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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<Table>
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</Table>
HANOVER DIRECT, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
HANOVER DIRECT, INC.
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1. Title of each class of securities to which transaction applies: ........
2. Aggregate number of securities to which transaction applies: ...........
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act
Rule 0-11 (set forth the amount on which the filing fee is calculated and
state how it
was determined): .........................................................
4. Proposed maximum aggregate value of transaction: .......................
5. Total fee paid: ........................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration number, or the
form or schedule and the date of its filing.
1. Amount previously paid: ................................................
2. Form, Schedule or Registration Statement No.: ..........................
3. Filing Party: ..........................................................
4. Date Filed: ............................................................
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HANOVER DIRECT, INC.
115 RIVER ROAD, BUILDING 10
EDGEWATER, NEW JERSEY 07020
(201) 863-7300
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 16, 2002
Dear Stockholders:
We will hold the 2002 Annual Meeting of Stockholders of Hanover Direct,
Inc., a Delaware corporation (the "Company"), at the Sheraton Suites on the
Hudson, 500 Harbor Boulevard, Weehawken, New Jersey 07087 on Thursday, May 16,
2002 at 9:30 a.m., local time. The meeting's purpose is to:
1. Elect 5 directors;
2. Delegate to the Board of Directors authority to select the Company's
independent auditors for the fiscal year ending December 28, 2002, after
review by the Audit Committee of the Board of Directors, from amongst
established national audit firms;
3. Ratify the 2002 Stock Option Plan for Directors; and
4. 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
stockholder 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 (the
"Series B Preferred Stock" and, together with the Common Stock, the "Voting
Stock") at the close of business on Monday, March 25, 2002.
Along with the attached Proxy Statement, we are also enclosing a copy of
the Company's 2001 Annual Report to Stockholders, which includes our financial
statements.
All stockholders of record of Voting Stock are cordially invited to attend.
Whether or not you expect to attend the Annual Meeting, please vote.
Stockholders of record of the Company's Common Stock may vote their shares by
completing and returning the enclosed proxy card or may vote via the Internet or
by telephone. Instructions for shareholders of Common Stock to vote via the
Internet or by telephone are in the enclosed 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 stockholder 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 Hanover Direct,
Inc., 1500 Harbor Boulevard, Weehawken, New Jersey 07087, a complete list of the
stockholders entitled to vote at the Annual Meeting, arranged in alphabetical
order.
PLEASE VOTE -- YOUR VOTE IS IMPORTANT
Charles F. Messina
Secretary
April 12, 2002
HANOVER DIRECT, INC.
115 RIVER ROAD, BUILDING 10
EDGEWATER, NEW JERSEY 07020
(201) 863-7300
PROXY STATEMENT FOR THE 2002 ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON MAY 16, 2002
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
<Table>
ANNUAL MEETING: May 16, 2002 Sheraton Suites on the Hudson
9:30 a.m., local time 500 Harbor Boulevard
Weehawken, New Jersey 07087
RECORD DATE: Close of business on Monday, March 25, 2002. If you were a stockholder at
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 Annual
Meeting. On the record date, we had 138,215,800 shares of our Common Stock
outstanding and 1,622,111 shares of Series B Preferred Stock outstanding.
As of March 25, 2002, Richemont Finance S.A., a Luxembourg company
("Richemont"), beneficially owned 28,691,888 shares of Common Stock
(approximately 20.8% of the outstanding Common Stock) and 1,622,111 shares
of Series B Preferred Stock, collectively representing approximately 29.1%
of the combined voting power of the Voting Stock.
MAILING DATE: On or about Friday, April 12, 2002.
AGENDA: 1. Elect 5 directors.
2. Delegate to the Board of Directors authority to select the Company's
independent auditors for the fiscal year ending December 28, 2002,
after review by the Audit Committee of the Board of Directors, from
amongst established national audit firms.
3. Ratify the 2002 Stock Option Plan for Directors.
4. Any other proper business.
</Table>
<Table>
VOTE REQUIRED: Proposal 1: The affirmative vote of the holders of a
Elect 5 directors 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. So, if you do not vote for a
nominee, your vote will not count either for or
against the 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 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: The affirmative vote of the holders of the
Ratify the 2002 Stock majority of the combined voting power of the
Option Plan for Voting Stock voted at the Annual Meeting, whether
Directors in person or by proxy, and whether by mail,
Internet or telephone, is required to ratify the
plan. 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.
BROKER NON-VOTES: If your broker does not vote on any of the 3 proposals, it will have no
effect on the votes with respect to any of the 3 proposals.
PROXIES: Please vote; your vote is important. Prompt return of your proxy will help
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 Internet 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 of Common Stock
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.
</Table>
2
<Table>
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 delegation of authority for the appointment of the auditors and "FOR"
the 2002 Stock Option Plan for Directors.
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: Charles F. Messina, Secretary, at Hanover Direct, Inc., 115
River Road, Edgewater, New Jersey 07020;
- deliver another signed proxy, dated later than this proxy, to Mr.
Messina, 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. Messina, 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 The Company will pay all costs, estimated at $45,000 in the aggregate, of
SOLICITATION: soliciting these proxies. Although we are mailing these proxy materials,
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.
</Table>
3
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.
THOMAS C. SHULL...........
AGE 50 President and Chief Executive Officer and a member of
the Board of Directors since December 5, 2000, and
Chairman of the Board since January 10, 2002. In
1990, Mr. Shull co-founded Meridian Ventures, a
venture management and turnaround firm presently
based in Connecticut, and has served as chief
executive officer since its inception. From 1997 to
1999, he served as President and Chief Executive
Officer of Barneys New York, a leading luxury
retailer, where he led them out of bankruptcy. From
1992 to 1994, Mr. Shull was Executive Vice President
of the R.H. Macy Company, Inc., where he was
responsible for human resources, information
technology, business development, strategic planning
and merchandise distribution and led the merger
negotiations with Federated Department Stores. Prior
to that, he served as a consultant with McKinsey &
Company and in the early 1980s as a member of the
National Security Council Staff in the Reagan White
House.
EDWARD M. LAMBERT.........
AGE 41 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
Tecstar, Inc., a space systems manufacturer. Mr.
Lambert is a graduate of the California Institute of
Technology (Cal Tech) and holds a M.B.A. from the
Harvard Business School.
MICHAEL D. CONTINO........
AGE 41 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. 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.
4
CHARLES F. MESSINA........
AGE 58 Executive Vice President, Chief Administrative
Officer and Secretary since April 25, 2001. Group
President since November 2001. From December 1999
until December 2000, Mr. Messina served as the Vice
President of Human Resources for Hanover Brands, Inc.
Mr. Messina joined the Company in August 1999. Before
joining the Company, Mr. Messina was the Vice
President for Specialty Retail, International
Sourcing and Human Resources with Meldisco, a
division of the Melville Corporation, and, prior to
that, Mr. Messina served as the Vice President of
Human Resources for the Children's Place.
WILLIAM C. KINGSFORD......
AGE 55 Vice President and Corporate Controller since May
1997. Prior to May 1997, Mr. Kingsford was Vice
President and Chief Internal Auditor at Melville
Corporation.
FRANK J. LENGERS..........
AGE 45 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 53 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.
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 highly compensated executive officers who were serving as executive
officers at the end of the Company's 2001 fiscal year.
<Table>
<Caption>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
NAME AND FISCAL ---------------------- OTHER ANNUAL OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARDED (#) COMPENSATION ($)
------------------ ------ ---------- --------- ---------------- ------------ ----------------
Thomas C. Shull(1)....... 2001 $900,000(2) $600,000(2) $180,000(7) 500,000(11) --
President and Chief 2000 $ 75,000(2) -- $ 15,000(7) 2,700,000(12) --
Executive Officer 1999 -- -- -- -- --
Brian C. Harriss(1)...... 2001 $335,192 $375,000(3) $ 12,000(8) -- $4,089(16)
Executive Vice President 2000 $296,154 $129,500(3) $ 12,000(8) 100,000(13) $3,421(17)
and Chief Financial 1999 $140,000 -- $ 6,000(8) 400,000(14) $ 88(18)
Officer
Michael D. Contino(1).... 2001 $317,115 $350,000(4) $ 12,000(9) -- $3,876(19)
Executive Vice President 2000 $243,269 $124,692(4) $ 12,000(9) 150,000(13) $3,253(20)
and
Chief Information Officer 1999 $197,533 $182,718(4) $ 12,000(9) 100,000(15) $3,080(21)
Charles F. Messina(1).... 2001 $233,076 $300,000(5) $ 12,000(10) -- $4,080(22)
Executive Vice President, 2000 $179,438 $ 75,273(5) -- 100,000(13) $1,773(23)
Chief Administrative 1999 -- -- -- -- --
Officer and Secretary
William C. 2001 $168,000 $ 21,156(6) -- -- $1,340(24)
Kingsford(1)...........
Vice President and 2000 $166,260 $ 34,273(6) -- 41,000(13) $1,040(25)
Controller 1999 $155,000 $ 67,813(6) -- -- $ 565(26)
</Table>
- ---------------
(1) Thomas C. Shull was named President and Chief Executive Officer and was
elected to the Company's Board of Directors on December 5, 2000. On April
25, 2001, Brian C. Harriss became Executive Vice President and Chief
Financial Officer of the Company, Michael D. Contino became Executive Vice
President and Chief Operating Officer of the Company, Charles F. Messina
became Executive Vice President, Chief Administrative Officer and Secretary
of the Company, and William C. Kingsford became Vice President and
Controller of the Company. Effective January 28, 2002, Mr. Harriss resigned
as Executive Vice President and Chief Financial Officer of the Company.
(2) Paid to Meridian Ventures, LLC, a limited liability company controlled by
Mr. Shull ("Meridian"), in consideration for providing the services of Mr.
Shull pursuant to the provisions of a Services 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 Service Agreement dated as of December 14, 2001, as amended effective
April 12, 2002 (the "December 2001 Services Agreement" and, together with
the December 2000 Services Agreement and the August 2001 Services
Agreement, the "Services Agreements"), each among Meridian, the Company and
Mr. Shull. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements."
(3) Includes the following payments made by the Company on behalf of Mr.
Harriss: for fiscal 2001, a $375,000 2001 performance bonus paid in 2002;
and for fiscal 2000, a $129,500 2000 performance bonus paid in 2001.
6
(4) Includes the following payments made by the Company on behalf of Mr.
Contino: for fiscal year 2001, a $350,000 2001 performance bonus paid in
2002; for fiscal 2000, a $124,692 2000 performance bonus paid in 2001; and
for fiscal 1999, a $182,718 1999 performance bonus paid in 2000.
(5) Includes the following payments made by the Company on behalf of Mr.
Messina: for fiscal year 2001, a $300,000 2001 performance bonus paid in
2002; and for fiscal 2000, a $72,273 2000 performance bonus paid in 2001.
(6) Includes the following payments made by the Company on behalf of Mr.
Kingsford: for fiscal year 2001, a $21,156 2001 performance bonus paid in
2002; for fiscal 2000, a $34,273 2000 performance bonus paid in 2001; and
for fiscal 1999, a $67,813 performance bonus paid in 2000.
(7) 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."
(8) Includes the following payments made by the Company on behalf of Mr.
Harriss: $12,000 in car allowance and related benefits in 2001; $12,000 in
car allowance and related benefits in 2000; and $6,000 in car allowance and
related benefits in 1999.
(9) Includes the following payments made by the Company on behalf of Mr.
Contino: $12,000 in car allowance and related benefits in 2001; $12,000 in
car allowance and related benefits in 2000; and $12,000 in car allowance
and related benefits in 1999.
(10) Includes the following payments made by the Company on behalf of Mr.
Messina: $12,000 in car allowance and related benefits in 2001.
(11) Granted pursuant to the December 2001 Services Agreement and allocated to
Mr. Shull. See "Employment Contracts, Termination of Employment 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-Control Arrangements."
(13) Issued by the Company pursuant to the Company's 2000 Management Stock
Option Plan. See "Report of the Stock Option and Executive Compensation
Committee on Executive Compensation -- 2000 Management Stock Option Plan."
(14) Issued by the Company pursuant to the Company's 1996 Stock Option Plan. See
"Report of the Stock Option and Executive Compensation Committee on
Executive Compensation -- 1996 Stock Option Plan."
(15) These options were granted effective November 3, 1999 and become
exercisable after four years.
(16) Includes the following payments made by the Company on behalf of Mr.
Harriss in 2001: $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.
(17) 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; $438 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(18) Includes the following payments made by the Company on behalf of Mr.
Harriss in 1999: $37 in long-term disability premiums; $41 in term life
insurance premiums; and $10 of accidental death insurance premiums.
7
(19) Includes the following payments made by the Company on behalf of Mr.
Contino in 2001: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $722 in long-term disability premiums; $281 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(20) Includes the following payments made by the Company on behalf of Mr.
Contino in 2000: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $110 in long-term disability premiums; $270 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(21) Includes the following payments made by the Company on behalf of Mr.
Contino in 1999: $2,666 in matching contributions under 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.
(22) Includes the following payments made by the Company on behalf of Mr.
Messina in 2001: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $530 in long-term disability premiums; $677 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(23) Includes the following payments made by the Company on behalf of Mr.
Messina in 2000: $1,237 in matching contributions under the Company's
401(k) Savings Plan; and $536 in long-term disability premiums.
(24) Includes the following payments made by the Company on behalf of Mr.
Kingsford in 2001: $237 in matching contributions under the Company's
401(k) Savings Plan; $386 in long-term disability premiums; $677 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(25) Includes the following payments made by the Company on behalf of Mr.
Kingsford in 2000: $764 in matching contributions under the Company's
401(k) Savings Plan; and $276 in term life insurance premiums.
(26) Includes the following payments made by the Company on behalf of Mr.
Kingsford in 1999: $139 in matching contributions under the Company's
401(k) Savings Plan; and $426 in term life insurance premiums.
8
STOCK OPTIONS:
The following table contains information concerning options granted to the
Chief Executive Officer and our four next highly compensated executive officers
who were serving as executive officers at the end of fiscal 2001.
OPTION GRANTS IN FISCAL 2001
<Table>
<Caption>
NUMBER OF
SHARES PERCENT OF
UNDERLYING TOTAL OPTIONS
OPTIONS GRANTED TO
GRANTED IN EMPLOYEES IN EXPIRATION EXERCISE GRANT VALUE
NAME FISCAL YEAR FISCAL YEAR (%) DATE PRICE ($) DATE ($)
---- ----------- --------------- ---------- --------- -----------
Thomas C. Shull(1).............. 500,000 50% (2) $0.30 $ 81,000(3)
Brian C. Harriss................ 0 0% -- -- --
Michael D. Contino.............. 0 0% -- -- --
Charles F. Messina.............. 0 0% -- -- --
William C. Kingsford............ 0 0% -- -- --
</Table>
- ---------------
(1) Stock options granted to Thomas C. Shull during fiscal 2001 are subject
to the terms and conditions of the December 2001 Services Agreement. See
"Employment Contracts, Termination of Employment and Change-in-Control
Arrangements."
(2) These options expire on the second anniversary of the termination of
the December 2001 Services Agreement. See "Employment Contracts, Termination of
Employment and Change-in-Control Arrangements."
(3) The fair value of each option granted to Mr. Shull during fiscal 2001
is estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions: risk free interest rate of 2.82%, expected lives
of 1.25 years, expected volatility of 129.73%, and no expected dividends.
The following table contains information concerning the fiscal 2001
year-end values of all options granted to the Chief Executive Officer and our
four next highly compensated executive officers who were serving as executive
officers at the end of fiscal 2001.
FISCAL YEAR-END OPTION VALUES
<Table>
<Caption>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END (#) FISCAL YEAR-END (#)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
Thomas C. Shull(1)........ 0 $0 1,350,000 1,850,000 $135,000 $160,000
Brian C. Harriss(2)....... 0 $0 291,667 208,333 0 0
Michael D. Contino(2)..... 0 $0 287,500 162,500 0 0
Charles F. Messina(2)..... 0 $0 25,000 75,000 0 0
William C. Kingsford(2)... 0 $0 79,367 30,750 0 0
</Table>
- ---------------
(1) 2,700,000 options were awarded to Mr. Shull under the December 2000 Services
Agreement. Of such options, 1,350,000 are exercisable and the remaining
1,350,000 are exercisable on June 30, 2002, or
9
earlier under certain circumstances. These options expire on the second
anniversary of the termination of the December 2001 Services Agreement. An
additional 500,000 options were awarded to Mr. Shull under the December 2001
Services Agreement. These options are exercisable on March 31, 2003, or
earlier under certain circumstances, and expire on the third anniversary of
the termination of the December 2001 Services Agreement.
(2) 200,000 options for Mr. Contino, 400,000 options for Mr. Harriss and 69,117
options for Mr. Kingsford 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,
150,000 options for Mr. Contino, 100,000 options for Mr. Messina, 100,000
options for Mr. Harriss and 41,000 options for Mr. Kingsford represent
options granted pursuant to the 2000 Management Stock Option 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 exercisable after four years.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS:
December 2000 Services Agreement. Effective December 5, 2000, Thomas C.
Shull, Meridian Ventures, LLC, a limited liability company controlled by Mr.
Shull ("Meridian"), and the Company entered into a Services Agreement (the
"December 2000 Services Agreement"). The December 2000 Services Agreement was
replaced by a subsequent services agreement, dated as of August 1, 2001 (the
"August 2001 Services Agreement"), among Mr. Shull, Meridian and the Company,
and a Services Agreement, dated as of December 14, 2001 (the "December 2001
Services Agreement"), among Mr. Shull, Meridian, and the Company, as described
below. Pursuant to the December 2000 Services Agreement, the Company granted Mr.
Shull and the consultants stock options (the "Meridian Options") for an
aggregate four million (4,000,000) shares of the Company's Common Stock.
Hanover Direct, Inc. Key Executive Eighteen-Month Compensation Continuation
Plan. Effective April 27, 2001, the Company terminated the Hanover Direct, Inc.
Key Executive Thirty-Six Month Compensation Continuation Plan and the Hanover
Direct, Inc. Key Executive Twenty-Four Month Compensation Continuation Plan.
Effective April 27, 2001, the Company established the Hanover Direct, Inc. Key
Executive Eighteen Month Compensation Continuation Plan (the "Executive Plan")
for its Chief Executive Officer, corporate executive vice presidents, corporate
senior vice presidents, strategic unit presidents, and other employees selected
by its Chief Executive Officer. The purpose of the Executive Plan is to attract
and retain key management personnel by reducing uncertainty and providing
greater personal security in the event of a Change of Control. For purposes of
the Executive Plan, a "Change of Control" will occur: (i) when any person
becomes, through an acquisition, the beneficial owner of shares of the Company
having at least 50% of the total number of votes that may be cast for the
election of directors of the Company (the "Voting Shares"); provided, however,
that the following acquisitions shall not constitute a Change of Control: (a) if
a person owns less than 50% of the voting power of the Company and that person's
ownership increases above 50% solely by virtue of an acquisition of stock by the
Company, then no Change of Control will have occurred unless and until that
person subsequently acquires one or more additional shares representing voting
power of the Company; or (b) any acquisition by a person who as of the date of
the establishment of the Executive Plan owned at least 33% of the Voting Shares;
(ii)(a) notwithstanding the foregoing, a Change of Control will occur when the
stockholders 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 or series of sales since April 27,
2001 involving an aggregate of 50% or more of the market value of the Company's
assets
10
(for this purpose, such 50% amount is deemed to be $107.6 million) (an "Asset
Sale"); or (III) a complete liquidation or dissolution of the Company; (b)
notwithstanding (ii)(a), stockholder 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 (other than an Asset Sale) immediately following which the
stockholders of the Company immediately prior to the Transaction continue to
have a majority of the voting power in the resulting entity; (iii) when, within
any 24 month period, persons who were directors of the Company (each, a
"Director") immediately before the beginning of such period (the "Incumbent
Directors") cease (for any reason other than death or disability) to constitute
at least a majority of the Board of Directors or the board of directors of any
successor to the Company (For purposes of (iii), any Director who was not a
Director as of the effective date of the Executive Plan will be deemed to be an
Incumbent Director if such Director was elected to the Board of Directors by, or
on the recommendation of, or with the approval of, at least a majority of the
members of the Board of Directors or the nominating committee who, at the time
of the vote, qualified as Incumbent Directors either actually or by prior
operation of (iii), and any persons (and their successors from time to time) who
are designated by a holder of 33% or more of the Voting Shares to stand for
election and serve as Directors in lieu of other such designees serving as
Directors on the effective date of the Executive Plan shall be considered
Incumbent Directors. Notwithstanding the foregoing, any director elected to the
Board of Directors to avoid or settle a threatened or actual proxy contest shall
not, under any circumstances, be deemed to be an Incumbent Director); or (iv)
when the Company sells, assigns or transfers more than 50% of its interest in,
or the assets of, one or more of its subsidiaries (each, a "Sold Subsidiary"
and, collectively, the "Sold Subsidiaries"); provided, however, that such a
sale, assignment or transfer will constitute a Change of Control only for: (a)
the Executive Plan participants who are employees of that Sold Subsidiary; and
(b) the Executive Plan participants who are employees of a direct or indirect
parent company of one or more Sold Subsidiaries, and then only if: (I) the gross
assets of such parent company's Sold Subsidiaries constitute more than 50% of
the gross assets of such parent company (calculated on a consolidated basis with
the direct and indirect subsidiaries of such parent 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
(iv), a Transaction shall be deemed to involve the sale of more than 50% of a
company's assets if: (a) the gross assets being sold constitute more than 50% of
the gross assets of the Company as stated on the most recent balance sheet of
the Company; (b) the property, plant and equipment being sold constitute more
than 50% of the property, plant and equipment of the Company as stated on the
most recent balance sheet of the Company; or (c) in the case of a
publicly-traded company, the ratio (as of the date a binding agreement for the
sale is entered) of (x) the capitalization (based on the sale price) of the
division, subsidiary or business unit being sold, to (y) the market
capitalization of the Company, is greater than 0.50. For purposes of this (iv),
no Change of Control will be deemed to have occurred if, immediately following a
sale, assignment or transfer by the Company of more than 50% of its interest in,
or the assets of, a Sold Subsidiary, any stockholder of the Company owning 33%
or more of the voting power of the Company immediately prior to such
transaction, owns no less than the equivalent percentage of the voting power of
the Sold Subsidiary.)
11
Under the Executive Plan, an Executive Plan participant shall be entitled
to Change of Control Benefits under the Executive Plan solely if there occurs a
Change of Control and thereafter the Company terminates his/her employment other
than For Cause (as defined in the Executive Plan) or the participant voluntarily
terminates his/her employment with the Company For Good Reason (as defined in
the Executive Plan), in either case, solely during the 2-year period immediately
following the Change of Control. A participant will not be entitled to Change of
Control Benefits under the Executive Plan if: (i) he/she voluntarily terminates
his/her employment with the Company or has his/her employment with the Company
terminated by the Company, in either case, prior to a Change of Control, (ii)
he/she voluntarily terminates employment with the Company following a Change of
Control but other than For Good Reason, (iii) he/she is terminated by the
Company following a Change of Control For Cause, (iv) has his/her employment
with the Company terminated solely on account of his/her death, (v) he/she
voluntarily or involuntarily terminates his/her employment with the Company
following a Change of Control as a result of his/her Disability (as defined in
the Executive Plan), or (vi) his/her employment with the Company is terminated
by the Company upon or following a Change of Control but where he/she receives
an offer of comparable employment, regardless of whether the participant accepts
the offer of comparable employment.
The Change of Control Benefits under the Executive Plan are as follows: (i)
an amount equal to 18 months of the participant's annualized base salary; (ii)
an amount equal to the product of 18 multiplied by the applicable monthly
premium that would be charged by the Company for COBRA continuation coverage for
the participant, the participant's spouse and the dependents of the participant
under the Company's group health plan in which the participant was participating
and with the coverage elected by the participant, in each case immediately prior
to the time of the participant's termination of employment with the Company;
(iii) an amount equal to 18 months of the participant's car allowance then in
effect as of the date of the termination of the participant's employment with
the Company; and (iv) an amount equal to the cost of 12 months of
executive-level outplacement services at a major outplacement services firm.
Transaction Bonus Letters. During May 2001, each of Charles F. Messina,
Thomas C. Shull, Brian C. Harriss and Michael D. Contino (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"). The Company has 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. The
Transaction Bonus Letters, other than with respect to Mr. Harriss, 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
12
offset against the December 2000 flat fee provided for in the December 2000
Services Agreement and shall be payable at such times and in such amounts as
provided in the Executive Plan rather than in a lump sum payable within five
business days after the termination date of the December 2000 Services Agreement
as contemplated by the December 2000 Services Agreement). For purposes of the
change in control benefits under the Executive Plan and the Letter Agreement,
Mr. Shull's annualized base salary is $600,000. In addition to the benefits
provided by the December 2000 Services Agreement, Mr. Shull and those persons
named in the December 2000 Services Agreement shall also be entitled to the
optional cash out of stock options as provided in the Executive Plan. Under the
Letter Agreement, Mr. Shull is also entitled to payment of one year annual base
salary in the event he is terminated without cause during any period of his
continued employment as the Chief Executive Officer of the Company following the
termination of the December 2000 Services Agreement. The participation and
benefits to which Mr. Shull is entitled under the Executive Plan shall also
survive the termination of the December 2000 Services Agreement pursuant to the
terms thereof in the event that Mr. Shull is still employed as the Chief
Executive Officer of the Company and is a Participant under the Executive Plan.
Should the Executive Plan no longer be in effect or Mr. Shull no longer be a
Participant thereunder, Meridian and Mr. Shull shall continue to be entitled to
the compensation contemplated by the December 2000 Services Agreement.
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 which was to expire in December 2001. The
August 2001 Services Agreement was replaced by the December 2001 Services
Agreement, as described below.
December 2001 Services Agreement. As of December 14, 2001, Mr. Shull,
Meridian and the Company entered into the December 2001 Services Agreement,
which replaced the August 2001 Services Agreement which was to expire in June
30, 2002. The December 2001 Services Agreement was amended on April 12, 2002.
Under the December 2001 Services Agreement, Meridian will provide for the
benefit of the Company the services of Mr. Shull. The term of the December 2001
Services Agreement, and the term for the services of Mr. Shull began on December
14, 2001 and will terminate on March 31, 2003 (the "December 2001 Agreement
Term"). On or prior to February 1, 2003, the Company may extend the December
2001 Agreement Term on a day to day basis upon written notice to Mr. Shull, and
thereafter, either Mr. Shull or the Company may terminate the December 2001
Services Agreement and the December 2001 Agreement Term with 60 days notice to
the other.
Under the December 2001 Services Agreement, Meridian is to receive from the
Company $75,000 per month for the services of Mr. Shull (the "December 2001 Base
Fee"). The Company also is required to pay Meridian $15,000 per month during the
December 2001 Agreement Term (the "December 2001 Flat Fee"). The Company also
reimburses Mr. Shull for reasonable out-of-pocket expenses incurred on behalf of
the Company.
Under the December 2001 Services Agreement, the Company shall make a lump
sum cash payment of $450,000 to Meridian on June 30, 2002, provided the December
2001 Services Agreement is then in effect. This payment will be made by the end
of 2002.
Under the December 2001 Services Agreement, the Company guaranteed Mr.
Shull a target bonus for the Company's 2001 fiscal year pursuant to the
Company's 2001 Management Incentive Plan equal to $300,000, which was paid
during the first quarter of 2002. In addition, Mr. Shull has earned a maximum
bonus for the Company's 2001 fiscal year pursuant to the Company's 2001
Management Incentive Plan equal to $600,000 (including the above-described
target bonus). This payment will be made by the end of 2002.
13
Mr. Shull shall receive the same bonus amount for fiscal 2002 under the
Company's 2002 Management Incentive Plan as all other Class 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 Class 8 participants
thereunder.
The Company also acknowledged in the December 2001 Services Agreement that
it has extended the benefits of its Executive Plan, and its transaction bonus
program, to Mr. Shull.
Under the December 2001 Services Agreement, upon the closing of any
transaction which constitutes a Change of Control (as defined in the December
2001 Services Agreement), provided that Mr. Shull is then employed by the
Company, the Company shall make a lump sum cash payment to Meridian on the date
of such closing of $900,000 pursuant to the Executive Plan, $300,000 pursuant to
the Company's transaction bonus program and at least $300,000 in target bonus
(plus any amount of maximum bonus) payable pursuant to the Company's 2001
Management Incentive Plan. Any such lump sum payment would be in lieu of (i) any
cash payment under the December 2001 Services Agreement as a result of a
termination of the December 2001 Services Agreement 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 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 December 2001 Services
Agreement, such 50% amount shall be deemed to be $107.6 million), and (ii) the
aggregate amount of December 2001 Base Fees and December 2001 Flat Fees to which
Meridian would have otherwise been entitled through the end of the December 2001
Agreement Term.
Pursuant to the December 2001 Services Agreement, the Company has granted
to Mr. Shull and the Consultants options for an aggregate of 1,000,000 shares of
the Company's Common Stock with an exercise price equal to the closing price on
December 14, 2001 (the "2001 Options"). Edward M. Lambert, the Company's
Executive Vice President and Chief Financial Officer, was a Consultant at the
time of the December 2001 Services Agreement and was awarded 300,000 of the 2001
Options.
Under the December 2001 Services Agreement, additional amounts are payable
to Meridian by the Company under certain circumstances upon the termination of
the December 2001 Services Agreement. If the termination is on account of the
expiration of the December 2001 Agreement Term, Meridian shall be entitled to
receive a lump sum payment equal to $450,000 in severance pay and at least
$300,000 in target or maximum bonus pursuant to the Company's 2001 Management
Incentive Plan or 2002 Management Incentive Plan, as applicable. If the
termination is on account of the Company's material breach of the December 2001
Services Agreement or the Company's termination of the engagement of Meridian
and Mr. Shull where there has been no Willful Misconduct (as defined in the
December 2001 Services Agreement) or material breach thereof by either Mr. Shull
or Meridian, Meridian shall be entitled to receive (i) a lump sum payment equal
to the aggregate amount of December 2001 Base Fees and December 2001 Flat Fees
to which it would have otherwise been entitled through the end of the December
2001 Agreement Term, plus (ii) $600,000 in severance pay and at least $300,000
in target or maximum bonus pursuant to the Company's 2001 or 2002 Management
Incentive Plan, as applicable. 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 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 December 2001 Services Agreement, such 50%
amount shall be deemed to be $107.6 million) (an "Asset Sale") 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 Company's
Executive Plan shall not then be in effect, Meridian shall be entitled to
receive a lump sum payment equal to the aggregate amount of December 2001 Base
Fees and December 2001 Flat Fees to which it would have otherwise been entitled
through the end of the December 2001 Agreement Term. If the termination is on
14
account of the acquisition of the Company (whether by merger or the acquisition
of all of its outstanding capital stock) or the sale or 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 December 2001 Services 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 Company's Executive Plan shall
not then be in effect, Meridian shall be entitled to receive a lump sum payment
equal to the greater of the aggregate amount of December 2001 Base Fees and
December 2001 Flat Fees to which it would have otherwise been entitled through
the end of the December 2001 Agreement Term or $1,000,000. If the termination is
on account of an acquisition or sale of the Company (whether by merger or the
acquisition of all of its outstanding capital stock) or the sale or 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 December 2001 Services
Agreement, such 50% amount shall be deemed to be $107.6 million) and the
Company's Executive Plan shall then be in effect, Mr. Shull shall be entitled to
receive his benefit under the Company's Executive Plan plus a lump sum cash
payment on the date of closing of such sale or acquisition of $300,000 pursuant
to the Company's transaction bonus program and at least $300,000 in target bonus
(plus any amount of maximum bonus) payable pursuant to the Company's 2001
Management Incentive Plan or 2002 Management Incentive Plan, as applicable.
Under the December 2001 Services Agreement, the Company is required to
maintain directors' and officers' liability insurance during the December 2001
Agreement Term. The Company is also required to indemnify Meridian, Mr. Shull or
any member, officer or employee of, or consultant, contractor or subcontractor
to, Meridian who serves as a Consultant to the Company.
The Transaction Bonus Letter between the Company and Mr. Shull remains
valid and in effect, pursuant to which the Company shall pay Mr. Shull a lump
sum transaction bonus equal to $300,000 on the date of closing of any
transaction which constitutes a Change of Control (as defined in the Company's
Executive Plan) provided that he is actively employed by the Company on the date
the Change of Control occurs. Mr. Shull's voluntary termination or involuntary
termination for cause shall cause such transaction bonus to become null and
void.
STOCK OPTION AND EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION:
At various times during the fiscal year ended December 29, 2001, the Stock
Option and Executive Compensation Committee of the Board of Directors of the
Company consisted of Alan Grieve, Kenneth Krushel, Alan G. Quasha, Eloy Michotte
and Ralph Destino. 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 2001 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 member
of the Stock Option and Executive Compensation Committee. During the 2001 fiscal
year, no executive officer of the Company served as a director of another
entity, one of whose executive officers served as a member of the Stock Option
and Executive Compensation Committee. During the 2001 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 of the Company.
15
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 E. Pendleton James (Chairman), Kenneth
Krushel and Basil P. Regan, each an outside 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 2001 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 stockholders 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 stockholder 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 stockholder value
creation.
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. Shull's compensation
and other benefits are specified in the December 2001 Services Agreement which
was the product of arm's-length negotiations. See "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements."
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 Plan. Currently,
approximately 215 executives and key managers are eligible to participate in the
annual 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
16
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. Target bonus opportunities for
Messrs. Contino, Harriss, Messina and Shull for fiscal year 2001 were 50% of
salary while maximum bonuses were 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 2001 were based on Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA), net sales, variable contribution and other 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 2001. Payments to the Chief Executive Officer and the four next
most highly compensated executive officers under the 2001 Management Incentive
Plan aggregated $1,646,156. One hundred percent of awards made under the bonus
plan are currently paid in 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 stockholder
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 thereby aligning
executives' interests with those of the 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 20,000
shares, 80,000 shares and 294,249 shares of the Company's Common Stock in fiscal
years 2001, 2000 and 1999 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 1993 Executive Equity 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
17
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 employees are eligible to participate in the 1996 Stock Option Plan.
During 2001, no options to purchase shares of Common Stock were granted pursuant
to the 1996 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 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.
During 2001, a total of 80,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the 1999 Stock Option
Plan for Directors. 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 or such director declining to stand for reelection.
As of December 29, 2001, 370,000 options to purchase Common Stock under the 1999
Stock Option Plan for Directors were outstanding, of which 253,332 options were
exercisable.
During 2002, 50,000 options to purchase shares of Common Stock were granted
to one eligible director in accordance with the 1999 Stock Option Plan for
Directors.
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.
18
During 2001 and to date during 2002, no options to purchase shares of
Common Stock were granted in accordance with the 2000 Management Stock Option
Plan. During 2001, 30,000 options to purchase shares of Common Stock were
granted to three former Directors of the Company serving as consultants in
accordance with the 2000 Management Stock Option Plan.
2002 Stock Option Plan for Directors
The purpose of the 2002 Stock Option Plan for Directors, which is subject
to ratification by stockholders at the Annual Meeting, 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 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 25,000 shares of Common Stock on August 2, 2002, August 1, 2003 and
August 3, 2004, 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 in thirds 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 case options
may be exercised within 12 months after the date of death or disability. See
Proposal 3 -- Ratification of 2002 Stock Option Plan for Directors.
Chief Executive Officer Compensation
On December 5, 2000, Thomas C. Shull was named President and Chief
Executive Officer and was elected to the Board of Directors of the Company.
Effective on that date, Mr. Shull, Meridian and the Company entered into the
December 2000 Services Agreement. Under the December 2000 Services Agreement,
Meridian will provide for the benefit of the Company the services of Mr. Shull
and the Consultants. The term of the December 2000 Services Agreement, and the
term for the 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, pursuant to
which the term of the services of Mr. Shull and the Consultants began on
December 14, 2001 and will terminate on March 31, 2003. See "Employment
Contracts, Termination of Employment and Change-in-Control Arrangements."
Nondeductible Compensation
Section 162(m) of the Internal Revenue Code, as amended (the "Code"),
generally disallows a tax deduction to public companies for compensation over
$1,000,000 (the "$1 Million Limit") paid to a company's chief executive officer
and four other most highly compensated executive officers, as reported in its
proxy statement. Qualifying performance-based compensation is not subject to the
deduction limit, if certain requirements are met. The Company has 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 in 2001
19
relating to Thomas C. Shull exceeded the $1 Million Limit; consequently, the
excess of such payments over the $1 Million Limit is not deductible.
Respectfully Submitted,
The Stock Option and Executive
Compensation Committee
E. Pendleton James (Chairman)
Kenneth J. Krushel
Basil P. Regan
REPORT OF THE AUDIT COMMITTEE:
The Audit Committee has reviewed and discussed with management and Arthur
Andersen LLP ("AA"), the Company's independent auditors, the Company's audited
financial statements as of and for the year ended December 29, 2001. The Audit
Committee is aware that the Company has obtained a letter of representation from
AA that such audit was subject to AA's quality control system for the U.S.
accounting and auditing practice to provide reasonable assurance that the
engagement was conducted in compliance with professional standards and that
there was appropriate continuity of AA personnel working on audits and
availability of national office consultation.
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 29,
2001.
Respectfully Submitted,
The Audit Committee
J. David Hakman (Chairman)
Kenneth J. Krushel
E. Pendleton James
20
PERFORMANCE GRAPH:
The following graph compares the yearly percentage change in the cumulative
total stockholder 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
[COMPARISION GRAPH]
<Table>
<Caption>
- --------------------------------------------------------------------------------
12/96 12/97 12/98 12/99 12/00 12/01
- --------------------------------------------------------------------------------
HANOVER DIRECT,
INC. $100.00 $400.00 $458.33 $483.33 $50.00 $ 49.33
S&P 500 $100.00 $119.26 $157.14 $177.69 $97.48 $191.80
PEER GROUP $100.00 $133.36 $171.47 $207.56 $188.66 $166.24
</Table>
* Direct Marketing Peer Group consists of direct merchandising companies that
market their products through alternative distribution channels, such as mail
or television media; peer companies include Blair, Lands' End, Lillian Vernon,
Spiegel and Williams Sonoma. Damark International, Inc. was removed from the
Direct Marketing Peer Group in 2001.
NOTE: Assumes $100 invested on December 31, 1996 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.
21
DIRECTOR COMPENSATION:
Standard Arrangements. Non-employee directors of the Company or its
subsidiaries receive an annual cash fee of $40,000. During fiscal year 2001,
certain directors received per diem fees for extraordinary services not
exceeding $60,000 in the aggregate per person. In addition, such directors
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 Employment and Change-in-
Control Arrangements." The Company does not compensate its employees, or
employees of its subsidiaries, who serve as directors. During fiscal 2001, the
Company provided $50,000 of term life insurance for each director.
During 2001, a total of 80,000 options to purchase shares of Common Stock
were granted to eligible directors in accordance with the 1999 Stock Option Plan
for Directors. During 2001, 10,000 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 29, 2001, 370,000 options to purchase Common Stock
under the 1999 Stock Option Plan for Directors were outstanding, of which
253,332 options were exercisable.
During 2002, 50,000 options to purchase shares of Common Stock were granted
to one eligible director in accordance with the 1999 Stock Option Plan for
Directors.
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
At March 25, 2002, Richemont Finance S.A. ("Richemont"), a Luxembourg
company, owned approximately 20.8% of the Company's Common Stock outstanding and
100% of the of Series B Preferred Stock outstanding (collectively representing
approximately 29.1% of the combined voting power of Voting Stock), through
direct ownership.
At December 29, 2001, current and former officers and executives of the
Company (which did not include the Chief Executive Officer or any of the 4 most
highly compensated executive officers) owed the Company approximately $0.3
million, excluding accrued interest, under the 1993 Executive Equity Incentive
22
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 2002.
On December 19, 2001, the Company consummated a transaction with Richemont
(the "Richemont Transaction"). In the Richemont Transaction, the Company
repurchased from Richemont all of the outstanding shares of the Series A
Preferred Stock and 74,098,769 shares of the Common Stock of the Company held by
Richemont in return for the issuance to Richemont of 1,622,111 shares of
newly-created Series B Preferred Stock and the reimbursement of expenses of $1
million to Richemont. Richemont agreed, as part of the transaction, to forego
any claim it had to the accrued but unpaid dividends on the Series A Preferred
Stock. The Richemont Transaction was made pursuant to an Agreement (the
"Agreement"), dated as of December 19, 2001, between the Company and Richemont.
As part of the Richemont Transaction, the Company (i) released Richemont, the
individuals appointed by Richemont to the Board of Directors of the Company and
certain of their respective affiliates and representatives (collectively, the
"Richemont Group") from any claims by or in the right of the Company against any
member of the Richemont Group which arise out of Richemont's acts or omissions
as a stockholder of or lender to the Company or the acts or omissions of any
Richemont board designee in his capacity as such and (ii) entered into an
Indemnification Agreement 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. Shull, Meridian and the Company entered into
the December 2001 Services Agreement which replaced the August 2001 Services
Agreement. The December 2001 Services Agreement was amended on April 12, 2002.
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. Harriss and Mr. Contino.
On April 30, 2001, the Company and Mr. Shull entered into the Letter
Agreement, relating to certain termination payments under the Executive Plan.
As of December 5, 2000, Mr. Shull, Meridian and the Company entered into
the December 2000 Services Agreement.
Diana Quasha, the wife of Alan Quasha, a former Director of the Company,
entered into an employment agreement (the "Henre Employment Agreement") with
Henre, Inc. ("Henre"), a subsidiary of the Company. Pursuant to the Henre
Employment Agreement, Ms. Quasha served as President of Henre. Ms. Quasha
resigned as President of Henre effective January 5, 2001, and the Henre
Employment Agreement has terminated. The Company paid Ms. Quasha $4,423 as final
salary through her termination date of January 5, 2001 and, pursuant to an
Agreement and General Release of Claims between the Company and Ms. Quasha, the
Company paid Ms. Quasha discretionary severance of $57,500 during 2001.
Paul Quattro, the brother-in-law of Michael Contino, Executive Vice
President and Chief Operating Officer of the Company, was hired by the Company
in May 2000 as an independent contractor. Mr. Quattro held various project
manager positions at Desius LLC in the internet group. Mr. Quattro's
relationship with the Company as an independent contractor was terminated on
January 5, 2001 in connection with the Company's cessation of operations with
respect to Desius LLC. Mr. Quattro was paid $68,214.93 for his eight
23
(8) months of service to the Company. During 2001, the Company paid Mr. Quattro
an additional $7,200, representing $2,400 for services performed up to the
termination of his relationship with the Company as an independent contractor
and $4,800 as a termination payment in lieu of notice.
John F. Shull, the brother of Thomas C. Shull, the President and Chief
Executive Officer of the Company, acts as a consultant under the December 2001
Services Agreement, and has received an option to purchase 100,000 shares of the
Company's Common Stock under the December 2001 Services Agreement.
Michael G. Lutz, the former Executive Vice President and Chief Operating
Officer of the Company, purchased shares of the Company's Common Stock pursuant
to the 1993 Executive Equity Incentive Plan. Pursuant to such plan, the Company
and Mr. Lutz entered into a Tandem Note, whereby Mr. Lutz financed 80% of the
purchase price of the shares he purchased with a full recourse Company loan due
in 2001. On February 10, 2002, Mr. Lutz tendered such shares back to the Company
in exchange for cancellation of the Tandem Note.
Either the Company's Board of Directors, a committee of the Company's Board
of Directors, or the stockholders have approved these relationships and
transactions and, to the extent that such arrangements are available from
non-affiliated parties, all relationships and transactions are on terms no less
favorable to the Company than those available from non-affiliated parties.
24
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 25, 2002. Information in the table is based on information
furnished to the Company by such persons or groups and statements filed with the
Securities and Exchange Commission (the "Commission").
<Table>
<Caption>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS(1)
- -------------- ------------------- -------------------- ----------
Series B Richemont Finance S.A. ........................... 1,622,111(1) 100%
Participating 35 Boulevard Prince Henri
Preferred Stock L 1724 Luxembourg
Common Stock Richemont Finance S.A. ........................... 28,691,888(1) 20.8%
35 Boulevard Prince Henri
L 1724 Luxembourg
Common Stock Regan Partners, L.P. and Basil P. Regan........... 38,795,016(2) 28.1%
600 Madison Avenue
New York, New York 10022
Common Stock Theodore Kruttschnitt............................. 10,144,000(3) 7.3%
1730 South El Camino Real
Suite 400
San Mateo, California 94402
</Table>
- ---------------
(1) Information concerning the number of shares beneficially owned has been
taken from Amendment No. 4 to the Statement on Schedule 13D filed by
Richemont on December 28, 2001 with the Commission.
(2) Mr. 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 1,004,900 shares of Common
Stock. Also includes options to purchase 16,666 shares exercisable within 60
days.
(3) Information concerning the number of shares beneficially owned has been
taken from the Amendment No. 13 to Statement on Schedule 13D filed by Mr.
Kruttschnitt on June 16, 1997 with the Commission. The Schedule 13D
indicates that Mr. Kruttschnitt had sole voting and sole dispositive power
with respect to 10,074,000 shares of Common Stock. The Schedule 13D also
indicates that Mr. Kruttschnitt is a member of a group which includes Mr.
Hakman, who beneficially owns 334,390 shares (which includes 36,666 fully
vested unexercised options and options to purchase 23,332 shares exercisable
within 60 days). Also includes fully vested options held by Mr. Kruttschnitt
to purchase 70,000 shares.
25
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
25, 2002. 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 him.
<Table>
<Caption>
SHARES OF PERCENT OF
NAME OF BENEFICIAL OWNER COMMON STOCK CLASS(1)
- ------------------------ ------------ ----------
J. David Hakman(2).......................................... 334,390(3) *
Kenneth Krushel............................................. 59,998(4) *
E. Pendleton James.......................................... 0 *
Basil P. Regan(5)........................................... 38,795,016(5) 28.1%
Thomas C. Shull............................................. 1,350,000(6) *
Michael D. Contino.......................................... 327,400(7) *
William C. Kingsford........................................ 120,500(8) *
Edward M. Lambert........................................... 0 *
Frank J. Lengers............................................ 16,000(9) *
Steven Lipner............................................... 22,174(10) *
Charles B. Messina.......................................... 55,000(11) *
Directors and executive officers as a group (11 persons).... 41,080,478 29.7%
</Table>
- ---------------
* 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 138,215,800 shares of Common
Stock outstanding as of March 25, 2002.
(2) An Amendment No. 13 to the Statement on Schedule 13D filed by Mr.
Kruttschnitt on June 16, 1997 with the Commission indicates that Theodore
Kruttschnitt is a member of a group which includes Mr. Hakman, who
beneficially owns 334,390 shares (which includes 36,666 fully vested
unexercised options and options to purchase 23,332 shares exercisable
within 60 days).
(3) Includes 36,666 fully vested unexercised options and options to purchase
23,332 shares exercisable within 60 days.
(4) Includes 36,666 fully vested unexercised options and options to purchase
23,332 shares exercisable within 60 days.
(5) Mr. 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 1,004,900 shares of Common
Stock. Also includes options to purchase 16,666 shares exercisable within
60 days.
(5) Includes options to purchase 16,666 shares exercisable within 60 days.
(6) Represents 1,350,000 fully vested unexercised options.
(7) Includes 325,000 fully vested unexercised options.
(8) Represents 89,617 fully vested unexercised options.
(9) Includes 16,000 fully vested unexercised options.
(10) Includes 20,000 fully vested unexercised options.
(11) Includes 50,000 fully vested unexercised options.
26
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 6 Directors. On January 10, 2002, the Board of
Directors announced the reduction of the number of Directors of the Company from
6 to 5. 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, the former
Chairman of the Board, and Alan Grieve and each to serve until the Company's
next annual meeting of stockholders.
The Board has nominated 5 directors for election at the Annual Meeting. All
of them are currently serving as directors. If you 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:
THOMAS C. SHULL...........
AGE 50 Thomas C. Shull has been Chairman of the Company's
Board of Directors since January 10, 2002 and a
member of the Board of Directors of the Company and
President and Chief Executive Officer of the Company
since December 5, 2000. In 1990, Mr. Shull co-founded
Meridian Ventures, a venture management and
turnaround firm presently based in Connecticut, and
has served as chief executive officer since its
inception. From 1997 to 1999, he served as President
and Chief Executive Officer of Barneys New York, a
leading luxury retailer, where he led them out of
bankruptcy. From 1992 to 1994, Mr. Shull was
Executive Vice President of the R.H. Macy Company,
Inc., where he was responsible for human resources,
information technology, business development,
strategic planning and merchandise distribution and
led the merger negotiations with Federated Department
Stores. Prior to that, he served as a consultant with
McKinsey & Company and in the early 1980s as a member
of the National Security Council Staff in the Reagan
White House.
E. PENDLETON JAMES........
AGE 72 E. Pendleton James has been a director of the Company
since January 2002. Mr. James has over thirty years
experience in executive search and recently merged
his firm, Pendleton James Associates, with Whitehead
Mann. He currently serves on the Board of the
Citizens for Democracy Corps and is a Trustee for the
Center for the Study of the Presidency. Mr. James
served as an assistant to Presidents Nixon and
Reagan. He is a former member of the Board of
Directors of Comsat Corporation, the Metropolitan
Life Series Fund, the White House Fellows Commission,
the Ronald Reagan Foundation and the USO World Board
of Governors.
27
J. DAVID HAKMAN...........
AGE 60 J. David Hakman has been the President and Chief
Executive Officer of Hakman Capital Corporation,
Burlingame, California, an investment and merchant
banking firm, since 1980. Mr. Hakman also serves as a
director 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 and was
elected a director of the Company in October 1991.
KENNETH J. KRUSHEL........
AGE 49 Kenneth J. Krushel has been the Executive Vice
President of Strategic and Business Development of
Blackboard Inc., a provider of e-education software
and commerce and access systems, since December 2000.
From October 1999 to December 2000, Mr. Krushel was
the Chairman and Chief Executive Officer of College
Enterprises, Inc. From 1996 to 1999, Mr. Krushel was
the Senior Vice President of Strategic Development
for NBC Corp. and from 1994 to 1996 was Senior Vice
President, Business Development, for King World
Productions. Formerly, Mr. Krushel was President and
Chief Operating Officer of Think Entertainment and
Vice-President of Programming and Marketing for
American Cablesystems. Mr. Krushel was elected a
director of the Company in May 1999.
BASIL P. REGAN............
AGE 61 Basil P. Regan has been the General Partner of Regan
Partners, L.P., a limited partnership which invests
primarily in turnaround companies and special
situations, since December 1989. He has been
President of Regan Fund Management Ltd. since October
1995, which manages Regan Partners, L.P., Regan Fund
International, L.P. and Super Hedge Fund, L.P. From
1986 to 1989, Mr. Regan was Vice President and
Director of Equity Research of Reliance Group
Holdings. Mr. Regan was elected a director of the
Company in August 2001.
BOARD MEETINGS:
In 2001, the Board held 11 meetings in person or by conference telephone
and took action by written consent on 10 occasions. Each incumbent director
attended at least 75% of the aggregate number of the Company's Board Meetings
and his committee meetings.
BOARD COMMITTEES:
The Board has standing Executive, Audit, Stock Option and Executive
Compensation, Nominating and Transactions Committees.
The Executive Committee.
- At various times during 2001, Messrs. Eloy Michotte, Alan G. Quasha,
Thomas C. Shull, Alan Grieve and Robert F. Wright were members of the
Executive Committee. Currently, Messrs. Basil P. Regan (Chairman), Thomas
C. Shull and Kenneth Krushel are members of the Executive Committee.
28
- The duties of the Executive Committee include:
- recommending actions to the Board; and
- acting on behalf of the Board on certain operating matters requiring
Board approval when the Board is not in session.
- The Executive Committee held 7 meetings in person or by conference call
in 2001.
The Audit Committee.
- At various times during 2001, Messrs. Robert F. Wright, J. David Hakman,
Basil P. Regan and Kenneth Krushel were members of the Audit Committee.
Currently, Messrs. J. David Hakman (Chairman), Kenneth Krushel and 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;
- seeking to insure the independence and performance of the Company's
external auditors and advising the Board;
- monitoring the independence and performance of the Company's independent
auditors and internal auditing department;
- 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 financial statements prior to
filing or distribution;
- in consultation with management, the independent 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 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;
- reviewing the performance, independence and compensation of the
independent auditors and approving, appointing and/or discharging
auditors on an annual basis. Reviewing the independent auditor's plan,
discussing yearly audit results with auditors prior to release, and
considering independent auditors' judgments with respect to the quality
and appropriateness of the Company's accounting methods; and
- reviewing the internal organizational structure and qualifications, as
needed; reviewing the annual 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
29
annually, with the Company's counsel, any legal matters that could have
a significant impact on the Company's financial statements.
- The Company's Board of Directors has adopted a written charter for the
Audit Committee, a copy of which was previously filed with the Commission
as Appendix A to the Company's Proxy Statement for the 2001 annual
meeting of the Company's stockholders.
- The Audit Committee held 4 meetings in 2001 in person or by conference
call.
The Stock Option and Executive Compensation Committee.
- At various times during 2001, Mr. Alan Grieve, Kenneth Krushel, Alan G.
Quasha, Eloy Michotte and Ralph Destino were members of the Stock Option
and Executive Compensation Committee. Currently, Messrs. E. Pendleton
James (Chairman), Kenneth Krushel and Basil P. Regan are members of the
Stock Option and Executive Compensation Committee.
- The duties of the Stock Option and Executive Compensation Committee
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 did not hold any
meetings in 2001 in person or by conference call and took action by
written consent on 1 occasion in 2001.
The Nominating Committee.
- At various times during 2001, Messrs. Thomas C. Shull, Ralph Destino, J.
David Hakman and Alan Grieve and Ms. June Klein were members of the
Nominating Committee. Currently, Messrs. Thomas C. Shull (Chairman), J.
David Hakman and E. Pendleton James 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 2 meetings in 2001 and took action by
written consent on 1 occasion in 2001.
- 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 stockholders for
election in the event of an election other than at an annual meeting of
stockholders, and at least 75 days before the date that corresponds to
the record date of the prior year's annual meeting of stockholders in the
event of an election at an annual meeting of stockholders, and in all
events must include certain required information. The Nominating
Committee will consider nominees recommended by stockholders in
accordance with the Company's Bylaws.
The Transactions Committee.
- At various times during 2001, Messrs. J. David Hakman, Kenneth Krushel,
Theodore H. Kruttschnitt and Robert F. Wright and Ms. June Klein were
members of the Transactions Committee. Currently,
30
Messrs. Kenneth Krushel (Chairman), J. David Hakman and E. Pendleton
James are members of the Transactions Committee.
- The duties of the Transactions Committee include:
- Providing assistance to the directors in fulfilling their responsibility
to the stockholders 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 interests of
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 22 meetings in 2001 in person or by
conference call.
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. We have directors and officers liability
insurance policies, underwritten by Excel Specialty Insurance, Zurich American
Insurance Company and National Union Fire Insurance Company of Pittsburgh, PA,
in the aggregate amount of $30,000,000. As to reimbursements by the insurer of
the Company's indemnification expenses, the policies have a $250,000 deductible
for securities claims against the Company and a $150,000 deductible for all
other indemnifiable losses. The policy terms are from June 1, 2001 to June 1,
2002.
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 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.
31
VOTE REQUIRED:
The affirmative vote of the 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 best judgment.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION
OF THE NOMINEES FOR DIRECTOR.
32
PROPOSAL 2
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
INDEPENDENT PUBLIC ACCOUNTANTS:
During February 2002, the Company's Board of Directors authorized
management to proceed with Arthur Andersen LLP ("AA") as the independent public
accountants to audit the Company's financial statements for the fiscal year
ending December 28, 2002, and to retain other auditors if AA could not
efficiently and effectively prepare their opinion relating to such audit. AA
audited the Company's financial statements for the fiscal year ended December
29, 2001. However, given the uncertainty and pace of developments related to
AA's recent indictment, the Company is reviewing its options regarding the
retention of independent public accountants to audit the Company's financial
statements for the fiscal year ending December 28, 2002. 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 delegate to the Board
of Directors authority to select the Company's independent auditors for the
fiscal year ending December 28, 2002, after review by the Audit Committee of the
Board of Directors, from amongst established national audit firms.
Representatives of AA 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 another independent auditor for the fiscal year ending December 28,
2002, 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. AA billed the Company an aggregate of $759,360 for
professional services rendered for the audit of the Company's financial
statements for fiscal year ended December 29, 2001 and its reviews of the
Company's financial statements included in the Company's Forms 10-Q for the 2001
fiscal year.
Financial Information Systems Design and Implementation Fees. During the
fiscal year ended December 29, 2001, AA 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 29, 2001, AA billed
the Company an aggregate of $743,392 for services rendered in connection with
tax assistance, advisory services and internal audit support and development
consulting.
The Audit Committee of the Board of Directors has considered whether the
provision of services by AA described in the preceding two paragraphs are
compatible with maintaining AA's independence as the Company's principal
accountant.
33
VOTE REQUIRED:
The affirmative vote of the holders of the 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 with respect to the selection of auditors. Each share of Common Stock
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 BOARD OF
DIRECTORS OF AUTHORITY TO SELECT THE COMPANY'S INDEPENDENT AUDITORS FOR
THE FISCAL YEAR ENDING DECEMBER 28, 2002, AFTER REVIEW BY THE
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS, FROM AMONGST ESTABLISHED
NATIONAL AUDIT FIRMS.
34
PROPOSAL 3
RATIFICATION OF THE 2002 STOCK OPTION PLAN FOR DIRECTORS
GENERALLY:
We are asking you to ratify the Compensation Committee's adoption of the
2002 Stock Option Plan for Directors (the "Plan"). The purpose of the Plan is to
advance the interests of the Company, through the grant of options to purchase
shares of Common Stock, by providing non-employee directors of the Company
(other than directors who are non-resident United States aliens), with a larger
personal and financial interest in the success of the Company. The following is
a brief summary of the Plan. The complete text of the Plan is attached hereto as
Appendix A.
GENERAL INFORMATION:
Persons Eligible To Participate. Each director of the Company who is
neither an employee of the Company nor a United States non-resident alien (an
"Eligible Director").
Effective Date and Duration of Plan. The Plan became effective on the date
of its adoption by the Compensation Committee, 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 of Plan. The Plan is administered by a committee (the
"Committee") consisting of at least two members of the Board. The 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.
Status of Options. Options granted under the Plan are nonqualified options
not qualifying as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended.
Shares Subject to Options Granted Under Plan. The maximum number of shares
of Common Stock that may be delivered or purchased under the Plan is 500,000,
subject to adjustment to preserve the value of an option grant 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.
The shares of Common Stock to be issued in connection with the exercise of
stock options granted under the Plan may be authorized but unissued shares of
Common Stock 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 option granted under the Plan, certain shares
are no longer subject to an option granted under the Plan, such shares will
again be available for future option grants under the Plan.
Amendment of Plan. The Plan may be amended by the Board or a duly
authorized committee thereof as the Board or such committee deems advisable.
However, no Plan amendment will become effective unless approved by affirmative
vote of the Company's stockholders 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 Plan amendment may impair the rights of any Plan participant
under any option previously
35
granted under the Plan without a participant's consent. The Board or a duly
authorized committee thereof has 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 granted under the Plan so as to terminate them upon such
effectiveness. If the Board or such committee exercises such power, all options
then outstanding shall be deemed to terminate upon such effectiveness.
Interested Persons. E. Pendleton James, J. David Hakman, Kenneth J.
Krushel and Basil P. Regan all have an interest in the approval of the Plan by
the Company's stockholders by virtue, as described below, of their entitlement
to option grants under the Plan as of the date of their appointment to the
Company's Board and on August 2, 2002, August 1, 2003 and August 3, 2004,
provided that each such person continues to serve as a director of the Company
on each such date.
AWARDS AVAILABLE UNDER PLAN:
Pursuant to the Plan, each Eligible Director is 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"). In addition, on each of August 2,
2002, August 1, 2003 and August 3, 2004, provided that each such date occurs
after the Initial Appointment Date, each Eligible Director whose Initial
Appointment Date preceded such date will be granted an option to purchase an
additional 25,000 shares of Common Stock provided that he or she is a director
of the Company 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, the Committee
may, to the extent it deems appropriate, 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 option limits under the Plan (or make
provision for cash payments to the holders of options granted under the Plan).
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. However, each option granted
under the Plan will become exercisable at a rate of no less than 33 1/3% per
year from its date of grant, with the exception that all options granted under
the Plan will become immediately and fully exercisable upon the occurrence of a
"Change of Control" (as defined in the Hanover Direct, Inc. Key Executive
Twenty-Four Month Compensation Continuation Plan). Options granted under the
Plan may not be exercised more than 3 months after a participant ceases to be a
director of the Company, except in the case of the participant's 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 is the fair market value of such
shares on the date of grant of such option. For purposes of the Plan, the fair
market value of a share of Common Stock is 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 exercise. The Plan provides that the option exercise
price may be paid in cash or in shares of Common Stock valued at their fair
market value
36
on the date of exercise. Alternatively, an option granted under the Plan 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 exercise
price, and such other documents as the Committee may determine.
During a participant's lifetime, options granted under the Plan may be
exercised only by such participant and may not be transferred, other than by
will or by the laws of descent and distribution, except that 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, provided that 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:
For the federal income tax purposes, the grant of an option granted under
the Plan will have no immediate tax consequences to the participant. The
exercise of the option by the participant will result in taxable income to the
participant, as compensation, in an amount equal to 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.
37
NEW PLAN BENEFITS:
The following table summarizes the option grants that may be awarded under
the 2002 Stock Option Plan for Directors during the term thereof, assuming the
2002 Stock Option Plan for Directors is ratified by the Company's stockholders.
2002 STOCK OPTION PLAN FOR DIRECTORS
<Table>
<Caption>
NUMBER OF SHARES
NAME AND POSITION DOLLAR VALUE ($) SUBJECT TO OPTIONS
- ----------------- ---------------- ------------------
Thomas C. Shull(1).................................. 0 None
Brian C. Harriss(1)................................. 0 None
Michael D. Contino(1)............................... 0 None
Charles F. Messina(1)............................... 0 None
William C. Kingsford(1)............................. 0 None
Executive Group(1).................................. 0 None
Non-Executive Director Group........................ Unknown(2) Up to 500,000
in the aggregate
Non-Executive Officer Employee Group(1)............. 0 None
</Table>
- ---------------
(1) Pursuant to the terms of the 2002 Stock Option Plan for Directors, only
those directors of the Company who are neither an employee of the Company
nor a United States non-resident alien are eligible to participate.
(2) 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.
VOTE REQUIRED:
The affirmative vote of the holders of the majority of the combined voting
power of the Voting Stock voted at the Annual Meeting, whether in person or by
proxy, whether by mail, Internet or telephone, is required to ratify the 2002
Stock Option Plan for Directors. Each share of Common Stock has one (1) vote and
each share of Series B Preferred Stock has ten (10) votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE RATIFICATION
OF THE 2002 STOCK OPTION PLAN FOR DIRECTORS.
38
STOCKHOLDER PROPOSALS FOR THE 2003 ANNUAL MEETING
If you wish to submit proposals to be presented at the 2003 Annual Meeting
of Stockholders of the Company, they must be received by the Company no later
than January 4, 2003 for them to be included in the Company's proxy material for
that meeting.
DISCRETIONARY AUTHORITY
If the Company did not receive notice of any matter that is to come before
the stockholders at the 2002 Annual Meeting of Stockholders on or before March
20, 2002, which corresponds to forty-five (45) days before the date on which the
Company first mailed this proxy statement, the proxy for the 2002 Annual Meeting
of Stockholders 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 29, 2001 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., 115
RIVER ROAD, EDGEWATER, NEW JERSEY 07020.
By Order of the Board of Directors
Charles F. Messina
Secretary
Dated: April 12, 2002
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
39
APPENDIX A
HANOVER DIRECT, INC.
2002 STOCK OPTION PLAN FOR DIRECTORS
1. PURPOSE. The purpose of the Hanover Direct, Inc. 2002 Stock Option
Plan for Directors (the "Plan") is to advance 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. The Plan shall be administered by a committee (the
"Committee") consisting of at least two members of the Board of Directors of the
Company (the "Board"). The 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. 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 director of the Company who is neither an employee
of the Company nor an Ineligible Director (as hereinafter defined) (a
"Non-Employee Director") shall be eligible to be granted Options to purchase
shares of Common Stock ("Options") under the Plan. An "Ineligible Director"
means any director of the Company who is a nonresident alien.
Nothing contained in the Plan, or in any Option granted pursuant to the
Plan, shall confer upon any Director any right to the continuation of his or her
directorship or limit in any way the right of the Company to terminate his or
her directorship at any time.
4. THE SHARES. Options may be granted from time to time under the Plan
for the purchase, in the aggregate, of not more than 500,000 shares of common
stock, par value $0.66 2/3 per share, of the Company ("Common Stock") (subject
to adjustment pursuant to Section 13). 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 acquired 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 the 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 Option to
purchase 25,000 shares of Common Stock (subject to serve as a member of the
Board on such date, an Option to purchase 25,000 shares of Common Stock
(subject to adjustment pursuant to Section 13). An "Award Date" means
August 2, 2002, August 1, 2003 and August 3, 2004.
A-1
6. OPTION PRICE. The price (the "Option 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. 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 Award Date, the 10 trading days immediately preceding the
Award Date, and the 10 trading days immediately following the Award Date.
7. TERM AND EXERCISABILITY OF OPTIONS. Options shall be granted for a
maximum term of 10 years. Subject to the other provisions of the Plan relating
to exercisability of Options, or as otherwise provided by the Committee and
evidenced in an Option agreement, 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, or as otherwise provided by the Committee and evidenced in an Option
agreement, 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 or 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 Option granted
under the Plan to the participant's 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 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).
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 nonqualified
options not qualifying as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended.
A-2
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 holder 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, 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 of any 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 exercisable 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 evidence as to the ownership of the Option and may require
consents and releases of taxing authorities that it may deem advisable.
A-3
HANOVER DIRECT, INC.
PROXY FOR
THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON THURSDAY, MAY 16, 2002
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Hanover Direct, Inc. (the "Company") hereby
appoints each of William C. Kingsford and Charles F. Messina, attorneys and
proxies, each with full power of substitution, to represent the undersigned and
vote all shares of the common stock of the Company which the undersigned is
entitled to vote, with all powers the undersigned would possess if personally
present, at the Annual Meeting of Stockholders of the Company to be held at the
Sheraton Suites on the Hudson, 500 Harbor Boulevard, Weehawken, New Jersey 07087
on Thursday, May 16, 2002 at 9:30 a.m. local time, and at any adjournments
thereof, with respect to the proposals 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 stockholder.
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF
ALL NOMINEES AS DIRECTORS OF THE COMPANY, "FOR" DELEGATION TO THE BOARD OF
DIRECTORS OF AUTHORITY TO SELECT THE COMPANY'S INDEPENDENT AUDITORS FOR THE
FISCAL YEAR ENDING DECEMBER 28, 2002 AFTER REVIEW BY THE AUDIT COMMITTEE OF THE
BOARD OF DIRECTORS, FROM AMONGST ESTABLISHED NATIONAL AUDIT FIRMS, "FOR" THE
RATIFICATION OF THE 2002 STOCK OPTION PLAN FOR DIRECTORS AND IN THE DISCRETION
OF THE PROXIES WITH RESPECT TO ALL OTHER MATTERS WHICH MAY PROPERLY COME BEFORE
THE ANNUAL MEETING AND ANY ADJOURNMENTS THEREOF. THE UNDERSIGNED ACKNOWLEDGES
RECEIPT OF THE ACCOMPANYING NOTICE OF ANNUAL MEETING AND PROXY STATEMENT.
IMPORTANT: SIGNATURE AND DATE REQUIRED ON REVERSE SIDE
A [X] Please mark your votes as in this example.
1. ELECTION OF DIRECTORS
[ ] FOR all nominees listed at the right (except as marked to the contrary)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed at right
NOMINEES: J. David Hakman, Kenneth J. Krushel, Thomas C. Shull, Basil P. Regan
and E. Pendleton James
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.)
2. DELEGATE TO THE BOARD OF DIRECTORS AUTHORITY TO SELECT THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 28, 2002, AFTER
REVIEW BY THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS, FROM AMONGST
ESTABLISHED NATIONAL AUDIT FIRMS.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. RATIFICATION OF THE 2002 STOCK OPTION PLAN FOR DIRECTORS.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. IN THEIR DISCRETION, THE ABOVE 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 hereby acknowledges receipt of a copy of the accompanying Notice
of Annual Meeting of 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.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY FORM PROMPTLY USING THE ENCLOSED
ENVELOPE.
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Signature of Common Stockholder(s)
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Name of Common Stockholder(s)
Dated:
----------------, 2002
NOTE: Please complete, date and sign exactly as name appears hereon. When
signing as attorney, administrator, executor, guardian, trustee or corporate
official, please add your title. If shares are held jointly, each holder should
sign.