Chief Executive Officer and our four
next most highly compensated executive officers whose total annual salary and bonus
exceeded $100,000 duringwho were serving as executive
officers at the end of the Company's 2002 fiscal 1999 and one additional individual who served as
an executive officer for part of fiscal 1999 and the prior two fiscal years.year.
LONG TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
----------------------- -------
SECURITIES
ANNUAL COMPENSATION ------------RESTRICTED UNDERLYING
NAME AND FISCAL ------------------------------------------- OTHER ANNUAL OPTIONSSTOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDED(#) COMPENSATION($)SALARY BONUS COMPENSATION AWARDS(S) SARS PAYOUTS COMPENSATION
------------------ ------ ------------- -------- ------------------------- ------------ ------------------------- ---------- ------- ------------
Rakesh K. Kaul.............. 1999 $595,679 $887,577(2)
Thomas C. Shull(1)........... 2002 $905,923(2) $1,327,500(2) $165,000(8) -- -- None $ 57,749(8) -- $ 11,365(15)2,116(15)
President and Chief 1998 $547,382 $174,541(2)2001 $900,000(3) $ 57,749(8)600,000(3) $180,000(8) -- 500,000(11) None --
Executive Officer 2000 $ 75,000(3) -- $ 11,446(16)15,000(8) -- 2,700,000(12) None --
Edward M. Lambert(1)......... 2002 $361,539 $ 685,000(4) -- -- 1,000,000(13) None $142,570(16)
Executive Vice President and 2001 -- -- -- -- 300,000(14) None --
Chief Financial Officer 1997 $542,769 $751,578(2)2000 -- -- -- -- -- None --
Brian C. Harriss(1).......... 2002 $459,226 $ 68,094(8) -- $ 8,773(17)
Richard B. Hoffmann(1)...... 1999 $315,385 $316,731(3)287,503(5) $ 12,000(9) 300,000(14)-- 600,000(13) None $ 3,386(18)10,001(17)
Executive Vice President -- 2001 $335,192 $ 375,000(5) $ 12,000(9) -- -- None $ 4,089(18)
Human Resources and Legal, 2000 $296,154 $ 129,500(5) $ 12,000(9) -- 100,000(13) None $ 3,421(19)
and Secretary
Michael D. Contino(1)........ 2002 $382,270 $ 565,988(6) $ 4,000(10) -- 1,000,000(13) None $ 9,873(20)
Executive Vice President and Chief 1998 $226,437 $25,000(3)2001 $317,115 $ 10,000(9) 250,000(14) 590(19)
Operating Officer,
Hanover Brands
Michael G. Lutz............. 1999 $304,904 $224,489(4)350,000(6) $ 12,000(10) -- -- None $ 7,280(20)
Executive Vice President 1998 $293,014 $31,849(4)3,876(21)
Chief Information Officer 2000 $243,269 $ 16,555(10) 100,000(14)182,718(6) $ 4,823(21)
and Chief Operating Officer 1997 $238,077 $166,900(4)12,000(10) -- 150,000(13) None $ 6,000(10) 50,000(14)3,253(22)
William C. Kingsford......... 2002 $169,390 $ 1,428(22)
Ralph J. Bulle.............. 1999 $201,308 $186,210(5)81,452(7) -- -- 125,000(13) None $ 12,000(11) -- $ 2,960(23)
Senior Vice President, 1998 $183,695 -- $ 12,000(11) -- $ 3,315(24)
Human Resources 1997 $188,542 $36,750(5) $ 6,000(11) 75,000(14) $ 29,786(25)
Michael D. Contino.......... 1999 $197,533 $182,718(6) $ 12,000(12) -- $ 3,080(26)
Senior7,285(23)
Vice President and 1998 $177,152Controller 2001 $168,000 $ 21,156(7) -- -- -- None $ 48,864(12)1,340(24)
2000 $166,260 $ 34,273(7) -- -- 41,000(13) None $ 3,093(27)
Chief Information Officer 1997 $156,846 $40,000(6) $ 6,000(12) 100,000(14) $ 3,011(28)
Larry J. Svoboda(1)......... 1999 $243,750 -- $123,300(13) -- $654,303(29)
Senior Vice President and 1998 $316,560 -- $ 14,400(13) -- $ 3,569(30)
Chief Financial Officer 1997 $265,385 $53,400(7) $147,811(13) 75,000(14) $ 1,848(31)1,040(25)
- ---------------
(1) Richard B. Hoffmann joinedThomas C. Shull was named President and Chief Executive Officer and was
elected to the Company in March 1998 as SeniorCompany's Board of Directors on December 5, 2000. On April
25, 2001, Brian C. Harriss became Executive Vice President and Chief
MarketingFinancial Officer of the Company and Michael D. Contino became Executive
Vice President and Chief Operating Officer of Hanover Brands in August 1999. Larry J. Svobodathe Company. Effective
January 28, 2002, Mr. Harriss resigned as Executive Vice President and
Chief Financial Officer on Juneof the Company. Effective January 28, 1999 and2002, Edward
M. Lambert was appointed to succeed Brian C. Harriss as SeniorExecutive Vice
President on October 8, 1999.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. Effective December 2, 2002, Mr. Harriss was
appointed Executive Vice President -- Human Resources and Legal and
Secretary of the Company.
(2) Includes$276,923 of salary and a $450,000 stay bonus was paid to Mr. Shull under an
Employment Agreement between Mr. Shull and the following payments madeCompany, 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 on behalfas its President and Chief
Executive Officer. Includes a $877,500 performance bonus for 2002 paid in
2003 under the 2002 Employment Agreement. The remaining $629,000 of salary
and bonus was paid to Meridian Ventures, LLC, a limited liability company
controlled by Mr. Shull ("Meridian"), in consideration for providing the
services of Mr. Kaul:
for fiscal 1999, a $744,599 1999 performance bonus paid in 2000 and a
$142,978 bonus representing the excess of the lesser of the option price of
certain vested options over $1.03; for fiscal 1998, a $174,541 bonus
representing the excess of the lesser of the option price of certain vested
options over $1.03; and for fiscal 1997, a $131,250 1997 performance bonus
paid in 1998, a $445,787 bonus to make a partial paymentShull, pursuant to the Company onprovisions of a note receivable underServices Agreement,
dated as of December 5, 2000 (the "December 2000 Services Agreement"), a
Services Agreement, dated as of August 1, 2001 (the "August 2001 Services
Agreement"), or a Services Agreement, dated as of December 14, 2001, as
amended effective
6
April 2, 2002 (the "December 2001 Services Agreement" and, together with
the Tandem OptionDecember 2000 Services Agreement agreed to be paid to
Mr. Kaul in connection with his hiring byand the August 2001 Services
Agreement, the "Services Agreements"), each among Meridian, the Company and
a $174,541 bonus
representingMr. Shull. See "Employment Contracts, Termination of Employment and Change
in Control Arrangements."
(3) Paid to Meridian Ventures, LLC under the excess of the lesser of the option price of certain vested
options over $1.03.
(3) Includes the following payments made by the Company on behalf of Mr.
Hoffmann: for fiscal 1999, a $291,731 1999 performance bonus paid in 2000
and $25,000 representing the second installment of a $50,000 sign-on bonus
from 1998; and for fiscal 1998, $25,000 representing the first installment
of a $50,000 sign-on bonus.
4
7Services Agreements.
(4) Includes the following payments made by the Company on behalf of Mr.
Lutz:Lambert: for fiscal 1999,2002, a $224,489 1999$200,000 performance bonus and a $100,000 stay
bonus paid in 2002 and a $385,000 performance bonus paid in 2000; for fiscal
1998, a $31,849 1998 performance bonus paid in 1999; and for fiscal 1997, a
$166,900 1997 performance bonus paid in 1998.2003.
(5) Includes the following payments made by the Company on behalf of Mr.
Bulle:Harriss: for fiscal 1999,2002, a $186,210 1999$287,503 performance bonus paid in 2000; and2003; for fiscal
1997,2001, a $36,750 1997$375,000 2001 performance bonus paid in 1998.2002; and for fiscal 2000,
a $129,500 2001 performance bonus paid in 2001.
(6) Includes the following payments made by the Company on behalf of Mr.
Contino: for fiscal 1999,2002, a $182,718 1999$565,988 2002 performance bonus paid in 2000;2003;
for fiscal 1997,year 2001, a $40,000 1997$350,000 2001 performance bonus paid in 1998.2002; and
for fiscal 2000, a $182,718 2000 performance bonus paid in 2001.
(7) Includes the following payments made by the Company on behalf of Mr.
Svoboda:Kingsford: for fiscal 1997,2002, a $53,400 1997$81,452 2002 performance bonus paid in 1998.2003;
for fiscal year 2001, a $21,156 2001 performance bonus paid in 2002; and
for fiscal 2000, a $34,273 2000 performance bonus paid in 2001.
(8) Paid to Meridian pursuant to the Services Agreements, and is deemed to
cover Meridian's over-head (including legal and accounting), health care
costs, payroll costs, and other expenses relating to Mr. Shull. See
"Employment Contracts, Termination of Employment and Change in Control
Arrangements."
(9) Includes the following payments made by the Company on behalf of Mr.
Kaul:
$57,749 in car allowance and related benefits in 1999; $57,749 in car
allowance and related benefits in 1998; and $10,345 in relocation expenses
and $57,749 in car allowance and related benefits in 1997.
(9) Includes the following payments made by the Company of behalf of Mr.
Hoffmann:Harriss: $12,000 in car allowance and related benefits in 1999; and
$10,0002002; $12,000 in
car allowance and related benefits in 1998.2001; and $12,000 in car allowance
and related benefits in 2000.
(10) Includes the following payments made by the Company on behalf of Mr.
Lutz:Contino: $4,000 in car allowance and related benefits in 2002; $12,000 in
car allowance and related benefits in 1999; $4,555 in relocation
expenses2001; and $12,000 in car allowance
and related benefits in 1998; and
$6,000 in car allowance and related benefits in 1997.2000.
(11) Includes the following payments made by the Company on behalf of Mr. Bulle:
$12,000 in car allowance and related benefits in 1999; $12,000 in car
allowance and related benefits in 1998; and $6,000 in car allowance and
related benefits in 1997.
(12) Includes the following payments made by the Company on behalf of Mr.
Contino: $12,000 in car allowance and related benefits in 1999; $36,864 in
relocation expenses and $12,000 in car allowance and related benefits in
1998; and $6,000 in car allowance and related benefits in 1997.
(13) Includes the following payments made by the Company on behalf of Mr.
Svoboda: $10,800 in car allowance and related benefits and $112,500 in
compensation relatedGranted pursuant to the exerciseDecember 2001 Services Agreement and allocated to
Mr. Shull. See "Employment Contracts, Termination of stock optionsEmployment and
Change-in-Control Arrangements."
(12) Granted pursuant to the December 2000 Services Agreement and allocated to
Mr. Shull. See "Employment Contracts, Termination of Employment and Change
in 1999; $14,400 in
car allowance and related benefits in 1998; and $133,411 in relocation
expenses and $14,400 in car allowance and related benefits in 1997.
(14)Control Arrangements."
(13) Issued by the Company pursuant to the Company's 19962000 Management Stock
Option Plan. See "Report of the Stock Option and Executive Compensation
Committee on Executive Compensation -- 2000 Management Stock Option Plan."
Options to purchase 100,000 shares issued to Mr. Harriss during 2000 were
forfeited during 2002 following his resignation as Executive Vice President
and Chief Financial Officer of the Company effective January 28, 2002.
(14) Granted pursuant to the December 2001 Services Agreement under the
Company's 2000 Management Stock Option Plan and allocated to Mr. Lambert.
See "Report of the Stock Option and Executive Compensation Committee on
Executive Compensation -- 2000 Management Stock Option Plan."
(15) Includes the following payments made by the Company on behalf of Mr. KaulShull
in 1999: $2,6662002: $85 in matching contributions under the Company's 401(k)
Savings Plan; $8,241group term life insurance premiums; $12 in accidental death
and disability insurance premiums; $50 in core
7
life insurance premiums; $44 in dental insurance premiums; $49 in long-term
disability premiums; $418and $1,876 in term life
insurance premiums and $40 of accidental deathhealth care insurance premiums.
(16) Includes the following payments made by the Company on behalf of Mr.
KaulLambert in 1998: $2,6662002: $79 in group term life insurance premiums; $26 in
accidental death and disability insurance premiums; $106 in core life
insurance premiums; $44 in dental insurance premiums; $191 in long-term
disability premiums; $1,876 in health care insurance premiums; $3,333 in
matching contributions under the Company's 401(k) Savings Plan; $8,241and
$136,915 in long-term disability premiums; $499 in term life
insurance premiums and $40a gross-up for income tax purposes of accidental death insurance premiums.travel expenses.
(17) Includes the following payments made by the Company on behalf of Mr.
KaulHarriss in 1997: $8,2412002: $276 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $38 in dental insurance premiums; $561 in long-term
disability premiums; $492$5,589 in term lifehealth care insurance premiumspremiums; $3,333 in
matching contributions under the Company's 401(k) Savings Plan; and $40 of accidental death insurance$2 in
vision plan premiums.
(18) Includes the following payments made by the Company on behalf of Mr.
HoffmannHarriss in 1999: $2,6662001: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $770 in long-term disability premiums; $439 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(19) Includes the following payments made by the Company on behalf of Mr.
Harriss in 2000: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $110 in long-term disability premiums; $570$438 in term
life insurance premiumspremiums; and $40 of accidental death insurance premiums.
5
8
(19) Includes the following payments made by the Company on behalf of Mr.
Hoffmann in 1998: $55 in long-term disability premiums; $515 in term life
insurance premiums and $20 of accidental death insurance premiums.
(20) Includes the following payments made by the Company on behalf of Mr.
LutzContino in 1999: $2,6662002: $120 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $143 in dental insurance premiums; $484 in long-term
disability premiums; $5,589 in health care insurance premiums; $3,333 in
matching contributions under the Company's 401(k) Savings Plan; $3,722and $2 in
long-term disability premiums; $852 in term life
insurance premiums and $40 of accidental death insurancevision plan premiums.
(21) Includes the following payments made by the Company on behalf of Mr.
LutzContino in 1998: $3,7222001: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $722 in long-term disability premiums; $1,061$281 in term
life insurance premiumspremiums; and $40 of accidental death insurance premiums.
(22) Includes the following payments made by the Company on behalf of Mr.
LutzContino in 1997: $2342000: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $110 in long-term disability premiums; $1,044$270 in term
life insurance premiumspremiums; and $40 of accidental death insurance premiums.
(23) Includes the following payments made by the Company on behalf of Mr.
BulleKingsford in 1999: $2,6662002: $516 in matching contributions under the Company's 401(k)
Savings Plan; $110group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $105 in dental insurance premiums; $265 in long-term
disability premiums; $144$6,195 in term lifehealth care insurance premiumspremiums; and $40 of accidental death insurance$2 in
vision plan premiums.
(24) Includes the following payments made by the Company on behalf of Mr.
BulleKingsford in 1998: $2,6662001: $237 in matching contributions under the Company's
401(k) Savings Plan; $110$386 in long-term disability premiums; $499$677 in term
life insurance premiumspremiums; and $40 of accidental death insurance premiums.
(25) Includes the following payments made by the Company on behalf of Mr.
BulleKingsford in 1997: $2,6542000: $764 in matching contributions under the Company's
401(k) Savings Plan; $26,490 in supplemental 401(k) contributions; $110 in
long-term disability premiums; $492and $276 in term life insurance premiumspremiums.
8
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS:
The following table contains information concerning options and $40stock
appreciation rights ("SARs") granted to the Chief Executive Officer and our four
next most highly compensated executive officers who were serving as executive
officers at the end of accidental death insurance premiums.
(26) Includes the following payments made byCompany's 2002 fiscal year. There were no SARs
granted during fiscal 2002 to the Company on behalfChief Executive Officer or our four next most
highly compensated executive officers who were serving as executive officers at
the end of the Company's 2002 fiscal year.
OPTION/SAR GRANTS IN FISCAL 2002
INDIVIDUAL GRANTS
----------------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENTAGE OF
UNDERLYING TOTAL OPTIONS/
OPTIONS/ SARS GRANTED EXERCISE MARKET PRICE GRANT DATE
SARS TO EMPLOYEES IN OR BASE ON DATE OF PRESENT
NAME GRANTED FISCAL YEAR 2002 PRICE GRANT EXPIRATION DATE VALUE($)
---- ---------- ---------------- -------- ------------ ------------------ ----------
Thomas C. Shull........ 0 0% -- -- -- $ 0
Edward M. Lambert(1)... 1,000,000 14.79% $0.24 $0.24 August 8, 2012(2) $181,600(3)
Brian C. Harriss(1).... 600,000 8.88% $0.27 $0.27 October 2, 2012(2) $123,660(4)
Michael D.
Contino(1)........... 1,000,000 14.79% $0.24 $0.24 August 8, 2012(2) $181,600(3)
William C.
Kingsford(1)......... 125,000 1.85% $0.24 $0.24 August 8, 2012(2) $ 22,700(3)
- ---------------
(1) Stock options granted to Mr. Lambert, Mr. Harriss, Mr. Contino in 1999: $2,666 in matching contributions underand Mr.
Kingsford during fiscal 2002 are subject to the terms and conditions of the
Company's 401(k) Savings Plan; $110 in long-term disability premiums; $264 in term
life insurance premiums and $40 of accidental death insurance premiums.
(27) Includes the following payments made by the Company on behalf of Mr.
Contino in 1998: $2,666 in matching contributions under the Company's
401(k) Savings Plan; $110 in long-term disability premiums; $277 in term
life insurance premiums and $40 of accidental death insurance premiums.
(28) Includes the following payments made by the Company on behalf of Mr.
Contino in 1997: $2,588 in matching contributions under the Company's
401(k) Savings Plan; $110 in long-term disability premiums; $273 in term
life insurance premiums and $40 of accidental death insurance premiums.
(29) Includes the following payments made by the Company on behalf of Mr.
Svoboda in 1999: $491,682 in severance under the Separation Agreement
discussed below under2000 Management Stock Option Plan. See "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements"; $159,256 related toArrangements."
(2) These options expire ten years after the issuancedate of Common
Stock associated with the waivergrant. See "Employment
Contracts, Termination of principalEmployment and interest balances owed by
Mr. Svoboda under the 1993 Executive Equity Incentive Plan; $2,666 in
matching contributions under the Company's 401(k) Savings Plan; $110 in
long-term disability premiums; $549 in term life insurance premiums and $40
of accidental death insurance premiums.
(30) Includes the following payments made by the Company on behalf of Mr.
Svoboda in 1998: $2,666 in matching contributions under the Company's
401(k) Savings Plan; $110 in long-term disability premiums; $753 in term
life insurance premiums and $40 of accidental death insurance premiums.
6
9
(31) Includes the following payments made by the Company on behalf of Mr.
Svoboda in 1997: $1,206 in matching contributions under the Company's
401(k) Savings Plan; $110 in long-term disability premiums; $492 in term
life insurance premiums and $40 of accidental death insurance premiums.
STOCK OPTIONS:
The following table contains information concerning options granted to the
Chief Executive Officer, our four next highly compensated executive officers
whose total annual salary and bonus exceeded $100,000 during fiscal 1999 and one
additional individual who served as an executive officer for part of fiscal
1999.
OPTION GRANTS IN FISCAL 1999
NUMBER OF PERCENT OF
SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION PRESENT
NAME GRANTED FISCAL YEAR (%) PRICE ($) DATE VALUE ($)(A)
---- ---------- --------------- --------- ---------- ------------
Rakesh K. Kaul.................. -- -- -- -- --
Richard B. Hoffmann
March 1999.................... 100,000 4.98% $3.00 3/3/06 $143,300
August 1999................... 200,000 9.95% $2.38 8/4/06 $225,580
Michael G. Lutz................. -- -- -- -- --
Ralph J. Bulle.................. -- -- -- -- --
Michael D. Contino.............. -- -- -- -- --
Larry J. Svoboda................ -- -- -- -- --
- ---------------
(a)Change-in-Control Arrangements."
(3) The fair value of each option granted to Mr. Lambert, Mr. Contino and
Mr. Kingsford during fiscal 2002 is estimated on the date of grant using the
Black-Scholes option-pricingoption pricing model with the following assumptions
for grants in March 1999 and August 1999:assumptions: risk free
interest rate of 5.33%
and 5.96%3.87%, respectively, expected lives of 46 years, expected volatility of
54.76% and 53.10%89.36%, respectively, and no expected dividends.
During 1999, Larry J. Svoboda purchased 50,000 shares of Common Stock
through the exercise of 50,000 options under the Company's 1996 Stock Option
Plan, realizing a(4) The fair value of $112,500.each option granted to Mr. Harriss during fiscal 2002
is estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions: risk free interest rate of 3.18%, expected life
of 6 years, expected volatility of 91.84%, and no expected dividends.
9
The following table contains information concerning the fiscal 19992002
year-end values of all options and SARs granted to the Chief Executive Officer
and our four next most highly compensated executive officers whose
total annual salary and bonus exceeded $100,000 and one additional individual
who servedwere serving as
an executive officer for partofficers at the end of the Company's 2002 fiscal 1999:year. No SARs have
been granted to the Chief Executive Officer or our four next most highly
compensated executive officers who were serving as executive officers at the end
of the Company's 2002 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN 2002 FISCAL YEAR-END OPTION VALUES(1)YEAR
AND DECEMBER 28, 2002 OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS
OPTIONSOPTIONS/SARS AT FISCAL YEAR-END (#)OPTIONS/SARS AT
FISCAL YEAR-END
------------------------------- -----------------------------DECEMBER 28, 2002 DECEMBER 28, 2002
----------------------- --------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISABLEON EXERCISE(#) REALIZED($) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ----------------------------- ----------- ------------------------------------ --------------------
Rakesh K. Kaul.......................... 4,147,500 3,382,500 $8,668,275 $7,069,425
Richard B. Hoffmann..................... 83,332 466,668 Thomas C. Shull.......... None None 3,200,000 options(1) $0/$ 5,208 0
84.38% exercisable
15.62% unexercisable
Edward M. Lambert........ None None 1,300,000 options(1)(2) $0/$ 210,417
Michael G. Lutz......................... 244,583 95,417 0
none exercisable
100% unexercisable
Brian C. Harriss......... None None 600,000 options(2) $0/$ 403,187 $ 51,163
7
10
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- -------------
Ralph J. Bulle.......................... 173,125 26,875 $ 367,631 $ 49,5190
none exercisable
100% unexercisable
Michael D. Contino...................... 166,664 33,336 Contino....... None None 1,450,000 options(2) $0/$ 345,795 0
24.14% exercisable
75.86% unexercisable
William C. Kingsford..... None None 235,117 options(2) $0/$ 60,405
Larry J. Svoboda........................ 446,250 -- $ 973,950 --0
38.12% exercisable
61.88% unexercisable
- ---------------
(1) Options for2,700,000 options were awarded to Mr. Kaul represent options granted in 1996 by the CompanyShull under the Tandem Option, the Closing Price OptionDecember 2000 Services
Agreement. All of such options were exercisable on December 28, 2002 and
the Performance Year Option
Plans,expire on June 30, 2005. 500,000 options were awarded to Mr. Shull, and
by NAR300,000 options were awarded to Mr. Lambert, under the Six, Seven, Eight and Nine Year Stock Option
Plans. 250,000December 2001
Services Agreement. These options forwere not exercisable on December 28, 2002;
Mr. Svoboda and 40,000Lambert's options for Mr. Lutz
represent tandem options granted pursuant to the 1993 Executive Equity
Incentive Plan. Under this plan, options generally becomeare exercisable after
three yearson March 31, 2003 and expire after six years from the date of grant.on March
31, 2006, while Mr. Svoboda's
vested tandemShull's options in accordance with his Separation Agreement with the
Company (see Severanceare exercisable on March 31, 2003, are
not saleable until September 30, 2004, and Employment Agreements below), are due to expire on MayMarch 31, 2000. 196,250 options for Mr. Svoboda, 300,000 options for Mr.
Lutz, 550,000 options for Mr. Hoffmann,2006.
(2) 200,000 options for Mr. BulleContino and 200,00069,117 options for Mr. ContinoKingsford
represent options granted pursuant to the 1996 Stock Option Plan. Under this
plan, these options become exercisable after three years and expire after
six years from the date of grant. Additionally, 600,000 options for Mr.
Harriss, 1,150,000 options for Mr. Contino, 1,000,000 options for Mr.
Lambert and 166,000 options for Mr. Kingsford represent options granted
pursuant to the grant. Mr.
Svoboda's vested options under the 19962000 Management Stock Option Plan,Plan. Under this plan, these
options become exercisable after four years and expire after ten years from
the date of grant. An additional 100,000 options for Mr. Contino represents
options granted effective November 3, 1999. These options become fully
exercisable after four years.
10
LONG-TERM INCENTIVE PLANS:
No awards under long-term incentive plans were granted in accordance
with his Separation Agreement,fiscal 2002 to
the Chief Executive Officer or our four next most highly compensated executive
officers who were serving as executive officers at the end of the Company's 2002
fiscal year.
DEFINED BENEFIT OR ACTUARIAL PLANS:
The Company has no defined benefit or actuarial plans under which benefits
are due to expire on May 31, 2000.determined primarily by final compensation (or average final compensation)
and years of service.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS:
The2002 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 an Executive Employmenta 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 March 7, 1996, with Rakesh K. Kaul,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 Company (the "Old Employment Agreement"). The Old2002 Employment Agreement provided for an "at will" term commencingbegan on March 7, 1996, at a base salary of
$525,000 per year. The OldSeptember 1, 2002 and
will terminate on September 30, 2004 (the "2002 Employment Agreement alsoTerm").
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 for Mr. Kaul'swith
participation in the Short-Term IncentiveCompany'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 Rakesh K. Kaul. That plan
provides for an annual bonus of between 0% and 125% of Mr. Kaul's base salary,
depending on the attainment of various performance objectives as determinedhis reasonable out-of-pocket expenses incurred
in accordanceconnection with the objective formula or standards adoptedhis employment by the Compensation
Committee as part ofCompany.
Under the performance goals for each such year. The Old
Employment Agreement also provided for Mr. Kaul's participation in the Long-Term
Incentive Plan for Rakesh K. Kaul. That plan provides for the purchase by Mr.
Kaul of 1,510,000 shares of Common Stock of the Company at their fair market
value; an option expiring March 7, 2006 for the purchase of 3,020,000 shares of
Common Stock (the "Tandem Option"); an option expiring March 7, 2006 to purchase
2,000,000 shares of Common Stock exercisable only upon satisfaction of the
condition that the closing price of the Common Stock has attained an average of
$4.50 per share during any period of 91 consecutive calendar days commencing
after August 23, 1996 and ending on or before March 7, 2002 (the "Closing Price
Option"); an option expiring March 7, 2006 to purchase an aggregate of 1,000,000
shares of Common Stock at their fair market value, subject to the attainment of
certain objective performance goals set by the Compensation Committee (the
"Performance Year Option"); and four options expiring March 7, 2002, and the
first three anniversaries thereof, respectively, for the purchase of 377,500
shares of Common Stock each, granted by NAR (the "Six," "Seven," "Eight" and
"Nine Year Stock Options"). The Old Employment Agreement also provided for the
grant of registration rights under the Securities Act of 1933, as amended (the
"Securities Act"), for shares of Common Stock owned by Mr. Kaul. Pursuant to the 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. Kaul whole,Shull on an after-tax
basis, forMarch 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
11
notwithstanding any loss realizedother termination of the Employment Agreement on or prior to
such date or as a result of another event constituting a Change of Control. The
March 31, 2003 payment was made on or prior to such date.
Under the sale2002 Employment Agreement, upon the closing of his residence at the time he joined
the Company. The Company alsoany transaction
which constitutes a "change of control" thereunder, provided Mr. Kaul with an automobile allowance of
$4,812 per month and related benefits. In
8
11
the event that Mr. Kaul's employment was actually or constructively terminatedShull is
then employed by the Company, other than for cause, he wouldthe Company will be entitled forrequired to make a 12-month period
commencinglump sum
cash payment to Mr. Shull on the date of his terminationsuch closing pursuant to (i) a continuationthe Change of
his base
salary, (ii) continued participation inControl Plan, the Company's medical, dental, life
insurancetransaction bonus program and retirement plans offered to senior executives of the Company, and
(iii) a bonus, payable in 12 equal monthly installments, equal to 100% of his
base salary (atCompany's
Management Incentive Plan for the rate in effect immediately prior toapplicable fiscal year. Any such termination). In
addition, Mr. Kaullump sum
payment would be entitled to receivein lieu of (i) toany cash payment under the extent not previously
paid, the short-term bonus payable to Mr. Kaul for the year preceding the year
of termination, and (ii) for the year in which Mr. Kaul's employment was
terminated, an additional bonus equal to his annual base salary for such year,
pro-rated to reflect the portion of such year during which Mr. Kaul was
employed. Mr. Kaul's employment would be deemed to be constructively terminated
by the Company in the event of a change in control (as defined in the Old2002 Employment
Agreement), the Company's bankruptcy, a material diminution of his
responsibilities, or a relocation of the Company's headquarters outside the New
York metropolitan area without his prior written consent. In the event that Mr.
Kaul's employment terminated other thanAgreement 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 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 2002 Employment Agreement Term.
Under the 2002 Employment Agreement, additional amounts are payable to Mr.
Shull by the Company Mr. Kaul would not be entitled to any payment or bonus, other than any
short-term bonus he was entitled to receive fromunder certain circumstances upon the year prior to termination.
The Company entered into a new Executivetermination of the
2002 Employment Agreement. If the termination is on account of the expiration of
the 2002 Employment Agreement dated as of
March 6, 2000 with Rakesh K. Kaul, the President and Chief Executive Officer of
the Company (the "Employment Agreement"). The Employment Agreement provides for
a three-year evergreen term commencing on March 6, 2000, at a base salary of
$597,300 per year. The base salary is subject to review on an annual basis. On
each anniversary, the Employment Agreement will automatically be extended for an
additional year unless either party has given at least 90 days prior notice of
nonrenewal. The Employment Agreement also provides that the Company, in its
discretion may assignTerm, Mr. Kaul to be Chief Executive Officer of erizon, Inc.
under certain circumstances. The Employment Agreement provides for Mr. Kaul's
participation in the 2000 Short-Term Incentive Plan for Rakesh K. Kaul. That
plan, as described below at pages 38 and 39, provides for an annual bonus of
between 0% and 150% of Mr. Kaul's base salary, depending on the attainment of
various performance objectives as determined in accordance with the objective
formula or standards adopted by the Compensation Committee as part of the
performance goals for each such year. The Employment Agreement also provides for
Mr. Kaul's participation in the 2000 Long-Term Incentive Plan for Rakesh K.
Kaul. That plan, as described more fully at pages 40 through 42, provides Mr.
Kaul with an option to purchase 6% of the Common Stock of erizon, Inc. (with
protection against dilution through erizon, Inc.'s next round of financing) at
the fair market value on the date of grant, which option vests in equal parts
over four years and expires ten years following the date of grant (the "erizon
Option"). The plan also provides for the modification to an option granted to
Mr. Kaul on March 7, 1996 and expiring on March 7, 2006, to purchase 2,000,000
shares of Common Stock of the Company (the "Closing Price Option"). The option
is now subject to a three-year vesting schedule, provided that it shall vest and
become immediately exercisable upon satisfaction of the condition that the
closing price of the Common Stock of the Company has attained an average of
$4.50 per share during any period of 91 consecutive calendar days commencing
after August 23, 1996 and ending on or before March 7, 2002. The Closing Price
Option also provides that within thirty days after the Closing Price Option
vests with respect to all or a portion of the shares of Common Stock underlying
such option, the Company shall pay Mr. Kaul an additional cash amount equal to
the number of shares of Common Stock with respect to which such option has
vested on such vesting date, multiplied by the excess of (i) the lesser of the
per share option price of such shares or the fair market value on such vesting
date of a share of Common Stock, over (ii) $1.03. The Employment Agreement also
provides for the grant of registration rights under the Securities Act of 1933,
as amended (the "Securities Act"), for shares of Common Stock owned by Mr. Kaul
and for (i) the registration of shares underlying the erizon Option within 90
days of erizon, Inc. becoming eligible to use an
9
12
S-8 or other similar form, and (ii) the registration of shares underlying the
Closing Price Option and of shares underlying options previously granted to Mr.
Kaul by the Company, within 90 days of the execution of the Employment
Agreement. In the event Mr. Kaul's employment is terminated by the Company other
than for cause (as defined in the Employment Agreement) or he resigns without
good reason (as defined in the Employment Agreement), he will be entitled to (i)
continuation of his base salary for a period of 24-months; (ii) continued
participation in the benefit plans of the Company for a period of 24-months;
(iii) a bonus payable over 24 months equal to two times the greater of (x) his
base salary or (y) the average of the short-term bonus amounts paid or payable
to Executive for the two years preceding the year of termination; (iv) to the
extent not previously paid, any short-term bonus for the year preceding the year
of termination; and (v) for the year of termination, an additional bonus equal
to his base salary, pro-rated to reflect the portion of such year during which
Mr. Kaul is employed. In the event Mr. Kaul's employment terminates as a result
of death or disability (as defined in the Employment Agreement), he will be
eligible to receive (i) to the extent not previously paid, the short-term bonus
for the year preceding the year of termination; and (ii) for the year of
termination an additional bonus equal to his base salary, pro-rated to reflect
the portion of such year during which Mr. Kaul is employed. The Employment
Agreement and attachments thereto also provide that in the event Mr. Kaul's
employment is terminated by Company without cause, by Mr. Kaul with good reason
or due to death or disability, the erizon Option and the Closing Price Option
shall vest and become exercisable in full. In the event that Mr. Kaul's
employment terminates other than as a result of termination by the Company
without cause, by Mr. Kaul with good reason or due to death or disability, he
will not be entitled to any payment or bonus, other than, to the extent not
previously paid, short-term bonus for the year preceding the year of
termination. Mr. Kaul is also a participant in a change of control plan that is
substantially similar to the change of control plan described below for other
executives of the Company (the "Thirty-Six Month Compensation Continuation
Plan"), provided that in the event of his termination without cause (as such
term is defined in the plan) or his resignation with good reason (as such term
is defined in the plan) within 24-months of a change of control (as such term is
defined in the plan) heShull 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 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: (i) three times his base salary; (ii) three timesto the aggregate amount of Base Compensation to which
he would have otherwise been entitled through the end of the 2002 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 (x) his base salary or (y) the averageBase
12
Compensation to which he would have otherwise been entitled through the end of
the short-term bonus amounts paid2002 Employment Agreement Term or payable to Executive for the two years preceding the year of termination;
(iii) to the extent not previously paid, any short-term bonus for the year
preceding the year of termination; and (iv) for the year of termination, an
additional bonus equal to his base salary, pro-rated to reflect the portion of
such year during which Mr. Kaul is employed. In addition, in the event of a
termination following a change of control, Mr. Kaul will continue to participate
in the Company's benefit plans for a period of 36-months and unvested options
shall vest and become exercisable immediately. In the event Mr. Kaul's payments
pursuant to the change of control plan exceed 110% of his "safe harbor," as
provided for in Internal Revenue Code Section 280(G), Mr. Kaul's payments will
be grossed-up for any excise taxes resulting therefrom.$1,000,000. If the payments do not
exceed 110%termination is on
account of his safe harbor, his payments will be reduced to the safe harbor
limits of Internal Revenue Code Section 280(G). The Employment Agreement also
provides that Mr. Kaul is subject to confidentiality and non-competition
obligations set forth in an agreement annexed to the Employment Agreement (the
"Non-Competition Agreement"). The Non-Competition Agreement provides in
pertinent part that, for a period of 24-months following the termination of his
employment for any reason, Mr. Kaul may not (i) be employed byacquisition or otherwise
provide services to a person, business, enterprise or legal entity that is
engaged in the same Business (as defined in the Employment Agreement) as the
Company, including its subsidiaries, affiliates and successors (collectively,
the "Company"); (ii) solicit the customers of the Company; or (iii) solicit
employees of the Company.
On June 28, 1999, Larry J. Svoboda resigned as Chief Financial Officersale of the Company and on October 8, 1999, he resigned as Senior Vice President(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
Company.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.
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 10
13
Separationstock 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 (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 Mr. Svoboda dated November 22, 1999 ("Separation
Agreement"),references to
formalize these resignations. Pursuant to this Separation
Agreement,the 2002 Employment Agreement.
During December 2001, the Company agreed to: (1) payentered into a stock option agreement
with Mr. Svoboda a lump-sum amountShull to evidence the grant to Mr. Shull of $325,000 (one year's salary) less (a) all applicable withholdings and taxes; (b)
$57,131.22 pursuant to the Company's waiving the principal and interest owed by
Mr. Svoboda under notes he issuedan option to purchase
Company500,000 shares of the Company's Common Stock under the 1993 Executive EquityCompany'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 Mr. 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 (see 6 below); (c) $93,408.58 for all
monies owed by Mr. Svoboda to("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 for relocation reimbursements,
interest and taxes related thereto; and (d) $1,400 pursuantauthorized the
President to the Company's
waiving the interest owed by Mr. Svoboda under his promissory notegrant options to the
Company dated January 26, 1997 (see 7 below); (2) pay for the continuance of Mr.
Svoboda's car allowance at the rate of $1,200 per month for one year; (3)
continue Mr. Svoboda's group health plan benefits for himself and his family for
one year; (4) provide for the benefit of Mr. Svoboda six months of senior-level
executive outplacement services at the firm of Drake Beam Morin and thereafter
to provide the same services itself on a month-to-month basis forpurchase up to an additional six months; (5) pay Mr. Svoboda a lump-sum amountaggregate of $37,540 (equal
to six-weeks accrued1,045,000 and
unused vacation); (6) extend the exercise period of all
vested options through May 31, 2000; and (7) pay Mr. Svoboda a lump-sum bonus of
$15,000 less all applicable withholdings and taxes for his contributions to
closing the sale1,366,000 shares of the Austad's catalog business.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.
13
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 which were accrued in the fourth quarter
of 2002.
Brian C. Harriss. Brian C. Harriss was appointed as 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 the
December 2002 appointment, Mr. Harriss and the Company have terminated a
severance agreement entered into during January 2002 at the time of Mr. Harriss'
resignation from the Company during January 2002, 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
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).
Hanover Direct, Inc. Key Executive Eighteen-Month Compensation Continuation
Plan. Effective December 26, 1999,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
Twenty-FourEighteen Month Compensation Continuation Plan (the "Executive Plan") for its
Chief Executive Officer, corporate executive vice presidents, corporate senior
vice presidents, strategic unit presidents, orand other employees selected by theits
Chief Executive Officer of
the Company, all of whom are approved by the Plan Administrator (except Mr.
Kaul, who has a separate agreement which is discussed below).Officer. The purpose of this planthe 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
plan,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 fifty percent (50%)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 fifty percent
(50%)50% of the voting power of the Company and that person's
ownership increases above fifty percent (50%)50% solely by virtue of an acquisition of stock by the
Company, then no Change of Control haswill 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 planExecutive Plan owned at least thirty-three percent (33%)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 fifty percent (50%)50% or more of the market value of
the Company's assets;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) above,, 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 twenty-four (24)24 month period, persons
14
who were directors of the Company (each, a "Director") immediately before the
beginning of such period (the "Incumbent Directors") shall cease (for any reason other
than death)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; or (iv) when the Company sells, assigns or transfers more than fifty percent (50%) of its interest in, or
the assets of, one or more subsidiaries (each, a "Sold Subsidiary" and,
collectively, "Sold Subsidiaries"); provided, however, that such a sale,
assignment or transfer will constitute a Change of Control only for: (a) the
participants who are employees of that Sold Subsidiary; and (b) the
11
14
participants who are employees of a direct or indirect parent company of one or
more Sold Subsidiaries of the Company, and then only if: (I) the gross assets of
its Sold Subsidiaries constitute more than fifty percent (50%) of the gross
assets of such parent company (calculated on a consolidated basis with the
direct and indirect subsidiaries of such parent company with reference to the
most recent balance sheets of the Sold Subsidiaries and the parent company);
(II) the property, plant and equipment of its Sold Subsidiaries constitute more
than fifty percent (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 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
its Sold Subsidiaries to (y) the market capitalization of the parent company, is
greater than 0.50. For(for
purposes of this subsection (iii), any directorDirector who was not a directorDirector as of the effective date
of this plan shallthe Executive Plan will be deemed to be an Incumbent Director if such
directorDirector 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 this clause. In addition,(iii), and any
persons (and their successors from time to time) who are designated by a holder
of thirty-three percent (33%)33% or more of the Voting Shares to stand for election and serve as a directorDirectors
in lieu of other such designees serving as directors,Directors on the effective date of
the Executive Plan shall be deemed to beconsidered Incumbent Directors
for the purposes of this subsection (iii).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. ForDirector); 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 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 parent company, is greater than 0.50. (For purposes of subsection
(iv), a Transaction shall be deemed to involve the sale of more than fifty percent (50%)50% of a
company's assets if: (a) the gross assets being sold constitute more than fifty percent
(50%)50% of
the gross assets of the companyCompany as stated on the most recent balance sheet of
the company;Company; (b) the property, plant and equipment being sold constitute more
than fifty percent (50%)50% of the property, plant and equipment of the companyCompany as stated on the
most recent balance sheet of the company;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,Company, is greater than 0.50. For purposes of subsectionthis (iv),
no Change of Control shallwill be deemed to have occurred if, immediately following a
sale, assignment or transfer by the Company of more than fifty
percent (50%)50% of its interest in,
or the assets of, a Sold Subsidiary, any shareholder of the Company owning thirty-three percent (33%)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.
A)
Under the Executive Plan, an Executive Plan participant in this plan shall be entitled
to severance pay and benefitsChange of Control Benefits under the plan onlyExecutive 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 participant's employment without causeExecutive Plan) or the participant voluntarily
terminates his/her employment for good reasonwith the Company For Good Reason (as defined in
the Executive Plan), in either case, solely during the two (2) year2-year period immediately
following the Change of Control. A participant shallwill not be entitled to severance pay and benefitsChange of
Control Benefits under the plan ifExecutive Plan if: (i) he/she (i) resigns other than for
good reason, (ii) isvoluntarily terminates
his/her employment with the Company or has his/her employment with the Company
terminated for cause, (iii) diesby the
15
Company, in either case, prior to a Change of Control, or prior to(ii) he/she voluntarily
terminates employment with the Company following a termination qualifying for severance pay and benefits
underChange of Control but other
than For Good Reason, (iii) he/she is terminated by the plan, orCompany 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 disability.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 amountChange of severance pay and benefits to which a participant will be
entitled shall includeControl Benefits under the Executive Plan are as follows: (i)
an amount equal to twenty-four (24)18 months of the participant's annualized base annualized salary; (ii)
an amount equal to the lesserproduct of (a)
two (2) times the target bonus for the participant as defined in the Company's
Management Incentive Plan, or (b) two (2) times the largest bonus calculated as
a percentage of base salary earned18 multiplied by the participant during any of the three
(3) years prior to the Change of Control, except that those participants with
less than one (1) full year of service as of the date of the Change of Control
will be paid at two (2) times
12
15
their target bonus amount as defined in the Company's Management Incentive Plan;
(iii) an amount equal to twenty-four (24) times theapplicable monthly applicable
premium that would be charged toby 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 atin 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; (iv)employment with the Company;
(iii) an amount equal to twenty-four (24)18 months of the participant's car allowance then in
effect as of the date of the termination of the participant;participant's employment with
the Company; and (v)(iv) an amount equal to the cost of twelve (12)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 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 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. Harriss released any
claims that he may have against the Company under his May 2001 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 is
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
16
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.
2002 Directors' Option Plan. Effective January 1, 2003, 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.
REPRICING OF OPTIONS/SARS:
During fiscal 2002, the Company did not adjust or amend the exercise price
of stock options or SARs previously awarded to the Chief Executive Officer or
our four next most highly compensated executive officers who were serving as
executive officers at the end of the Company's 2002 fiscal year.
STOCK OPTION AND EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION:
During the fiscal year ended December 25, 1999,28, 2002, the Stock Option and
Executive Compensation Committee of the Board of Directors of the Company
consisted of ShaileshE. Pendleton James, Kenneth J. Mehta (Chairman), Ralph Destino, JanKrushel and Basil P. du Plessis,
Alan G. Quasha and Howard M.S. Tanner.Regan. None of
such persons was, during such fiscal year or formerly, an officer or employee of
the Company or any of its subsidiaries or had any relationship with the Company
other than serving as a Director of the Company. During the 19992002 fiscal year, no
executive officer of the Company served as a
17
member of the compensation committee (or other board committee performing
equivalent functions or, in the absence of such committee, the entire board of
directors) of another entity, one of whose executive officers served as a member
of the Stock Option and Executive Compensation Committee. During the 2002 fiscal
year, no executive officer of the Company served as a director orof another
entity, one of whose executive officers served as a member of the Stock Option
and Executive Compensation Committee. During the 2002 fiscal year, no executive
officer of the Company served as a member of the compensation committee (or
other board committee performing equivalent functions or, in the absence of such
committee, the entire board of directors) of another entity, one of whose
executive officers served as a Director or on the
Compensation Committee of the Company.
REPORT OF THE STOCK OPTION AND EXECUTIVE COMPENSATION COMMITTEE ON EXECUTIVE
COMPENSATION:
The Stock Option and Executive Compensation Committee (the "Compensation
Committee"), currently consisting of fiveKenneth J. Krushel (Chairman), E. Pendleton
James and Robert H. Masson, each an outside directors,director, has the responsibility,
under delegated authority from the Company's Board of Directors, for developing,
administering and monitoring the executive compensation policies of the Company
and making recommendations to the Company's Board of Directors with respect to
these policies. The Board of Directors has accepted the Compensation Committee's
recommendations for 19992002 compensation.
Executive Compensation Philosophy
The Compensation Committee's executive compensation philosophy supports the
Company's overall business strategy and has at its core a strong link between
pay, performance and retention. The philosophy emphasizes recognition of
achievement at both the Company and individual level. A significant portion of
compensation delivered to executives to reflect such achievement is intended to
be in the form of long-term incentives. This long-term focus emphasizes
sustained performance and encourages retention of executive talent. In addition,
executives are encouraged to hold a significant ownership stake in the Company
so that their interests are closely aligned with those of the shareholdersstockholders in
terms of both risk and reward.
The specific executive compensation plans are designed to support the
executive compensation philosophy. Compensation of the Company's executives
consists of three components, which are discussed below: salary, annual
incentive awards and long-term incentive awards. Base salary levels have been
established in order to attract and retain key executives, commensurate with
their level of responsibility within the organization. Annual incentives closely
link executive pay with performance in areas that are critical to the Company's
short-term operating success. Long-term incentives motivate executives to make
decisions that are in the best interests of the Company's owners and reward them
for the creation of shareholderstockholder value. It is the intent of both the Company and
the Compensation Committee that the components of the executive compensation
program will support the Company's compensation philosophy, reinforce the
Company's overall business strategy, and ultimately drive shareholderstockholder value
creation.
13
16
Base Salaries
Individual salaries for executives of the Company, other than Mr. Shull,
are generally influenced by several equally weighted factors: the qualifications
and experience of the executive, the executive's level of responsibility within
the organization, pay levels at firms which compete with the Company for
executive talent, individual performance, and performance-related factors used
by the Company to determine annual incentive awards. Mr. Kaul joinedShull's compensation
and other benefits are specified in the Company effective March 7, 1996.
Salary for Mr. Kaul was set pursuant to an employment agreement entered into by
him with the Company in March 1996.2002 Employment Agreement. See
"Employment Contracts, Termination of Employment and Change-in-Control
Arrangements."
18
The base salaries of the Company's executives are subject to periodic
review and adjustment. Annual salary adjustments are made based on the factors
described above.
Annual Incentive Awards
In addition to base salaries, each of the Company's executives and selected
key managers participate in the Company's Management Incentive Compensation Plan. Currently,
approximately 250217 executives and key managers are eligible to participate in the
annual incentive plan.Management Incentive Plan. Under this plan, each participant is assigned
a target bonus, expressed as a percentage of his/her base salary, which is paid
if all performance targets are fully met. It is the policy of the Compensation
Committee to position target bonuses at competitive levels. Individual target
bonuses are based on the person's responsibility level in the organization and
the bonus award opportunity at the other organizations included in the
performance chart. Target bonus levels range from 5% to 100% of salary. TheTarget
bonus opportunities for Messrs. Contino, Harriss, Lambert and Shull for fiscal
year 2002 were 100% of salary while maximum bonuses were 150% of salary. For
purposes of the 2002 Management Incentive Plan, Mr. Shull's base salary was
deemed to be $600,000. Mr. Kingsford's target bonus for Mr. Kaul is 100%fiscal year 2002 was 25%
of salary while his maximum bonus is 125%
of salary. Target bonus opportunities for Messrs. Hoffmann, Lutz, Bulle and
Contino arewas 50% of salary while maximum bonuses are 100% of salary.
Participants are eligible to receive an annual bonus depending upon the
extent to which certain goals are achieved. As in past years, performance goals
for 19992002 were based on Earnings Before Interest, Taxes, Depreciation and
Taxes (EBIT)Amortization (EBITDA), cash flownet sales, variable contribution and other customer satisfaction and performance-related goals including Inventory
Fill, Inventory Turns, Returns and Order Cancellations.business
objectives. Goals are set at both the corporate and business unit levels,
depending on the participant's scope of responsibility thus encouraging teamwork
amongst the Company's employees. The importance of each goal in determining a
participant's bonus award also depends on his/her scope of responsibility.
Actual bonus levels vary depending upon the degree of achievement in
relationship to the performance goals.
Payouts of awards have been determined based on the Company's performance
during fiscal 1999. 100%2002. Payments to the Chief Executive Officer and the four next
most highly compensated executive officers under the 2002 Management Incentive
Plan for the fiscal year 2002 aggregated $2,197,443. One hundred percent of
awards made under the bonus plan are currently paid in cash.cash, in some cases on a
deferred basis.
Long-Term Incentive Awards
1993 Executive Equity Incentive Plan
The 1993 Executive Equity Incentive Plan terminated in accordance with its
terms on December 31, 1996. Such plan provided executives and other key
employees with incentives to maximize the long-term creation of shareholderstockholder
value. The long-term incentive plan encouraged executives to acquire and retain
a significant ownership stake in the Company. Under the plan, executives were
given an opportunity to purchase shares of Common Stock with up to 80% of the
purchase price financed with a full recourse Company loan. For each share of
stock an employee purchased, he/she received an option to acquire two additional
shares of Common Stock, to a maximum of 250,000 shares in the aggregate, which
vest after three years and expire after six years. By creating this opportunity,
the Company encouraged executives to own Common Stock 14
17
thereby aligning
executives' interests with those of the Shareholders.stockholders. The number of shares
offered for purchase to each executive and the corresponding number of tandem
options increased with the executive's level of responsibility within the
organization.
In December 1999, the rights of certain participants in this plan expired.
These participants had cumulative promissory notes of approximately $1.0 million
payable to the Company, comprised of $0.8 million of principal and $0.2 million
of interest, on the expiration date. Accordingly, collateral encompassing 294,24920,000
19
shares, 20,000 shares and 80,000 shares of the Company's Common Stock in fiscal
years 2002, 2001, and 2000 respectively, held in escrow on behalf of each
participant, 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, these
participants forfeited their initial 20% cash down payment, which was required
for entry into the plan.1993 Executive Equity Incentive Plan.
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.
As of December 28, 2002, no stock options remained outstanding or
exercisable under the 1993 Executive Entity Incentive Plan.
1996 Stock Option Plan
The purpose of the 1996 Stock Option Plan is to provide employees of the
Company and its subsidiaries with a larger personal and financial interest in
the success of the Company through the grant of stock-based incentive
compensation. Under the plan, employees may be granted options to purchase
shares of Common Stock at the fair market value on the date of grant. The total
options granted to an employee is one-half performance-based. The 1996 Stock
Option Plan provides that options may be granted for terms of not more than 10
years.
All employeesEmployees are no longer eligible to participate in the 1996 Stock Option
Plan. During 1999, 2,010,0002002, no options to purchase shares of Common Stock were granted
pursuant to the 1996 Stock Option Plan. However, as of December 28, 2002,
options to purchase 1,337,270 shares of Common Stock remained outstanding under
the 1996 Stock Option Plan.
2000 Management Stock Option Plan
The purpose of the 2000 Management Stock Option Plan is to advance the
interests of the Company and its stockholders by providing employees of the
Company, through the grant of options to purchase shares of Common Stock, with a
larger personal and financial interest in the success of the Company. Under the
terms of the plan, officers, directors, agents, and employees of the Company and
consultants to the Company or of any subsidiary of the Company may be granted
options to purchase shares of Common Stock at their fair market value on the
date of grant. The plan provides that options may be granted for terms of not
more than 10 years and shall vest according to the terms of the grant of the
options. In addition, options may not be exercised more than 30 days after a
participant ceases to be an employee of the Company, except in the case of
death, disability or retirement, in which cases options may be exercised within
90 days after the date of death, disability or retirement.
During 2002, 6,761,000 options to purchase shares of Common Stock were
granted to approximately 36 employees in accordance with the plan including options to
purchase an aggregate of 300,000 shares granted to(including the executives named in the executive
compensation table above.table) in accordance with the 2000 Management Stock Option Plan.
1999 Stock Option Plan for Directors
The purpose of the 1999 Stock Option Plan for Directors is to advance the
interests of the Company by providing non-employee directors of the Company,
through the grant of options to purchase shares of
20
Common Stock, with a larger personal and financial interest in the success of
the Company. Under the terms of the plan, directors who are neither employees of
the Company nor nonresident aliens shall be granted an option to purchase 50,000
shares of Common Stock as of the effective date of his or her initial
appointment or election to the Board or, if later, the effective date of the
plan, and shall be granted an option to purchase 10,000 shares of Common Stock
on August 4, 2000 and August 3, 2001, provided that such directors continue to
serve as directors on such dates. The price at which shares of Common Stock may
be purchased upon the exercise of the options granted under the plan shall be
the fair market value of such shares on the date of grant of the options. The
plan provides that options shall be granted for terms of 10 years and shall vest
one-third, one-third and one-third on the first, second and third anniversaries
of the date of grant. In addition, options may not be exercised more than 3
months after a participant ceases to be a director of the Company, except in the
case of death or disability, in which cases options may be exercised within 12
months after the date of such death or disability.
This plan is being submittedDuring 2002, a total of 50,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the shareholders of the Company for
ratification at the 2000 Annual Meeting. (See page 32 below).
15
18
2000 Management1999 Stock Option
Plan for Directors. During 2002, no options to purchase shares of Common Stock
under the 1999 Stock Option Plan for Directors were exercised. A total of
250,000 options to purchase shares of Common Stock which were granted to
eligible directors under the 1999 Stock Option Plan for Directors have expired
following the resignation of such directors from the Company's Board of
Directors. As of December 28, 2002, 420,000 options to purchase Common Stock
under the 1999 Stock Option Plan for Directors were outstanding, of which
316,667 options were exercisable.
No additional options to purchase shares of Common Stock will be granted
under the 1999 Stock Option Plan for Directors.
2002 Stock Option Plan for Directors
The purpose of the 2000 Management2002 Stock Option Plan for Directors is to advance the
interests of the Company and its shareholders by providing employeesnon-employee directors of the Company,
through the grant of options to purchase shares of Common Stock, with a larger
personal and financial interest in the success of the Company. Under the terms
of the plan, directors who are neither employees and officers of and consultants to the Company or
any affiliate of the Company maynor nonresident
aliens shall be granted optionsan option to purchase 50,000 shares of Common Stock as
of the effective date of his or her initial appointment or election to the Board
or, if later, the effective date of the plan, and shall be granted an option to
purchase 25,000 shares of Common Stock on August 2, 2002, and an option to
purchase 35,000 shares of Common Stock on August 1, 2003 and August 3, 2004,
provided that such directors continue to serve as directors on such dates. The
price at theirwhich shares of Common Stock may be purchased upon the exercise of the
options granted under the plan shall be the fair market value of such shares on
the date of grant.grant of the options. The plan provides that options mayshall be
granted for terms of not more than 10 years and shall vest according toone-third, one-third and one-third
on the termsfirst, second and third anniversaries of the grantdate of the options.grant. In addition,
options may not be exercised more than three (3)3 months after a participant ceases to be
an
employee, officer or consultant,a director of the Company, except in the case of death disability or retirement at or after age 65,disability, in which
cases options may be exercised within one (1) year12 months after the date of such death disability or
retirement.
To date in 2000, subjectdisability.
Effective January 1, 2003, the 2002 Stock Option Plan for Directors was
amended to ratificationincrease the annual service award for directors who are not employees
of the plan by the Company's
shareholders, 4,041,000Company from 25,000 to 35,000 options to purchase shares of Common Stock.
During 2002, a total of 100,000 options to purchase shares of Common Stock
were granted to approximately 104 employeeseligible directors all in accordance with the plan including2002 Stock Option
Plan for Directors. During 2002, no options to purchase an aggregateshares of 750,000Common Stock
under the 2002 Stock Option Plan for Directors were exercised. No options to
21
purchase shares of Common Stock which were granted to eligible directors under
the executives named in2002 Stock Option Plan for Directors have expired following the executive compensation table.
This plan is being submittedresignation
of such directors from the Company's Board of Directors. As of December 28,
2002, 100,000 options to purchase Common Stock under the shareholders2002 Stock Option Plan
for Directors were outstanding, none of the Company for
ratification at the 2000 Annual Meeting. (See page 35 below).which were exercisable.
Chief Executive Officer Compensation
The incentive elementsOn December 5, 2000, Thomas C. Shull was named President and Chief
Executive Officer and was elected to the Board of Directors of the compensation paid toCompany.
Effective on that date, Mr. Kaul during 1999
were determined on the same basis as that discussed above for all Named
Executives. Mr. Kaul's 1999 base salary was $595,679 pursuant to an employment
agreement entered into by himShull, Meridian and the Company in March 1996; Mr. Kaul was
awarded a bonus of $744,599 for his 1999 performance to be paid in 2000. In
addition, Mr. Kaul received a bonus of $142,978 during 1999 with respect to
certain stock options previously granted. In August 1996, Mr. Kaul purchased
1,510,000 shares of Common Stock pursuant to the Long-Term Incentive Plan for
Rakesh K. Kaul and received two tandem options for each share purchased for a
total of 3,020,000 options. In determining the terms of Mr. Kaul's compensation,
the Compensation Committee noted the option agreements between NAR and Mr. Kaul.
As of March 6, 2000, the Company entered into a new employment agreement
with Mr. Kaul, which is described at pages 9 and 10 above. In connection
therewith, the
December 2000 Short-Term Incentive PlanServices Agreement. Under the December 2000 Services Agreement,
Meridian provided for Rakesh K. Kaul, the 2000
Long-Term Incentive Plan for Rakesh K. Kaul and an amendment and restatement of
the Stock Option Agreement dated August 23, 1996, as amended, with Rakesh K.
Kaul forming a part of the 1996 Long-Term Incentive Plan for Rakesh K. Kaul, are
being submitted to the shareholdersbenefit of the Company the services of Mr. Shull and
certain persons providing consulting services to the Company thereunder (the
"Consultants"). The term of the December 2000 Services Agreement, and the term
for ratification at the Annual Meeting.services of Mr. Shull, began on December 5, 2000 and would have
terminated on December 4, 2001, while the term for the services of the
Consultants would have terminated on June 4, 2001. The December 2000 Services
Agreement was replaced by the August 2001 Services Agreement, pursuant to which
the term of the services of Mr. Shull and the Consultants began on August 1,
2001 and would have terminated on June 30, 2002. The August 2001 Services
Agreement was replaced by the December 2001 Services Agreement. Effective
September 1, 2002, the Company and Mr. Shull entered into the 2002 Employment
Agreement, which replaced the August 2001 Services Agreement. The 2002
Employment Agreement will expire on September 30, 2004. See pages 38 through 46 below.
16
19"Employment
Contracts, Termination of Employment and Change-in-Control Arrangements."
Nondeductible Compensation
The Compensation Committee currently does not anticipate that payments of
compensation in 2000 to the Named Executives which are subject to the $1 million
deduction limit under
Section 162(m) of the Internal Revenue Code, of 1986, as amended (the "Code"),
generally disallows a tax deduction to public companies for compensation over
$1,000,000 (the "$1 Million Limit"), will exceed $1 millionLimit) paid to a company's chief executive officer
and four other most highly compensated executive officers, as reported in 2000. Consequently,its
proxy statement. Qualifying performance-based compensation is not subject to the
deduction limit, if certain requirements are met. The Company expectshas not structured
certain aspects of the performance-based portion of the compensation for its
executive officers (which currently includes awards under performance based
annual management incentive plans) in a manner that complies with the statute.
Payments of compensation programin 2002 relating to be fullyThomas Shull, Edward Lambert and
Michael Contino exceeded the $1 Million Limit; consequently, in each case, the
excess of such payments over the $1 Million Limit was not deductible.
Respectfully Submitted,
The Stock Option and Executive
Compensation Committee
Mr. Ralph Destino
Ms. ShaileshKenneth J. MehtaKrushel (Chairman)
Mr. Jan P. du Plessis
Mr. Alan G. Quasha
Mr. Howard M.S. Tanner
17E. Pendleton James
Robert H. Masson
22
20REPORT OF THE AUDIT COMMITTEE:
The Audit Committee has reviewed and discussed with management and KPMG
LLP, the Company's independent auditors, the Company's audited financial
statements as of and for the year ended December 28, 2002.
The Audit Committee has discussed with the independent auditors the matters
required to be discussed by Statement on Auditing Standards ("SAS") No. 61,
Communication with Audit Committees, as amended by SAS 90.
The Audit Committee has received and reviewed the written disclosures and
the letter from the independent auditors required by Independence Standard No.
1, Independence Discussions with Audit Committees, as amended, by the
Independence Standards Board, and has discussed with the auditors the auditors'
independence.
Based on the review and discussions referred to above, we recommend to the
Board of Directors that the financial statements referred to above be included
in the Company's Annual Report on Form 10-K for the year ended December 28,
2002.
Respectfully Submitted,
Robert H. Masson (Chairman)
E. Pendleton James
Kenneth J. Krushel
23
PERFORMANCE GRAPH:
The following graph compares the yearly percentage change in the cumulative
total shareholderstockholder return on the Company's Common Stock for each of the Company's
last five fiscal years with the cumulative total return (assuming reinvestment
of dividends) of (i) the Standard & Poor's 500 Stock Index (which includes the
Company) and (ii) peer issuers from the Company's line of business selected by
the Company in good faith.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG HANOVER DIRECT, INC., THE S&P 500 INDEX AND A PEER GROUP
[COMPARISON[COMPARISION GRAPH]
HANOVER DIRECT, INC. PEER GROUP S&P 500
-------------------- ---------- -------Cumulative Total Return
---------------------------------------------------------
- --------------------------------------------------------------------------------
12/97 12/98 12/99 12/00 12/01 12/02
- --------------------------------------------------------------------------------
12/94 100 100 100
12/95 43 79 138
12/96 21 120 169
12/97 83 142 226
12/98 95 185 290
12/99 100 212 351
HANOVER DIRECT,
INC. 100.00 114.58 120.83 12.50 12.33 6.33
S & P 500 100.00 128.58 155.64 141.46 124.65 97.10
PEER GROUP 100.00 172.48 186.68 90.72 177.12 214.36
* Direct Marketing Peer Group consists of direct merchandising companies that
market their products through alternative distribution channels, such as mail,
Internet or television media; peer companies include Blair, Damark International,
Fingerhut (a subsidiary of Federated Department Stores, Inc.), Lands' End,
Lillian Vernon,
Spiegel and Williams Sonoma. Gander MountainLand's End was deletedacquired by Sears and was removed
from the groupDirect Marketing Peer Group in 1997 due to the discontinuance of its catalog operations and
subsequent acquisition by Holiday Company.2002.
NOTE: Assumes $100 invested on December 31, 19941997 in the Company's Common Stock,
S&P 500 Stock Index and the Direct Marketing Peer Group, and that
dividends of each are reinvested quarterly; December 1999 figures assume September
1999 shares outstanding for the Direct Marketing Peer Group given data
availability.
18quarterly.
24
21
DIRECTOR COMPENSATION:
Standard Arrangements. Non-employee directors of the Company or its
subsidiaries receive an annual cash fee of $15,000 plus $500$40,000. During fiscal year 2002,
certain directors received per diem fees for eachextraordinary services not
exceeding $40,000 in the aggregate per person. Commencing October 1, 2002,
non-employee directors of the Company will receive an additional $16,000,
$8,000, $8,000, $8,000 and $8,000 annual cash fee for serving as the Chairman of
the Audit, Compensation, Transaction, Executive and Nominating Committees,
respectively, of the Board meeting and $250 for each committee
meeting they attended.of Directors. In addition, such directors are entitled to share equally
1%participate
in the Eighteen Month Compensation Continuation Plan for Directors, the 1999
Stock Option Plan for Directors and the 2002 Stock Option Plan for Directors.
See "Employment Contracts, Termination of any pre-tax profits of the Company. Messrs. du PlessisEmployment and Tanner, who are
affiliates of Richemont, have waived their rights to receive director
compensation from the Company. We doChange-in-Control
Arrangements." The Company does not compensate ourits employees, or employees of
ourits subsidiaries, who serve as directors. In addition, Robert Wright's company
was paid an additional $25,000During fiscal 2002, the Company
provided $50,000 of term life insurance for work regarding the Board's Audit Committee.each director.
During 1999,2002, a total of 400,000 options to purchase shares of Common Stock
were granted to the 8 eligible directors and, in 2000, 50,000 options to purchase shares of Common Stock
were granted to the 1 eligible director,directors all in accordance with the 1999 Stock Option
Plan for Directors. During 2002, no options to purchase shares of Common Stock
under the 1999 Stock Option Plan for Directors were exercised. A total of
250,000 options to purchase shares of Common Stock which plan is subjectwere granted to
ratification byeligible directors under the 1999 Stock Option Plan for Directors have expired
following the resignation of such directors from the Company's shareholders. (See page 32 below). Messrs. du
PlessisBoard of
Directors. As of December 28, 2002, 420,000 options to purchase Common Stock
under the 1999 Stock Option Plan for Directors were outstanding, of which
316,667 options were exercisable.
During 2002, a total of 100,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the 2002 Stock Option
Plan for Directors. During 2002, no options to purchase shares of Common Stock
under the 2002 Stock Option Plan for Directors were exercised. No options to
purchase shares of Common Stock which were granted to eligible directors under
the 2002 Stock Option Plan for Directors have expired following the resignation
of such directors from the Company's Board of Directors. As of December 28,
2002, 100,000 options to purchase Common Stock under the 2002 Stock Option Plan
for Directors were outstanding, none of which were exercisable.
Effective January 1, 2003, 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.
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 Tanner do notserve 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 optionsa 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 plan.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.
25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
InAt December 1996, the Company finalized its agreement (the "Reimbursement
Agreement") with28, 2002, Richemont that provided the Company with up toFinance S.A. ("Richemont"), a Luxembourg
company, owned approximately $28 million of letters of credit through Swiss Bank Corporation, New York
Branch. The Company also paid a facility fee equal to 5% of the principal amount
of the letters of credit as well as all other fees incurred in connection with
providing the facility. The three letters of credit, which were to expire on
February 18, 1998, carried an interest rate of 3.5% above the prime rate and
were payable to Swiss Bank Corporation quarterly on amounts drawn under the
letters of credit. In the event that the Company had not paid in full, by the
expiration date, any outstanding balances under the letters of credit, Richemont
had the option, exercisable at any time prior to payment in full of all amounts
outstanding under the letters of credit, to convert such amount into Common
Stock of the Company at the mean of the bid and ask prices21.3% of the Company's Common Stock on November 8, 1996, or the mean of the bidoutstanding and
ask prices100% of the Company's CommonSeries B Preferred Stock on eachthrough direct and indirect
ownership.
At December 28, 2002, current and former officers and executives of the
thirty days immediately prior to the date
of exercise of the conversion privilege. The Reimbursement Agreement was
subordinate to the Company's Credit Facility with Congress Financial
Corporation. On December 5, 1996, Richemont advancedCompany owed the Company $10approximately $0.3 million, against the anticipated $28 million line of credit. The Company repaid the $10
million loan after the letter of credit agreement was completed on December 19,
1996. In November 1997, Richemont definitively agreed to extend its guaranteeexcluding accrued interest,
under the Reimbursement Agreement to March 30, 1999. As consideration for this
transaction, the Company paid to Richemont a fee of 4% of the principal amount
of each letter of credit aggregating $1,113,483.28. The extension required the
approval of Congress Financial Corporation ("Congress") and Swiss Bank, which
approvals were obtained in February 1998 and was subject to certain other
conditions. On February 18, 1998, the extension of the Richemont guarantee and
the closing of this transaction were consummated. Accordingly, the expiration
dates of two of the letters of credit were extended through March 30, 1999, and
the letters of credit were amended to reflect the assignment of all obligations
thereon from Swiss Bank, New York Branch to Swiss Bank, Stamford Branch. A
substitute letter of credit having an expiration date of March 30, 1999 was
issued to replace the third letter of credit. In February 1999, Richemont
definitively agreed to extend its guarantee under the Reimbursement Agreement to
March 31, 2000. As consideration for this transaction, the Company paid
Richemont a fee equal to 9.5% of the principal amount of each letter of credit
aggregating $2,486,000. The extension required the approval of Congress and UBS
AG, the successor to Swiss Bank, which approvals were obtained in March 1999,
and was subject to certain other conditions. On March 30, 1999, the closing of
the transaction was consummated. Accordingly, the expiration dates of all three
letters of credit were extended
19
22
through March 30, 2000. On March 24, 2000, the securities which were supported
by the three UBS letters of credit were redeemed by the Trustees for such
securities drawing on the letters of credit for the outstanding principal
balance of the securities and accrued and unpaid interest. No further draws may
be made under the letters of credit. The Company has reimbursed UBS for the
drawings under the letters of credit, and no amounts are owing by the Company to
Richemont under the Reimbursement Agreement.
On March 1, 2000, the Company entered into a new $25,000,000 unsecured line
of credit (the "Richemont $25,000,000 Line of Credit") with Richemont.
Borrowings under the Richemont $25,000,000 Line of Credit bear interest at a
rate of 0.583% per month (an annualized rate of 7.0%) on the average monthly
balance outstanding. In addition, the Company will pay Richemont a monthly fee
of $62,500 each month from March 1, 2000 up to the Maturity Date. The Richemont
$25,000,000 Line of Credit will mature on the earlier of December 30, 2000 and
the date on which Richemont makes an equity infusion in the Company or any of
the Company's subsidiaries (such earlier date, the "Maturity Date"). The
Richemont $25,000,000 Line of Credit will be reduced on a dollar-for-dollar
basis for each dollar of net equity proceeds contributed to the Company or
certain of its subsidiaries after March 24, 2000 (including through the
conversion of outstanding principal amounts under such Line of Credit, to the
extent that such net equity proceeds do not reduce the Richemont $10,000,000
Line of Credit (as defined below)). As of March 24, 2000, there were $5,000,000
of borrowings outstanding under the Richemont $25,000,000 Line of Credit.
In addition, on March 24, 2000 the Company negotiated a new $10,000,000
unsecured line of credit (the "Richemont $10,000,000 Line of Credit") with
Richemont. Borrowings under the Richemont $10,000,000 Line of Credit bear
interest at a rate of 0.125% per month (an annualized rate of 1.5%) on the
average monthly balance outstanding. In addition, the Company will pay Richemont
a monthly facility fee of $79,200 each month during the term of the Richemont
$10,000,000 Line of Credit. The maximum amount available to be drawn under the
Richemont $10,000,000 Line of Credit (the "Maximum Amount") was initially
$10,000,000 and will be reduced on a dollar-for-dollar basis for each dollar of
net equity proceeds contributed to the Company or certain of its subsidiaries
after March 24, 2000 (including through the conversion of outstanding principal
amounts under such Line of Credit). If the excess availability under the
Congress Credit Facility is less than $3,000,000, the Company will be required
to borrow under the Richemont $10,000,000 Line of Credit, and pay to Congress,
an amount such that the excess availability under the Congress revolving credit
facility after such payment will be at least $3,000,000. The Company may also
borrow up to $5,000,000 under the Richemont $10,000,000 Line of Credit to pay
trade creditors in the ordinary course of business. The Richemont $10,000,000
Line of Credit will remain in place until the Congress Credit Facility is
terminated or the Maximum Credit is reduced to zero. As of March 24, 2000, there
were no borrowings outstanding under the Richemont $10,000,000 Line of Credit.
The Richemont $25,000,000 Line of Credit and the Richemont $10,000,000 Line
of Credit were conditions to a March 24, 2000 amendment to the Company's credit
facility with Congress Financial Corporation, which amendment provided for a
maximum credit of up to $82,500,000. Such Richemont Lines of Credit are
subordinated to the amended Congress credit facility.
Of the Named Executives, only Michael G. Lutz purchased shares of Common
Stock pursuant to the 1993 Executive Equity Incentive Plan. Pursuant to such
plan, Mr. Lutz financed 80% of the purchase price of the shares he purchased
with a full recourse Company loanThese amounts due in 2001. This loan was outstanding at the
end of fiscal 1997, 1998 and 1999 and, as of March 31, 2000, was outstanding in
the following amount and with the following interest rate: $44,000/6.83%.
20
23
On August 23, 1996, Mr. Kaul purchased 1,510,000 shares of Common Stock
pursuant to the Long-Term Incentive Plan for Rakesh K. Kaul. Pursuant to such
plan, Mr. Kaul financed 80% of the purchase price of such shares ($1,396,750)
with a nonrecourse Company loan (the "Tandem Loan") originally due in four equal
consecutive annual installments of $349,187.50, together with interest thereon.
The Tandem Loan is secured by a pledge of such shares. In March 1998, the terms
of the Tandem Loan were amended and restated to provide for payment due in two
installments. The first installment of $349,187.50 was made by Mr. Kaul to the Company
bear interest at rates ranging from 5.54% to 7.75% and are due or will be due
during 2003.
During November 2002, the Company entered into Transaction Bonus Letters
with each of Mr. Lambert and Mr. Harriss.
On November 6, 2002, the Company entered into a Compensation Continuation
Arrangement with Mr. Lengers.
During October 2002, the Company entered into the Compensation Continuation
Agreements with Mr. Lambert, Mr. Harriss and Mr. Contino.
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.
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 which were accrued in the fourth quarter of 2002.
As of September 1, 2002, Mr. Shull and the Company entered into the 2002
Employment Agreement, which replaced the December 2001 Services Agreement. As of
September 1, 2002, Mr. Shull and the Company amended the Shull 2000 Stock Option
Agreement, the Shull 2001 Stock Option Agreement and the Shull Transaction Bonus
Letter.
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 23, 19978, 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.
During January 2002, at the time of Mr. Harriss' 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'
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.
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
26
Company held by Richemont in return for the issuance to Richemont of 1,622,111
shares of newly created Series B Preferred Stock and the balancereimbursement of
principal is dueexpenses 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
August 23,
2000.the Series A Preferred Stock. The Tandem Loan, which bears interest at 6.84%Richemont Transaction was made pursuant to an
Agreement (the "Agreement"), was outstanding at the end
of fiscal 1997, 1998 and 1999 and,dated as of March 31, 2000, in the principal amount
of $1,047,562. The Company has agreed to pay Mr. Kaul, on or before the due
dates, a bonus equal to the amount of the principal and/or interest due on the
Tandem Loan. The Company also paid Mr. Kaul a sign-on bonus equal to the amount
of the purchase price of the shares required to be paid in cash. In addition, in
connection with the amendment and restatement of the terms of the Tandem Loan in
March 1998, a second note (the "Tax Note") was issued by Mr. Kaul to the Company
in the amount of $211,729 to cover the tax consequences of the payment of the
first installment on the Tandem Loan. The Tax Note bears interest at 6.84% and
is due in full on August 23, 2001.
Pursuant to the Old Employment AgreementDecember 19, 2001, between the Company
and Mr. Kaul,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 NAR were obligatedcertain 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 paythe Company or the acts or
omissions of any Richemont board designee in his capacity as such and (ii)
entered into an 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 or lender of the Company or the acts or omissions of any
Richemont board designee in his capacity as such.
As of December 14, 2001, Mr. Kaul, withinShull, Meridian and the Company entered into
the December 2001 Services Agreement which replaced the August 2001 Services
Agreement.
As of August 1, 2001, Mr. Shull, Meridian and the Company entered into the
August 2001 Services Agreement which replaced the December 2000 Services
Agreement.
During May 2001, the Company entered into Transaction Bonus Letters with
each of Mr. Shull, Mr. Messina, Mr. Potts, Mr. Harriss and Mr. Contino.
On April 30, days after each
date as of which any stock option granted2001, the Company and Mr. Shull entered into the Letter
Agreement, relating to certain termination payments under the Long-Term Plan for Rakesh K.
Kaul vests with respect to all or a portionExecutive Plan.
As of December 2000, Mr. Shull, Meridian and the Company entered into the
December 2000 Services Agreement.
John F. Shull, the brother of Thomas C. Shull, the President and Chief
Executive Officer of the Company, acted as a consultant under the December 2001
Services Agreement, and received an option to purchase 100,000 shares of the
Company's Common Stock covered by suchunder the December 2001 Services Agreement and an option
an additional cash amount equal to the number ofpurchase 500,000 shares of the Company's Common Stock with respect to which such option became vested on such vesting
date multiplied byunder the excess of (i) the lesser of the option price of such
option or the fair market value on such vesting date (equal to the closing price
of the Common Stock on the American Stock Exchange) of a share of Common Stock,
over (ii) $1.03. Pursuant to such provision, the Company paid Mr. Kaul $349,083
and NAR paid Mr. Kaul an additional $142,977 from 1997 through 1999.December 2000
Services Agreement.
In January 1998, the Company made a $75,000 non-interest bearing loan to
Mr. Contino for the purchase by Mr. Contino of a new principal residence in the
State of New Jersey. The terms of the loan agreement includeincluded a provision for
the Company to forgive twenty percent (20%) of the original amount of the principal balance annually over five (5) years provided Mr. Contino remains inon the employmentfifth
anniversary of the Company. Should Mr. Contino voluntarily cease employment with
the Company, the outstanding principal balance of the loan is payable in full
thirty (30) days from the date on which Mr. Contino ceases to be employed by the
Company.loan. The loan iswas secured by the residence which the
proceeds were used to purchase. In May 1999, the Company made a $100,000 non-interest bearingThe loan to Mr.
Lutz for the purchase by Mr. Lutz of a new principal residence in the State of
New Jersey. The terms of the loan agreement include a provision for the Company
to forgive twenty percent (20%) of the original amount of the principal balance
annually over five (5) years provided Mr. Lutz remains in the employment of the
Company. Should Mr. Lutz voluntarily cease employment with the Company, the
outstanding principal balance of the loan is payablewas forgiven in full thirty (30) days
from the date on which Mr. Lutz ceases to be employed by the Company. The loan
is secured by the residence which the proceeds were used to purchase.
Diana Quasha, the wife of Alan Quasha, entered into an employment agreementin accordance with
Henre, Inc. ("Henre"), a subsidiary of the Company and party to a
distribution arrangement with Compagnie de la Chine, on June 25, 1999. Pursuant
to the employment agreement, Ms. Quasha serves as President of Henre retroactive
to May 10, 1999 at the base salary of $115,000 per year. She is eligible for an
annual cash bonus of up to fifty percent (50%) of her base salary, with a target
of twenty-five percent (25%) of her base salary, based on the business's
achieving planned performance levels. She also will receive a five percent (5%)
non-
21
24
voting equity stake in any joint venture between Henre and Compagnie de la Chine
upon the formation of the joint venture company: one-half of this stake will
vest over five (5) years in ten percent (10%) increments upon each anniversary
date of her employment provided she remains employed and the other half will
vest in the sole discretion of the Chief Executive Officer of the Company based
on her performance. If the joint venture becomes a publicly traded company, Ms.
Quasha's equity stake will be converted to non-voting shares of such company's
stock; if the joint venture does not become a publicly-traded company within the
five (5) year vesting schedule or should her employment be involuntarily
terminated without cause prior to a public offering, her vested equity stake
will be cashed out within sixty (60) days pursuant to the employment agreement.
In addition, Ms. Quasha is eligible to participate inits terms during January 2003.
Either the Company's various
employee benefit plans and is entitled to three (3) weeks paid vacation per
year.
Either the Board of Directors, a committee of the Company's Board
of Directors, or the Shareholdersstockholders have approved these relationships and
transactions and, to the extent that such arrangements are available from non-affiliatednon
affiliated parties, all relationships and transactions are on terms no less
favorable to the Company than those available from non-affiliatednon affiliated parties.
2227
25
PRINCIPAL HOLDERS OF VOTING SECURITIES OF THE COMPANY
CERTAIN BENEFICIAL OWNERS:
The following table lists the beneficial owners known by management of at
least 5% of the Company's Common Stock or 5% of the Company's Series B Preferred
Stock as of March 31, 2000.April 2, 2003. Information in the table is based on information
furnished to usthe Company by such persons or groups and statements filed with the
Securities and Exchange Commission.
COMMON STOCKCommission (the "Commission").
SHARESNAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESSTITLE OF CLASS OF BENEFICIAL OWNER COMMON STOCKBENEFICIAL OWNERSHIP(1) CLASS(1)
------------------------------------ ------------- -------------- ------------------- ----------------------- ----------
Series B Richemont Finance S.A....................................... 102,790,657(2) 48.2%S.A. ......................... 1,622,111(2) 100%
Participating 35 Boulevard Prince Henri
Preferred Stock L 1724 Luxembourg
Common Stock Richemont Finance S.A. ......................... 29,446,888(2) 21.3%
35 Boulevard Prince Henri
L 1724 Luxembourg
Common Stock Regan Partners, L.P. and Basil P. Regan..................... 43,469,850(3) 20.4%
6Regan......... 38,745,017(3) 28.0%
32 East 43rd57th Street
New York, New York 1001710022
Common Stock Theodore Kruttschnitt........................... 10,144,000(4) 7.3%
1730 South El Camino Real
Suite 400
San Mateo, California 94402
- ---------------
(1) In the case of Common Stock, includes shares of Common Stock issued upon
exercise of options or warrants exercisable within 60 days for the subject
individual only. Percentages of Common Stock are computed on the basis of
213,369,446138,315,800 shares of Common Stock outstanding as of March 31, 2000.April 2, 2003.
(2) Information concerning the number of shares beneficially owned has been
taken from Amendment No. 35 to the Statement on Schedule 13D filed by
Richemont on August 6, 1998March 21, 2003 with the Securities and Exchange Commission.
Such figure does not include 1,510,000 shares of Common Stock owned by NAR
Group Limited, of which Richemont is a shareholder, which could also be
deemed to be beneficially owned by Richemont (which has shared power to vote
and dispose of such shares). Richemont also holds an irrevocable proxy to
vote an additional 4,289,000 shares of Common Stock currently held by a
third party, representing an additional 2.0% of the Common Stock outstanding
as of March 31, 2000. Richemont disclaims beneficial ownership of the shares
owned by NAR and the shares subject to the proxy.
(3) Information concerning the number of shares beneficially owned has been
taken from the Statement on Schedule 13D filed by Regan Partners L.P. and
Basil P. Regan on January 20, 2000 with the Securities and Exchange
Commission and information supplied by Mr. Regan to the Company regarding
stock purchases subsequent to December 31, 1999. The Schedule 13D indicates
that Mr. Regan and Regan Partners L.P. have shared voting and dispositive power
with respect to 42,649,35037,773,450 shares of Common Stock and Mr. Regan has sole
voting and dispositive power with respect to 626,000954,900 shares of Common Stock.
In addition,Also includes options to purchase 16,667 shares exercisable within 60 days.
(4) Information concerning the Companynumber of shares beneficially owned has been
advisedtaken from the Amendment No. 14 to Statement on Schedule 13D filed by Mr.
Kruttschnitt on May 28, 2002 with the Commission. The Schedule 13D indicates
that The Wellcome
Trust -- Regan Fund Management Ltd. purchased, subsequentMr. Kruttschnitt had sole voting and sole dispositive power with
respect to December 31,
1999, 194,500 additional10,074,000 shares of Common Stock. 23Also includes options held by
Mr. Kruttschnitt to purchase 70,000 shares exercisable within 60 days.
28
26
SECURITY OWNERSHIP OF MANAGEMENT OF THE COMPANY
MANAGEMENT OWNERSHIP:
No director or executive officer owns any shares of Series B Preferred
Stock.
The following table lists share ownership of the Common Stock as of March
31, 2000.April 2,
2003. The information includes beneficial ownership by each of our current
directors and executive officers and by all directors and executive officers as
a group. Except as noted below, to our knowledge, each person named in the table
has sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
SHARES OF PERCENT OF
NAME OF BENEFICIAL OWNER COMMON STOCKSTOCK(1) CLASS(1)
------------- ------------------------ --------------- ----------
Ralph Destino............................................... 5,000(3) *
J. David Hakman(2).......................................... 274,392 *
Rakesh K. Kaul.............................................. 7,040,000(4) 3.3%
June R. Klein............................................... 15,100Robert H. Masson.......................................... 0 *
Kenneth Krushel............................................. -- --
Theodore H. Kruttschnitt(2)................................. 10,074,000 4.7%
Shailesh J. Mehta........................................... 5,000Krushel........................................ 60,000(2) *
Jan P. du Plessis........................................... -- --
Alan G. Quasha.............................................. 1,946,098(5)E. Pendelton James........................................ 16,667(3) *
Basil P. Regan.............................................. 43,469,850(6) 20.4%
Howard M.S. Tanner.......................................... 150,000(7) *
Robert F. Wright............................................ 83,050 *Regan(4)......................................... 38,745,017(4) 28.0%
Thomas C. Shull........................................... 3,200,000(5) 2.3%
Michael G. Lutz............................................. 350,406(8)D. Contino........................................ 389,900(6) *
Brian C. Harriss............................................Harriss.......................................... 53,600 *
Curt Johnson................................................ -- --
Ralph J. Bulle.............................................. 205,183(9) *
Michael D. Contino.......................................... 169,064(10) *
Richard B. Hoffmann......................................... 250,000(11) *
William C. Kingsford........................................ 79,165(12)Kingsford...................................... 99,867(7) *
LarryEdward M. Lambert......................................... 300,000(8) *
Frank J. Svoboda............................................ 588,250(13)Lengers.......................................... 19,000(9) *
Steven Lipner............................................. 26,174(10) *
Directors and executivesexecutive officers as a group (20(11
persons)... 64,758,158 30.4%................................................ 42,910,225(11) 31.0%
- ---------------
* Less than 1%
(1) Includes in each case shares of Common Stock issuable upon exercise of
options or warrants exercisable within 60 days for the subject individual
only. Percentages are computed on the basis of 214,021,998138,315,800 shares of Common
Stock outstanding as of April 6, 2000.2, 2003.
(2) Information concerning the number ofRepresents options to purchase 60,000 shares beneficially owned has been
taken from Amendment No. 13 to the Statement on Schedule 13D filed by Mr.
Kruttschnitt on June 16, 1997 with the Securities and Exchange Commission.
Such statement sets forth the number of shares beneficially owned by Mr.
Kruttschnitt and, of such shares, the number as to which he holds sole
voting power, shared voting power, sole dispositive power or shared
dispositive power. The amended Schedule 13D also indicated that Mr.
Kruttschnitt is a member of a group which includes Mr. Hakman, who
beneficially owns 274,392 shares.
24
27exercisable within 60 days.
(3) Represents options to purchase 5,00016,667 shares exercisable within 60 days.
(4) IncludesMr. Regan and Regan Partners L.P. have shared voting and dispositive power
with respect to 37,773,450 shares of Common Stock and Mr. Regan has sole
voting and dispositive power with respect to 954,900 shares of Common
Stock. Also includes options to purchase 5,530,00016,667 shares exercisable within
60 days.
(5) Includes 1,510,000Represents options to purchase 3,200,000 shares owned by NAR Group Limited. All of the shares
owned by NAR Group Limited could also be deemed to be beneficially owned by
Mr. Quasha, due to his shared investment and voting power in NAR Group
Limited.exercisable within 60 days.
(6) Includes 23,903,700 shares owned by Regan Partners, L.P., 12,348,500 owned
by Regan Fund International, L.P., 3,675,150 owned by The Wellcome
Trust -- Regan Fund Management Ltd., 2,029,800 owned by Super Hedge Fund,
L.P., 866,700 owned by Athena Partners, L.P., and 20,000 owned by Lenore
Robins (co-general partner of Athena Partners, L.P.).
(7) Mr. Tanner is the 51% owner of a family holding company which owns 150,000
shares of Common Stock.
(8) Includes options to purchase 277,916387,500 shares exercisable within 60 days.
(7) Represents options to purchase 99,867 shares exercisable within 60 days.
(8) Represents options to purchase 300,000 shares exercisable within 60 days.
(9) IncludesRepresents options to purchase 173,12519,000 shares exercisable within 60 days.
(10) Includes options to purchase 166,66425,000 shares exercisable within 60 days.
(11) Includes options to purchase 200,0004,124,701 shares exercisable within 60 days.
(12) Represents options to purchase 79,165 shares exercisable within 60 days.
(13) Includes options to purchase 446,250 shares exercisable within 60 days held
by this former executive officer.
2529
28
PROPOSAL I
ELECTION OF DIRECTORS
GENERALLY:
The Board of Directors currently consists of 5 members. The Board of
Directors amended the Company's Bylaws, effective on the date of the 2001 Annual
Meeting of Stockholders of the Company (May 31, 2001) to reduce the size of the
Company's Board of Directors to six Directors. 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
meeting of stockholders. 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.
The Board has nominated 125 directors for election at the Annual Meeting. All
of them are currently serving as directors. If you re-elect them,elect the 5 directors
nominated for election at the Annual Meeting, they will hold office until the
next annual meeting of stockholders 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.
NOMINEES:
RALPH DESTINO.............THOMAS C. SHULL...........
AGE 63 Ralph Destino51 Thomas C. Shull has been Chairman of the Chairman EmeritusCompany's
Board of Cartier, Inc, a luxury goods business,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 19851997 to 1999, Mr. Destino served
as Chairman of Cartier, Inc., and from 1974 to 1985 he served as President
and CEO of Cartier (Far East) Ltd.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 R.H. Macy Company, Inc., where he was responsible
for human resources, information technology, business
development, strategic planning and Cartier, Inc. Cartier, Inc. ismerchandise
distribution and led the merger negotiations with
Federated Department Stores. Prior to that, he served
as a subsidiary of
Compagnie Financiere Richemont, A.G., a Swiss
public company engagedconsultant with McKinsey & Company and in the
luxury goods and
other businesses and an affiliateearly 1980s as a member of Richemont. Mr.
Destino was electedthe National Security
Council Staff in the Reagan White House.
E. PENDLETON JAMES........
AGE 73 E. Pendleton James has been a director of the Company
since January 2002. Mr. James has over thirty years
experience in October 1991.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.
30
KENNETH J. DAVID HAKMAN...........KRUSHEL........
AGE 5851 Kenneth J. David HakmanKrushel has been the Chief Executive OfficerVice
President of Hakman Capital Corporation, Burlingame,
California, an investmentStrategic and merchant banking
firm, since 1980. Mr. Hakman also serves as a
directorBusiness Development of
Concord Camera Corp., a firm which
manufactures and distributes cameras. Mr. Hakman
was originally appointed a director of the Company
in May 1989 pursuant to a nomination and standstill
agreement among the Company and Theodore H.
Kruttschnitt, Edmund Manwell, and himself
("Nomination and Standstill Agreement") and was
elected a director of the Company in October 1991.
RAKESH K. KAUL............
AGE 48 Rakesh K. Kaul has served as the Company's President
and Chief Executive Officer since March 7, 1996.
Mr. Kaul served as Vice Chairman and Chief
Operating Officer of Fingerhut Companies,Blackboard Inc., a multi-media direct marketing company, from March
1995provider of e-education software
and commerce and access systems, since December 2000.
From October 1999 to February 1996 and Executive Vice President
and Chief Administrative Officer of Fingerhut from
January 1992 until March 1995. Prior to 1992,December 2000, Mr. KaulKrushel was the Senior Vice President of Strategy and
Finance and a director of Shaklee Corporation, a
direct marketing company. Mr. Kaul was elected a
director of the Company in March 1996.
JUNE R. KLEIN.............
AGE 51 June R. Klein has been the Chief Executive Officer of
Technology & Marketing Ventures, Inc., a New
York-based consultancy to management-funding and
distributor businesses, since 1992. From 1989
through 1991, Ms. Klein served as a Senior
Executive for vertical markets, venture management
and subsidiaries at Wang Labs. She was also
Managing Director of Global Electronic and
Government Products for Chase Bank from 1986 to
1989 and Vice President of the Information
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29
Business and Global Delivery Services for Citicorp
Group from 1983 to 1986. Ms. Klein also served as
Manager of Sales, Systems Integration and
Development for IBM from 1975 to 1982 and in
telecommunications positions for Merrill Lynch from
1970 to 1975. Ms. Klein was elected a director of
the Company in May 1999.
KENNETH KRUSHEL...........
AGE 48 Kenneth Krushel has been
the Chairman and Chief Executive Officer of College
Enterprises, Inc., an
outsourcing partner to colleges and universities in
the areas of campus "stored-value" systems and
software, reprographics and custom publishing and
copyright clearance, since October 1999. From July 1996 to October 1999, Mr. Krushel was
the Senior Vice President of Strategic Development
for NBC Corp., a major television network, and from January
1994 to July 1996 was Senior Vice
President, Business Development, for King World
Productions,
the largest syndication production and distribution
business in the world. Mr. Krushel has also worked
as a business development and strategic planning
consultant for MGM, Lifetime Television, Sega
Corporation, Paramount Communications, USA
Networks, Time-Warner, New Line, the CBC,
Television New Zealand, and Lancit Productions. From 1987 to 1989,Formerly, Mr. Krushel was President and
Chief Operating Officer of Think Entertainment a
cable and
broadcast television production company
founded by Telecommunications, Inc. Mr. Krushel was
also Vice PresidentVice-President of Programming and Marketing for
American Cablesystems from 1981 until the sale
of the company in 1987 to Continental Cable.Cablesystems. Mr. Krushel was elected a
director of the Company in May 1999.
THEODOREROBERT H. KRUTTSCHNITT..............MASSON..........
AGE 57 Theodore Kruttschnitt has been the67 Robert H. Masson served as Senior Vice President,
Finance and Administration and Vice President and
Chief Financial Officer of Limar
Realty Group,Parsons & Whittemore,
Inc., a real estate investment company,
since November 1992.global pulp and paper manufacturer, from May
1990 until his retirement June 30, 2002. Prior
thereto, Mr. Kruttschnitt serves on the
Board of Directors of Cooper DevelopmentMasson held various executive, financial
and treasury roles with The Ford Motor Company,
a
firm which invests in personal care products
businesses. Mr. Kruttschnitt was appointed a
directorKnutson Construction Company, Ellerbe, PepsiCo, Inc.
and Combustion Engineering (now part of the CompanyABB
Group). Mr. Masson currently serves as a Trustee and
as the Chairman of the Finance Committee of The Naval
Aviation Museum Foundation, Inc. in May 1989 pursuant to the
Nomination and Standstill Agreement andPensacola,
Florida. Mr. Masson was elected a director of the
Company in October 1991.
SHAILESH J. MEHTA.........
AGE 50 Shailesh J. Mehta has been the Chief Executive
Officer and a director of Providian Financial
Corporation (formerly known as Providian Bancorp,
Inc.), a consumer lending financial services
company, since 1988 and Chairman and President
since 1997. He joined Providian in 1986 as
Executive Vice President and Chief Operating
Officer. Mr. Mehta was Chairman and Chief Executive
Officer of Providian Direct Insurance, a direct
marketer of life and health insurance, from 1993 to
1994 and President, Chief Operating Officer and a
director of Providian Corporation, a
shareholder-owned diversified financial services
company and the former parent company of Providian
Financial Corporation, from 1994 to 1997. Mr. Mehta
was elected a director of the Company in July 1997.
JAN P. DU PLESSIS.........
AGE 46 Jan P. du Plessis has been Finance Director of
Compagnie Financiere Richemont, A.G. and Richemont
S.A., both of which are affiliates of
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30
Richemont, since 1988. He also serves as a director
of British American Tobacco plc ("BAT"). Mr. du
Plessis also served as Finance Director of Rothmans
International BV and its predecessor companies from
1990 to October 1996 and remained on its board
until such company was merged with BAT in 1999. Mr.
du Plessis was elected a director of the Company in
March 1997.
ALAN G. QUASHA............
AGE 50 Alan G. Quasha has been President of Quadrant
Management, Inc., an investment management company,
since 1988. From 1980 to September 1991, he was
partner in the New York City law firm of Quasha
Wessely & Schneider. Mr. Quasha also serves as a
director of NAR Group Limited. In addition, Mr.
Quasha served as a director of Richemont S.A., an
affiliate of Richemont, until 1999, when he
resigned upon being nominated for election to the
board of Compagnie Financiere Richemont, A.G., also
an affiliate of Richemont. Mr. Quasha was elected a
director of the Company and Chairman of the Board
in October 1991.effective January 1, 2003.
BASIL P. REGAN............
AGE 5962 Basil P. Regan has been the General Partner of Regan
Partners, L.P., a limited partnership whichthat 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 serves a director of NewsEdge Corporation, a
provider of global news and current awareness
solutions for business. Mr. Regan was elected a director of the
Company in March 2000.
HOWARD M.S. TANNER........
AGE 55 Howard M.S. Tanner has been Executive Director of
Richemont S.A., an affiliate of Richemont, since
1988. Mr. Tanner was elected a director of the
Company in March 1997.
ROBERT F. WRIGHT..........
AGE 74 Robert F. Wright has been the President of Robert F.
Wright Associates, Inc., business consultants,
since 1988. Prior thereto, he was a senior partner
of the accounting firm Arthur Andersen & Co. Mr.
Wright is a director of Reliance Standard Life
Insurance Co., a life insurance company, and
affiliates, Williams Real Estate Co., Inc., a real
estate company, The Navigator Group, Inc., a
property insurance company, U.S. Timberlands
Company, L.P., a manager of Western Timberlands,
and Quadlogic Controls Corp., a company engaged in
the production of electrical metering equipment.
Mr. Wright also serves on the board of Deotexis
Inc., a company commercializing control release
patents, and Universal American Financial Corp., a
life insurance holding company. Mr. Wright was
elected a director of the Company in October 1991.August 2001.
BOARD MEETINGS:
In 1999,2002, the Board held 59 meetings in person or by conference telephone.telephone and
took action by written consent on 4 occasions. Each incumbent director attended
at least 75% of the aggregate number of his or herthe Company's Board Meetings and his
or her committee meetings.
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31
BOARD COMMITTEES:
The Board has standing Executive, Audit, Stock Option and Executive
Compensation, Nominating, and Transactions Committees.
The Executive Committee.Committee
- During 19992002, Messrs. Basil P. Regan, Thomas C. Shull and currently,Kenneth J.
Krushel were members of the Executive Committee. Currently, Messrs. TannerBasil
P. Regan (Chairman), Kaul, du Plessis,
QuashaThomas C. Shull and Wright were members.Kenneth J. Krushel are members
of the Executive Committee.
- The duties of the Executive Committee include:
- recommending actions to the Board; and
31
- acting on behalf of the Board on certain operating matters requiring
Board approval when the Board is not in session.
- The Executive Committee held 65 meetings in person or by conference call
in 2002 and took action by written consent on 4 occasions1 occasion in 1999.2002.
The Audit Committee.
- During 1999At various times during 2002, Messrs. J. David Hakman, Kenneth J. Krushel
and currently,E. Pendleton James were members of the Audit Committee. Currently,
Messrs. WrightRobert H. Masson (Chairman), Hakman, du PlessisKenneth J. Krushel and Tanner were members.E. Pendleton
James are members of the Audit Committee. Each of the members of the
Audit Committee is independent, as defined in Rule Section 121(A) of the
American Stock Exchange's listing standards.
- The duties of the Audit Committee include:
- monitoring the integrity of the Company's financial reporting process
and systems of internal controls regarding finance, accounting, and
legal compliance;
- responsibility for the appointment, compensation and oversight of the
work of the independent auditor (including resolution of disagreements
between management and the independent auditor regarding financial
reporting) for the purpose of preparing its audit report or any related
work;
- determining the extent of funding necessary for payment of compensation
to the independent auditor for the purpose of rendering or issuing the
annual audit report and to any independent legal counsel or other
advisors retained under the preceding paragraph to advise the Audit
Committee;
- seeking to insure and monitor the independence and performance of the
Company's external auditors and internal auditing department and advise
the Board;
- reviewing withand approving all related-party transactions after such
transactions have been reviewed and approved by the Transactions
Committee of the Board;
- monitoring the independence and performance of the Company's independent
public accountantsauditors and internal auditing department;
- ensuring that the scopeindependent auditor submits to the Audit Committee on
an annual basis a written statement consistent with Independent
Standards Board Standard No. 1, discussing with the independent auditor
any disclosed relationships or services that may impact the objectivity
and independence of theirthe independent auditor, and satisfying itself as to
the independent auditor's independence;
- confirming that the independent auditor does not violate the audit
rotation requirements of Section 203 of the Sarbanes-Oxley Act of 2002,
which provides that the auditor may not perform audit services for the
Company if the lead audit partner or the audit partner responsible for
reviewing the audit has performed audit services for the Company for
each of the five previous fiscal years;
- establishing procedures for the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
accounting controls or auditing matters and the confidential, anonymous
submission by employees of the Company of concerns regarding
questionable accounting or auditing matters;
- providing an avenue of communication among the independent auditors,
management, the internal auditing department and the Board of Directors;
- reviewing and reassessing the adequacy of its charter at least annually;
- reviewing the Company's annual audited consolidated financial statements and any
accounting proceduresprior to
filing or internal control comments containeddistribution;
32
- in consultation with the management, the independent public accountants'auditors and the
internal auditors, considering the integrity of the Company's financial
reporting processes and controls and significant risk exposures;
- reviewing with financial management letter, including corrective
action taken by management;and the independent auditors the
Company's quarterly financial results prior to the release of earnings
and/or the Company's quarterly financial statements prior to filing or
distribution;
- annually reviewing the performance, independence and compensation of the
independent auditors and approving, appointing and/or discharging
auditors on an annual basis. Reviewing the adequacyindependent auditor's plan,
discussing yearly audit results with auditors prior to release, and
scopeconsidering independent auditors' judgments with respect to the quality
and appropriateness of the internal
audit department's planned audit program;Company's accounting methods;
- reviewing the internal audit department's interim audit reports,
including the evaluation of repliesorganizational structure and corrective action being taken;
-qualifications, as
needed; reviewing the adequacyannual audit scope and plan; reviewing the
appointment, annual performance reviews and replacement of internal
audit executives; reviewing summary findings and management's response;
and reviewing annually, with the Company's counsel, any legal matters
that could have a significant impact on the Company's financial
statements;
- annually assessing its performance of the internal accounting control systemsduties specified in the
charter of the CompanyAudit Committee and reporting its subsidiaries;findings to the Board;
and
- reviewingperforming any other activities consistent with the charter of the Audit
Committee, the Company's By-Laws and approving management's recommendationgoverning law as the Audit
Committee or the Company's Board of Directors deems necessary or
appropriate.
- The Company's Board of Directors has adopted a written charter for the
appointmentAudit Committee, a copy of outside independent public accountants priorwhich is filed as Appendix A to the submission of
their nomination to the Board for approval and to the Shareholders for
ratification.this Proxy
Statement.
- The Audit Committee held 46 meetings in 1999 in person or by conference call.call in
2002 and took action by written consent on 1 occasion in 2002.
- 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 concerned with the accuracy and completeness of"audit committee financial
expert" serving on the Company's consolidated financial statements and matters which relate to them.
However, the Audit Committee's role does not involve the professional evaluation
of the quality of the audit conducted by the independent public accountants.
While it is believed that the Audit Committee's activities are beneficial
because they provide ongoing oversight on behalf of the full Board, they do not
alter the traditional roles and responsibilities of the Company's
29
32
management and independent public accountants with respect to the accounting and
control functions and financial statement presentation.Committee.
The Stock Option and Executive Compensation Committee.
- During 1999At various times during 2002, Messrs. E. Pendleton James, Kenneth J.
Krushel and currently,Basil P. Regan were members of the Stock Option and Executive
Compensation Committee. Currently, Messrs. MehtaKenneth J. Krushel (Chairman),
Destino, du Plessis,
QuashaE. Pendleton James and Tanner were members.Robert H. Masson are members of the Stock Option
and Executive Compensation Committee.
- The duties of the Stock Option and Executive Compensation Committee
include:
-include reviewing and making recommendations for approval by the Board of
remuneration arrangements for directors and members of management.
- The Stock Option and Executive Compensation Committee held 4 meetings1 meeting in
19992002 in person or by conference call and took action by written consent
on 1 occasion9 occasions in 1999.2002.
33
The Nominating Committee.
- During 1999 and currently,At various times during 2002, Messrs. Kaul (Chairman), Destino andThomas C. Shull, J. David Hakman
and Ms. KleinE. Pendleton James were members.members of the Nominating Committee.
Currently, Messrs. E. Pendleton James (Chairman), Basil P. Regan and
Robert H. Masson are members of the Nominating Committee.
- The duties of the Nominating Committee include:
- evaluating and recommending candidates for election to the Board.
- The Nominating Committee held no meetings in person or by conference
call in 2002 and took action by written consent on 1 meetingoccasion in 1999.2002.
- The Bylaws of the Company require advance notice of nominations for
election to the Board, other than those made by the Board. Unless waived
by the Board, a notice of nomination must be received by the Company at
least 75 days before initiation of solicitation to the Shareholdersstockholders for
election in the event of an election other than at an annual meeting of
shareholders,stockholders, and at least 75 days before the date that corresponds to
the record date of the prior year's annual meeting of shareholdersstockholders in
the event of an election at an annual meeting of shareholders,stockholders, and in
all events must include certain required information. The Nominating
Committee will consider nominees recommended by Shareholdersstockholders in
accordance with the Company's Bylaws.
The Transactions Committee.
- During 1999 and currently,At various times during 2002, Messrs. J. David Hakman, (Chairman),Kenneth J. Krushel
and KruttschnittE. Pendleton James were members of the Transactions Committee.
Currently, Messrs. Kenneth J. Krushel (Chairman), Robert H. Masson and Ms. Klein were members.E.
Pendleton James are members of the Transactions Committee.
- The duties of the Transactions Committee include:
- reviewing and, if necessary, retaining independent expertsProviding assistance to review any
and all transactions notthe directors in fulfilling their responsibility
to the ordinary course of business between the
Company and directors, members of management or persons owning 10% or
more of the Company's securities; and
- reporting its findingsstockholders by recommending appropriate actions to the Board of
Directors or acting on behalf of the Board of Directors on a matter
which requires Board approval involving any of the following:
(a) A material transaction with: (1) a person who (or an entity which)
may possess control of the Company by virtue of contract, ownership
of securities or otherwise; (2) a director or stockholder owning
more than ten percent (10%) of the voting securities of the Company;
or (3) a person who is related by blood or marriage to a director or
stockholder owning more than ten percent (10%) of the voting
securities of the Company;
(b) A material transaction or series of transactions pursuant to which,
or as a result of which it is reasonably foreseeable that, a person
or entity described in subparagraph (a) above would (1) obtain
consideration which is either more favorable or materially different
than the consideration to be received by, or is at the expense of,
other holders of the same class of stock of the Company, or (2) have
interests materially different than or adverse to the fairness, merits and
potential conflictsinterests of
interest.the other holders of the same or any other class of stock of the
Company; or
(c) A material transaction or series of transactions that the Board of
Directors determines to refer to the Transactions Committee.
- The Transactions Committee held 10 meetings in 19991 meeting in person or by conference call.
30
33call
in 2002 and took no action by written consent in 2002.
INDEMNIFICATION OF OFFICERS AND DIRECTORS:
We indemnify our executive officers and directors to the fullest extent
permitted by applicable law against liabilities incurred as a result of their
service to the Company and directors, in particular, against liabilities
incurred as a result of their service as directors of other corporations when
serving at the request of the
Company. In addition, the Shareholders' Agreement,
dated October 25, 1991, between the Company and NAR provides for
indemnification, to the fullest extent permitted by law, of NAR's designees to
the Board against, among other things, all liabilities and claims arising out of
their service in any capacity for or on behalf of the34
Company. We have a directors and officers liability insurance policy,policies,
underwritten by National
Union ZurichGreenwich Insurance Company, Zurich American Insurance Company
and TamarackNational Union Fire Insurance Company of Pittsburgh, PA, in the aggregate
amount of $30,000,000.$25,000,000. As to reimbursements by the insurer of the Company's
indemnification expenses, the policy haspolicies have a $250,000 deductible for securities
claims against the Company and a $150,000 deductible for all other indemnifiable
losses. The policy term isterms are from June 1, 19992002 to June 1, 2000.2003.
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 ("Commission") and the American Stock
Exchange. Based solely on a review of the reports and representations furnished
to the 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.requirements except for Messrs. Kingsford, Lengers and Lipner, who each failed
to file one report in a timely fashion.
VOTE REQUIRED:
The 12 nominees for director who receiveaffirmative vote of the most votes will be elected.holders of a plurality of the combined voting
power of all shares of Voting Stock voted at the Annual Meeting, whether in
person or by proxy, whether by mail, Internet or telephone, and voting together
as a single class, is required to elect directors. Each share of Common Stock
has one (1) vote and each share of Series B Preferred Stock has ten (10) votes.
The enclosed proxy allows you to vote for the election of all of the nominees
listed, to withhold authority to vote for one or more of such nominees or to
withhold authority to vote for all of such nominees.
If you do not vote for a nominee, your vote will not count either for or
against the nominee. Also, if your broker does not vote on any of the nominees,
it will have no effect on the election.
The persons named in the enclosed proxy intend to vote FOR the election of
all of the nominees. Each of the nominees currently serves as a director and has
consented to be nominated. We do not foresee that any of the nominees will be
unable or unwilling to serve, but if such a situation should arise your proxy
will vote in accordance with his or her best judgment.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION
OF THE NOMINEES FOR DIRECTOR.
3135
34
PROPOSAL 2
RATIFICATIONSELECTION OF THE 1999 STOCK OPTION PLAN FOR DIRECTORS
GENERALLY:
WeINDEPENDENT PUBLIC ACCOUNTANTS
INDEPENDENT PUBLIC ACCOUNTANTS:
Ratification of the Company's selection of independent auditors by the
Company's stockholders is not required and no recommendation of independent
auditors is being made to stockholders at this time. Instead, we are asking you
to ratifydelegate to the Board's adoptionAudit Committee of the 1999 Stock Option
PlanBoard of Directors authority to select
the Company's independent auditors for Directors. The purposethe fiscal year ending December 27, 2003
from amongst established national audit firms.
Representatives of KPMG LLP ("KPMG"), which audited the Company's financial
statements for the fiscal year ended December 28, 2002, are expected to be
present at the Annual Meeting with the opportunity to make a statement if they
desire to do so and to respond to appropriate questions. If, before the Annual
Meeting, the Board of Directors selects an independent auditor other than KPMG
for the fiscal year ending December 27, 2003, it is expected that
representatives of such audit firm will be present at the Annual Meeting with
the opportunity to make a statement if they desire to do so and to respond to
appropriate questions.
FEES AND INDEPENDENCE:
Audit Fees. KPMG billed the Company an aggregate of $613,501 for
professional services rendered for the audit of the 1999 Stock Option PlanCompany's financial
statements for fiscal year ended December 28, 2002 and its reviews of the
Company's financial statements included in the Company's Forms 10-Q for the 2002
fiscal year. Arthur Andersen LLP billed the Company an aggregate of $29,800 for
professional services rendered for its reviews of the Company's financial
statements included in the Company's Form 10-Q for the first quarter of the 2002
fiscal year.
Financial Information Systems Design and Implementation Fees. During the
fiscal year ended December 28, 2002, KPMG provided no services and therefore
billed no fees to the Company in connection with financial information systems
design and implementation.
All Other Fees. During the fiscal year ended December 28, 2002, KPMG
billed the Company an aggregate of $151,955 for services other than services
specified in the preceding paragraphs.
The Audit Committee of the Board of Directors ishas considered whether the
provision of services by KPMG described in the preceding two paragraphs are
compatible with maintaining KPMG's independence as the Company's principal
accountant.
CHANGES IN INDEPENDENT PUBLIC ACCOUNTANTS:
The Company's Board of Directors, upon recommendation of its Audit
Committee, ended the engagement of Arthur Andersen LLP ("Arthur Andersen") as
the Company's independent public accountants, effective on the filing on May 14,
2002 of the Company's Form 10-Q for the fiscal quarter ended March 30, 2002, and
authorized the engagement of KPMG to advanceserve as the interestsCompany'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.
During the Company's fiscal years ended December 30, 2000 and December 29,
2001, and the subsequent interim period through May 14, 2002, there were no
disagreements between the Company and Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to Arthur Andersen's
satisfaction, would
36
have caused Arthur Andersen to make reference to the subject matter of the
disagreement in connection with its reports.
The audit reports of Arthur Andersen on the consolidated financial
statements of the Company throughand subsidiaries as of and for the grantfiscal years ended
December 30, 2000 and December 29, 2001 did not contain any adverse opinion or
disclaimer of optionsopinion, nor were they qualified or modified as to purchase shares of Common Stock, by providing non-employee directorsuncertainty,
audit scope, or accounting principles.
The Company has provided Arthur Andersen with a copy of the Company (other than directors who are nonresident United States aliens) with a
larger personal and financial interest in the successforegoing
disclosures.
None of the Company. The
following is a brief summaryreportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred within the Company's fiscal years ended December 30,
2000 and December 29, 2001 and the subsequent interim period through May 14,
2002.
During the Company's fiscal years ended December 29, 2001, and the
subsequent interim period through May 14, 2002, the Company did not consult with
KPMG regarding any of the 1999 Stock Option Plan for Directors. The
complete textmatters or events set forth in Item 304(a)(2)(i) and
(ii) of the plan is attached as Annex A and reference is made to such
Annex for a complete statement of the provisions of the plan.
GENERAL INFORMATION:
Effective date and duration of the plan. The plan became effective on the
date of its adoption by the Board, subject to the ratification of the plan by
the affirmative vote or consent of holders of a majority of the issued and
outstanding shares of Common Stock, and will terminate 10 years from the date of
its adoption or such earlier date as the Board may determine.
Administration. The plan is administered by a committee consisting of at
least two members of the Board. Such committee shall have full power and
authority to interpret the plan, to establish such rules and regulations as it
deems appropriate for the administration of the plan, and to take such other
action as it deems necessary or desirable for the administration of the plan.
Underlying shares awarded under the plan. The maximum number of shares of
Common Stock that may be delivered or purchased under the plan is 700,000,
subject to adjustment to preserve the value of an award in the event of any
change in the outstanding Common Stock by reason of any stock dividend, stock
split, combination of shares, recapitalization or other similar change in the
capital stock of the Company, or in the event of the merger or consolidation of
the Company with or into any other corporation or the reorganization of the
Company. Options to purchase 400,000 shares of Common Stock were granted under
the plan in 1999 and options to purchase 50,000 shares of Common Stock were
granted under the plan in 2000, all subject to ratification of the plan by the
Company's shareholders.
The shares of Common Stock may be authorized but unissued shares that are
not reserved for any other purpose or previously issued shares acquired by the
Company and held in its treasury. If, as a result of the termination or
expiration of an award or otherwise, certain shares are no longer subject to an
award under the plan, such shares would again be available for future awards
under the plan.
Amendment of the plan. The plan may be amended by the Board or a duly
authorized committee as the Board or such committee deems advisable; provided,
however, that no amendment shall become effective unless approved by affirmative
vote of the Company's shareholders if such approval is necessary or desirable
for the continued validity of the plan or if the failure to obtain such approval
would adversely affect the compliance of the plan with Rule 16b-3 or any
successor ruleRegulation S-K under the Securities Exchange Act of 1934, or any other rule or
regulation. No amendment may, without the consent of a participant, impair his
or her rights under any option previously granted under the plan. The Board or a
duly authorized committee thereof shall have the power, in the event of any
disposition of substantially all of the assets of the Company, its dissolution,
any merger or consolidation of the Company with or into any other corporation,
or the merger or consolidation
32
35
of any other corporation into the Company, to amend all outstanding option
grants to terminate such options as of such effectiveness. If the Board or such
committee shall exercise such power, all options then outstanding shall be
deemed to terminate upon such effectiveness.
AWARDS AVAILABLE UNDER THE PLAN:
Pursuant to the plan, each director who is neither an employee of the
Company nor a non-resident United States alien ("Eligible Director") shall be
granted an option to purchase 50,000 shares of Common Stock as of the effective
date of his or her initial appointment or election to the Board (or, if later,
the effective date of the plan) (the "Initial Appointment Date"). On August 4,
2000 and August 3, 2001, provided that each such date occurs after the Initial
Appointment Date, each Eligible Director shall be granted an option to purchase
10,000 shares of Common Stock provided he or she continues to serve as a
director on such date. In the event of any change in the outstanding Common
Stock by reason of any merger, share exchange, reorganization, consolidation,
recapitalization, stock dividend, stock split, combination of shares, split-up,
spin-off, or other similar transaction or event affecting the Common Stock, the
Committee may in its discretion make substitutions or adjustments in the
aggregate number and kind of shares of Common Stock reserved for issuance under
the Plan, in the number, kind and price of shares of Common Stock subject to
outstanding options, and in the award limits under the Plan (or make provision
for cash payment to the holders of options).
All options granted under the plan will be evidenced by option agreements.
Each option shall be granted for a term of 10 years. Each option will be
exercisable in accordance with the terms and conditions set forth in the option
agreements evidencing the grant of such options. Notwithstanding the foregoing,
however, and subject to the other provisions of the plan relating to
exercisability, each participant shall have the cumulative right as of the
first, second, and third anniversaries of the date of grant, to purchase up to
one-third, two-thirds, and 100%, respectively, of the shares underlying the
options granted; provided, however, that options shall become fully exercisable
in the event of a Change of Control (as defined in the Hanover Direct, Inc. Key
Executive Twenty-Four Month Compensation Continuation Plan). Options may not be
exercised more than 3 months after a participant ceases to be a director of the
Company, except in the case of death or disability, in which case options may be
exercised within 12 months after the date of such death or disability.
The price at which shares of Common Stock may be purchased upon the
exercise of an option granted under the plan will be the fair market value of
such shares on the date of grant of such option. For purposes of determining the
price under the plan, the fair market value of a share of Common Stock shall be
deemed to be the average of the closing price of the Common Stock on the date of
grant, the ten trading days immediately preceding such date, and the ten trading
days immediately following such date.
Full payment of the purchase price for shares of Common Stock purchased
upon the exercise, in whole or part, of an option granted under the plan must be
made at the time of such purchase. The plan provides that the payment price may
be paid in cash or in shares of Common Stock valued at their fair market value
on the date of exercise. Alternatively, an option may be exercised in whole or
in part by delivering a properly executed exercise notice together with
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds necessary to pay the payment price, and such
other documents as the Committee deems necessary.
During a participant's lifetime, options granted under the plan may be
exercised only by such participant. Furthermore, any options granted under the
plan may not be transferred, other than by will or by the laws of
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descent and distribution. Notwithstanding the foregoing, a participant may
transfer any option granted under the plan to his or her spouse, children,
grandchildren, parents, and/or siblings or to one or more trusts for the benefit
of such family members, if the agreement evidencing such option so provides and
the participant does not receive any consideration for the transfer. Any option
so transferred will be subject to the same terms and conditions that applied to
such option immediately prior to its transfer, except that it will not be
further transferable by the transferee during such transferee's lifetime.
FEDERAL INCOME TAX CONSEQUENCES:
The grant of an option will have no immediate tax consequences to a
participant. The exercise of an option will require such participant to include
in income, as compensation, the amount by which the fair market value of the
acquired shares on the exercise date exceeds the option price. Upon a subsequent
sale or taxable exchange of such shares, such participant will recognize long or
short-term capital gain or loss equal to the difference between the amount
realized on the sale and the tax basis of such shares. The Company will be
entitled to a deduction in the amount of any compensation income that a
participant recognizes in connection with an option.amended.
VOTE REQUIRED:
The affirmative vote of athe holders of the majority of votes castthe combined voting
power of the Voting Stock voted at the Annual Meeting, whether in person or by
proxy, and whether by mail, Internet or telephone, is required to ratifydelegate
authority with respect to the 1999selection of auditors. Each share of Common Stock
Option Plan for Directors.has one (1) vote and each share of Series B Preferred Stock has ten (10) votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" DELEGATION TO THE RATIFICATIONAUDIT
COMMITTEE OF THE 1999 STOCK OPTION PLAN FOR DIRECTORS.
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PROPOSAL 3
RATIFICATIONBOARD OF THE 2000 MANAGEMENT STOCK OPTION PLAN
GENERALLY:
We are asking you to ratify the Compensation Committee's adoption of the
2000 Management Stock Option Plan. The purpose of the 2000 Management Stock
Option Plan is to advance the interests of the Company and its shareholders by
providing employees and officers of and consultants to the Company and its
affiliates, through the grant of options to purchase shares of Common Stock,
with a larger personal and financial interest in the success of the Company. The
following is a brief summary of the proposed 2000 Management Stock Option Plan.
The complete text of the plan is attached as Annex B and reference is made to
that Annex for a complete statement of the provisions of the plan.
GENERAL INFORMATION:
Effective date and duration of the plan. The plan became effective on the
date of its adoption by the Board, subject to ratification of the plan by the
affirmative vote or consent of a majority of the issued and outstanding shares
of Common Stock, and will terminate 10 years from the date of its adoption or
such earlier date as the Board may determine.
Administration. The plan is administered by a committee consisting of at
least two members of the Board and that satisfies the requirements of applicable
law, the provisions of Rule 16b-3 under the Securities Exchange Act of 1934, or
any successor rule. The committee will select persons to receive awards under
the plan, determine the amount of each award and the terms and conditions
governing such award, interpret the plan and any option granted thereunder,
establish such rules and regulations as it deems appropriate for the
administration of the plan, and take any other action necessary or desirable for
the administration of the plan.
Underlying shares awarded under the plan. The maximum number of shares of
Common Stock that may be delivered or purchased under the plan is 20,000,000,
subject to adjustment in the event of any stock dividend, stock split,
combination of shares, recapitalization, split-up, spin-off or other similar
change in the capital structure or shares of the Company, or in the event of the
merger or consolidation of the Company with or into any other corporation or the
reorganization of the Company. Options to purchase 4,041,000 shares of Common
Stock have been granted to date in 2000, subject to ratification of the plan by
the Company's shareholders.
The shares of Common Stock may be authorized but unissued shares or
treasury shares.
Amendment of the plan. The plan may be amended by the Board as the Board
deems advisable; provided, however, that no amendment shall become effective
unless approved by affirmative vote of the Company's shareholders if such
approval is necessary or desirable for the continued validity of the plan or if
the failure to obtain such approval would adversely affect the compliance of the
plan with Rule 16b-3 or any successor rule under the Securities Exchange Act of
1934 or any other rule or regulation. The Board shall have the power, in the
event of any disposition of substantially all of the assets of the Company, its
dissolution, any merger or consolidation of the Company with or into any other
corporation, or the merger or consolidation of any other corporation into the
Company, to amend all outstanding option grants to terminate such options as of
such effectiveness. The Board may in its discretion accelerate the vesting of
outstanding options prior to the effectiveness of such termination.
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AWARDS AVAILABLE UNDER THE PLAN:
Pursuant to the plan, options to purchase Common Stock of the Company may
be granted to any employee or officer of or consultant to the Company or any
affiliate of the Company.
Any options awarded under the plan, which will be evidenced by option
agreements, will be either options intended to qualify as incentive stock
options ("Incentive Stock Options") under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or options not so intended to qualify
("Nonstatutory Stock Options"); provided, however, that Incentive Stock Options
may be granted only to employees of the Company or a subsidiary.
No employee may be granted options under the plan during any consecutive
12-month period on more than 1,000,000 shares of Common Stock.
Generally, an option may be granted for a term not to exceed 10 years from
the date such option is granted. All options will be exercisable in accordance
with the terms and conditions set forth in the option agreements evidencing the
grant of such options. Except under limited circumstances involving termination
of employment due to retirement or death or disability, a participant may not
exercise any option granted under the plan within the first year after the date
of grant of such option. Except as otherwise provided in the related option
agreement, options may not be exercised more than ninety (90) days after a
participant ceases to be an employee or officer of or consultant to the Company,
except in the case of death or disability or an employee's retirement at or
after age 65, in which case options may be exercised within one (1) year after
the date of death, disability or retirement. Except in the case of the
participant's death or permanent disability, the exercise of an Incentive Stock
Option more than three (3) months after a participant ceases to be an employee
will cause such Option to be treated as a Nonstatutory Stock Option.
The exercise price per share for each option will be the fair market value
of such share on the date of grant. For purposes of determining the price under
the plan, the fair market value of a share of Common Stock shall be deemed to be
the average of the closing price of the Common Stock on the ten trading days
immediately preceding the date of grant and the ten trading days immediately
following such date.
The aggregate fair market value (determined as of the time such option is
granted) of the Common Stock for which any employee may have Incentive Stock
Options vesting in any calendar year may not exceed $100,000.
Payment for the portion exercised must be made at the time of exercise. The
purchase price may be paid in cash or, if so provided in the option agreement
evidencing the grant of the option, in shares of Common Stock valued at their
fair market value on the date of purchase. Alternatively, if the option
agreement evidencing the grant of such option so provides, the option may be
exercised in whole or in part by delivering a properly executed exercise notice
together with irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds necessary to pay the purchase price
and applicable withholding taxes, and such other documents as the committee
administering the plan may determine.
During a participant's lifetime, options granted under the plan will be
exercised only by such participant. Furthermore, any options granted under the
plan may not be transferred, other than by will or by the laws of descent and
distribution. If so permitted by the option agreement, however, a participant
may transfer, without payment of consideration, a Nonstatutory Stock Option to
his or her spouse, children, grandchildren, parents, and/or siblings or to one
or more trusts or partnerships for the benefit of such family members.
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FEDERAL INCOME TAX CONSEQUENCES:
Under currently applicable provisions of the Code, an optionee will not be
deemed to receive any income for federal tax purposes upon the grant of an
option under the plan, nor will the Company be entitled to a tax deduction at
that time. However, upon the exercise of an option the tax consequences are as
follows:
Incentive Stock Options. Upon the exercise of an Incentive Stock Option,
there is no income recognized by the optionee at the time of exercise, although
for alternative minimum tax purposes, the excess of the fair market value of the
acquired stock on the exercise date over the option price may constitute an
adjustment in computing alternative minimum taxable income. If the stock is held
at least one year following the exercise date and at least two years from the
date of grant of the option, upon a subsequent taxable disposition of the
acquired stock the optionee will realize a long-term capital gain or loss upon
sale, measured as the difference between the option exercise price and the sale
price. If either of these holding periods has not been satisfied, when a
participant disposes of his or her stock, the participant will be required to
include in income, as compensation, the lesser of (i) the difference between the
option price and the fair market value of the acquired stock on the exercise
date, or (ii) the amount of gain realized on such disposition. In addition,
depending on the amount received as a result of such disposition, such
participant may realize long or short-term capital gain or loss.
Nonstatutory Stock Options. Upon the exercise of a Nonstatutory Stock
Option, the optionee will be deemed to have received ordinary income in an
amount equal to the difference between the fair market value of the acquired
stock on the exercise date and the option price. Upon a subsequent taxable
disposition of the acquired stock, such participant will realize long or
short-term capital gain or loss equal to the amount realized on the sale and the
tax basis of the stock.
Consequences to the Company. The Company will be entitled to a deduction
in the amount of any ordinary income that a participant recognizes in connection
with the exercise of a Nonstatutory Stock Option or the early disposition of
stock acquired upon the exercise of an Incentive Stock Option.
VOTE REQUIRED:
The affirmative vote of a majority of votes cast at the Annual Meeting,
whether in person or by proxy whether by mail, Internet or telephone, is
required to ratify the 2000 Management Stock Option Plan.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE RATIFICATION
OF THE 2000 MANAGEMENT STOCK OPTION PLAN.
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PROPOSAL 4
RATIFICATION OF THE 2000 SHORT-TERM
INCENTIVE PLAN FOR RAKESH K. KAUL
GENERALLY:
We are asking you to ratify the Compensation Committee's adoption of the
2000 Short-Term Incentive Plan for Rakesh K. Kaul (the "2000 Short-Term Plan").
The purpose of the 2000 Short-Term Plan is to promote incentives and rewards to
Mr. Kaul, who will have a significant impact on the long-term success of the
Company. The following is a brief summary of the 2000 Short-Term Plan. The
complete text of the 2000 Short-Term Plan is attached as Annex C and reference
is made to that Annex for a complete statement of the provisions of the plan.
SUMMARY OF THE PLAN:
The 2000 Short-Term Plan is administered by the Compensation Committee,
which is composed of directors who are "disinterested persons" as such term is
defined under Rule 16b-3 promulgated under the Securities Exchange Act of 1934.
Mr. Kaul, serving as President and Chief Executive Officer of the Company, is
the sole person eligible to participate in the 2000 Short-Term Plan.
The 2000 Short-Term Plan provides that on or before March 31 of each
calendar year commencing during the term of Mr. Kaul's employment agreement,
effective March 6, 2000, with the Company, the Compensation Committee shall
establish written performance goals with respect to such year ("performance
year"). The performance goals shall be expressed in terms of objective financial
criteria with respect to the Company consisting of one or more of the following:
earnings per share; earnings before interest and taxes; earnings before
interest, taxes, depreciation and amortization; or quantifiable improvements in
inventory levels. The performance goals shall incorporate a performance target
for such performance year and shall state, in terms of an objective formula or
standard (the terms of which shall preclude discretion to increase the bonus
amount that would otherwise be payable upon attainment of the goal), the bonus
payable to Mr. Kaul pursuant to the 2000 Short-Term Plan as a function of the
actual performance level attained; provided, however, that (i) the bonus for any
fiscal year shall be between 0 and 150 percent of Mr. Kaul's base salary during
such year, (ii) the bonus payable in the event of the attainment of 100% of the
performance target shall be 100% of such base salary, and (iii) such bonus shall
in no event exceed $1,500,000. The Compensation Committee shall obtain Mr.
Kaul's input and advice before establishing the performance goals for any fiscal
year.
Except as otherwise provided in Mr. Kaul's employment agreement (relating
to termination of employment or as provided for under the terms of the Company's
Thirty-Six Month Compensation Continuation Plan), upon the Compensation
Committee's certification following the end of each performance year as to the
actual performance level attained, the Company shall pay Mr. Kaul, in cash, the
bonus (if any) for such year, as determined in accordance with the objective
formula or standard adopted as part of the performance goals for such year. Such
payment shall be made at the same time as short-term bonuses are paid to other
Company executives. The Compensation Committee shall not have discretion to
increase the bonus above the amount determined under the objective formula or
standard adopted for such performance year.
The Company believes that amounts received by Mr. Kaul under the 2000
Short-Term Plan should constitute qualified performance-based compensation that
is exempt from the $1 million limit under Section 162(m) of the Code on a
publicly-held corporation's deductions for certain remuneration paid to
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"covered employees" (the "$1 Million Cap"). Accordingly, the Company should be
entitled to deduct amounts payable to Mr. Kaul under the 2000 Short-Term Plan.
VOTE REQUIRED:
The affirmative vote of a majority of the votes cast at the Annual Meeting,
whether in person or by proxy whether by mail, Internet or telephone, is
required to ratify the 2000 Short-Term Plan.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR"
THE RATIFICATION OF THE 2000 SHORT-TERM PLAN.
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PROPOSAL 5
RATIFICATION OF THE 2000 LONG-TERM
INCENTIVE PLAN FOR RAKESH K. KAUL
GENERALLY:
We are asking you to ratify the Compensation Committee's adoption of the
2000 Long-Term Incentive Plan for Rakesh K. Kaul (the "2000 Long-Term Plan").
The purpose of the 2000 Long-Term Plan is to promote an alignment of the
interests of Mr. Kaul, who will have a significant impact on the long-term
success of the Company and its subsidiary erizon, Inc. (collectively herein, the
"Company"), with the interest of the Company and its shareholders by affording
Mr. Kaul a proprietary interest in the Company's growth while providing Mr. Kaul
with an incentive to make a personal financial investment in the Company and to
remain in the Company's employ. The following is a brief summary of the 2000
Long-Term Plan. The complete text of the 2000 Long-Term Plan is attached as
Annex D and reference is made to that Annex for a complete statement of the
provisions of the plan.
SUMMARY OF THE PLAN:
The 2000 Long-Term Plan is administered by the Compensation Committee,
which is composed of directors who are "disinterested persons" as such term is
defined under Rule 16b-3 promulgated under the Securities Exchange Act of 1934.
Mr. Kaul, serving as President and Chief Executive Officer of the Company, is
the sole person eligible to participate in the 2000 Long-Term Plan. The 2000
Long-Term Plan will terminate on December 31, 2004. Any option outstanding at
the time of such termination, whether or not vested, shall remain in effect in
accordance with its terms and those of the 2000 Long-Term Plan.
Erizon Option. Mr. Kaul was granted an option on April 14, 2000 under the
2000 Long-Term Plan to purchase that number of shares of common stock of erizon,
Inc. representing 6% of the fully-diluted common stock of erizon, Inc. as of
such date (the "Initial Option"), with protection against further dilution until
such time as erizon, Inc. shall complete its first round of Board-approved
equity or convertible debt financing after which time there shall be not
protection from further dilution. The exercise price for the Initial Option is
equal to the fair market value of the common stock of erizon, Inc. on the date
of grant as determined in good faith by the Board of Directors of the Company,
provided that the fair market value of the common stock of erizon, Inc. for
purposes of establishing the exercise price for the Initial Option shall not
exceed $200,000,000.
Upon completion of its first round of financing, the Company has agreed to
grant to Mr. Kaul an additional option to purchase shares of common stock of
erizon, Inc. that, together with the Initial Option, shall represent 6% of the
fully diluted common stock of erizon, Inc. (the "Additional Option" and together
with the Initial Option, the "Option"). The exercise price of the Additional
Option shall be equal to the fair market value of the common stock of erizon,
Inc. on the date the Additional Option is granted to Mr. Kaul, as determined in
good faith by the Board of Directors of the Company. The Additional Option will
be treated in other respects as if granted on April 14, 2000. The Option shall
expire on March 6, 2010, subject to earlier cancellation or termination. The
Option is considered a Nonstatutory Stock Option rather than an Incentive Stock
Option.
The Option is nontransferable other than by will or the laws of descent and
distribution and is exercisable, during Mr. Kaul's lifetime, only by him. The
purchase price for the Option may be paid in cash or in shares of common stock,
or in a combination of cash and shares. Alternatively, the Option may be
exercised by
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delivering an exercise notice together with irrevocable instructions to a broker
to deliver promptly to the Company the amount of sale or loan proceeds necessary
to pay the purchase price.
The Option will vest and become exercisable in equal parts on each
successive anniversary of March 6, 2000 over the four-year period commencing on
March 6, 2000 provided that Mr. Kaul remains employed by the Company. However,
the Option shall immediately vest and become exercisable in full (i) upon the
termination of Mr. Kaul's employment by reason of death, Disability (as
defined), by the Company without Cause (as defined), by Mr. Kaul within ninety
days of an occurrence constituting Good Reason (as defined) or (ii) upon the
occurrence of a Change of Control (as defined). (See "Executive Compensation and
Other Information -- Employment Contracts, Termination of Employment and
Change-in-Control Arrangements" on p. 9 above). The Option provides that if Mr.
Kaul's employment is involuntarily terminated other than for Cause or Mr. Kaul
resigns for Good Reason, he may exercise the Option during the six-month period
following the later of (x) such termination or (y) the registration of the
shares underlying the Option. If Mr. Kaul's employment terminates by reason of
death or Disability, his Option may be exercised during the twelve-month period
following such termination of employment. If Mr. Kaul's employment terminates
other than for Cause or if Mr. Kaul resigns with Good Reason within twenty-four
months of a Change of Control, the Option may be exercised during the
twelve-month period following such termination. If Mr. Kaul's employment
terminates in other circumstances, the Option may be exercised only within 30
days after such termination. In all of the foregoing circumstances, the Option
may be exercisable only with respect to the number of shares of common stock of
erizon, Inc. as to which the Option is otherwise exercisable (or would have been
exercisable had his employment not terminated) on the date of exercise. In no
event may an Option be exercised after its expiration. In the event of a change
in the common stock of erizon, Inc. by reason of a stock split, stock merger or
other reorganization of the Company, the terms of the Option shall be adjusted
to preserve the value of the award.
If at the time of Mr. Kaul's termination for any reason the common stock of
erizon, Inc. is not publicly-traded, at Mr. Kaul's request, the Company shall
purchase from Mr. Kaul the shares as to which the Option is exercisable or any
portion thereof at the then current fair market value as determined by the Board
of Directors of the Company in good faith. Any dispute concerning the valuation
of the fair market value of the Company will be determined using a "baseball
arbitration model" by a mutually agreed upon investment banking company. The
computation of fair market value will assume (i) underwriter fees and discounts
as if an initial public offering had taken place, and (ii) public market
security.
If any award under the 2000 Long-Term Plan is exercised or cashed out or
terminates or expires or its forfeited without a payment being made to the
participant in the form of common stock of erizon, Inc., the shares subject to
such award, if any, shall be available for distribution in connection with
awards under the 2000 Long-Term Plan. Any shares of common stock of erizon, Inc.
that are used by Mr. Kaul as full or partial payment of withholding or other
taxes or as payment for the exercise or conversion price of an award under the
2000 Long-Term Plan shall be available for distribution in connection with
awards under the 2000 Long-Term Plan.
Closing Price Option. The 2000 Long-Term Plan provides that the Closing
Price Option granted to Mr. Kaul pursuant to the Stock Option Agreement dated
August 23, 1996, as amended, shall be further amended and restated. The terms of
such amendment and restatement are described in Proposal 6. (See pages 43
through 46 below).
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FEDERAL INCOME TAX CONSEQUENCES:
Erizon Option. Under currently applicable provisions of the Code, Mr. Kaul
will not be deemed to receive any income for federal tax purposes upon the grant
of the Option under the 2000 Long-Term Plan, nor will the Company be entitled to
a tax deduction at that time. However, upon the exercise of the Option, Mr. Kaul
will be deemed to have received ordinary income in an amount equal to the
difference between the fair market value of the acquired stock on the exercise
date and the option price. Upon a subsequent taxable disposition of the acquired
stock, Mr. Kaul will realize long or short-term capital gain or loss equal to
the amount realized on the sale and the tax basis of the stock.
Consequences to the Company. The Company will be entitled to a deduction
in the amount of any ordinary income that Mr. Kaul recognizes in connection with
the exercise of a Nonstatutory Stock Option.
Closing Price Option. The Federal income tax consequences of the Closing
Price Option are discussed in Proposal 6 (see pages 45 and 46 below).
VOTE REQUIRED:
The affirmative vote of a majority of the votes cast at the Annual Meeting,
whether in person or by proxy whether by mail, Internet or telephone, is
required to ratify the 2000 Long-Term Plan.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR"
THE RATIFICATION OF THE 2000 LONG-TERM PLAN.
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PROPOSAL 6
APPROVAL OF AN AMENDMENTDIRECTORS AUTHORITY TO THE STOCK OPTION AGREEMENT
DATED AUGUST 23, 1996, AS AMENDED, WITH RAKESH K. KAUL
GENERALLY:
The Board of Directors is submitting an amendment (the "Amendment") to the
Company's Stock Option Agreement (the "Stock Option Agreement") dated August 23,
1996, as amended in January 1998, with Rakesh Kaul ("Mr. Kaul") described herein
to the shareholders for their approval. The purpose of the Stock Option
Agreement, entered into pursuant to the Company's Long-Term Incentive Plan for
Mr. Kaul (the "Plan"), is to promote an alignment of the interests of Mr. Kaul,
who will have a significant impact on the long-term success of the Company, with
the interests of the Company and its shareholders by affording Mr. Kaul a
proprietary interest in the Company's growth while providing Mr. Kaul with an
incentive to make a personal financial investment in the Company and to remain
in the Company's employ. The Board of Directors believes that the Amendment will
benefit the Company and its shareholders and, thus, recommends approval of the
Amendment.
GENERAL INFORMATION:
Effective Date and Duration of the Stock Option Plan. The Plan became
effective on the date of its adoption by the Compensation Committee of the
Company's Board of Directors (the "Committee"), subject to approval by the
affirmative vote or consent of holders of a majority of the issued and
outstanding shares of Common Stock which was received at the 1996 Annual Meeting
of Shareholders, and terminated on December 31, 1996.
Administration. The Plan is administered by the Compensation Committee
which consists of at least two directors and that satisfies the provisions of
Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any successor rule. The Compensation Committee has full power and
authority to grant awards under the Plan and administer and interpret the Plan
and to adopt such rules, regulations, agreements, guidelines and instruments for
the administration of the Plan as it deems necessary or advisable.
Underlying Shares Awarded Under the Stock Option Plan. The maximum number
of shares of Common Stock that may be delivered or purchased under the Plan is
7,000,000, subject to adjustment to preserve the value of an award in the event
of any change in the outstanding Common Stock by reason of any stock dividend,
stock split, combination of shares, recapitalization or other similar change in
the capital stock of the Company, or in the event of the merger or consolidation
of the Company into or with any other corporation or the reorganization of the
Company. Options to purchase approximately 7,530,000 shares of Common Stock were
granted under the Plan in 1996 together with 1,510,000 Tandem Shares. See
"EXECUTIVE COMPENSATION AND OTHER INFORMATION -- Employment Contracts,
Termination of Employment and Change-in-Control Arrangements" and "-- Awards
Granted Under the Plan."
Except in the case of NAR Options (as hereinafter defined), the shares of
Common Stock issued under the Plan have been set aside out of authorized but
unissued shares that are not reserved for any other purpose, or previously
issued shares acquired by the Company and held in its treasury. The shares of
Common Stock subject to the NAR Options are shares owned by NAR Group Limited.
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46
Amendment of the Plan. The Plan may be amended by the Board of Directors
as the Board deems advisable; provided, however, that no amendment will become
effective unless approved by affirmative vote of the Shareholders if such
approval is necessary for the continued validity of the Plan or if the failure
to obtain such approval would adversely affect the compliance of the Plan with
Rule 16b-3 under the Exchange Act or any other rule or regulation. No amendment
may, without the consent of a participant, impair such participant's rights
under any option previously granted under the Plan.
AWARDS GRANTED UNDER THE PLAN:
Pursuant to the Plan and the Stock Option Agreement, options to purchase
Common Stock of the Company may be granted only to Mr. Kaul.
Under the Plan, Mr. Kaul had a right to: (1) purchase 1,510,000 shares of
Common Stock (after giving effect to certain anti-dilution adjustments resulting
from the 1996 Rights Offering) at a price equal to their fair market value on
the date of purchase, 20% of such purchase price to be paid in cash and 80% of
the purchase price to be financed over four years (the "Tandem Stock Purchase
Right"); (2) receive options, which shall vest at the rate of 25% per year
beginning on March 7, 1997, to purchase 3,020,000 shares of Common Stock (after
giving effect to certain anti-dilution adjustments resulting from the 1996
Rights Offering) at the fair market value on the date of grant provided Mr. Kaul
exercised the Tandem Stock Purchase Right (the "Tandem Option"); (3) receive an
option to purchase 1,000,000 shares of Common Stock at the fair market value on
the date of grant, subject to the achievement of certain performance goals
established by the Compensation Committee (the "Performance Year Option"); (4)
receive an option to purchase 2,000,000 shares of Common Stock at the fair
market value on the date of grant, which option expires on March 7, 2006 and
shall become exercisable only upon satisfaction of the condition that the
average closing price of the Common Stock has been at least $4.50 per share
during any period of 91 consecutive calendar days commending March 7, 1996 and
ending on or before March 7, 2002 (the "Closing Price Option") (see "-- Option
Agreement Amendment"); and (5) receive four options for the purchase of 377,500
shares of Common Stock (after giving effect to certain anti-dilution adjustments
resulting form the 1996 Rights Offering) each, at the fair market value thereof
on the date of grant, to be granted by NAR Group Limited (the "NAR Options").
All rights and options under the Plan had to have been exercised or granted
on or before September 1, 1996; they were, in fact, exercised or granted on or
about August 23, 1996, the date of closing of the 1996 Rights Offering. Each of
the options under the Plan is nontransferable other than by will or the laws of
descent and distribution and is exercisable, during Mr. Kaul's lifetime, only by
him; provided, however, that transfers to certain immediate family members or to
trusts for the benefit of Mr. Kaul or his immediate family members will be
permitted. The purchase price for each option may be paid in cash or in shares
of Common Stock, or in a combination of cash and shares. Alternatively, the
options may be exercised by delivering an exercise notice together with
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds necessary to pay the purchase price.
Each of the options under the Plan immediately vests in the event of Mr.
Kaul's termination of employment by reason of death or permanent disability or
upon the occurrence of a change in control during the term of his employment
agreement or within six months following the end of such term. Each option
provides that if Mr. Kaul's employment is involuntarily terminated (or is deemed
under his Employment Agreement to be involuntarily terminated) other than for
cause, he may exercise the option only until the later of (i) 12 months
following the date of such termination or (ii) in certain circumstances, March
10 of the year following the year in which the termination occurs. If Mr. Kaul's
employment terminates by reason of
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permanent disability or death, his option may be exercised during the
three-month period (one-year period in the case of death) following such
termination of employment. If Mr. Kaul's employment terminates in other
circumstances, the option may be exercised only within 30 days after such
termination. In the event of a change in the Common Stock by reason of a stock
split, stock dividend, recapitalization or other similar change in the capital
stock of the Company, or in the event of a merger or other reorganization of the
Company, the terms of the options shall be adjusted to preserve the value of the
award.
OPTION AGREEMENT AMENDMENT:
The Stock Option Agreement, which reflects the grant of the Closing Price
Option, currently provides that such option to purchase 2,000,000 shares of
Common Stock at the fair market value on the date of grant ($1.15625 per share)
shall become exercisable only upon satisfaction of the condition that the
average closing price of the Common Stock has been at least $4.50 per share
during any period of 91 consecutive calendar days commending March 7, 1996 and
ending on or before March 7, 2002. Pursuant to the Amendment, the Closing Price
Option will vest and become exercisable in equal parts on each successive
anniversary date of the Amendment over the three-year period commencing on March
6, 2000 provided Mr. Kaul remains employed by the Company. However, the Option
shall immediately vest and become exercisable in full (i) upon the termination
of Mr. Kaul's employment by reason of death, Disability (as defined), by the
Company without Cause (as defined), by Mr. Kaul within ninety days of an
occurrence constituting Good Reason (as defined), (ii) upon the occurrence of a
Change of Control (as defined) or (iii) upon satisfaction of the condition, as
certified by the Compensation Committee (such certification not to be improperly
withheld), that the average closing price of the Common Stock on the American
Stock Exchange composite tape or other recognized market source, as determined
by the Compensation Committee, has obtained an average of $4.50 per share during
any period of 91 consecutive calendar days commencing after August 23, 1996 and
ending on or before March 7, 2002. (See "Executive Compensation and Other
Information -- Employment Contracts, Termination of Employment and
Change-in-Control Arrangements" on p. 8 above). The Option provides that if Mr.
Kaul's employment is involuntarily terminated other than for Cause or Mr. Kaul
resigns for Good Reason, he may exercise the Option during the six-month period
following the later of (x) such termination or (y) the registration of the
shares underlying the Option. If Mr. Kaul's employment terminates by reason of
death or Disability, his Option may be exercised during the twelve-month period
following such termination of employment. If Mr. Kaul's employment terminates
other than for Cause or if Mr. Kaul resigns with Good Reason within twenty-four
months of a Change of Control, the Option may be exercised during the
twelve-month period following such termination. If Mr. Kaul's employment
terminates in other circumstances, the Option may be exercised only within 30
days after such termination. In all of the foregoing circumstances, the Option
may be exercisable only with respect to the number of shares of Common Stock as
to which the Option is otherwise exercisable (or would have been exercisable had
his employment not terminated) on the date of exercise. The Closing Price Option
expires on March 7, 2006.
The foregoing is a brief summary of the Amended and Restated Stock Option
Agreement. The complete text of the Amended and Restated Stock Option Agreement
is attached as Annex E and reference is made to that Annex for a complete
statement of the provisions of the amended and restated agreement.
FEDERAL INCOME TAX CONSEQUENCES:
The Federal income tax consequences under current law of the Closing Price
Option are as follows. The grant of the Closing Price Option to Mr. Kaul will
have no immediate income tax consequences. The exercise of the Closing Price
Option will require him to include in income, as compensation, the amount by
which the
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fair market value of the acquired shares on the exercise date exceeds the option
price. Upon a subsequent sale or taxable exchange of such shares, he will
recognize long or short-term capital gain or loss equal to the difference
between the amount realized on the sale and the tax basis of such shares.
The Company believes that income recognized by Mr. Kaul upon the exercise
of the Closing Price Option may not constitute qualified performance-based
compensation that is exempt from the $1 Million Cap. Accordingly, all or a
portion of any compensation income that Mr. Kaul recognizes upon the exercise of
the Closing Price Option may not be deductible by the Company.
VOTE REQUIRED:
The affirmative vote of a majority of the votes cast at the Annual Meeting,
whether in person or by proxy whether by mail, Internet or telephone, is
required to ratify the amendment to and restatement of the Stock Option
Agreement dated August 23, 1996, as amended, with Rakesh K. Kaul.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE AMENDMENT
TO AND RESTATEMENT OF THE STOCK OPTION AGREEMENT DATED
AUGUST 23, 1996, AS AMENDED, WITH RAKESH K. KAUL.
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PROPOSAL 7
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
GENERALLY:
We are asking you to ratify the Board's selection of Arthur Andersen LLP as
the independent certified public accountants of the Company for the fiscal year
ending December 30, 2000. Although the selection of auditors does not require
ratification, we are submitting this proposal to you because the Board believes
that this matter is of such significance as to warrant your participation. If
you do not ratify the appointment, the Board, after review by the Audit
Committee, will consider the appointment of other independent certified public
accountants.
Representatives of Arthur Andersen LLP will attend the Annual Meeting to
answer your questions.
VOTE REQUIRED:
The affirmative vote of a majority of the votes cast at the Annual Meeting,
whether in person or by proxy whether by mail, Internet or telephone, is
required to ratify the selection of auditors.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" RATIFICATION
OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP ASSELECT THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 30, 2000.
4727, 2003,
FROM AMONGST ESTABLISHED NATIONAL AUDIT FIRMS.
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50
SHAREHOLDERSTOCKHOLDER PROPOSALS FOR THE 20012004 ANNUAL MEETING
If you wish to submit proposals to be presented at the 20012004 Annual Meeting
of ShareholdersStockholders of the Company, they must be received by the Company no later
than December 15, 20007, 2003 for them to be included in the Company's proxy material
for that meeting.
DISCRETIONARY AUTHORITY
If the Company doesdid not receive notice of any matter that is to come before
the shareholdersstockholders at the 20012003 Annual Meeting of ShareholdersStockholders on or before
February 27, 2001,21, 2003, which corresponds to forty-five (45) days before the date on
which the Company first mailed this proxy statement, the proxy for the 20012003
Annual Meeting of ShareholdersStockholders may, pursuant to Rule 14a-4(c) of the Proxy Rules
under the Securities Exchange Act of 1934, as amended, confer discretionary
authority to vote on the matters presented.
OTHER MATTERS
The Board of Directors does not know of any other matters to be presented
at the Annual Meeting. If any additional matters are properly presented to the
Annual Meeting for action, the persons named in the enclosed proxy and acting
thereunder will have discretion to vote on such matters in accordance with their
own judgment.
YOU MAY OBTAIN A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 25, 199928, 2002, FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION WITHOUT CHARGE (EXCEPT FOR EXHIBITS TO SUCH ANNUAL REPORT, WHICH WILL
BE FURNISHED UPON PAYMENT OF THE COMPANY'S REASONABLE EXPENSES IN FURNISHING
SUCH EXHIBITS) BY WRITING TO: INVESTOR RELATIONS, HANOVER DIRECT, INC., 1500
HARBOR BOULEVARD, WEEHAWKEN,115
RIVER ROAD, EDGEWATER, NEW JERSEY 07087.07020, OR FROM THE COMPANY'S WEB SITE AT
WWW.HANOVERDIRECT.COM.
By Order of the Board of Directors
CURT JOHNSONLOGO
Brian C. Harriss
Secretary
Dated: April 17, 20007, 2003
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND
RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE OR
VOTE BY THE INTERNET OR BY TELEPHONE.
PLEASE VOTE -- YOUR VOTE IS IMPORTANT
4838
51
ANNEXAPPENDIX A
HANOVER DIRECT, INC.
1999 STOCK OPTION PLAN FORCHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
1. PURPOSE. The purposeORGANIZATION:
There shall be a committee of the 1999 Stock Option Plan forBoard of Directors (the
"Plan") is to advancebe known as the
interests of Hanover Direct, Inc. (the "Company") by
providing non-employee directors of the Company, through the grant of options to
purchase shares of Common Stock (as hereinafter defined), with a larger personal
and financial interest in the Company's success.
2. ADMINISTRATION.Audit Committee. The PlanAudit Committee shall be administered by a committee (the
"Committee") consistingconsist of at least twothree (3) members
of the Board of Directors and shall have a Chairman, who shall be elected by a
majority of the members of the Board of Directors. The members of the Audit
Committee shall be appointed by the Board of Directors. The members of the Audit
Committee may be removed for cause by a majority of the Board of Directors.
The members of the Audit Committee shall meet the independence, financial
sophistication and literacy, experience and other requirements of the American
Stock Exchange, the Securities and Exchange Commission and any other applicable
requirements. The Chairman of the Audit Committee shall meet the requirements of
the American Stock Exchange, the Securities and Exchange Commission and any
other applicable requirements.
The Audit Committee may form and delegate authority to subcommittees, when
appropriate.
STATEMENT OF POLICY:
The Audit Committee shall provide assistance to the Company's directors in
fulfilling their responsibility to shareholders and the investment community
relating to (1) the corporate accounting and reporting practices of the Company,
(the "Board"). The Committee shall have full power(2) the quality and authority to
interpret the Plan, to establish such rules and regulations as it deems
appropriate for the administrationintegrity of the Plan, and to take such other action as
it deems necessary or desirable for the administration of the Plan. The
Committee's interpretation and construction of any provision of the Plan or the
terms of any Option (as hereinafter defined) shall be conclusive and binding on
all parties.
3. PARTICIPANTS. Each directorfinancial reports of the Company, who(3) the
independent auditor's qualifications, independence and performance, (4) the
performance of the Company's internal audit function and (5) the compliance by
the Company with legal and regulatory requirements. In so doing, it is neitherthe
responsibility of the Audit Committee to maintain free and open means of
communication among the directors, the independent auditor, the internal
auditors, and the financial management of the Company. Notwithstanding the
foregoing, the independent auditor of the Company shall be ultimately
accountable and shall report directly to the Audit Committee.
MEETINGS:
The Audit Committee shall meet at least four times a year on a quarterly
basis, or more frequently as circumstances require. The Chairman of the Audit
Committee will preside at each meeting of the Audit Committee and, in
consultation with the other members of the Audit Committee, shall set the
frequency and length of each meeting. The Chairman of the Audit committee shall
set the agenda of items to be addressed at each upcoming meeting after
consultation with the chief financial officer, the head of internal audit, the
independent auditor and the Company's inside and outside counsel. The Chairman
of the Audit Committee shall ensure that the agenda for each upcoming meeting of
the Audit Committee is circulated to each member of the Audit Committee.
RESPONSIBILITIES AND RESOURCES:
As the independent auditor is ultimately accountable to the Audit
Committee, the Audit Committee shall be directly responsible for the
appointment, compensation and oversight of the work of the independent auditor
employed by the Company for the purpose of preparing or issuing an audit report
or related work on
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behalf of the Company. The Audit Committee must meet privately with the
independent auditor from time to time. The Audit Committee shall consult with
management but shall not delegate these responsibilities.
The Audit Committee has the authority to conduct any investigation
appropriate to fulfilling its responsibilities.
The Audit Committee may request any officer or employee of the Company nor an Ineligible Director (as hereinafter defined) (a
"Non-Employee Director")or
the Company's outside counsel or independent auditor to attend a meeting of the
Audit Committee, or to meet with any members of, or consultants to, the Audit
Committee. The Audit Committee may also meet with the Company's investment
bankers or financial analysts who follow the Company.
The Audit Committee has the authority to retain, at the Company's expense,
independent legal counsel and other advisors as it determines necessary to carry
out its duties.
The Audit Committee shall be eligibledetermine the extent of funding necessary for
payment of compensation to be granted options(a) the independent auditor for the purpose of
rendering or issuing the annual audit report and (b) to purchase
shares of Common Stock ("Options")any independent legal
counsel or other advisors retained under the Plan. An "Ineligible Director"
means any director who is a nonresident alien.
Nothing containedpreceding paragraph to advise the
Audit Committee.
In carrying out its responsibilities, the Audit Committee shall establish
and maintain flexible policies and procedures, in the Plan, or in any Option granted pursuantorder to best react to
changing conditions and to ensure to the Plan, shall confer upon any director any right to the continuation of his or her
directorship or limit in any way the rightdirectors and shareholders of the
Company to terminate his or
her directorship at any time.
4. THE SHARES. Options may be granted from time to time underthat the Plan
for the purchase, in the aggregate, of not more than 700,000 shares of common
stock, par value $0.66 2/3 per share,corporate accounting and reporting practices of the Company ("Common Stock") (subject
to adjustment pursuant to Section 13). Such shares of Common Stock may be set
aside outare
in accordance with all requirements and are of the authorized but unissued shareshighest quality.
In carrying out these responsibilities, the Audit Committee will:
GENERAL:
1. Monitor the Company's financial reporting process and systems of
Common Stock not reserved for
any other purpose or outinternal controls regarding finance, accounting, and legal compliance.
2. Seek to insure and monitor the independence and performance of previously issued shares acquiredthe
Company's external auditor and internal auditing department and advise the Board
of Directors.
3. Review and approve all related-party transactions after such
transactions have been reviewed and approved by the Company and
held in its treasury. Any shares of Common Stock which, by reason of the
termination or expiration of an Option or otherwise, are no longer subject to
purchase pursuant to an Option granted under the Plan, may again be subjected to
an Option under the Plan.
5. OPTION GRANTS. Options shall be evidenced by option agreements which
shall be subject to the terms and conditions set forth in the Plan and such
other terms and conditions not inconsistent herewith as theTransactions Committee may
approve.
(a) INITIAL APPOINTMENT AWARDS. As of the effective date of his or
her initial appointment or election to the Board (or, if later, the
effective date of the Plan) (the "Initial Appointment Date"), a
Non-Employee Director shall receive a grant of an Option to purchase 50,000
shares of Common Stock (subject to adjustment pursuant to Section 13).
(b) ANNUAL SERVICE AWARDS. On each Award Date (as hereinafter
defined) occurring after a Non-Employee Director's Initial Appointment
Date, such Non-Employee Director shall be granted, provided he or she
continues to serve as a member of
the Board on such date, an Optionof Directors.
INDEPENDENT AUDITOR:
4. Be directly responsible for the appointment, compensation and oversight
of the work of the independent auditor (including resolution of disagreements
between management and the independent auditor regarding financial reporting)
for the purpose of preparing its audit report or any related work.
5. Have the authority to purchasereview in advance, and grant any appropriate
pre-approvals, of 10,000 shares(a) all audit services to be provided by the independent
auditor and (b) all permitted non-audit services to be provided by the
independent auditor, and in connection therewith to approve all fees and other
terms of Common Stock (subjectengagement. The authority to adjustment pursuant
to Section 13). An "Award Date" means August 4, 2000 or August 3, 2001.
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52
6. OPTION PRICE. The price (the "Option Price") at which shares of Common
Stockgrant pre-approvals may be purchased upon the exercise of an Option granted under the Plan
shall be the fair market value of such shares on the date of grant of such
Option. Solely for purposes of this Section 6, the fair market value of a share
of Common Stock shall be deemed to be the average of the closing prices of the
Common Stock on the Initial Appointment Date or Award Date, as the case may be,
the 10 trading days immediately preceding such date, and the 10 trading days
immediately following such date.
7. TERM AND EXERCISABILITY OF OPTIONS. Options shall be granted for terms
of 10 years. Subject to the other provisions of the Plan relating to
exercisability of Options, the participant shall have the cumulative right as of
the first, second, and third anniversaries of the date of grant, to purchase up
to one-third, two-thirds, and 100%, respectively, of the Option Shares;
provided, however, that in the event of a Change of Control (as such term is
defined in the Hanover Direct, Inc. Key Executive Twenty-Four Month Compensation
Continuation Plan) the participant shall have the cumulative right to purchase
up to 100% of the Option Shares.
8. TERMINATION OF DIRECTORSHIP. Except as otherwise provided in this
Section 8, no person may exercise an Option more than three months after the
first date on which he or she ceases to be a director of the Company. If a
participant ceases to be a director of the Company by reason of death or
disability, any Options held by him or her may be exercised within 12 months
after the date he or she ceases to be a director of the Company. In no event may
an Option be exercised after the expiration of the term of such Option.
9. PAYMENT. Full payment of the purchase price for shares of Common Stock
purchased upon the exercise, in whole or in part, of an Option granted under the
Plan shall be made at the time of such exercise. The Option Price may be paid in
cash or in shares of Common Stock valued at their fair market value on the date
of exercise. Alternatively, an Option may be exercised in whole or in part by
delivering a properly executed exercise notice together with irrevocable
instructions to a broker to deliver promptly to the Company the amount of sale
or loan proceeds necessary to pay the Option Price, and such other documents as
the Committee may determine.
No shares of Common Stock shall be issued or transferred to a participant
until full payment therefor has been made, and a participant shall have none of
the rights of a stockholder until shares are issued or transferred to him or
her.
10. NONTRANSFERABILITY. Options granted under the Plan shall not be
transferable other than by will ordelegated by
the laws of descent and distribution, and,
during a participant's lifetime, shall be exercisable only by him or her.
Notwithstanding the foregoing, a participant may transfer any Nonqualified Stock
Option granted under the Plan to the participant's spouse, children,
grandchildren, parents, and/or siblings orAudit Committee to one or more trusts forof its members. However, any decision made by
these members must be presented to the benefit
of such family members, if the agreement evidencing such Option so providesfull Audit Committee at Audit Committee
meetings.
6. Review and the participant does not receive any consideration for the transfer. Any Option
so transferred shall continueapprove disclosures required regarding non-audit services to
be subject to the same termsincluded in Securities and conditions
that applied to such Option immediately prior to its transfer (except that such
transferred Option shall not be further transferable by the transferee during
the transferee's lifetime).
11. ISSUANCE OF SHARES. If a participant so requests, shares purchased
upon the exercise of an Option may be issued or transferred in the name of the
participant and another person jointly with the right of survivorship.
12. STATUS OF OPTIONS. Options granted under the Plan are nonstatutory
options not qualifying as incentive stock optionsExchange Commission periodic reports filed under
Section 42213(a) of the
Internal Revenue Code of 1986, as amended.
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53
13. CHANGES IN CAPITAL STRUCTURE, ETC. In the event of any merger, share
exchange, reorganization, consolidation, recapitalization, reclassification,
distribution, stock dividend, stock split, reverse stock split, split-up,
spin-off, or other similar transaction or event affecting the Common Stock, the
Committee is authorized, to the extent it deems appropriate, to make
substitutions or adjustments in the aggregate number and kind of shares of
Common Stock reserved for issuance under the Plan, in the number, kind and price
of shares of Common Stock subject to outstanding awards, and in the award limits
under the Plan (or to make provision for cash payment to the holders of an
Option). Outstanding Options shall be appropriately amended as to price and
other terms in a manner consistent with the aforementioned adjustment to the
shares of Common Stock subject to the Plan. Fractional shares resulting from any
adjustment in Options pursuant to this Section 13 may be settled in cash or
otherwise as the Committee shall determine. Notice of any adjustment shall be
given by the Company to each holder of an Option which shall have been adjusted
and such adjustment (whether or not such notice is given) shall be effective and
binding for all purposes of this Plan.
14. EFFECTIVE DATE AND TERMINATION OF PLAN. The Plan shall become
effective on the date of its adoption by the Board or a duly authorized
committee thereof, subject to the ratification of the Plan by the affirmative
vote or consent of holders of a majority of the issued and outstanding shares of
Common Stock. The Plan shall terminate 10 years from the date of its adoption or
such earlier date as the Board or such committee may determine. Any Option
outstanding under the Plan at the time of its termination shall remain in effect
in accordance with its terms and conditions and those of the Plan.
15. AMENDMENT. The Board or a duly authorized committee thereof may amend
the Plan in any respect from time to time; provided, however, that no amendment
shall become effective unless approved by affirmative vote of the Company's
shareholders if such approval is necessary or desirable for the continued
validity of the Plan or if the failure to obtain such approval would adversely
affect the compliance of the Plan with Rule 16b-3 or any successor rule under the Securities Exchange Act of 1934, or any other rule or regulation. No
amendment may, withoutas amended.
7. Review the consent of a participant, impair his or her rights
under any Option previously granted under the Plan.
The Board or a duly authorized committee thereof shall have the power, in
the event of any disposition of substantially allperformance of the assetsindependent auditor annually.
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8. Ensure that the independent auditor submits to the Audit Committee on
an annual basis a written statement consistent with Independent Standards Board
Standard No. 1, discuss with the independent auditor any disclosed relationships
or services that may impact the objectivity and independence of the Company,
its dissolution, any merger or consolidation of the Company with or into any
other corporation, or the merger or consolidation of any other corporation into
the Company, to amend all outstanding Options to terminate such Options as of
such effectiveness. If the Board shall exercise such power, all Options then
outstanding shall be deemed to terminate upon such effectiveness.
16. LEGAL AND REGULATORY REQUIREMENTS. No Option shall be exercisableindependent
auditor and no shares will be delivered under the Plan except in compliance with all
applicable federal and state laws and regulations including, without limitation,
compliance with the rules of all domestic stock exchanges on which the Common
Stock may be listed. Any share certificate issued to evidence shares for which
an Option is exercised may bear such legends and statements as the Committee
shall deem advisable to assure compliance with federal and state laws and
regulations. No Option shall be exercisable, and no shares will be delivered
under the Plan, until the Company has obtained consent or approval from
regulatory bodies, federal or state, having jurisdiction over such matters as
the Committee may deem advisable.
In the case of the exercise of an Option by a person or estate acquiring
the right to exercise the Option by bequest or inheritance, the Committee may
require reasonable evidencesatisfy itself as to the ownershipindependent auditor's independence.
9. Obtain and review an annual report, at a minimum, on an annual basis,
from the independent auditor describing (a) the independent auditor's internal
quality control procedures and (b) any material issues raised by the most recent
internal quality control review, or peer review, of the Optionindependent auditor, or
by any inquiry or investigation by governmental or professional authorities,
within the preceding five years, with respect to one or more independent audits
carried out by the independent auditor, and may require
consents and releases of taxing authoritiesany steps taken to deal with any
such issues.
10. Confirm that it may deem advisable.
August 5, 1999
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ANNEX B
HANOVER DIRECT, INC.
2000 MANAGEMENT STOCK OPTION PLAN
1. PURPOSE. The purpose of this Hanover Direct, Inc. 2000 Management
Stock Option Plan (the "Plan")the auditor that is to advanceperform the interestsaudit services for the
Company does not violate the audit rotation requirements of Hanover Direct,
Inc. (the "Company") and its shareholders by providing employees and officersSection 203 of and consultantsthe
Sarbanes-Oxley Act of 2002, which provides that the auditor may not perform
audit services for the Company if the lead audit partner or the audit partner
responsible for reviewing the audit has performed audit services for the Company
for each of the five previous fiscal years.
11. Review all reports that the federal securities laws require the
independent auditor to submit to the CompanyAudit Committee.
12. Meet with the independent auditor prior to the audit to review the
planning and its affiliates, through the grant of
options to purchase shares of Common Stock (as hereinafter defined), with a
larger personal and financial interest in the successstaffing of the Company.
2. ADMINISTRATION. The Plan shall be administered by a committee (the
"Committee") consisting of at least two membersaudit. Discuss general audit approach, scope,
staffing, locations, and reliance upon management and internal audit.
13. Consider the independent auditor's judgments about the quality and
appropriateness of the BoardCompany's accounting principles and disclosures as
applied in its financial reporting.
14. Obtain from the independent auditor assurance that Section 10A of Directors of the
Company (the "Board"). The Committee shall be constituted in such a manner as to
satisfy the requirements of applicable law, the provisions of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, (the "Exchange Act"), orrelating to "Audit Requirements"
has not been implicated.
15. Review with the independent auditor any successor rule. The Committee shall be appointed, and vacancies shall be filled,management letter provided by
the Board. The Committee shall have full powerindependent auditor and authoritywith management the Company's response to (i) selectthat
letter. Such review should include:
(a) any difficulties encountered in the individualscourse of the audit work,
including any restrictions on the scope of activities or access to whom Options may be granted underrequired
information, and any disagreements with management; and
(b) any changes required in the Plan; (ii) determineplanned scope of the number of shares of Common Stock covered by each Optioninternal audit.
16. Review with the independent auditor and the termsinternal audit department
any significant disagreement between management and conditions, not inconsistentthe independent auditor or
the internal audit department in connection with the provisionspreparation of the
Plan, governing such
Option; (iii) interpretfinancial statements.
17. Meet at least quarterly with the Planindependent auditor in separate
executive sessions.
WITH RESPECT TO THE ANNUAL FINANCIAL STATEMENTS:
18. Review and discuss with management, the internal audit department and
the independent auditor the Company's annual audited financial statements prior
to submission to stockholders, any governmental body, any stock exchange or the
public.
19. Discuss with the independent auditor the matters required to be
discussed by AICPA Statement on Auditing Standards No. 61, as amended, relating
to the conduct of the audit.
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20. Prepare the report to shareholders required by the Securities and
Exchange Commission to be included in the Company's annual proxy statement and
any Option granted thereunder; (iv)
establish such rules and regulations as it deems appropriate for the
administrationother reports of the Plan;Audit Committee required by applicable securities laws
or stock exchange listing requirements or rules.
21. Review with management and (v) take such other action as it deems necessary
or desirable for the administrationindependent auditor the certification
by the Chief Executive Officer and the Chief Financial Officer of the Plan. Any actionCompany's
annual financial statements and the management's discussion and analysis section
in the Company's Annual Report on Form 10-K.
WITH RESPECT TO THE QUARTERLY FINANCIAL STATEMENTS:
22. Review and discuss with management, the internal audit department and
the independent auditor the Company's quarterly financial statements prior to
submission to stockholders, any governmental body, any stock exchange or the
public.
23. Review with management and the independent auditor the certification
by the Chief Executive Officer and the Chief Financial Officer of the CommitteeCompany's
quarterly financial statements and the management's discussion and analysis
section in the Company's Quarterly Reports on Form 10-Q.
PERIODIC REVIEWS:
24. Discuss at least quarterly with respectthe independent auditor, without
management being present, (a) its judgments about the quality and
appropriateness of the Company's accounting principles and financial disclosure
practices as applied in its financial reporting and (b) the completeness and
accuracy of the Company's financial statements.
25. Consider and approve, as appropriate, significant changes to the
administration ofCompany's accounting principles and financial disclosure practices as suggested
by the Plan shall be taken by majority vote.
The Committee's interpretation and construction of any provision of the Planindependent auditor, management or the terms ofinternal audit department and any
Option shallitems required to be conclusive and binding on all parties.
3. PARTICIPANTS. Options may be granted under the Plan to any employee or
officer of, or consultant to, the Company or of any affiliate of the Company.
Nothing contained in the Plan, or in any Option granted pursuant to the
Plan, shall confer upon any employee any right to the continuation of his or her
employment, or limit in any way the Company's right to terminate his or her
employment.
4. THE SHARES. The shares that may be delivered or purchased under the
Plan shall not exceed an aggregate of 20,000,000 shares (subject to adjustment
pursuant to Section 7) of common stock, par value $.66 2/3 per share, of the
Company (the "Common Stock") (subject to adjustment pursuant to Section 7). Such
shares of Common Stock may be set aside out of the authorized but unissued
shares of Common Stock not reserved for any other purpose or out of previously
issued shares acquiredcommunicated by the Company and held in its treasury. Any shares of
Common Stock which, by reason of the termination or expiration of an Option or
otherwise, are no longer subject to an Option may again be subjected to an
Option under the Plan.
5. OPTIONS. Options to purchase Common Stock ("Options") shall be
evidenced by option agreements which shall be subject to the terms and
conditions set forth in the Plan and such other terms and conditions not
inconsistent herewith as the Committee may approve.
(a) TYPES OF OPTIONS. Options granted under the Plan shall, as
determined by the Committee at the time of grant, be either Options
intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") ("Incentive Stock
Options") or Options not intended to so qualify ("Nonstatutory Stock
Options"); provided, however, that Incentive Stock Options may be granted
only to employees of the Company or a subsidiary (within the meaning of
Section 424(f) of the Code) of the Company (a "Subsidiary"). Each option
agreement shall identify the
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55
Option as an Incentive Stock Option or as a Nonstatutory Stock Option.
Notwithstanding such designation, however, to the extent that the aggregate
fair market value (determined on the date of grant) of Common Stock for
which a participant is granted Incentive Stock Options that first become
exercisable during any given calendar year exceeds $100,000, the Option
shall be treated as a Nonqualified Stock Option. For this purpose,
Incentive Stock Options shall be taken into account in the order in which
they were granted.
(b) PRICE. The price at which shares of Common Stock may be purchased
upon the exercise of an Option granted under the Plan shall be the fair
market value of such shares on the date of grant of such Option; provided,
however, that an Incentive Stock Option granted to an employee who owns
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any parent (within the meaning of
Section 424(e) of the Code) or Subsidiary shall have a purchase price for
the underlying shares equal to 110% of the fair market value of the Common
Stock on the date of grant.
Solely for purposes of this Section 5(b) and Section 5(a), the fair
market value of a share of Common Stock shall be deemed to be the average
of the closing prices of the Common Stock on the 10 trading days
immediately preceding the date of grant and the 10 trading days immediately
following such date.
(c) PER-PARTICIPANT LIMIT. No participant may be granted Options
during any consecutive 12-month period on more than 1,000,000 shares of
Common Stock (subject to adjustment pursuant to Section 7).
(d) NONTRANSFERABILITY. Options granted under the Plan shall not be
transferable other than by will or by the laws of descent and distribution,
and, during a participant's lifetime, shall be exercisable only by the
participant. Notwithstanding the foregoing, the Committee may, in the
manner established by the Committee, allow a participant to transfer,
without payment of consideration, any Nonstatutory Stock Option granted
under the Plan to the participant's spouse, children, grandchildren,
parents, and/or siblings, or to one or more trusts or partnerships for the
benefit of such family members. Any Option so transferred shall continue to
be subject to the same terms and conditions that applied to such Option
immediately prior to its transfer (except that such transferred Option
shall not be further transferable by the transferee during the transferee's
lifetime).
(e) TERM AND EXERCISABILITY OF OPTIONS. Options may be granted for
terms of not more than 10 years and shall be exercisableindependent auditor in accordance with
such termsAICPA SAS No. 61 (see item 18 above). Review with the independent auditor,
management and conditions as are set forth in the option agreement
evidencing the grant of such Options. In no event shall an Incentive Stock
Option granted to an employee who owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or
any parent (within the meaning of Section 424(e) of the Code) or Subsidiary
be exercisable after the expiration of five years from the date such
Incentive Stock Option is granted.
Except as otherwise provided in Section 5(f), no Option granted under
the Plan shall be exercisable by a participant during the first year after
the date of grant of such Option.
(f) TERMINATION OF EMPLOYMENT. Except tointernal audit department, at appropriate intervals, the
extent otherwise
providedto which any changes or improvements in the option agreement evidencing such Option, an Option may not
be exercised after a participant ceases to be an employee, officeraccounting or consultant exceptfinancial
practices, as set forth in this Section 5(f).
(i) Death, Disability, or Retirement. If a participant ceases to
be an employee, officer or consultant by reason of death, permanent
disability (within the meaning of Section 22(e)(3) of the
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56
Code), or, in the case of an employee, retirement at or after age 65,
the participant (or the participant's estate in the event of the
participant's death) may, within one (1) year following such cessation,
exercise the Option with respect to all or any part of the shares of
Common Stock subject thereto regardless of whether the Option was
otherwise exercisable at the time of such cessation. Except in the case
of the participant's death or permanent disability, the exercise of an
Incentive Stock Option more than three (3) months after a participant
ceases to be an employee of the Company or a Subsidiary will cause such
Option to be treated as a Nonstatutory Stock Option.
(ii) Other Reasons. If a participant ceases to be an employee,
officer or consultant for any reason other than death, permanent
disability, or retirement at or after age 65, the participant may,
within three (3) months following such cessation, exercise the Option
with respect to all or any part of the shares of Common Stock subject
thereto, but only to the extent that such Option was exercisable at the
time of such cessation.
In no event may an Option be exercised after the expiration of the term of
such Option.
(g) PAYMENT. Full payment of the purchase price for shares of Common
Stock purchased upon the exercise, in whole or in part, of an Option
granted under the Plan shall be made at the time of such exercise. The
purchase price may be paid in cash or, if so provided in the option
agreement evidencing the grant of such Option, in shares of Common Stock
valued at their fair market value on the date of purchase. Alternatively,
if the option agreement evidencing the grant of such Option so provides,
the Option may be exercised in whole or in part by delivering a properly
executed exercise notice together with irrevocable instructions to a broker
to deliver promptly to the Company the amount of sale or loan proceeds
necessary to pay the purchase price and applicable withholding taxes, and
such other documents as the Committee may determine.
6. WITHHOLDING. No later than the date as of which an amount first
becomes includible in the gross income of a participant for Federal income tax
purposes with respect to any Option under the Plan, the participant shall pay to
the Company, or make arrangement satisfactory to the Committee regarding the
payment of, any Federal, state, or local taxes required by law to be withheld
with respect to such amount. Unless otherwise determinedapproved by the Audit Committee, withholding obligations may be settledhave been implemented.
26. Periodically review and discuss with Common Stock, including Common Stock
that is part ofmanagement, the Option that gives rise to the withholding requirement. The
obligations of the Company under the Plan shall be conditional on such payment
or arrangementsinternal audit
department and the Company shall, to the extent permitted by law, have the
right to deductindependent auditor, as appropriate, any such taxes from any payment of any kind due to the
participant.
7. CHANGES IN CAPITAL STRUCTURE, ETC. In the event of any merger, share
exchange, reorganization, consolidation, recapitalization, reclassification,
distribution, stock dividend, stock split, reverse stock split, split-up,
spin-off,legal, regulatory or
other similar transaction or event affecting the Common Stock, the
Committee is authorized, to the extent it deems appropriate, to make
substitutions or adjustments in the aggregate number and kind of shares of
Common Stock reserved for issuance under the Plan, in the number, kind and price
of shares of Common Stock subject to outstanding awards, and in the award limits
under the Plan (or to make provision for cash payment to the holders of an
Option). Outstanding Options shall be appropriately amended as to price and
other terms in a manner consistent with the aforementioned adjustment to the
shares of Common Stock subject to the Plan. Fractional shares resulting from any
adjustment in Options pursuant to this Section 7 may be settled in cash or
otherwise as the Committee shall determine. Notice of any adjustment shall be
given by the Company to each holder of an Option which shall have been adjusted
and such adjustment (whether or not such notice is given) shall be effective and
binding for all purposes of this Plan.
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8. EFFECTIVE DATE AND TERMINATION OF PLAN. The Plan shall become
effective on the date of its adoption by the Board, subject to the ratification
of the Plan by the affirmative vote or consent of holders of a majority of the
issued and outstanding shares of Common Stock. The Plan shall terminate 10 years
from the date of its adoption or such earlier date as the Board may determine.
Any Option outstanding under the Plan at the time of its termination shall
remain in effect in accordance with its terms and conditions and those of the
Plan.
9. AMENDMENT. The Board may amend the Plan in any respect from time to
time; provided, however,compliance matters that no amendment shall become effective unless
approved by affirmative vote of the Company's shareholders if such approval is
necessary for the continued validity of the Plan or if the failure to obtain
such approval would adversely affect the compliance of the Plan with Rule 16b-3
under the Exchange Act or any other rule or regulation. No amendment may,
without the consent of a participant, impair such participant's rights under any
Option previously granted under the Plan.
The Board shall have the power, in the event of any disposition of
substantially all of the assets of the Company, its dissolution, any merger or
consolidation of the Company with or into any other corporation, or the merger
or consolidation of any other corporation into the Company, to amend all
outstanding Options to terminate such Options as of the effectiveness of such
transaction. If the Board shall exercise such power, all Options then
outstanding shall be deemed to terminate upon such effectiveness. The Board may,
in its sole discretion, amend all outstanding Options to cause them to be
immediately exercisable prior to the effectiveness of such termination.
10. LEGAL AND REGULATORY REQUIREMENTS. No Option shall be exercisable and
no shares shall be delivered under the Plan except in compliance with all
applicable Federal and state laws and regulations including, without limitation,
compliance with withholding tax requirements and with the rules of all domestic
stock exchanges on which the Common Stock may be listed. Any share certificate
issued to evidence shares for which an Option is exercised may bear such legends
and statements as the Committee shall deem advisable to assure compliance with
Federal and state laws and regulations. No Option shall be exercisable and no
shares shall be delivered under the Plan, until the Company has obtained consent
or approval from regulatory bodies, Federal or state, having jurisdiction over
such matters as the Committee may deem advisable.
In the case of the exercise of an Option by a person or estate acquiring
the right to exercise the Option by bequest or inheritance, the Committee may
require reasonable evidence as to the ownership of the Option and may require
consents and releases of taxing authorities that it may deem advisable.
11. GENERAL PROVISIONS.
(a) Nothing contained in the Plan, or in any Option granted pursuant
to the Plan, shall confer upon any employee any right to the continuation
of the employee's employment.
(b) Nothing contained in the Plan, or in any Option granted under the
Plan, shall be construed to prevent the Company from taking any corporate
action which is deemed by the Company to be appropriate or in its best
interest, whether or not such action would have an adverse effect on the
Plan or any Option granted under the Plan. No participant, beneficiary, or
other person shall have any claim against the Company as a result of any
such action.
(c) The Plan and all Options made and actions taken thereunder shall
be governed by and construed in accordance with the laws of the State of
New York.
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58
ANNEX C
2000 SHORT-TERM INCENTIVE PLAN FOR RAKESH K. KAUL
1. PURPOSE. The purpose of this 2000 Short-Term Incentive Plan for Rakesh
K. Kaul (the "Plan") is to promote incentives and rewards to Rakesh K. Kaul
("Kaul"), who willcould have a significant impact on the long-term successCompany's
financial statements, including applicable changes in accounting standards or
rules.
27. Review and reassess the Company's directors' and officers' liability
insurance.
28. Review and discuss with management the Company's major risk exposures
and the steps management has taken to monitor, control and manage such
exposures, including the Company's risk assessment and risk management
guidelines and policies.
29. Review and discuss with management the Company's earnings press
releases, including the use of Hanover
Direct, Inc. (the "Company").
2. ADMINISTRATION. The Plan shall"pro forma" or "adjusted" non-GAAP information,
as well as financial information and earnings guidance provided to analysts and
rating agencies. At least the chairman of the audit committee should review the
Company's earnings press releases before they are released to the public.
INTERNAL AUDIT DEPARTMENT:
30. Review the organizational structure and qualifications of the internal
audit department, as needed.
31. Review, based upon the recommendation of the independent auditor and
the chief internal auditor, the scope and plan of the work to be administereddone by the
Compensation
Committeeinternal audit department.
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32. Review the appointment, annual performance reviews, and replacement of
the senior internal audit executive.
33. In consultation with the independent auditor and the internal audit
department, review the adequacy of the Company's Board of Directors (the "Committee"). The Committee
shall consist of two or more membersinternal control structure and
shall be constituted in such a manner
asprocedures designed to satisfyinsure compliance with laws and regulations, and discuss
the requirements of applicable law. The Committee shall have full
powerresponsibilities, budget and authority to grant awards hereunder and to administer and interpret
the Plan and to adopt such rules, regulations, agreements, guidelines, and
instruments for the administrationstaffing needs of the Plan as it deems necessaryinternal audit
department.
34. Establish procedures for (a) the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal accounting
controls or advisable.
3. ELIGIBILITY. Kaul shall beauditing matters and (b) the only person eligible to participate in
the Plan.
4. PERFORMANCE GOALS. On or before March 31 of each calendar year
commencing during the termconfidential, anonymous submission by
employees of the Employment Agreement dated March 6, 2000
between KaulCompany of concerns regarding questionable accounting or
auditing matters.
35. Review the significant reports to management prepared by the internal
auditing department and management's responses.
36. On a regular basis, review summaries of findings prepared by the
Company (the "Employment Agreement"), the Committee shall
establish written performance goalsinternal audit department, together with respectmanagement's response and follow-up to
such year ("performance
year"). The performance goals shall be expressed in terms of one or more of the
following objective financial criteria with respect to the Company: earnings per
share, earnings before interest and taxes, earnings before interest, taxes,
depreciation and amortization, or quantifiable improvements in inventory levels.
The performance goals shall incorporate a performance target for such
performance year and shall state, in terms of an objective formula or standard
(the terms of which shall preclude discretion to increase the bonus amount that
would otherwise be payable upon attainment of the goal), the bonus payable to
the Executive pursuant to this Section 4 as a function of the actual performance
level attained; provided, however, that (i) the bonus for any fiscal year shall
be between 0% and 150% of the Executive's Base Salary during such year, (ii) the
bonus payable in the event of the attainment of 100% of the performance target
shall be 100% of such Base Salary, and (iii) such bonus shall in no event exceed
$1,500,000. The Committee shall obtain Kaul's input and advice before
establishing the performance goals for any fiscal year.
5. BONUS PAYMENTS. Except as otherwise provided in Section 7 of the
Employment Agreement (relating to termination of employment or as provided for
under the terms of the Hanover Direct, Inc. Thirty-Six Month Compensation
Continuation Plan), upon the Compensation Committee's certification following
the end of each performance year as to the actual performance level attained,
the Company shall pay the Executive, in cash, the bonus for such year, as
determined in accordancethese reports.
LEGAL COMPLIANCE:
37. Periodically review with the objective formula or standard adopted as part
of the performance goals for such year. Such payment shall be made at the time
as short-term bonuses are paid to other Company executives. The Committee shall
not have discretion to increase the bonus above the amount determined under the
objective formula or standard adopted for such performance year.
6. EFFECTIVENESS OF PLAN. The Plan shall be effective as of the date of
its adoption by the Committee, subject to approval thereof at a meeting of
shareholders by the holders of a majority of the shares of Common Stock presentCompany's in house and entitled to vote at the meeting. Following the initial approval of the Plan
by the Company's shareholders, shareholder approval of the Plan shall be
required thereafter only to the extent required in order for compensation paid
under the Plan to qualify as performance-based compensation for purposes of
Section 162(m)(4)(C) of the Internal Revenue Code of 1986, as amended.
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59
ANNEX D
2000 LONG-TERM INCENTIVE PLAN FOR RAKESH K. KAUL
1. PURPOSE. The purpose of this 2000 Long-Term Incentive Plan for Rakesh
K. Kaul (the "Plan") is to promote an alignment of the interests of Rakesh K.
Kaul ("Kaul"), who willindependent
counsel any legal matters that could have a significant impact on the long-term success of
Hanover Direct, Inc.Company's
financial statements, the Company's compliance with applicable laws and
regulations, and any material reports or inquiries received from regulators or
governmental agencies.
38. Obtain timely reports from management and the Company's senior
internal auditing executive and Counsel that the Company and its subsidiary erizon, Inc. (collectivelysubsidiaries
are in conformity with applicable legal requirements and the "Company"),Company's Corporate
Code of Conduct, including disclosures of insider and affiliated party
transactions.
39. Advise the Board of Directors with respect to the Company's policies
and procedures regarding compliance with applicable laws and regulations and
with the interestsCompany's Corporate Code of Conduct.
40. Review and approve the Company's Corporate Code of Conduct, as it may
be amended and updated from time to time, and ensure that management has
implemented a compliance program to enforce such Code. Ensure that such
compliance program includes reporting violations of such Code of Conduct to the
Audit Committee.
41. Review reported violations of the Company's Corporate Code of Conduct.
42. Review and approve (a) any change or waiver in the Company's Corporate
Code of Conduct for principal executives and senior financial officers and (b)
any disclosures made on Form 8-K regarding such change or waiver.
OTHER AUDIT COMMITTEE RESPONSIBILITIES:
43. Maintain minutes of meetings and regularly report to the Board of
Directors on the Committee's activities after each Audit Committee meeting.
44. Review and reassess the adequacy of this Charter at least annually and
recommend any proposed changes to the Board of Directors for approval. Submit
the Charter to the Board of Directors for approval, and have the document
published, at least every three years, in the Company's proxy statement in
accordance with regulations of the Securities and Exchange Commission.
45. Annually assess its performance of the duties specified in this
Charter and report its findings to the Board of Directors.
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46. Perform any other activities consistent with this Charter, the
Company's by-laws and governing law, as the Audit Committee or the Board of
Directors deems necessary or appropriate.
* * *
While the Audit Committee has the responsibilities and powers set forth in
this Charter, the role of the Audit Committee is oversight. The members of the
Audit Committee are not full-time employees of the Company and its shareholdersmay or may not be
accountants or auditors by affording
Kaul a proprietary interestprofession or experts in the Company's growth while providing Kaul with an
incentivefields of accounting or
auditing and, in any event, do not serve in such capacity. Consequently, it is
not the duty of the Audit Committee to make a personal financial investment in the Company andconduct audits or to remain
indetermine that the
Company's employ.
2. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee of the Company's Board of Directors (the "Committee"). The Committee
shall consist of two or more membersfinancial statements and shall be constituted in such a manner
as to satisfy the requirements of applicable law, the provisions of Rule 16b-3
under the Securities Exchange Act of 1934 or any successor rule. The Committee
shall have full powerdisclosures are complete and authority to grant awards hereunderaccurate and to administer
and interpret the Plan and to adopt such rules, regulations, agreements,
guidelines, and instruments for the administration of the Plan as it deems
necessary or advisable.
3. ELIGIBILITY. Kaul shall be the only person eligible to participate in
the Plan.
4. AWARD. Kaul shall be granted an option (the "erizon Option") to
purchase 60 shares of Common Stock of erizon, Inc., which amount represents 6%
of the fully-diluted Common Stock of erizon, Inc. as of the date hereof, with
protection against further dilution until such time as erizon, Inc. shall
complete its next round of financing. The terms of the erizon Option shall be as
set forth in APPENDIX A. The total number of shares of Common Stock of erizon,
Inc. reserved and available for distribution pursuant to the Plan shall be 150,
all of which may be granted in a single year. If any award under the Plan is
exercised or cashed out or terminates or expires or is forfeited without a
payment being made to the participant in the form of Common Stock of erizon,
Inc., the shares subject to such award, if any, shall be available for
distribution in connection with awards under the Plan. Any shares of Common
Stock of erizon, Inc. that are used by the participant as full or partial
payment of withholding or other taxes or as payment for the exercise or
conversion price of an award under the Plan shall be available for distribution
in connection with awards under the Plan.
In the event of any merger, share exchange, reorganization, consolidation,
recapitalization, reclassification, distribution, stock dividend, stock split,
reverse stock split, split-up, spin-off, issuance of rights or warrants or other
similar transaction or event affecting the Common Stock of erizon, Inc. after
adoption of the Plan by the Committee, the Committee is authorized, to the
extent it deems appropriate, to make substitutions or adjustments in the
aggregate number and kind of shares of Common Stock of erizon, Inc. reserved for
issuance under the Plan, in the number, kind and price of shares of Common Stock
of erizon, Inc. subject to outstanding award and in the award limits set forth
in this Section (or to make provision for cash payment to the holders of the
award).
5. CLOSING PRICE OPTION. The Closing Price Option granted to Executive
pursuant to a Stock Option Agreement dated August 23, 1996, shall be amended and
restated
in accordance with generally accepted accounting principles and applicable rules
and regulations. These are the terms set forth in APPENDIX B.
Inresponsibility of management and the event of any merger, share, exchange, reorganization, consolidation,
recapitalization, reclassification, distribution, stock dividend, stock split,
reverse stock split, split-up, spin-off, issuance of rights or warrants or other
similar transaction or event affectingindependent
auditor. Nor is it the Common Stockduty of the Company after
adoption of
D-1
60Audit Committee to conduct investigations, to
resolve disagreements, if any, between management and the Plan by the Committee, the Committee is authorized,independent auditor or
to the extent it deems
appropriate, to make substitutions or adjustments in the aggregate numberassure compliance with laws and kind of shares of Common Stock of the Company reserved for issuance under the
Plan, in the number, kind and price of shares of Common Stock of the Company
subject to outstanding award and in the award limits set forth in this Section
(or to make provision for cash payment to the holders of the award).
6. EFFECTIVENESS OF PLAN. The Plan shall be effective as of the date of
its adoption by the Committee, subject to approval thereof at a meeting of
shareholders by the holders of a majority of the shares of Common Stock present
and entitled to vote at the meeting. In the event the shareholders fail to
approve the Plan, any awards shall be rescinded and all actions taken hereunder
shall be null and void.
The Plan shall terminate on December 31, 2004. Any option outstanding at
the time of such termination, whether or not vested, shall remain in effect in
accordance with its terms and those of the Plan.
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61
APPENDIX A
ERIZON OPTION
This STOCK OPTION AGREEMENT (this "Agreement") is made as of April 14, 2000
between Hanover Direct, Inc., a Delaware corporation (the "Company"), and Rakesh
K. Kaul (the "Executive").
WHEREAS, the Compensation Committee of the Company's Board of Directors
(the "Compensation Committee") has heretofore adoptedregulations and the Company's shareholders have heretofore approved and ratified the Long-Term Incentive Plan
for Rakesh K. Kaul (the "Plan"); and
WHEREAS, the Plan provides for the grantingCorporate Code
of stock options in erizon,
Inc. subject to the terms set forth herein
NOW, THEREFORE, in consideration of the promises and the mutual agreements
herein set forth, the parties hereto agree as follows:
1. The Company hereby evidences and confirms the grant to the
Executive on the date hereof (the "Date of Grant") by the Compensation
Committee of an option (the "Initial Option") to purchase 60 shares of the
Common Stock of erizon, Inc. (the "Shares"), which amount represents 6% of
the fully diluted Common Stock (including all outstanding warrants and
options, vested and unvested) of erizon, Inc. as of the date hereof. The
exercise price for the Initial Option shall be equal to the fair market
value of the Common Stock of erizon, Inc. on the Date of Grant as
determined in good faith by the Board of Directors of the Company, provided
that the fair market value of the Common Stock of erizon, Inc. for purposes
of establishing the exercise price for the Initial Option shall not exceed
$200,000,000. Executive shall receive protection from further dilution of
the Shares until such time as erizon, Inc. completes its first round of
Board-approved equity or convertible debt financing after which time there
shall be no protection from further dilution of the Shares. Upon completion
of its first round of Board-approved equity or convertible debt financing,
the Company shall grant Executive an additional option (the "Additional
Option") to purchase Shares that, together with the Initial Option, shall
represent 6% of the fully diluted Common Stock of erizon, Inc. (including
all outstanding warrants and options, vested and unvested). The exercise
price for the Additional Option shall be equal to the fair market value of
the Common Stock on the date the Additional Option is granted to Executive,
as determined in good faith by the Board of Directors of the Company. Other
than as expressly provided for in this Section 1, the Initial Option and
the Additional Option (collectively the "Option") shall be treated as if
granted on the Date of Grant. The Option shall expire on March 6, 2010 (the
"Expiration Date"), subject to earlier cancellation or termination as
provided herein.
2. Subject to the other provisions contained herein regarding the
exercisability of the Option, the Option shall become exercisable only as
provided in this Section 2:
(a) Except as otherwise provided in paragraph (b), the Option shall
vest and become exercisable in equal parts on each successive
anniversary of March 6, 2000 over the four-year period commencing on
March 6, 2000 provided that Executive remains employed by the Company
and/or its affiliates or subsidiaries (collectively the "Company").
(b) Notwithstanding the foregoing, the Option shall immediately
vest and become exercisable in full (i) upon the termination of
Executive's employment by reason of death, Disability, by the Company
without Cause or by Executive within ninety days of an occurrence
constituting Good
D-3Conduct.
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62
Reason (as such terms are defined in the Employment Agreement dated as
of March 6, 2000 between Executive and the Company (hereinafter the
"Employment Agreement")) or (ii) upon the occurrence of a Change of
Control (as such term is defined in the Hanover Direct, Inc. Thirty-Six
Month Compensation Continuation Plan (hereinafter the "Change of Control
Plan")).
3. In the event of a termination of the Executive's employment with
the Company while any portion of the Option remains unexercised, the
Executive's rights to exercise the Option shall be exercisable only as
follows:
(i) Involuntary Termination. If the Executive's employment is
involuntarily terminated by the Company other than for Cause or
Executive resigns for Good Reason (as such terms are defined in the
Employment Agreement), his Option may be exercised during the six-month
period following the later of (x) such termination or (y) the
registration of the Shares underlying the Option. For purposes hereof,
the provisions of the Employment Agreement shall apply in determining
whether the Executive's employment has been involuntarily terminated by
the Company other than for Cause or if Executive has resigned with Good
Reason.
(ii) Death. If the Executive's employment terminates by reason of
death, the Option may be exercised during the twelve-month period
following such termination.
(iii) Disability. If the Executive's employment terminates by
reason of Disability (as such term is defined in the Employment
Agreement), the Option may be exercised during the twelve-month period
following such termination. For purposes hereof, the provisions of the
Employment Agreement shall apply in determining whether the Executive's
employment has been terminated due to a Disability.
(iv) Change of Control. If Executive's employment terminates other
than for Cause or if Executive resigns with Good Reason (as such terms
are defined in the Employment Agreement) within twenty-four months of a
Change of Control (as such term is defined in the Employment Agreement),
the Option may be exercised during the twelve-month period following
such termination. For purposes hereof, the provisions of the Change of
Control Plan shall apply in determining whether a Change of Control has
occurred.
(v) Termination in Other Circumstances. If the Executive's
employment terminates in circumstances not described in clauses (i)
through (iv), the Executive may, within 30 days following such
termination, exercise the Option with respect to such number of Shares
as to which the Option is exercisable on the date of termination, as
determined pursuant to Section 2.
Notwithstanding the foregoing, the Option shall in no event be exercisable
in whole or in part after the Expiration Date.
4. If at the time of Executive's termination for any reason the Common
Stock of erizon, Inc. is not publicly-traded, at the Executive's request,
the Company shall purchase from the Executive the Shares as to which the
Option is exercisable, as determined pursuant to Section 2, or any portion
thereof at the then current fair market value as determined by the Board of
Directors of the Company in good faith. Any dispute concerning the
valuation of the fair market value of the Company will be determined using
a "baseball arbitration model" by a mutually agreed upon investment banking
company. The computation of fair market value will assume (i) underwriter
fees and discounts as if the Initial Public Offering had taken place, and
(ii) public market security.
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63
5. (a) Except as provided in paragraph (b), the Option is not
transferable by the Executive other than by will or the laws of descent and
distribution and is exercisable, during the Executive's lifetime, only by
the Executive.
(b) Notwithstanding the provisions of paragraph (a):
(i) In the event of the Executive's incapacity, the Option may be
exercised by a conservator, guardian, or the agent under a Durable Power
of Attorney;
(ii) Upon the Executive's death, the Option is transferable by
will, by a revocable or irrevocable trust established by the Executive,
or by a written beneficiary designation executed by the Executive and
delivered to the Company prior to the Executive's death;
(iii) The Executive may transfer the Option to the Executive's
spouse and/or issue or trusts for the benefit of the Executive. the
Executive's spouse, and/or the Executive's issue.
6. In order to exercise the Option, in whole or in part, the Executive
shall give written notice to the Company, specifying the number of Shares
to be purchased and the purchase price to be paid, and accompanied by the
payment of the purchase price. Such purchase price may be paid in cash, a
certified check, or a bank check payable to the Company, or in whole shares
of Common Stock held by the Executive for at least six months evidenced by
negotiable certificates, valued at their fair market value on the date of
exercise, or in a combination of the foregoing. Alternatively, the Option
may be exercised, in whole or in part, by delivering a properly executed
exercise notice together with irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds
necessary to pay the purchase price, and such other documents as the
Compensation Committee may require. Upon receipt of payment, the Company
shall deliver to the Executive (or to any other person entitled to exercise
the Option) a certificate or certificates for such Shares. If certificates
representing shares of Common Stock are used to pay all or part of the
purchase price of the Option, separate certificates shall be delivered by
the Company representing the same number of shares as each certificate so
used and an additional certificate shall be delivered representing the
additional shares to which the Executive is entitled as a result of
exercise of the Option.
7. The Option shall be exercised only with respect to full Shares or
fractional shares having a value of not less than $100,000; no fractional
Shares having lesser value shall be issued.
8. As a condition to the issuance of Shares under the Option, the
Executive agrees to remit to the Company at the time of exercise any taxes
required to be withheld by the Company under the applicable laws or other
regulations of any governmental authority, whether federal, state of local,
and whether domestic or foreign. The Company shall promptly remit such
taxes to the applicable governmental authority.
9. If the Executive so requests in writing, shares purchased upon
exercise of the Option may be issued in the name of the Executive and
another person jointly with the right of survivorship, or in the name of a
revocable trust of which the Executive is the grantor.
10. The Option does not qualify as an incentive stock option under
Section 422 of the Internal Revenue Code.
11. This Option shall be binding upon and inure to the benefit of any
successor or assignee of the Company and to any executor, administrator,
legal representative, legatee, or distributee or transferee entitled by law
or the provisions of the Plan to the Executive's rights hereunder.
D-5
64
12. The Option is subject in all respects to the terms of the Plan,
the provisions of which are incorporated in this Agreement by reference.
13. This Agreement is entered into, and shall be construed and
enforced, under the laws of the State of New York, and shall not be
modified except by written agreement signed by the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
HANOVER DIRECT, INC.
By:
------------------------------------
Its:
--------------------------------------
/s/
--------------------------------------
Rakesh K. Kaul
D-6
65
APPENDIX B
AMENDED AND RESTATED
CLOSING PRICE OPTION
This AMENDED AND RESTATED STOCK OPTION AGREEMENT (this "Agreement") is made
as of April 14, 2000 between Hanover Direct, Inc., a Delaware corporation (the
"Company"), and Rakesh K. Kaul (the "Executive").
WHEREAS, the Compensation Committee of the Company's Board of Directors
(the "Compensation Committee") has heretofore adopted and the Company's
shareholders have heretofore approved and ratified the 2000 Long-Term Incentive
Plan for Rakesh K. Kaul (the "Plan"); and
WHEREAS, the Plan provides for certain modifications to the terms of the
Closing Price Option granted to Executive as part of the Long-Term Incentive
Plan for Rakesh K. Kaul dated August 23, 1996 (the "Old Plan") subject to the
terms set forth herein.
NOW, THEREFORE, in consideration of the promises and the mutual agreements
herein set forth, the parties hereto agree as follows:
1. The Company hereby evidences and confirms the grant to the
Executive on August 23, 1996 (the "Date of Grant") by the Compensation
Committee of an option (the "Option") to purchase 2,000,000 shares of
Common Stock (the "Shares") at an option price of $1.15625 per share,
representing the fair market value of the Common Stock on the date thereof.
The Option shall expire on March 7, 2006 (the "Expiration Date"), subject
to earlier cancellation or termination as provided herein.
2. Subject to the other provisions contained herein regarding the
exercisability of the Option, this Option shall become exercisable only as
provided in this Section 2.
(a) Except as otherwise provided in paragraph (b), this Option
shall vest and become exercisable in equal parts on each successive
anniversary of March 6, 2000 over the three year period commencing on
March 6, 2000, provided that Executive remains employed by the Company
and/or its affiliates or subsidiaries (collectively the "Company").
(b) Notwithstanding the foregoing, the Option shall immediately
vest and become exercisable in full (i) upon the termination of
Executive's employment by reason of death, Disability, by Company
without Cause or by Executive within ninety days of an occurrence
constituting Good Reason (as such terms are defined in the Employment
Agreement dated as of March 6, 2000 between Executive and the Company
(the "Employment Agreement")), (ii) upon a Change of Control (as such
term is defined in the Hanover Direct, Inc. Thirty-Six Month
Compensation Continuation Plan (the "Change of Control Plan")), or (iii)
upon satisfaction of the condition, as certified by the Compensation
Committee (such certification not to be improperly withheld), that the
average closing price of the Common Stock on the American Stock Exchange
composite tape or other recognized market source, as determined by the
Compensation Committee, has obtained an average of $4.50 per share
during any period of 91 consecutive calendar days commencing after
August 23, 1996 and ending on or before March 7, 2002.
D-7
66
3. In the event of a termination of the Executive's employment with
the Company while any portion of the Option remains unexercised, the
Executive's rights to exercise the Option shall be exercisable only as
follows:
(i) Involuntary Termination. If the Executive's employment is
involuntarily terminated by the Company other than for Cause or
Executive resigns for Good Reason (as such terms are defined in the
Employment Agreement), his Option may be exercised during the six-month
period following the later of (x) such termination or (y) the
registration of the Shares underlying the Option. For purposes hereof,
the provisions of the Employment Agreement shall apply in determining
whether the Executive's employment has been involuntarily terminated by
the Company other than for Cause or if Executive has resigned with Good
Reason.
(ii) Death. If the Executive's employment terminates by reason of
death, the Option may be exercised during the twelve-month period
following such termination.
(iii) Disability. If the Executive's employment terminates by
reason of Disability (as such term is defined in the Employment
Agreement), the Option may be exercised during the twelve-month period
following such termination. For purposes hereof, the provisions of the
Employment Agreement shall apply in determining whether the Executive's
employment has been terminated due to a Disability.
(iv) Change of Control. If Executive's employment terminates other
than for Cause or if Executive resigns with Good Reason (as such terms
are defined in the Change of Control Plan) within twenty-four months of
a Change of Control (as such term is defined in the Change of Control
Plan), the Option may be exercised during the twelve-month period
following such termination. For purposes hereof, the provisions of the
Change of Control Plan shall apply in determining whether a Change of
Control has occurred.
(v) Termination in Other Circumstances. If the Executive's
employment terminates in circumstances not described in clauses (i)
through (iv), the Executive may, within 30 days following such
termination, exercise the Option with respect to such number of Shares
as to which the Option is exercisable on the date of termination, as
determined pursuant to Section 2.
Notwithstanding the foregoing, the Option shall in no event be exercisable
in whole or in part after the Expiration Date.
4. (a) Except as provided in paragraph (b), the Option is not
transferable by the Executive other than by will or the laws of descent and
distribution and is exercisable, during the Executive's lifetime, only by
the Executive.
(b) Notwithstanding the provisions of paragraph (a):
(i) In the event of the Executive's incapacity, the Option may be
exercised by a conservator, guardian, or the agent under a Durable Power
of Attorney;
(ii) Upon the Executive's death, the Option is transferable by
will, by a revocable or irrevocable trust established by the Executive,
or by a written beneficiary designation executed by the Executive and
delivered to the Company prior to the Executive's death;
(iii) The Executive may transfer the Option to the Executive's
spouse and/or issue or trusts for the benefit of the Executive. the
Executive's spouse, and/or the Executive's issue.
D-8
67
5. In order to exercise the Option, in whole or in part, the Executive
shall give written notice to the Company, specifying the number of Shares
to be purchased and the purchase price to be paid, and accompanied by the
payment of the purchase price. Such purchase price may be paid in cash, a
certified check, or a bank check payable to the Company, or in whole shares
of Common Stock evidenced by negotiable certificates, valued at their fair
market value on the date of exercise, or in a combination of the foregoing.
Alternatively, the Option may be exercised, in whole or in part, by
delivering a properly executed exercise notice together with irrevocable
instructions to a broker to deliver promptly to the Company the amount of
sale or loan proceeds necessary to pay the purchase price, and such other
documents as the Compensation Committee may require. Upon receipt of
payment, the Company shall deliver to the Executive (or to any other person
entitled to exercise the Option) a certificate or certificates for such
Shares. If certificates representing shares of Common Stock are used to pay
all or part of the purchase price of the Option, separate certificates
shall be delivered by the Company representing the same number of shares as
each certificate so used and an additional certificate shall be delivered
representing the additional shares to which the Executive is entitled as a
result of exercise of the Option.
6. The Option shall be exercised only with respect to full Shares; no
fractional Shares shall be issued.
7. As a condition to the issuance of Shares under the Option, the
Executive agrees to remit to the Company at the time of exercise any taxes
required to be withheld by the Company under the applicable laws or other
regulations of any governmental authority, whether federal, state of local,
and whether domestic or foreign. The Company shall promptly remit such
taxes to the applicable governmental authority.
8. If the Executive so requests in writing, shares purchased upon
exercise of the Option may be issued in the name of the Executive and
another person jointly with the right of survivorship, or in the name of a
revocable trust of which the Executive is the grantor.
9. The Option does not qualify as an incentive stock option under
Section 422 of the Internal Revenue Code.
10. This Option shall be binding upon and inure to the benefit of any
successor or assignee of the Company and to any executor, administrator,
legal representative, legatee, or distributee or transferee entitled by law
or the provisions of the Plan to the Executive's rights hereunder.
11. The Option is subject in all respects to the terms of the Plan,
the provisions of which are incorporated in this Agreement by reference.
12. This Agreement is entered into, and shall be construed and
enforced, under the laws of the State of New York, and shall not be
modified except by written agreement signed by the parties hereto.
13. This Agreement supercedes any prior agreements regarding the
Closing Price Option, including the Stock Option Agreement between Hanover
Direct, Inc. and Kaul dated August 23, 1996 concerning the subject matter
hereof.
D-9
68
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
HANOVER DIRECT, INC.
By:
--------------------------------------
Its:
--------------------------------------
--------------------------------------
Rakesh K. Kaul
D-10
69
ANNEX E
AMENDED AND RESTATED
CLOSING PRICE OPTION
This AMENDED AND RESTATED STOCK OPTION AGREEMENT (this "Agreement") is made
as of April 14, 2000 between Hanover Direct, Inc., a Delaware corporation (the
"Company"), and Rakesh K. Kaul (the "Executive").
WHEREAS, the Compensation Committee of the Company's Board of Directors
(the "Compensation Committee") has heretofore adopted and the Company's
shareholders have heretofore approved and ratified the 2000 Long-Term Incentive
Plan for Rakesh K. Kaul (the "Plan"); and
WHEREAS, the Plan provides for certain modifications to the terms of the
Closing Price Option granted to Executive as part of the Long-Term Incentive
Plan for Rakesh K. Kaul dated August 23, 1996 (the "Old Plan") subject to the
terms set forth herein.
NOW, THEREFORE, in consideration of the promises and the mutual agreements
herein set forth, the parties hereto agree as follows:
1. The Company hereby evidences and confirms the grant to the
Executive on August 23, 1996 (the "Date of Grant") by the Compensation
Committee of an option (the "Option") to purchase 2,000,000 shares of
Common Stock (the "Shares") at an option price of $1.15625 per share,
representing the fair market value of the Common Stock on the date thereof.
The Option shall expire on March 7, 2006 (the "Expiration Date"), subject
to earlier cancellation or termination as provided herein.
2. Subject to the other provisions contained herein regarding the
exercisability of the Option, this Option shall become exercisable only as
provided in this Section 2.
(a) Except as otherwise provided in paragraph (b), this Option
shall vest and become exercisable in equal parts on each successive
anniversary of March 6, 2000 over the three year period commencing on
March 6, 2000, provided that Executive remains employed by the Company
and/or its affiliates or subsidiaries (collectively the "Company").
(b) Notwithstanding the foregoing, the Option shall immediately
vest and become exercisable in full (i) upon the termination of
Executive's employment by reason of death, Disability, by Company
without Cause or by Executive within ninety days of an occurrence
constituting Good Reason (as such terms are defined in the Employment
Agreement dated as of March 6, 2000 between Executive and the Company
(the "Employment Agreement")), (ii) upon a Change of Control (as such
term is defined in the Hanover Direct, Inc. Thirty-Six Month
Compensation Continuation Plan (the "Change of Control Plan")), or (iii)
upon satisfaction of the condition, as certified by the Compensation
Committee (such certification not to be improperly withheld), that the
average closing price of the Common Stock on the American Stock Exchange
composite tape or other recognized market source, as determined by the
Compensation Committee, has obtained an average of $4.50 per share
during any period of 91 consecutive calendar days commencing after
August 23, 1996 and ending on or before March 7, 2002.
E-1
70
3. In the event of a termination of the Executive's employment with
the Company while any portion of the Option remains unexercised, the
Executive's rights to exercise the Option shall be exercisable only as
follows:
(i) Involuntary Termination. If the Executive's employment is
involuntarily terminated by the Company other than for Cause or
Executive resigns for Good Reason (as such terms are defined in the
Employment Agreement), his Option may be exercised during the six-month
period following the later of (x) such termination or (y) the
registration of the Shares underlying the Option. For purposes hereof,
the provisions of the Employment Agreement shall apply in determining
whether the Executive's employment has been involuntarily terminated by
the Company other than for Cause or if Executive has resigned with Good
Reason.
(ii) Death. If the Executive's employment terminates by reason of
death, the Option may be exercised during the twelve-month period
following such termination.
(iii) Disability. If the Executive's employment terminates by
reason of Disability (as such term is defined in the Employment
Agreement), the Option may be exercised during the twelve-month period
following such termination. For purposes hereof, the provisions of the
Employment Agreement shall apply in determining whether the Executive's
employment has been terminated due to a Disability.
(iv) Change of Control. If Executive's employment terminates other
than for Cause or if Executive resigns with Good Reason (as such terms
are defined in the Change of Control Plan) within twenty-four months of
a Change of Control (as such term is defined in the Change of Control
Plan), the Option may be exercised during the twelve-month period
following such termination. For purposes hereof, the provisions of the
Change of Control Plan shall apply in determining whether a Change of
Control has occurred.
(v) Termination in Other Circumstances. If the Executive's
employment terminates in circumstances not described in clauses (i)
through (iv), the Executive may, within 30 days following such
termination, exercise the Option with respect to such number of Shares
as to which the Option is exercisable on the date of termination, as
determined pursuant to Section 2.
Notwithstanding the foregoing, the Option shall in no event be exercisable
in whole or in part after the Expiration Date.
4. (a) Except as provided in paragraph (b), the Option is not
transferable by the Executive other than by will or the laws of descent and
distribution and is exercisable, during the Executive's lifetime, only by
the Executive.
(b) Notwithstanding the provisions of paragraph (a):
(i) In the event of the Executive's incapacity, the Option may be
exercised by a conservator, guardian, or the agent under a Durable Power
of Attorney;
(ii) Upon the Executive's death, the Option is transferable by
will, by a revocable or irrevocable trust established by the Executive,
or by a written beneficiary designation executed by the Executive and
delivered to the Company prior to the Executive's death;
(iii) The Executive may transfer the Option to the Executive's
spouse and/or issue or trusts for the benefit of the Executive. the
Executive's spouse, and/or the Executive's issue.
E-2
71
5. In order to exercise the Option, in whole or in part, the Executive
shall give written notice to the Company, specifying the number of Shares
to be purchased and the purchase price to be paid, and accompanied by the
payment of the purchase price. Such purchase price may be paid in cash, a
certified check, or a bank check payable to the Company, or in whole shares
of Common Stock evidenced by negotiable certificates, valued at their fair
market value on the date of exercise, or in a combination of the foregoing.
Alternatively, the Option may be exercised, in whole or in part, by
delivering a properly executed exercise notice together with irrevocable
instructions to a broker to deliver promptly to the Company the amount of
sale or loan proceeds necessary to pay the purchase price, and such other
documents as the Compensation Committee may require. Upon receipt of
payment, the Company shall deliver to the Executive (or to any other person
entitled to exercise the Option) a certificate or certificates for such
Shares. If certificates representing shares of Common Stock are used to pay
all or part of the purchase price of the Option, separate certificates
shall be delivered by the Company representing the same number of shares as
each certificate so used and an additional certificate shall be delivered
representing the additional shares to which the Executive is entitled as a
result of exercise of the Option.
6. The Option shall be exercised only with respect to full Shares; no
fractional Shares shall be issued.
7. As a condition to the issuance of Shares under the Option, the
Executive agrees to remit to the Company at the time of exercise any taxes
required to be withheld by the Company under the applicable laws or other
regulations of any governmental authority, whether federal, state of local,
and whether domestic or foreign. The Company shall promptly remit such
taxes to the applicable governmental authority.
8. If the Executive so requests in writing, shares purchased upon
exercise of the Option may be issued in the name of the Executive and
another person jointly with the right of survivorship, or in the name of a
revocable trust of which the Executive is the grantor.
9. The Option does not qualify as an incentive stock option under
Section 422 of the Internal Revenue Code.
10. This Option shall be binding upon and inure to the benefit of any
successor or assignee of the Company and to any executor, administrator,
legal representative, legatee, or distributee or transferee entitled by law
or the provisions of the Plan to the Executive's rights hereunder.
11. The Option is subject in all respects to the terms of the Plan,
the provisions of which are incorporated in this Agreement by reference.
12. This Agreement is entered into, and shall be construed and
enforced, under the laws of the State of New York, and shall not be
modified except by written agreement signed by the parties hereto.
13. This Agreement supercedes any prior agreements regarding the
Closing Price Option, including the Stock Option Agreement between Hanover
Direct, Inc. and Kaul dated August 23, 1996 concerning the subject matter
hereof.
E-3
72
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
HANOVER DIRECT, INC.
By: /s/ Brian C. Harriss
------------------------------------
Its: Senior Vice President
------------------------------------
/s/ RAKESH K. KAUL
--------------------------------------
Rakesh K. Kaul
E-4
73
HANOVER DIRECT, INC.
PROXY FOR COMMON STOCKHOLDERS FOR
THE ANNUAL MEETING OF SHAREHOLDERSSTOCKHOLDERS
TO BE HELD ON THURSDAY, MAY 4, 200015, 2003
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned common stockholder of Hanover Direct, Inc. (the "Company")
hereby appoints each of Edward M. Lambert and Brian C. Harriss, attorneys and
Curt B. Johnson, andproxies, each of them, proxies of the undersigned, with full power of substitution, to represent the undersigned and
vote all shares of Common Stockthe common stock of Hanover Direct, Inc., a Delaware corporation
("Hanover"),the Company which the undersigned is
entitled to vote, with all powers the undersigned would possess if personally
present, at the Annual Meeting of ShareholdersStockholders of Hanoverthe Company to be held at the
Hotel Intercontinental, located at
111 East 48th Street,Sheraton Suites on the Hudson, 500 Harbor Boulevard, Weehawken, New York, New York 10017,Jersey 07087
on Thursday, May 4, 2000,15, 2003 at 9:30 a.m. (local time), orlocal time, and at any adjournmentadjournments
thereof, with allrespect to the powersproposals hereinafter set forth and upon such other
matters as may properly come before the Annual Meeting and any adjournments
thereof.
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned would have if personally present, on the following matters:
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER, IF NO DIRECTION IS INDICATED,common stockholder.
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED "FOR" ITEMS 1, 2, 3, 4, 5, 6THE ELECTION OF ALL
NOMINEES AS DIRECTORS OF THE COMPANY, "FOR" THE DELEGATION TO THE AUDIT
COMMITTEE OF THE BOARD OF DIRECTORS OF AUTHORITY TO SELECT AUDITORS OF THE
COMPANY AND 7 ANDIN THE DISCRETION OF THE PROXIES WILL USE THEIR
DISCRETION WITH RESPECT TO ALL OTHER MATTERS
WHICH MAY PROPERLY COME BEFORE THE ANNUAL MEETING AND ANY MATTERS REFERRED TO IN ITEM 8.ADJOURNMENTS THEREOF.
THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF THE ACCOMPANYING NOTICE OF ANNUAL
MEETING AND PROXY STATEMENT.
IMPORTANT: SIGNATURE AND DATE REQUIRED ON REVERSE SIDE
B-1
74
--------------------------------
WHEN PROXY IS OKAYED
PLEASE SIGN, & DATE ITAND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR
VOTE IN BLUE OR BLACK INK AS SHOWN HERE [X]
1. ELECTION OF DIRECTORS
[ ] FOR ALL NOMINEES
[ ] WITHHOLD AUTHORITY FOR ALL NOMINEES
[ ] FOR ALL EXCEPT (See instructions below)
NOMINEES: o Thomas C. Shull
o E. Pendleton James
o Kenneth J. Krushel
o Robert H. Masson
o Basil P. Regan
INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the circle next to each nominee you wish to
withhold, as shown here: -
2. DELEGATE TO THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS AUTHORITY TO
SELECT THE COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING
DECEMBER 27, 2003 FROM AMONGST ESTABLISHED NATIONAL AUDIT FIRMS.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. IN THEIR DISCRETION, THE ABOVE Please date, sign and mail your
proxy card back as soon as possible!NAMED PROXIES ARE AUTHORIZED TO VOTE IN
ACCORDANCE WITH THEIR OWN JUDGMENT ON SUCH OTHER BUSINESS AS MAY PROPERLY
COME BEFORE THE MEETING.
The undersigned herby acknowledges receipt of a copy of the accompanying Notice
of Annual Meeting of Shareholders
HANOVER DIRECT, INC.
May 4, 2000
Please Detach and Mail in the Envelope Provided
- ------------------------------------------------------------------------------------------------------------------------------------
A [X] Please mark your
votes as in this
example.
For all WITHHOLD
nominees AUTHORITY
listed at to vote
the right for all
(except as nominees Nominees: Ralph Destino
marked listed at J. David Hakman
to the right Rakesh K. Kaul FOR AGAINST ABSTAIN
contrary) June R. Klein 2. Ratification of the 1999
1. ELECTION Kenneth Krushel Stock Option Plan for [ ] [ ] [ ]
OF [ ] [ ] Theodore H. Kruttschnitt Directors.
DIRECTORS Shalesh J. Mehta
Jan P. du Plessis 3. Ratification of the 2000 [ ] [ ] [ ]
(INSTRUCTION: To withhold authority Alan G. Quasha Management Stock Option
to vote for any individual nominee, Basil P. Regan Plan.
write that nominee's name in the Howard M.S. Tanner
space provided below.) Robert F. Wright 4. Ratification of the 2000
Short-Term Incentive Plan [ ] [ ] [ ]
- ------------------------------------------ for Rakesh K. Kaul.
5. Ratification of the 2000
Long-Term Incentive Plan
for Rakesh K. Kaul. [ ] [ ] [ ]
6. Ratification of an amendment
to and restatement of the Stock
Option Agreement, dated
August 23, 1998, as amended,
with Rakesh K. Kaul. [ ] [ ] [ ]
7. Ratification of the appointment
by the Board of Directors of
Hanover, of Arthur Andersen
LLP as Hanover's Independent
auditors for the fiscal year
ending December 30, 2000. [ ] [ ] [ ]
8. In their discretion, the above named proxies
are authorized to vote in accordance with
their own judgment upon such other business as
may properly come before the meeting.
Signature(s): Dated: , 2000 The undersigned hereby acknowledges receipt of a
---------------------------------- ----------- copy of the accompanying Notice of Annual Meeting
Signature if held jointly Dated: , 2000 of Shareholders and Proxy Statement and hereby
---------------------- ----------- revokes any Proxy or Proxies heretofore given. You
Note: Please complete, date and sign exactly as name appears may strike out the persons named as proxies and
hereon.Stockholders and Proxy Statement and hereby revokes any
Proxy or Proxies heretofore given. You may strike out the persons named as
proxies and designate a person of your choice, and may send this Proxy directly
to such person.
To change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that changes
to the registered name(s) on the account may not be submitted via this
method. [ ]
--------------------------------------
Signature of Shareholder
Date: ----------
--------------------------------------
Signature of Shareholder
Date: ----------
B-2
NOTE: Please sign exactly as your name or names appear on this Proxy. When signing as attorney, administrator, designate a person of your choice, and may send
executor, guardian, trustee or corporate official, this Proxy directly to such person.
please add your title. If
shares are held jointly, each holder should sign.
75
ANNUAL MEETING OF SHAREHOLDERS OF
HANOVER DIRECT, INC.
MAY 4, 2000
---------------------------
PROXY VOTING INSTRUCTIONS
---------------------------
TO VOTE BY MAIL
Please date,When signing as executor,
administrator, attorney, trustee or guardian, please give full title as such. If
the signer is a corporation, please sign and mail your proxy cardfull corporate name by duly authorized
officer, giving full title as such. If signer is a partnership, please sign in
the envelope provided as soon as
possible.
TO VOTE BY TELEPHONE (TOUCH-TONE PHONE ONLY)
Please call toll-free 1-800-PROXIES and follow the instructions. Have your
control number and the proxy card available when you call.
TO VOTE BY INTERNET
Please access the web page at "www.voteproxy.com" and follow the on-screen
instructions. Have your control number available when you access the web page.
---------------------------
YOUR CONTROL NUMBER IS
---------------------------
Please Detach and Mail in the Envelope Provided
- ------------------------------------------------------------------------------------------------------------------------------------
A [X] Please mark your
votes as in this
example.
For all WITHHOLD
nominees AUTHORITY
listed at to vote
the right for all
(except as nominees Nominees: Ralph Destino
marked listed at J. David Hakman FOR AGAINST ABSTAIN
to the right Rakesh K. Kaul
contrary) June R. Klein 2. Ratification of the 1999
1. ELECTION Kenneth Krushel Stock Option Plan for [ ] [ ] [ ]
OF [ ] [ ] Theodore H. Kruttschnitt Directors.
DIRECTORS Shallesh J. Mehta
Jan P. du Plessis 3. Ratification of the 2000 [ ] [ ] [ ]
(INSTRUCTION: To withhold authority Alan G. Quasha Management Stock Option
to vote for any individual nominee, Basil P. Regan Plan.
write that nominee's name in the Howard M.S. Tanner
space provided below.) Robert F. Wright 4. Ratification of the 2000
Short-Term Incentive Plan [ ] [ ] [ ]
- ------------------------------------------ for Rakesh K. Kaul.
5. Ratification of the 2000
Long-Term Incentive Plan
for Rakesh K. Kaul. [ ] [ ] [ ]
6. Ratification of an amendment
to and restatement of the Stock
Option Agreement, dated
August 23, 1998, as amended,
with Rakesh K. Kaul. [ ] [ ] [ ]
7. Ratification of the appointment
by the Board of Directors of
Hanover, of Arthur Andersen
LLP as Hanover's Independent
auditors for the fiscal year
ending December 30, 2000. [ ] [ ] [ ]
8. In their discretion, the above named proxies
are authorized to vote in accordance with
their own judgment upon such other business as
may properly come before the meeting.
Signature(s): Dated: , 2000 The undersigned hereby acknowledges receipt of a
---------------------------------- ----------- copy of the accompanying Notice of Annual Meeting
Signature if held jointly Dated: , 2000 of Shareholders and Proxy Statement and hereby
---------------------- ----------- revokes any Proxy or Proxies heretofore given. You
Note: Please complete, date and sign exactly as name appears may strike out the persons named as proxies and
hereon. When signing as attorney, administrator, designate a person of your choice, and may send
executor, guardian, trustee or corporate official, this Proxy directly to such person.
please add your title. If shares are held jointly,
each holder should sign.
partnership name by authorized person.
B-3