UNITED STATES 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:
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[X] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission
Only
[ ] Definitive Proxy Statement (as permitted by Rule 14a6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
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HANOVER DIRECT, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(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:
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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):
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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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PRELIMINARY COPY
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 JUNE 3, 2004
Dear Stockholders:
We will hold the 2004 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, June 3,
2004 at 9:30 a.m., local time. The meeting's purpose is to:
1. Elect 9 directors;
2. Approve an amendment to the Company's Certificate of Incorporation to
reduce the par value of each share of Common Stock from $0.66 2/3 per
share to $0.01 per share and reclassify the outstanding shares of Common
Stock into such lower par value shares;
3. Approve an amendment to the Company's Certificate of Incorporation to
increase the number of shares of Additional Preferred Stock (the
"Additional Preferred Stock") which the Company would have authority to
issue from 5,000,000 shares to 15,000,000 shares and make a corresponding
change in the total number of shares of all classes of stock which the
Company has authority to issue;
4. Ratify and approve the adoption of the 2004 Stock Option Plan for
Directors;
5. Ratify and approve certain amendments to the 2002 Stock Option Plan for
Directors as described in the accompanying Proxy Statement;
6. Delegate to the Audit Committee of the Board of Directors authority to
select the Company's independent auditors for the fiscal year ending
December 25, 2004 from amongst established national audit firms; and
7. 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 or the Company's Series C Participating Preferred
Stock at the close of business on Monday, April 19, 2004.
Along with the attached Proxy Statement, we are also enclosing a copy of the
Company's 2003 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 card. 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., 115 River Road, Building 10, Edgewater, New Jersey 07020, a complete list
of the stockholders entitled to vote at the Annual Meeting, arranged in
alphabetical order.
PLEASE VOTE -- YOUR VOTE IS IMPORTANT
Charles E. Blue
Secretary
[April 26], 2004
PRELIMINARY COPY
HANOVER DIRECT, INC.
115 RIVER ROAD, BUILDING 10
EDGEWATER, NEW JERSEY 07020
(201) 863-7300
PROXY STATEMENT FOR THE 2004 ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON JUNE 3, 2004
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
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ANNUAL MEETING: June 3, 2004 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, April 19, 2004.
If you were a stockholder as of the record date of the Company's
SHARES ENTITLED TO VOTE: Common Stock, par value $0.66 2/3 per share (the "Common Stock"), or
the Company's Series C Participating Preferred Stock, par value
$0.01 per share (the "Series C Preferred Stock" and, together with
the Common Stock, the "Voting Stock"), you may vote at the Annual
Meeting. Each share of Common Stock is entitled to one (1) vote.
Each share of Series C Preferred Stock is entitled to one hundred
(100) votes. On the record date, the Company had 220,173,633 shares
of Common Stock outstanding (excluding treasury shares) and 564,819
shares of Series C Preferred Stock outstanding. As of the record
date, Chelsey Direct, LLC, a Delaware limited liability company
("Chelsey"), beneficially owned 111,304,721 shares of Common Stock
(approximately 51% of the outstanding Common Stock) and 564,819
shares of Series C Preferred Stock, collectively representing
approximately 61% of the combined voting power of the Voting Stock.
As of the record date, Regan Partners, L.P. ("Regan Partners"),
Regan International Fund Limited and Basil P. Regan beneficially
owned 38,821,683 shares of Common Stock (approximately 18% of the
outstanding Common Stock).
MAILING DATE: On or about [April 26], 2004.
AGENDA: 1. Elect 9 directors;
2. Approve an amendment to the Company's Certificate of
Incorporation to reduce the par value of each share of Common Stock
from $0.66 2/3 per share to $0.01 per share and reclassify the
outstanding shares of Common Stock into such lower par value
shares;
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3. Approve an amendment to the Company's Certificate of
Incorporation to increase the number of shares of Additional
Preferred Stock which the Company would have authority to issue
from 5,000,000 shares to 15,000,000 shares and make a
corresponding change in the total number of shares of all classes
of stock which the Company would have authority to issue;
4. Ratify and approve the adoption of the 2004 Stock Option Plan for
Directors;
5. Ratify and approve certain amendments to the 2002 Stock Option
Plan for Directors described in this Proxy Statement;
6. Delegate to the Audit Committee of the Board of Directors
authority to select the Company's independent auditors for the
fiscal year ending December 25, 2004 from amongst established
national audit firms; and
7. Any other proper business.
VOTE REQUIRED: The affirmative vote of the holders of a plurality of the combined
PROPOSAL 1: voting power of all shares of Voting Stock voted at the Annual
ELECT 9 DIRECTORS 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. So, if you do not vote for a nominee, your vote
will not count either for or against the nominee. Each share of
Common Stock has one (1) vote and each share of Series C Preferred
Stock has one hundred (100) votes.
The affirmative vote of the holders of (a) a majority of the
PROPOSAL 2: APPROVE AN outstanding shares of Common Stock, voting separately as a single
AMENDMENT TO THE COMPANY'S class, (b) at least two-thirds of the outstanding shares of Series C
CERTIFICATE OF INCORPORATION Preferred Stock, voting separately as a class, and (c) the holders
THAT WOULD REDUCE THE PAR VALUE of the majority of the combined voting power of the Voting Stock
OF EACH SHARE OF COMMON STOCK outstanding, voting together as a single class, is required to
FROM $0.66 2/3 PER SHARE TO approve Proposal 2. Abstentions and broker non-votes will have the
$0.01 PER SHARE same effect as if you voted against the proposal. Each share of
Common Stock has one (1) vote and each share of Series C Preferred
Stock has one hundred (100) votes.
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PROPOSAL 3: APPROVE AN The affirmative vote of the holders of (a) at least two-thirds of
AMENDMENT TO THE COMPANY'S the outstanding shares of Series C Preferred Stock, voting
CERTIFICATE OF INCORPORATION separately as a class, and (b) a majority of the combined voting
THAT WOULD INCREASE THE NUMBER power of all shares of Voting Stock outstanding, voting together as
OF SHARES OF ADDITIONAL single class, is required to approve Proposal 3. Abstentions and
PREFERRED STOCK WHICH THE broker non-votes will have the same effect as if you voted against
COMPANY WOULD HAVE AUTHORITY TO the proposal. Each share of Common Stock has one (1) vote and each
ISSUE AND MAKE A CORRESPONDING share of Series C Preferred Stock has one hundred (100) votes.
CHANGE IN THE NUMBER OF SHARES
OF ALL CLASSES OF STOCK WHICH
THE COMPANY WOULD HAVE
AUTHORITY TO ISSUE
PROPOSAL 4: RATIFY AND APPROVE The affirmative vote of the holders of the majority of the combined
THE ADOPTION OF THE 2004 STOCK voting power of the Voting Stock voted at the Annual Meeting,
OPTION PLAN FOR DIRECTORS whether in person or by proxy, and whether by mail, Internet or
telephone, is required to approve Proposal 4. Abstentions and broker
non-votes will not have any effect on the proposal. Each share of
Common Stock has one (1) vote and each share of Series C Preferred
Stock has one hundred (100) votes.
PROPOSAL 5: RATIFY AND APPROVE The affirmative vote of the holders of the majority of the combined
CERTAIN AMENDMENTS TO THE 2002 voting power of the Voting Stock voted at the Annual Meeting,
STOCK OPTION PLAN FOR DIRECTORS whether in person or by proxy, and whether by mail, Internet or
AS DESCRIBED IN THIS PROXY telephone, is required to approve Proposal 5. Abstentions and broker
STATEMENT non-votes will not have any effect on the proposal. Each share of
Common Stock has one (1) vote and each share of Series C Preferred
Stock has one hundred (100) votes.
PROPOSAL 6: DELEGATE TO THE The affirmative vote of the holders of the majority of the combined
AUDIT COMMITTEE OF THE BOARD OF voting power of the Voting Stock voted at the Annual Meeting,
DIRECTORS AUTHORITY TO SELECT whether in person or by proxy, and whether by mail, Internet or
THE COMPANY'S INDEPENDENT telephone, is required to ratify the selection of auditors. So, if
AUDITORS FOR THE FISCAL YEAR you abstain from voting, your vote will not count either for or
ENDING DECEMBER 25, 2004 FROM against the proposal. Each share of Common Stock has one (1) vote
AMONGST ESTABLISHED NATIONAL and each share of Series C Preferred Stock has one hundred (100)
AUDIT FIRMS votes.
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In connection with the recapitalization of the Company described
VOTE ASSURED: below, Chelsey, Stuart Feldman (a principal of Chelsey Capital, LLC
and a director of the Company), Regan Partners, Regan International
Fund Limited and Basil P. Regan entered into a voting agreement
providing that each of them will vote any shares of the Company
beneficially owned by them or any entity affiliated with them (i) to
effectuate the amendments to the Company's Certificate of
Incorporation described in Proposals 2 and 3 and (ii) for their
nominees to the Board of Directors described in Proposal 1. See
"PROPOSAL 1 -- ELECTION OF DIRECTORS -- Introduction." As of the
record date, Chelsey beneficially owned 111,304,721 shares of Common
Stock (approximately 51% of the outstanding Common Stock) and
564,819 shares of Series C Preferred Stock, collectively
representing approximately 61% of the combined voting power of the
Voting Stock. As of the record date, Regan Partners, Regan
International Fund Limited and Basil P. Regan beneficially owned
38,728,350 shares of Common Stock (approximately 18% of the
outstanding Common Stock). Accordingly, the approval of Proposals 1,
2 and 3 is assured. Furthermore, based upon the voting power of
Chelsey described above, Chelsey alone will be able to control the
outcome of all matters upon which it votes, including Proposals 4, 5
and 6.
The Company's bylaws provide that the holders of a majority of the
outstanding shares or of the voting power, as the case may be, shall
constitute a quorum at a meeting of stockholders for the transaction
of any business, unless the action to be taken at the meeting shall
require a greater proportion. Therefore, shares representing a
majority of the votes entitled to be cast by the holders of Common
Stock and Series C Preferred Stock outstanding on the record date,
voting together as a class, are required to be present in person or
by proxy at the Annual Meeting in order to constitute a quorum to
transact business with regard to each of the proposals. In addition,
QUORUM: shares representing at least two-thirds of the votes entitled to be
cast by the holders of Series C Preferred Stock outstanding on the
record date, voting separately as a class, must be present in person
or by proxy at the Annual Meeting in order to constitute a quorum to
transact business with regard to Proposals 2 and 3 and shares
representing a majority of the votes entitled to be cast by the
holders of Common Stock outstanding on the record date, voting
separately as a class, must be present in person or by proxy at the
Annual Meeting in order to constitute a quorum to transact business
with regard to Proposal 2. Shares as to which holders abstain from
voting as to a particular matter, and shares held in "street name"
by brokers or nominees who indicate on their proxies that they do
not have discretionary authority to vote those shares as to a
particular matter (that is, broker non-votes), will be counted in
determining whether there is a quorum of stockholders present at the
Annual Meeting for all matters.
ABSTENTIONS Abstentions and broker non-votes will have no effect with respect to
AND BROKER NON-VOTES: Proposals 1, 4, 5 and 6. Abstentions and broker non-votes, however,
will have the effect of negative votes with respect to Proposals 2
and 3.
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Please vote; your vote is important. Prompt return of your proxy
PROXIES: 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 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.
Unless you tell us on the proxy card to vote differently, the
Company will vote signed returned proxies "for" the Board's nominees
for directors, "for" the approval of the amendment to Certificate of
Incorporation that would reduce the par value per share of the
Company's Common Stock, "for" the approval of the amendment to
Certificate of Incorporation that would increase the number of
shares of Additional Preferred Stock which the Company would have
authority to issue and increase the number of shares of all classes
of stock which the Company would have authority to issue, "for" the
ratification and approval of the adoption the 2004 Stock Option for
Directors, "for" the ratification and approval of the amendments to
the 2002 Stock Option Plan for Directors described herein and "for"
the ratification of the delegation of authority to the Audit
Committee to select the Company's independent auditors.
If any nominee cannot or will not serve as a director, your proxy
will vote in accordance with his or her best judgment. At the time
the Company began printing this Proxy Statement, it 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 your
proxy, to: Charles E. Blue, Secretary, at Hanover Direct, Inc., 115
River Road, Building 10, Edgewater, New Jersey 07020;
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- deliver another signed proxy, dated later than your proxy, to Mr.
Blue, 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. Blue, 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.
The Company will pay all costs, estimated at $50,000 in the
COST OF SOLICITATION: aggregate, of soliciting proxies for the Annual Meeting. Although
the Company is mailing these proxy materials, the Company's
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. The Company 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 the Company's business are
welcome. You may use the space provided on the proxy card for this
purpose, if desired. Although the Company may not respond on an
individual basis, your comments help the Company to measure your
satisfaction and it may benefit from your suggestions.
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DIRECTORS AND EXECUTIVE OFFICERS
THE RECAPITALIZATION
On November 30, 2003, the Company consummated the transactions contemplated
by the Recapitalization Agreement, dated as of November 18, 2003, with Chelsey
(the "Recapitalization Agreement") and recapitalized the Company, completed the
reconstitution of the Board of Directors of the Company and settled certain
outstanding litigation between the Company and Chelsey (the "Recapitalization").
Immediately prior to the consummation of the transactions contemplated by the
Recapitalization Agreement, Chelsey was the holder of 29,446,888 shares of
Common Stock of the Company, or approximately 21.3% of the Common Stock, and
1,622,111 shares of the Company's Series B Participating Preferred Stock, having
a par value of $0.01 per share and ten votes per share (the "Series B Preferred
Stock"), consisting of all of the issued and outstanding shares of preferred
stock of the Company, and with its Common Stock collectively representing
approximately 29.6% of the combined voting power of the Company's securities.
Prior to the consummation of the Recapitalization, Regan Partners was the holder
of 38,795,017 shares of Common Stock of the Company, or approximately 28.0% of
the outstanding Common Stock.
Pursuant to the Recapitalization Agreement, Chelsey exchanged all of the
1,622,111 shares of Series B Preferred Stock held by it for the issuance to it
of 564,819 shares of newly-created Series C Preferred Stock and 81,857,833
additional shares of Common Stock. The shares of Series C Preferred Stock are
entitled to vote with the shares of Common Stock on all matters on which the
Common Stock votes and are entitled to one hundred (100) votes per share plus
that number of votes as shall equal the dollar value of any accrued, unpaid and
compounded dividends with respect to such shares. The Series C Preferred Stock
is also entitled to vote as a class on any matter that would adversely affect
such Series C Preferred Stock.
The Board of Directors of the Company was reconstituted, simultaneously
with the execution of the Recapitalization Agreement on November 18, 2003, so
that the number of directors comprising the Board of Directors of the Company
was fixed at eight, four of whom were designated by Chelsey. Upon the closing of
the Recapitalization, the number of directors comprising the Board of Directors
of the Company was fixed at nine, five of whom were designated by Chelsey. The
Committees of the Board of Directors were also reconstituted, simultaneously
with the execution of the Recapitalization Agreement on November 18, 2003, and
again on the closing of the Recapitalization.
Upon the issuance of the Series C Preferred Stock and the additional shares
of Common Stock to Chelsey pursuant to the Recapitalization Agreement, Chelsey
became the owner of 111,304,721 shares of Common Stock constituting
approximately 51% of the outstanding Common Stock, and 564,819 shares of Series
C Preferred Stock, constituting all of the outstanding shares of preferred stock
and with its Common Stock collectively representing approximately 61% of the
combined voting power of the Company. Regan Partners continued to be the holder
of 38,728,350 shares of Common Stock of the Company, or approximately 18% of the
outstanding Common Stock. Upon the reconstitution of the Board of Directors
pursuant to the Recapitalization Agreement, Chelsey had the ability to designate
a majority of the members of the Board of Directors and Regan had the ability to
designate one member of the Board of Directors for a period of two years. The
Recapitalization was a "change in control" of the Company.
Pursuant to the Recapitalization Agreement, the Company, acting through its
Board of Directors and in accordance with its charter and bylaws and applicable
law, agreed to recommend the following amendments to its Certificate of
Incorporation, which are the subject of Proposals 2 and 3 included in this Proxy
Statement (the "Charter Amendments"), to effectuate the following: (i) a
reduction in the par value per share of Common Stock from $0.66 2/3 per share to
$0.01 per share and (ii) an increase by 10 million shares of the
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number of authorized shares of preferred stock of the Company, all of such
shares to be issuable by the Board of Directors in one or more series. The
Company has no current plans for the issuance of such shares of preferred stock.
Pursuant to the Recapitalization Agreement, the Company, acting through its
Board of Directors, also agreed to recommend an amendment to its Certificate of
Incorporation to effect a reverse split of its Common Stock in a ratio of 10 for
1 a the first annual meeting of stockholders following the closing of the
Recapitalization Agreement. On April 14, 2004, the Company and Chelsey agreed to
postpone the recommendation of the reverse split to the Company's shareholders
for one year.
In connection with the Recapitalization, Chelsey, Stuart Feldman, Regan
Partners and Basil Regan entered into a Voting Agreement dated as of November
30, 2003 (the "Voting Agreement") providing that each of them will vote any
shares of the Company beneficially owned by them or any entity affiliated with
them to effectuate the Recapitalization and the Charter Amendments and to elect
the nominees to the Board of Directors of Chelsey and Regan Partners designated
pursuant to the Recapitalization Agreement for a period of two years unless
sooner terminated.
Additional information about the Recapitalization is contained in the
Company's Current Reports on Form 8-K, dated November 10, 2003, November 18,
2003 and November 30, 2003, which were filed with the Commission on November 10,
2003, November 19, 2003 and December 1, 2003, respectively, and in the Company's
Annual Report on Form 10-K for the fiscal year ended December 27, 2003. See also
"Certain Relationships and Related Transactions." All of the Company's filings,
and exhibits thereto, may be inspected without charge at the public reference
section of the Securities and Exchange Commission (the "Commission") at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of this
material also may be obtained from the Commission at prescribed rates. The
Commission also maintains a website that contains reports, proxy and information
statements and other information regarding public companies that file reports
with the Commission. Copies of the Company's filings may be obtained from the
Commission's website at http://www.sec.gov. Copies of the Company's filings may
also be obtained from the offices of the American Stock Exchange at 20 Broad
Street, New York, New York.
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Directors
Directors hold office until the next annual meeting or until their
successors have been elected or until their earlier death, resignation,
retirement, disqualification or removal as provided in the Company's Certificate
of Incorporation and bylaws.
The Board of Directors of the Company was reconstituted, simultaneously
with the execution of the Recapitalization Agreement on November 18, 2003, so
that the number of directors comprising the Board of Directors of the Company
was fixed at eight, consisting of Martin Edelman, Wayne Garten, Stuart Feldman,
William Wachtel, Basil Regan, Thomas Shull, David Brown and Robert Masson, four
of whom (Messrs. Edelman, Garten, Feldman and Wachtel) were designated by
Chelsey and one of whom was designated by Regan Partners (Basil Regan). Upon the
closing of the Recapitalization, the number of directors comprising the Board of
Directors of the Company was fixed at nine, five of whom were designated by
Chelsey, including Donald Hecht who joined the Board on the closing of the
Recapitalization as a designee of Chelsey, and one of whom was designated by
Regan Partners. The Committees of the Board of Directors were also
reconstituted, simultaneously with the execution of the Recapitalization
Agreement on November 18, 2003, and again on the closing of the
Recapitalization.
The Corporate Governance Agreement, dated as of November 30, 2003, executed
in connection with the Recapitalization Agreement provides that, for a period of
two years from the closing of the Recapitalization, in
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the event that Messrs. Edelman, Garten, Feldman, Wachtel or Hecht or their
respective successors are unable or unwilling to serve as a director or
committee member for any reason, Chelsey will designate a director or committee
member, as applicable, in place of such person. The Corporate Governance
Agreement further provides that in the event Mr. Regan or his successor is
unable or unwilling to serve as a director or committee member for any reason,
Regan Partners will designate a director or committee member, as applicable, in
place of such person. The Corporate Governance Agreement also provides that in
the event that the Company's Chief Executive Officer, Mr. Shull, or his
successor, is unable or unwilling to serve as a director for any reason, the
Board of Directors will designate the Chief Executive Officer of the Company to
serve on the Board of Directors in place of such person. In the event that
Messrs. Brown or Masson or their respective successors are unable or unwilling
to serve as a director or committee member for any reason, the Board of
Directors (acting without the participation of Messrs. Wachtel and Feldman) will
designate a director or committee member, as applicable, in place of such
person. Notwithstanding the foregoing, any such substitute person not designated
by the Board of Directors must be reasonably acceptable to the Board of
Directors.
With the exception of Martin Edelman who resigned from the Board of
Directors effective February 15, 2004, the Board of Directors of the Company
currently consists of the individuals named above plus Paul S. Goodman who was
designated by Chelsey to fill the vacancy on the Board effective April 12, 2004
due to Mr. Edelman's resignation.
Please see "PROPOSAL 1 -- Election of Directors" for the names, ages and
business experience of each of the Company's directors and Mr. Goodman, 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.
On November 3, 2003, Charles E. Blue was appointed Chief Financial Officer
of the Company effective November 11, 2003 replacing Edward M. Lambert as Chief
Financial Officer effective on such date in connection with the Company's
ongoing strategic business realignment program. Mr. Blue joined the Company in
1999 and had most recently served as Senior Vice President, Finance, a position
eliminated by the strategic business realignment program. Mr. Lambert continued
to serve as Executive Vice President of the Company until January 2, 2004. Also
effective November 11, 2003, Brian C. Harriss was appointed Executive Vice
President, Finance and Administration of the Company. Effective February 13,
2004, the position of Executive Vice President, Finance and Administration held
by Brian C. Harriss was also eliminated in connection with the Company's ongoing
strategic business realignment program. On such date, Mr. Blue was appointed to
succeed Mr. Harriss as Secretary of the Company.
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Set forth below is certain information regarding the current executive
officers of the Company:
THOMAS C. SHULL...........
AGE 52 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 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.
MICHAEL D. CONTINO........
AGE 43 Executive Vice President and Chief Operating Officer
since April 25, 2001. Senior Vice President and Chief
Information Officer from December 1996 to April 25,
2001 and President of Keystone Internet Services,
Inc. (now Keystone Internet Services, LLC) since
November 2000. Mr. Contino joined the Company in 1995
as Director of Computer Operations and
Telecommunications. Prior to 1995, Mr. Contino was
the Senior Manager of IS Operations at New Hampton,
Inc., a subsidiary of Spiegel, Inc.
WILLIAM C. KINGSFORD......
AGE 57 Senior Vice President, Treasury and Control
(Corporate Controller) since May 2003. Vice President
and Corporate Controller from May 1997 to May 2003.
Prior to May 1997, Mr. Kingsford was Vice President
and Chief Internal Auditor at Melville Corporation.
Mr. Kingsford filed a petition under Chapter 13 of
the United States Bankruptcy Code during March 2001.
CHARLES E. BLUE...........
AGE 43 Senior Vice President and Chief Financial Officer
effective November 11, 2003 and Secretary effective
February 13, 2004. Mr. Blue joined the Company in
1999 and had most recently served as the Company's
Senior Vice President, Finance. Before joining the
Company, he held the positions of Director of
Planning and Treasury for Genesis Direct, Inc. and
Director of Strategic Planning for The Copeland
Companies.
STEVEN LIPNER.............
AGE 55 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.
10
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 the
Company's four (4) next most highly compensated executive officers who were
serving as executive officers at the end of the Company's 2003 fiscal year.
<Table>
<Caption>
LONG TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
----------------------- -------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
NAME AND ------------------------ OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS(S) SARS PAYOUTS COMPENSATION
------------------ ---- ---------- ---------- ------------ ---------- ---------- ------- ------------
Thomas C. Shull(1)......... 2003 $ 915,588(2) $2,250,000(2) -- -- -- None $ 12,369(18)
President and Chief 2002 $ 905,923(3) $1,327,500(3) $165,000(10) -- -- None $ 2,116(19)
Executive Officer 2001 $ 900,000(4) $ 600,000(4) $180,000(10) -- 500,000(14) None --
Edward M. Lambert(1)....... 2003 $1,046,923(5) $ -- -- -- -- None $101,486(20)
Executive Vice President 2002 $ 361,539 $ 685,000(6) -- -- 1,000,000(15) None $142,570(21)
2001 -- $ -- -- -- 300,000(17) None --
Brian C. Harriss(1)........ 2003 $ 357,902 $ 168,500(7) -- -- -- None $ 12,164(22)
Executive Vice President, 2002 $ 459,226 $ 287,503(7) $ 12,000(11) -- 600,000(15) None $ 10,001(23)
Finance and Administration 2001 $ 335,192 $ 375,000(7) $ 12,000(11) -- -- None $ 4,089(24)
and Secretary
Michael D. Contino(1)...... 2003 $ 393,698 $ 193,500(8) -- -- -- None $151,282(25)
Executive Vice President 2002 $ 382,270 $ 565,988(8) $ 4,000(12) -- 1,000,000(15) None $ 9,873(26)
and Chief Operating Officer 2001 $ 317,115 $ 350,000(8) $ 12,000(12) -- -- None $ 3,876(27)
Charles E. Blue(1)......... 2003 $ 231,096 $ -- -- -- -- None $ 12,219(28)
Senior Vice President 2002 $ 197,000 $ 206,938(9) $ 4,000(13) -- 250,000(16) None $ 9,873(29)
and Chief Financial Officer 2001 $ 175,858 $ 92,500(9) $ 8,733(13) -- -- None $ 3,992(30)
</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 and Michael D. Contino became Executive
Vice President and Chief Operating Officer of the Company. Effective
January 28, 2002, Mr. Harriss resigned as Executive Vice President and
Chief Financial Officer of the Company. 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. Effective December 2, 2002, Mr. Harriss was
appointed Executive Vice President, Human Resources and Legal and Secretary
of the Company. Effective November 11, 2003, Charles E. Blue was appointed
Senior Vice President and Chief Financial Officer of the Company replacing
Edward M. Lambert as Chief Financial Officer effective on such date in
connection with the Company's strategic business realignment program. Mr.
Lambert continued to serve as an Executive Vice President of the Company
until January 2, 2004. Also effective November 11, 2003, Brian C. Harriss
was appointed Executive Vice President, Finance and Administration.
Effective February 13, 2004, Mr. Harriss resigned from all positions held
with the Company as part of the Company's strategic business realignment
program and Mr. Blue was appointed to succeed Mr. Harriss as Secretary of
the Company.
(2) $915,588 of salary, a $450,000 stay bonus and a $1,350,000 change of
control payment was paid to Mr. Shull under an Employment Agreement between
Mr. Shull and the Company, dated as of
11
September 1, 2002, as amended by Amendment No. 1 thereto dated as of
September 1, 2002, Amendment No. 2 thereto dated as of June 23, 2003, and
Amendment No. 3 thereto dated as of August 3, 2003 (as amended, the "2002
Employment Agreement"), pursuant to which Mr. Shull is employed by the
Company as its President and Chief Executive Officer. An additional
$450,000 transaction bonus was paid to Mr. Shull under the Shull
Transaction Bonus Letter (as defined below).
(3) $276,923 of salary and a $450,000 stay bonus was paid to Mr. Shull under
the 2002 Employment Agreement between Mr. Shull and the Company. Includes a
$877,500 performance bonus for 2002 paid in 2003 under the 2002 Employment
Agreement. The remaining $629,000 of salary and bonus was paid to Meridian
Ventures, LLC, a limited liability company controlled by Mr. Shull
("Meridian"), in consideration for providing the services of Mr. 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 Services
Agreement, dated as of December 14, 2001, as amended effective April 2,
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."
(4) Paid to Meridian Ventures, LLC under the Services Agreements.
(5) $406,923 of salary and $640,000 of severance was paid to Mr. Lambert in
connection with a severance agreement with the Company dated November 4,
2003.
(6) Includes the following payments made by the Company to Mr. Lambert: for
fiscal 2002, a $200,000 performance bonus and a $100,000 stay bonus paid in
2002 and a $385,000 performance bonus paid in 2003.
(7) Includes the following payments made by the Company to Mr. Harriss: for
fiscal 2003, a $168,500 transaction bonus, for fiscal 2002, a $287,503 2002
performance bonus paid in 2003; and for fiscal 2001, a $375,000 2001
performance bonus paid in 2002.
(8) Includes the following payments made by the Company to Mr. Contino: for
fiscal 2003, a $193,500 transaction bonus, for fiscal 2002, a $565,988 2002
performance bonus paid in 2003; and for fiscal year 2001, a $350,000 2001
performance bonus paid in 2002.
(9) Includes the following payments made by the Company to Mr. Blue: for fiscal
2002, a $206,938 performance bonus for 2002 paid in 2003; and for fiscal
2001, a $92,500 performance bonus for 2001 paid in 2002.
(10) 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."
(11) Includes the following payments made by the Company on behalf of Mr.
Harriss: $12,000 in car allowance and related benefits in 2002; and $12,000
in car allowance and related benefits in 2001.
(12) Includes the following payments made by the Company on behalf of Mr.
Contino: $4,000 in car allowance and related benefits in 2002; and $12,000
in car allowance and related benefits in 2001.
(13) Includes the following payments made by the Company on behalf of Mr. Blue:
$4,000 in car allowance and related benefits in 2002; and $8,733 in car
allowance and related benefits in 2001.
(14) 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
(15) 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."
Options to purchase 100,000 shares issued to Mr. Harriss during 2000 were
forfeited during 2002 following his resignation as Executive Vice President
and Chief Financial Officer of the Company effective January 28, 2002.
(16) Issued by the Company pursuant to the Company's 2000 Management Stock
Option Plan.
(17) Granted pursuant to the December 2001 Services Agreement under the
Company's 2000 Management Stock Option Plan and allocated to Mr. Lambert.
See "Report of the Stock Option and Executive Compensation Committee on
Executive Compensation -- 2000 Management Stock Option Plan."
(18) Includes the following payments made by the Company on behalf of Mr. Shull
in 2003: $276 in group term life insurance premiums; $40 in accidental
death and disability insurance premiums; $162 in core life insurance
premiums; $205 in dental insurance premiums; $158 in long-term disability
premiums; $8,195 in health care insurance premiums; and $3,333 in matching
contributions under the Company's 401(k) Savings Plan.
(19) Includes the following payments made by the Company on behalf of Mr. Shull
in 2002: $85 in group term life insurance premiums; $12 in accidental death
and disability insurance premiums; $50 in core life insurance premiums; $44
in dental insurance premiums; $49 in long-term disability premiums; and
$1,876 in health care insurance premiums.
(20) Includes the following payments made by the Company on behalf of Mr.
Lambert in 2003: $125 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $205 in dental insurance premiums; $158 in long-term
disability premiums; $8,195 in health care insurance premiums; $3,333 in
matching contributions under the Company's 401(k) Savings Plan; and $89,268
in a gross-up for income tax purposes of travel expenses.
(21) Includes the following payments made by the Company on behalf of Mr.
Lambert in 2002: $79 in group term life insurance premiums; $26 in
accidental death and disability insurance premiums; $106 in core life
insurance premiums; $44 in dental insurance premiums; $191 in long-term
disability premiums; $1,876 in health care insurance premiums; $3,333 in
matching contributions under the Company's 401(k) Savings Plan; and
$136,915 in a gross-up for income tax purposes of travel expenses.
(22) Includes the following payments made by the Company on behalf of Mr.
Harriss in 2003: $287 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $159 in long-term disability premiums; $8,195 in health
care insurance premiums; and $3,321 in matching contributions under the
Company's 401(k) Savings Plan.
(23) Includes the following payments made by the Company on behalf of Mr.
Harriss in 2002: $276 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $38 in dental insurance premiums; $561 in long-term
disability premiums; $5,589 in health care insurance premiums; $3,333 in
matching contributions under the Company's 401(k) Savings Plan; and $2 in
vision plan premiums.
(24) 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.
(25) Includes the following payments made by the Company on behalf of Mr.
Contino in 2003: $125 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $205 in dental insurance premiums; $159 in long-term
disability premiums;
13
$8,195 in health care insurance premiums; and $3,333 in matching
contributions under the Company's 401(k) Savings Plan. Also includes
forgiveness of a $75,000 non-interest-bearing loan made by the Company to
Mr. Contino in January 1998. The loan was forgiven in full in accordance
with its terms during January 2003. In addition to the loan forgiveness,
the Company paid all applicable withholding taxes totaling $64,063.
(26) Includes the following payments made by the Company on behalf of Mr.
Contino in 2002: $120 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $143 in dental insurance premiums; $484 in long-term
disability premiums; $5,589 in health care insurance premiums; $3,333 in
matching contributions under the Company's 401(k) Savings Plan; and $2 in
vision plan premiums.
(27) 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.
(28) Includes the following payments made by the Company on behalf of Mr. Blue
in 2003: $125 in group term life insurance premiums; $40 in accidental
death and disability insurance premiums; $162 in core life insurance
premiums; $205 in dental insurance premiums; $159 in long-term disability
premiums; $8,195 in health care insurance premiums; and $3,333 in matching
contributions under the Company's 401(k) Savings Plan.
(29) Includes the following payments made by the Company on behalf of Mr. Blue
in 2002: $120 in group term life insurance premiums; $40 in accidental
death and disability insurance premiums; $162 in core life insurance
premiums; $143 in dental insurance premiums; $285 in long-term disability
premiums; $6,195 in health care insurance premiums; $3,265 in matching
contributions under the Company's 401(k) Savings Plan; and $2 in vision
plan premiums.
(30) Includes the following payments made by the Company on behalf of Mr. Blue
in 2001: $116 in group term life insurance premiums; $2,345 in matching
contributions under the Company's 401(k) Savings Plan; $403 in long-term
disability premiums; $162 in term life insurance premiums; and $40 of
accidental death insurance premiums.
14
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
The following table contains information concerning options and stock
appreciation rights ("SARs") granted to the Chief Executive Officer and the
Company's four (4) next most highly compensated executive officers who were
serving as executive officers at the end of the Company's 2003 fiscal year.
There were no SARs granted during fiscal 2003 to the Chief Executive Officer or
the Company's four (4) next most highly compensated executive officers who were
serving as executive officers at the end of the Company's 2003 fiscal year.
OPTION/SAR GRANTS IN FISCAL 2003
<Table>
<Caption>
INDIVIDUAL GRANTS
----------------------------------------------------------------------------
NUMBER OF GRANT DATE
SECURITIES PERCENTAGE OF VALUE
UNDERLYING TOTAL OPTIONS/ ----------
OPTIONS/ SARS GRANTED EXERCISE MARKET PRICE GRANT DATE
SARS TO EMPLOYEES IN OR BASE ON DATE OF PRESENT
NAME GRANTED FISCAL YEAR 2003 PRICE GRANT EXPIRATION DATE VALUE($)
---- ---------- ---------------- -------- ------------ --------------- ----------
Thomas C. Shull........ -- -- -- -- -- --
Edward M. Lambert...... -- -- -- -- -- --
Brian C. Harriss....... -- -- -- -- -- --
Michael D. Contino..... -- -- -- -- -- --
Charles E Blue......... -- -- -- -- -- --
</Table>
15
The following table contains information concerning the fiscal 2003
year-end values of all options and SARs granted to the Chief Executive Officer
and the Company's four (4) next most highly compensated executive officers who
were serving as executive officers at the end of the Company's 2003 fiscal year.
No SARs have been granted to the Chief Executive Officer or the Company's four
(4) next most highly compensated executive officers who were serving as
executive officers at the end of the Company's 2003 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN 2003 FISCAL YEAR
AND DECEMBER 27, 2003 OPTION/SAR VALUES
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
DECEMBER 27, 2003 DECEMBER 27, 2003
----------------------- --------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------------------- --------------------
Thomas C. Shull.......... None None 3,200,000 options(1) $0/$0
100% exercisable
Edward M. Lambert........ None None 1,300,000 options(1)(2) $0/$0
100% exercisable
Brian C. Harriss......... None None 600,000 options(2) none $0/$0
100% exercisable
Michael D. Contino....... None None 1,450,000 options(2) $0/$0
100% exercisable
Charles E. Blue.......... None None 294,000 options $0/$0
100% exercisable
</Table>
- ---------------
(1) 2,700,000 options were awarded to Mr. Shull under the December 2000 Services
Agreement. All of such options were exercisable on December 28, 2002 and
expire on March 31, 2006. 500,000 options were awarded to Mr. Shull, and
300,000 options were awarded to Mr. Lambert, under the December 2001
Services Agreement. Mr. Lambert's options are exercisable on March 31, 2003
and expire on March 31, 2006, while Mr. Shull's options are exercisable on
March 31, 2003, are not saleable until September 30, 2004 and expire on
March 31, 2006.
(2) 200,000 options for Mr. Contino represent options granted pursuant to the
1996 Stock Option Plan. Under this plan, these options become exercisable
after three years and expire after six years from the date of grant.
Additionally, 600,000 options for Mr. Harriss, 1,150,000 options for Mr.
Contino, 1,000,000 options for Mr. Lambert, and 235,117 options for Mr. Blue
represent options granted pursuant to the 2000 Management Stock Option Plan.
Under this plan, Mr. Harriss' and Mr. Contino's options become exercisable
after four years and expire after ten years from the date of grant; Mr.
Lambert's options became fully vested on January 2, 2004. An additional
100,000 options for Mr. Contino represent options granted effective November
3, 1999. These options became fully exercisable after four years.
16
EQUITY COMPENSATION PLAN INFORMATION TABLE
The following table provides information about the securities authorized
for issuance under the Company's equity compensation plans as of December 27,
2003:
<Table>
<Caption>
(A) (B) (C)
-------------------- -------------------- ----------------------------
NUMBER OF NUMBER OF SECURITIES
SECURITIES TO BE REMAINING AVAILABLE FOR
ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER EQUITY
EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN(A))
------------- -------------------- -------------------- ----------------------------
Equity compensation plans approved
by security holders............... 11,551,446 $0.70 16,648,554
Equity compensation plans not
approved by security holders...... 2,700,000 0.25 2,700,000
---------- ----------
Total............................... 14,251,446 $0.62 19,348,554
========== ===== ==========
</Table>
LONG-TERM INCENTIVE PLANS
No awards under long-term incentive plans were granted in fiscal 2003 to
the Chief Executive Officer or the Company's four (4) next most highly
compensated executive officers who were serving as executive officers at the end
of the Company's 2003 fiscal year.
DEFINED BENEFIT OR ACTUARIAL PLANS
The Company has no defined benefit or actuarial plans under which benefits
are determined primarily by final compensation (or average final compensation)
and years of service.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Shull Employment Agreement. Effective December 5, 2000, Thomas C. Shull,
Meridian Ventures, LLC, a limited liability company controlled by Mr. Shull
("Meridian"), and the Company entered into a Services Agreement (the "December
2000 Services Agreement"). The December 2000 Services Agreement was replaced by
a subsequent services agreement, dated as of August 1, 2001 (the "August 2001
Services Agreement"), among Mr. Shull, Meridian and the Company, and a Services
Agreement, dated as of December 14, 2001 (the "2001 Services Agreement"), among
Mr. Shull, Meridian, and the Company. The 2001 Services Agreement was replaced
effective September 1, 2002 by an Employment Agreement between Mr. Shull and the
Company, dated as of September 1, 2002, as amended by Amendment No. 1 thereto,
dated as of September 1, 2002, Amendment No. 2 thereto, dated as of June 23,
2003, and Amendment No. 3 thereto, dated as of August 3, 2003 (as amended, the
"2002 Employment Agreement"), pursuant to which Mr. Shull is employed by the
Company as its President and Chief Executive Officer, as described below. The
term of the 2002 Employment Agreement began on September 1, 2002 and will
terminate on March 31, 2006 (the "2002 Employment Agreement Term").
Under the 2002 Employment Agreement, Mr. Shull is to receive from the
Company base compensation equal to $855,000 per annum, payable at the rate of
$71,250 per month, subject to certain exceptions described in the 2002
Employment Agreement ("Base Compensation"). Mr. Shull is to be provided with
participation in the Company's employee benefit plans, including but not limited
to the Company's Key Executive Eighteen Month Compensation Continuation Plan
(the "Change of Control Plan") and its transaction bonus program.
17
The Company is also to reimburse Mr. Shull for his reasonable out-of-pocket
expenses incurred in connection with his employment by the Company.
Under the 2002 Employment Agreement, the Company paid the remaining unpaid
$300,000 of Mr. Shull's fiscal 2001 bonus under the Company's 2001 Management
Incentive Plan in December 2002. Mr. Shull also received the same bonus amount
for fiscal 2002 under the Company's 2002 Management Incentive Plan as all other
Level 8 participants (as defined in such plan) received under such plan for such
period, subject to all of the terms and conditions applicable generally to Level
8 participants thereunder. Mr. Shull earned an annual bonus for fiscal 2003
under the Company's 2003 Management Incentive Plan consistent with bonuses
awarded to other senior executives under such plan. Mr. Shull shall earn an
annual bonus for fiscal 2004 under such plan as the Company's Compensation
Committee may approve in a manner consistent with bonuses awarded to other
senior executives under such plan.
Under the 2002 Employment Agreement, the Company made two installment
payments in September and November 2002 to satisfy the obligation of $450,000 to
Mr. Shull previously due to be paid to Meridian on June 30, 2002. In addition,
the Company agreed to make two equal lump sum cash payments of $225,000 each to
Mr. Shull on March 31, 2003 and September 30, 2004, provided the 2002 Employment
Agreement has not terminated due to Willful Misconduct (as defined in the 2002
Employment Agreement) or material breach thereof by Mr. Shull, or Mr. Shull's
death or permanent disability. Such payments were to be made notwithstanding any
other termination of the Employment Agreement on or prior to such date or as a
result of another event constituting a Change of Control. The March 31, 2003
payment was made on or prior to such date. The Recapitalization constituted a
"change of control" under the 2002 Employment Agreement and Mr. Shull received a
payment in the amount of $225,000 in December 2003 under the terms of the 2002
Employment Agreement, representing an acceleration of the cash payment due in
September 2004.
Under the 2002 Employment Agreement, upon the closing of any transaction
which constitutes a "change of control" thereunder, provided that Mr. Shull is
then employed by the Company, the Company will be required to make a lump sum
cash payment to Mr. Shull on the date of such closing pursuant to the Change of
Control Plan, the Company's transaction bonus program and the Company's
Management Incentive Plan for the applicable fiscal year. Any such lump sum
payment would be in lieu of (i) any cash payment under the 2002 Employment
Agreement as a result of a termination thereof upon the first day after the
acquisition of the Company (whether by merger or the acquisition of all of its
outstanding capital stock) or the tenth day after the sale or any series of
sales since April 27, 2001 involving an aggregate of 50% or more of the market
value of the Company's assets (for this purpose under the 2002 Employment
Agreement, such 50% amount shall be deemed to be $107.6 million), and (ii) the
aggregate amount of Base Compensation to which Mr. Shull would have otherwise
been entitled through the end of the 2002 Employment Agreement Term. The
Recapitalization constituted a "change of control" under the 2002 Employment
Agreement and Mr. Shull received payments on December 5, 2003 and December 12,
2003 in the aggregate amount of $1,575,000 under the terms of the 2002
Employment Agreement, representing a $1,350,000 change of control payment and
the acceleration of a $225,000 cash payment due in September 2004. These amounts
were recorded as compensation to Mr. Shull. Mr. Shull will not be entitled to
any additional change of control payments under the 2002 Employment Agreement
relating to the Recapitalization transaction.
Under the 2002 Employment Agreement, additional amounts are payable to Mr.
Shull by the Company under certain circumstances upon the termination of the
2002 Employment Agreement. If the termination is on account of the expiration of
the 2002 Employment Agreement Term, Mr. Shull shall be entitled to receive such
amount of bonus as may be payable pursuant to the Company's applicable bonus
plan as well as employee benefits such as accrued vacation and insurance in
accordance with the Company's customary
18
practice. If the termination is on account of the Company's material breach of
the 2002 Employment Agreement or the Company's termination of the 2002
Employment Agreement where there has been no Willful Misconduct (as defined in
the 2002 Employment Agreement) or material breach thereof by Mr. Shull, Mr.
Shull shall be entitled to receive (i) a lump sum payment equal to the aggregate
amount of Base Compensation to which he would have otherwise been entitled
through the end of the 2002 Employment Agreement Term (not to exceed 18 months
of such Base Compensation), plus (ii) such additional amount, if any, in
severance pay which, when combined with the amount payable pursuant to clause
(i) equals 18 months of Base Compensation and such amount of bonus as may be
payable pursuant to the Company's 2002 Management Incentive Plan or other bonus
plan, as applicable (based upon the termination date and the terms and
conditions of the applicable bonus plan), as described in paragraph 4(b), as
well as employee benefits such as accrued vacation and insurance in accordance
with the Company's customary practice. If the termination is on account of the
acquisition of the Company (whether by merger or the acquisition of all of its
outstanding capital stock) or the sale or any series of sales since April 27,
2001 involving an aggregate of 50% or more of the market value of the Company's
assets (for this purpose under the 2002 Employment Agreement, such 50% amount
shall be deemed to be $107.6 million) and the amount realized in the transaction
is less than $0.50 per common share (or the equivalent of $0.50 per common
share), and if and only if the Change of Control Plan shall not then be in
effect, Mr. Shull shall be entitled to receive a lump sum payment equal to the
aggregate amount of Base Compensation to which he would have otherwise been
entitled through the end of the 2002 Employment Agreement Term. If the
termination is on account of the acquisition of the Company (whether by merger
or the acquisition of all of its outstanding capital stock) or the sale or any
series of sales since April 27, 2001 involving an aggregate of 50% or more of
the market value of the Company's assets (for this purpose under the 2002
Employment Agreement, such 50% amount shall be deemed to be $107.6 million) and
the amount realized in the transaction equals or exceeds $0.50 per common share
(or the equivalent of $0.50 per common share), and if and only if the Change of
Control Plan shall not then be in effect, Mr. Shull shall be entitled to receive
a lump sum payment equal to the greater of the Base Compensation to which he
would have otherwise been entitled through the end of the 2002 Employment
Agreement Term or $1,000,000. If the termination is on account of an acquisition
or sale of the Company (whether by merger or the acquisition of all of its
outstanding capital stock) or the sale or any series of sales since April 27,
2001 involving an aggregate of 50% or more of the market value of the Company's
assets (for this purpose under the 2002 Employment Agreement, such 50% amount
shall be deemed to be $107.6 million) and the Change of Control Plan shall then
be in effect, Mr. Shull shall only be entitled to receive his benefit under the
Change of Control Plan. The Recapitalization transaction was deemed a "change of
control" for purposes of the 2002 Employment Agreement and the Change of Control
Plan. The Company was permitted to make any payments thereunder on the closing
of the Recapitalization. Mr. Shull received payments on December 5, 2003 and
December 12, 2003 in the aggregate amount of $1,575,000 under the terms of the
2002 Employment Agreement, representing a $1,350,000 change of control payment
and the acceleration of a $225,000 cash payment due in September 2004. Mr. Shull
will not be entitled to any additional change of control payments under the 2002
Employment Agreement relating to the Recapitalization transaction.
Under the 2002 Employment Agreement, the Company is required to maintain
directors' and officers' liability insurance for Mr. Shull during the 2002
Employment Agreement Term. The Company is also required to indemnify Mr. Shull
in certain circumstances.
Amended Thomas C. Shull Stock Option Award Agreements. During December
2000, the Company entered into a stock option agreement with Thomas C. Shull to
evidence the grant to Mr. Shull of an option to purchase 2.7 million shares of
the Company's common stock (the "Shull 2000 Stock Option Agreement").
19
Effective as of September 1, 2002, the Company amended the Shull 2000 Stock
Option Agreement to (i) extend the final expiration date for the stock option
under the Shull 2000 Stock Option Agreement to June 30, 2005, and (ii) replace
all references therein to the December 2000 Services Agreement with references
to the 2002 Employment Agreement. Effective as of August 3, 2003, the 2002
Employment Agreement was amended to extend the final expiration date for the
stock option under the Shull 2000 Stock Option Agreement to March 31, 2006.
During December 2001, the Company entered into a stock option agreement
with Mr. Shull to evidence the grant to Mr. Shull of an option to purchase
500,000 shares of the Company's Common Stock under the Company's 2000 Management
Stock Option Plan (the "Shull 2001 Stock Option Agreement"). Effective as of
September 1, 2002, the Company has amended the Shull 2001 Stock Option Agreement
to (i) provide that any shares purchased by Mr. Shull under the Shull 2001 Stock
Option Agreement would not be saleable until September 30, 2004, and (ii)
replace all references therein to the 2001 Services Agreement with references to
the 2002 Employment Agreement.
Amended Thomas C. Shull Transaction Bonus Letter. During May 2001, Thomas
C. Shull entered into a letter agreement with the Company (the "Shull
Transaction Bonus Letter") under which he would be paid a bonus on the
occurrence of certain transactions involving the sale of certain of the
Company's businesses. Effective as of September 1, 2002, the Company has amended
the Shull Transaction Bonus Letter to (i) increase the amount of Mr. Shull's
agreed to base salary for purposes of the transaction bonus payable thereunder
from $600,000 to $900,000, and (ii) replace all references therein to the
December 2000 Services Agreement with references to the 2002 Employment
Agreement.
The Recapitalization transaction was deemed a "change of control" for
purposes of the Shull Transaction Bonus Letter. The Company was permitted to
make any payments thereunder on or after the closing of the Recapitalization.
Mr. Shull received an additional $450,000 payment on December 5, 2003 under the
terms of the Shull Transaction Bonus Letter.
Issuance of Stock Options. On August 8, 2002, the Company issued options
to purchase 3,750,000 shares of the Company's Common Stock to certain Management
Incentive Plan ("MIP") Level 7 and 8 employees, including various executive
officers, at a price of $0.24 per share and services rendered under the
Company's 2000 Management Stock Option Plan. In addition, on August 8, 2002, the
Company authorized the President to grant options to purchase up to an aggregate
of 1,045,000 and 1,366,000 shares of the Company's Common Stock to certain MIP
Level 4 and MIP Level 5 and 6 employees, respectively, at a price of $0.24 per
share and services rendered under the Company's 2000 Management Stock Option
Plan.
On October 2, 2002, the Company issued options to purchase 600,000 shares
of the Company's Common Stock to an Executive Vice President at a price of $0.27
per share and services rendered under the Company's 2000 Management Stock Option
Plan.
On September 29, 2003, the Company issued options to purchase an aggregate
of 100,000 shares of the Company's Common Stock to two newly-elected Board
members at a price of $0.27 per share and services rendered.
On August 1, 2003, the Company issued options to purchase an aggregate of
210,000 shares of the Company's Common Stock to the then existing six board
members at a price of $0.25 per share and services rendered and options to
purchase 35,000 shares at a price of $0.25 per share and services rendered to a
consultant to the Company per their agreement.
20
On July 29, 2003, the Company issued options to purchase an aggregate of
100,000 shares of the Company's Common Stock to two newly-elected Board members
at a price of $0.25 per share and services rendered.
Charles F. Messina. During September 2002, Charles F. Messina resigned as
Executive Vice President, Chief Administrative Officer and Secretary of the
Company. In connection with such resignation, the Company and Mr. Messina
entered into a severance agreement dated September 30, 2002 providing for cash
payments of $884,500 and other benefits which were accrued in the fourth quarter
of 2002.
Brian C. Harriss. Brian C. Harriss was appointed as Executive Vice
President, Human Resources and Legal and Secretary of the Company effective
December 2, 2002 and as Executive Vice President, Finance and Administration
effective November 11, 2003. Prior to January 2002, Mr. Harriss had served the
Company as Executive Vice President and Chief Financial Officer. In connection
with the December 2002 appointment, Mr. Harriss and the Company terminated a
severance agreement entered into during January 2002 at the time of Mr. Harriss'
resignation from the Company during January 2002, and Mr. Harriss waived his
rights to certain payments under such severance agreement. Effective February
15, 2004, the position of Executive Vice President, Finance and Administration
was eliminated in connection with the Company's ongoing strategic business
realignment program. In connection with such change, Mr. Harriss and the Company
entered into a severance agreement dated February 15, 2004 providing for
$545,000 of cash payments, as well as other benefits that was accrued and paid
in the first quarter of 2004. Mr. Harriss is also entitled to receive a payment
under the Company's 2003 Management Incentive Plan.
Chief Financial Officer. On November 3, 2003, Charles E. Blue was
appointed Chief Financial Officer of the Company effective November 11, 2003,
replacing Edward M. Lambert as Chief Financial Officer effective on such date in
connection with the Company's ongoing strategic business realignment program.
Mr. Blue joined the Company in 1999 and had most recently served as Senior Vice
President, Finance, a position eliminated by the strategic business realignment
program. Mr. Lambert continued to serve as Executive Vice President of the
Company until January 2, 2004. In connection with such change, Mr. Lambert and
the Company entered into a severance agreement dated November 4, 2003 providing
for $640,000 of cash payments, as well as other benefits that were accrued and
paid in the fourth quarter of 2003. Mr. Lambert is also entitled to receive a
payment under the Company's 2003 Management Incentive Plan.
Other Executives. In October 2002, the Company entered into arrangements
with Edward M. Lambert, Brian C. Harriss and Michael D. Contino (the
"Compensation Continuation Agreements") pursuant to which it agreed to provide
eighteen months of severance pay, COBRA reimbursement and Exec-U-Care plan
coverage in the event their employment with the Company is terminated either by
the Company other than "For Cause" or by them "For Good Reason" (as such terms
are defined). On November 6, 2002, the Company also entered into a Compensation
Continuation Agreement with Frank Lengers pursuant to which it agreed to provide
twelve months of severance pay, COBRA reimbursement and Exec-U-Care plan
coverage in the event his employment with the Company is terminated either by
the Company "For Cause" or by Mr. Lengers "For Good Reason" (as such terms are
defined).
Hanover Direct, Inc. Key Executive Eighteen-Month Compensation Continuation
Plan. Effective April 27, 2001, the Company terminated the Hanover Direct, Inc.
Key Executive Thirty-Six Month Compensation Continuation Plan and the Hanover
Direct, Inc. Key Executive Twenty-Four Month Compensation Plan. Effective April
27, 2001, the Company established the Hanover Direct, Inc. Key Executive
Eighteen Month Compensation Continuation Plan (the "Executive Plan") for its
Chief Executive Officer, corporate executive vice presidents, corporate senior
vice presidents, strategic unit presidents, and other
21
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 of 50% or more of the market value of the Company's assets (for this
purpose, 50% is deemed to be $107.6 million); or (III) a complete liquidation or
dissolution of the Company; (b) notwithstanding (ii)(a), 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 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
22
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
transactions, owns no less than the equivalent percentage of the voting power of
the Sold Subsidiary.)
Under the Executive Plan, an Executive Plan participant shall be entitled
to Change of Control Benefits under the Executive Plan solely if there occurs a
Change of Control (which occurred on the closing of the Recapitalization) 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.
The Recapitalization transaction was a "Change of Control" for purposes of
the Executive Plan.
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
23
the occurrence of the first 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.
The Recapitalization transaction was a "Change of Control" for purposes of
the Directors Plan. The Company was permitted to make all payments thereunder on
or after the closing of the Recapitalization. On December 18, 2003, each of the
eight non-employee directors (Messrs. Brown, James, Krushel, Sonnenfeld, Masson,
Regan, Garten and Edelman) received a payment in the amount of $87,000 under the
terms of the Directors Plan.
Change in Control Payments. Pursuant to the Recapitalization Agreement,
upon completion of the Recapitalization, there was a "change in control" of the
Company for purposes of all of the Company's existing Compensation Continuation
(Change of Control) Plans, including the Directors Change of Control Plan, the
Employment Agreement, dated as of September 1, 2002, as amended, between the
Company and Mr. Shull and the Transaction Bonus Letters between the Company and
the following executive officers: Mr. Shull, Mr. Contino and Mr. Harriss. Mr.
Shull received payments on December 5, 2003 and December 12, 2003 in the
aggregate amount of $1,575,000 under the terms of the 2002 Employment Agreement.
See "Employment Contracts, Termination of Employment and Change-in-Control
Arrangements -- 2002 Employment Agreement." In December 2003, Messrs. Shull,
Harriss and Contino received payments in the amount of $450,000, $168,500 and
$193,500, respectively, under the terms of the Transaction Bonus Letters to
which they are a party. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements -- Transaction Bonus Letters." On December 18,
2003, each of the eight non-employee directors (Messrs. Brown, James, Krushel,
Sonnenfeld, Masson, Regan, Garten and Edelman) received a payment in the amount
of $87,000 under the terms of the Hanover Direct, Inc. Directors Change of
Control Plan. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements -- Hanover Direct, Inc. Directors Change of
Control Plan." All of such amounts were treated as compensation to the
recipients.
Transaction Bonus Letters. During May 2001, each of Thomas C. Shull,
Jeffrey Potts, Brian C. Harriss and Michael D. Contino and, during November
2002, each of Edward M. Lambert and Brian C. Harriss (each, a "Participant")
entered into a letter agreement with the Company (a "Transaction Bonus Letter")
under which the Participant would be paid a bonus on the occurrence of certain
transactions involving the sale of certain of the Company's businesses. In
addition, Mr. Shull is a party to a "Letter Agreement" with the Company, dated
April 30, 2001, pursuant to which, following the termination of the December
2000 Services Agreement, in the event he is terminated without cause during any
period of his continued employment as the Chief Executive Officer of the
Company, he shall be paid one year of his annual base salary (the "Shull
Termination Payment"). Effective June 1, 2001, the Company amended the Executive
Plan to provide that, notwithstanding anything to the contrary contained in the
Executive Plan, Section 10.2 of the Executive Plan shall not be effective with
respect to the payment of (i) a Participant's "Transaction Bonuses," and/or (ii)
the Shull Termination Payment. The payment of any such "Transaction Bonus" to
any of the Participants, and/or the payment of the Shull Termination Payment,
shall be paid in addition to, and not in lieu of, any Change of Control Benefit
payable to any Participant or Mr. Shull pursuant to the terms of the Executive
Plan. In
24
conjunction with his resignation as Executive Vice President and Chief Financial
Officer, Mr. Harriss released any claims that he may have against the Company
under his May 2001 Transaction Bonus Letter, although he entered into a new
Transaction Bonus Letter in November 2002. The remaining Transaction Bonus
Letters (with Messrs. Shull, Harriss and Contino), other than the Transaction
Bonus Letter with Messrs. Potts, Messina and Lambert, remain in effect.
The Recapitalization transaction was deemed a "change of control" for
purposes of the Transaction Bonus Letters. The Company was permitted to make all
payments thereunder on the closing of the Recapitalization. On December 5 and
12, 2003, Messrs. Shull, Harriss and Contino received payments in the aggregate
amount of $450,000, $168,500 and $193,500, respectively, under the terms of the
Transaction Bonus Letters to which they are a party. Mr. Lambert did not receive
any bonus payment in connection with the Recapitalization under the terms of the
Transaction Bonus Letter to which he is a party because he waived his rights
thereunder pursuant to his severance agreement with the Company.
Letter Agreement with Mr. Shull and Meridian. On April 30, 2001, Mr.
Shull, Meridian and the Company entered into a letter agreement (the "Letter
Agreement") specifying Mr. Shull's rights under the Executive Plan, which is
discussed above. Under the Letter Agreement, Mr. Shull and Meridian agreed that,
so long as the Executive Plan is in effect and Mr. Shull is a Participant
thereunder, Meridian and Mr. Shull will accept the Change in Control Benefits
provided for in the Executive Plan in lieu of the compensation contemplated by
the December 2000 Services Agreement between them (which benefits amounts will
not be offset against the December 2000 flat fee provided for in the December
2000 Services Agreement and shall be payable at such times and in such amounts
as provided in the Executive Plan rather than in a lump sum payable within five
business days after the termination date of the December 2000 Services Agreement
as contemplated by the December 2000 Services Agreement). For purposes of the
change in control benefits under the Executive Plan and the Letter Agreement,
Mr. Shull's annualized base salary is $600,000. In addition to the benefits
provided by the December 2000 Services Agreement, Mr. Shull and those persons
named in the December 2000 Services Agreement shall also be entitled to the
optional cash out of stock options as provided in the Executive Plan. Under the
Letter Agreement, Mr. Shull is also entitled to payment of one year annual base
salary in the event he is terminated without cause during any period of his
continued employment as the Chief Executive Officer of the Company following the
termination of the December 2000 Services Agreement. The participation and
benefits to which Mr. Shull is entitled under the Executive Plan shall also
survive the termination of the December 2000 Services Agreement pursuant to the
terms thereof in the event that Mr. Shull is still employed as the Chief
Executive Officer of the Company and is a Participant under the Executive Plan.
Should the Executive Plan no longer be in effect or Mr. Shull no longer be a
Participant thereunder, Meridian and Mr. Shull shall continue to be entitled to
the compensation contemplated by the December 2000 Services Agreement. The
Letter Agreement was superseded by the 2002 Employment Agreement.
2002 Directors' Option Plan. Effective January 1, 2003, the 2002 Stock
Option Plan for Directors was amended to increase the annual service award for
Directors who are not employees of the Company from 25,000 to 35,000 options to
purchase shares of Common Stock. In November 2003, the 2002 Stock Option Plan
for Directors was amended to increase the maximum number of shares of Common
Stock that may be delivered or purchased under the plan from 500,000 to 900,000.
See "PROPOSAL 5 -- Amendments to 2002 Stock Option Plan for Directors."
Stock Option Plans. Pursuant to the Company's Compensation Continuation
(Change of Control) Plans, upon the closing of the Recapitalization, all stock
options previously granted pursuant to the Company's stock option plans to the
Participants under such Change of Control Plans by the Company became fully
25
exercisable as of November 30, 2003 (the closing date of the Recapitalization),
whether or not otherwise exercisable and vested as of that date.
Salary Reduction. The Company effected salary reductions of 5% of base pay
for participants in its 2003 Management Incentive Plan, including Executive
Officers, effective with the pay period starting August 3, 2003. These salary
reductions are being restored to those participants at or below the
Vice-President level effective March 28, 2004.
Vacation and Sick Policies. During June 2003, the Company established and
implemented a new Company-wide vacation and sick policy applicable to all
employees, including Executive Officers, to better administer vacation and sick
benefits.
Michael D. Contino. In January 1998, the Company made a $75,000
non-interest bearing loan to Michael D. Contino, currently the Company's
Executive Vice President and Chief Operating Officer, for the purchase by Mr.
Contino of a new principal residence in the state of New Jersey. The terms of
the loan agreement, as amended, included a provision for the Company to forgive
the original amount of the principal on the fifth anniversary of the loan. The
loan was secured by the residence that the proceeds were used to purchase. The
loan was forgiven in full in accordance with its terms during January 2003. In
addition to the loan forgiveness, the Company paid all applicable withholding
taxes totaling $64,063.
REPRICING OF OPTIONS/SARS
During fiscal 2003, the Company did not adjust or amend the exercise price
of stock options or SARs previously awarded to the Chief Executive Officer or
the Company's four (4) next most highly compensated executive officers who were
serving as executive officers at the end of the Company's 2003 fiscal year.
STOCK OPTION AND EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION
At various times during fiscal year ended December 27, 2003, Messrs.
Jeffrey A. Sonnenfeld (Chairman), A. David Brown and Robert H. Masson were
members of the Stock Option and Executive Compensation Committee. Upon execution
of the Recapitalization Agreement, the members of the Stock Option and Executive
Compensation Committee became A. David Brown (Chairman), Wayne Garten and Stuart
Feldman who are also the current members of the Stock Option and Executive
Compensation Committee. 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 except for Mr. Garten who served in various executive positions at the
Company from 1983 to 1996. During the 2003 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 2003 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
2003 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.
26
REPORT OF THE STOCK OPTION AND EXECUTIVE COMPENSATION COMMITTEE ON EXECUTIVE
COMPENSATION
The report of the Stock Option and Executive Compensation Committee (the
"Compensation Committee") for the fiscal year ended December 27, 2003, is as
follows:
The Compensation Committee, consisting as of the date of this report for
the fiscal year ended December 27, 2003 of A. David Brown (Chairman), Wayne
Garten and Stuart Feldman, 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 2003 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 2002 Employment Agreement. 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.
27
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. As of the
date of this report (April 2004), approximately 207 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 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 50% to 125% of salary. Target bonus opportunities for Messrs. Contino,
Harriss, Lambert, Blue and Shull for fiscal year 2003 were 75% of salary while
maximum bonuses were 125% of salary. For purposes of the 2003 Management
Incentive Plan, Mr. Shull's base salary was deemed to be $900,000.
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 2003 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 2003. Payments related to fiscal year 2003 are scheduled to be
made to the Chief Executive Officer and the four (4) most highly compensated
executive officers in the amount of $153,487 for Mr. Shull, $97,208 for Mr.
Lambert, $81,898 for Mr. Harriss, $98,999 for Mr. Contino and $66,511 for Mr.
Blue under the 2003 Management Incentive Plan in the summer of 2004. Payments to
Messrs. Shull, Lambert, Harriss, Contino and Blue under the 2002 Management
Incentive Plan in the aggregate amount of $2,322,929 for the fiscal year 2002
were paid in fiscal year 2003. 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 (3) years and expire after six (6) 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 and 20,000 shares of the Company's Common Stock in fiscal years 2002 and
2001, respectively,
28
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.
At December 27, 2003, current and former officers and executives of the
Company owed the Company approximately $0.3 million, excluding accrued interest,
under the 1993 Executive Equity Incentive Plan. These amounts due to the Company
bear interest at rates ranging from 5.54% to 7.75% and are due or will be due
during 2004.
As of December 27, 2003, no stock options remained outstanding or
exercisable under the 1993 Executive Entity Incentive Plan.
1996 Stock Option Plan
The purpose of the 1996 Stock Option Plan is to provide employees of the
Company and its subsidiaries with a larger personal and financial interest in
the success of the Company through the grant of stock-based incentive
compensation. Under the plan, employees may be granted options to purchase
shares of Common Stock at the fair market value on the date of grant. The total
options granted to an employee is one-half performance-based. The 1996 Stock
Option Plan provides that options may be granted for terms of not more than 10
years.
Employees are no longer eligible to participate in the 1996 Stock Option
Plan. During 2003, no options to purchase shares of Common Stock were granted
pursuant to the 1996 Stock Option Plan. However, as of December 27, 2003,
options to purchase 872,446 shares of Common Stock remained outstanding under
the 1996 Stock Option Plan including options to purchase 110,000 shares held by
the executives named in the executive compensation table.
2000 Management Stock Option Plan
The purpose of the 2000 Management Stock Option Plan is to advance the
interests of the Company and its stockholders by providing employees of the
Company, through the grant of options to purchase shares of Common Stock, with a
larger personal and financial interest in the success of the Company. Under the
terms of the plan, officers, directors, agents, and employees of the Company and
consultants to the Company or of any subsidiary of the Company may be granted
options to purchase shares of Common Stock at their fair market value on the
date of grant. The plan provides that options may be granted for terms of not
more than 10 years and shall vest according to the terms of the grant of the
options. In addition, options may not be exercised more than 30 days after a
participant ceases to be an employee of the Company, except in the case of
death, disability or retirement, in which cases options may be exercised within
90 days after the date of death, disability or retirement.
During 2003, 65,000 options to purchase shares of Common Stock were granted
to employees in accordance with the 2000 Management Stock Option Plan. During
2003, no options were granted to executives named in the executive compensation
table in accordance with the 2000 Management Stock Option Plan.
1999 Stock Option Plan for Directors
The purpose of the 1999 Stock Option Plan for Directors is to advance the
interests of the Company by providing non-employee directors of the Company,
through the grant of options to purchase shares of
29
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 of Directors 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 2003, no options to purchase shares of Common Stock were granted to
eligible directors in accordance with the 1999 Stock Option Plan for Directors.
During 2003, no options to purchase shares of Common Stock under the 1999 Stock
Option Plan for Directors were exercised. During 2003, no options to purchase
shares of Common Stock granted to eligible directors under the 1999 Stock Option
Plan for Directors expired following the resignation of a director from the
Company's Board of Directors. As of December 27, 2003, 420,000 options to
purchase Common Stock under the 1999 Stock Option Plan for Directors were
outstanding, of which 366,667 options were exercisable.
No additional options to purchase shares of Common Stock will be granted
under the 1999 Stock Option Plan for Directors.
2002 Stock Option Plan for Directors
The purpose of the 2002 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
of Directors or, if later, the effective date of the plan, and shall be granted
an option to purchase 25,000 shares of Common Stock on August 2, 2002, and an
option to purchase 35,000 shares of Common Stock on August 1, 2003 and August 3,
2004, provided that such directors continue to serve as directors on such dates.
The price at 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.
Effective January 1, 2003, the 2002 Stock Option Plan for Directors was
amended to increase the annual service award for directors who are not employees
of the Company from 25,000 to 35,000 options to purchase shares of Common Stock.
In November 2003, the 2002 Stock Option Plan for Directors was amended to
increase the maximum number of shares of Common Stock that may be delivered or
purchased under the Plan from 500,000 to 900,000. See "PROPOSAL 5 -- Amendments
to 2002 Stock Option Plan for Directors."
30
During 2003, a total of 610,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the 2002 Stock Option
Plan for Directors. During 2003, no options to purchase shares of Common Stock
under the 2002 Stock Option Plan for Directors were exercised. During 2003, no
options to purchase shares of Common Stock granted to eligible directors under
the 2002 Stock Option Plan for Directors expired following the resignation of a
director from the Company's Board of Directors. As of December 27, 2003, 710,000
options to purchase Common Stock under the 2002 Stock Option Plan for Directors
were outstanding, 471,666 of which were exercisable.
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 provided for the benefit of the Company the services of Mr. Shull and
certain persons providing consulting services to the Company thereunder (the
"Consultants"). The term of the December 2000 Services Agreement, and the term
for 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. Effective
September 1, 2002, the Company and Mr. Shull entered into the 2002 Employment
Agreement, which replaced the August 2001 Services Agreement. The 2002
Employment Agreement will expire on March 31, 2006. See "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements."
Change in Control Payments
Pursuant to the Recapitalization Agreement, upon completion of the
Recapitalization, there was a "change in control" of the Company for purposes of
all of the Company's existing Compensation Continuation (Change of Control)
Plans, including the Directors Change of Control Plan, the 2002 Employment
Agreement between the Company and Mr. Shull and the Transaction Bonus Letters
between the Company and Mr. Shull, Mr. Contino and Mr. Harriss. Mr. Shull
received payments on December 5, 2003 and December 12, 2003 in the aggregate
amount of $1,575,000 under the terms of the 2002 Employment Agreement. See
"Employment Contracts, Termination of Employment and Change-in-Control
Arrangements -- 2002 Employment Agreement." In December 2003, Messrs. Shull,
Harriss and Contino received payments in the amount of $450,000, $168,500 and
$193,500, respectively, under the terms of the Transaction Bonus Letters to
which they are a party. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements -- Transaction Bonus Letters." On December 18,
2003, each of the eight non-employee directors (Messrs. Brown, James, Krushel,
Sonnenfeld, Masson, Regan, Garten and Edelman) received a payment in the amount
of $87,000 under the terms of the Hanover Direct, Inc. Directors Change of
Control Plan. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements -- Hanover Direct, Inc. Directors Change of
Control Plan."
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 (4) other most highly compensated executive officers, as reported
31
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 2003 relating to Thomas Shull and Edward
Lambert exceeded the $1 Million Limit; consequently, in each case, the excess of
such payments over the $1 Million Limit was not deductible.
Respectfully Submitted,
The Stock Option and Executive
Compensation
Committee (April 2004)
A. David Brown (Chairman)
Stuart Feldman
Wayne P. Garten
32
REPORT OF THE AUDIT COMMITTEE
The Audit Committee has reviewed and discussed with management and KPMG
LLP, the Company's independent auditors, the Company's audited financial
statements as of and for the year ended December 27, 2003.
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 27,
2003.
Respectfully Submitted,
The Audit Committee (April 2004)
Robert Masson (Chairman)
A. David Brown
Wayne P. Garten
Donald Hecht
33
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
(LINE GRAPH)
<Table>
<Caption>
Cumulative Total Return
---------------------------------------------------------
- --------------------------------------------------------------------------------
12/98 12/99 12/00 12/01 12/02 12/03
- --------------------------------------------------------------------------------
HANOVER DIRECT, INC 100.00 105.45 10.91 10.76 5.53 6.40
S & P 500 100.00 121.04 110.02 96.95 75.52 97.18
PEER GROUP 100.00 110.57 53.08 105.94 129.50 164.07
</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, Spiegel and Williams
Sonoma. Land's End was acquired by Sears and was removed from the Direct
Marketing Peer Group in 2002. Lillian Vernon Corp. was acquired in July 2003
by Ripplewood Holdings and Zelnick Media and was removed from the Direct
Marketing Peer Group in 2003.
NOTE: Assumes $100 invested on December 31, 1998 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.
34
DIRECTOR COMPENSATION
Standard Arrangements. Non-employee directors of the Company currently
receive an annual cash fee of $58,000. During the first half of fiscal year
2003, non-employee directors were to receive an annual cash fee of $40,000 and
an additional $16,000, $8,000, $8,000, $8,000 and $8,000 annual cash fee for
serving as the Chairman of the Audit, Compensation, Transaction, Executive and
Nominating Committees, respectively. Effective July 10, 2003, the Company
amended its director compensation policy to provide that the annual fee for
non-employee directors will be $58,000 and that there will be no supplemental
annual fees for serving as Chairman of a Board committee or for attending board
meetings. Non-employee directors also participate in the Hanover Direct, Inc.
Change of Control 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 2003, the Company provided $50,000 of term life
insurance for each director.
During 2003, no options to purchase shares of Common Stock were granted to
eligible directors in accordance with the 1999 Stock Option Plan for Directors.
During 2003, no options to purchase shares of Common Stock under the 1999 Stock
Option Plan for Directors were exercised. During 2003, no options to purchase
shares of Common Stock granted to eligible directors under the 1999 Stock Option
Plan for Directors expired following the resignation of a director from the
Company's Board of Directors. As of December 27, 2003, 420,000 options to
purchase Common Stock under the 1999 Stock Option Plan for Directors were
outstanding, of which 366,667 options were exercisable.
During 2003, a total of 610,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the 2002 Stock Option
Plan for Directors. During 2003, no options to purchase shares of Common Stock
under the 2002 Stock Option Plan for Directors were exercised. During 2003, no
options to purchase shares of Common Stock granted to eligible directors under
the 2002 Stock Option Plan for Directors expired following the resignation of a
director from the Company's Board of Directors. As of December 27, 2003, 710,000
options to purchase Common Stock under the 2002 Stock Option Plan for Directors
were outstanding, 471,666 of which were exercisable.
Effective January 1, 2003, the 2002 Stock Option Plan for Directors was
amended to increase the annual service award for directors who are not employees
of the Company from 25,000 to 35,000 options to purchase shares of Common Stock.
In November 2003, the 2002 Stock Option Plan for Directors was amended to
increase the maximum number of shares of Common Stock that may be delivered or
purchased under the plan from 500,000 to 900,000. See "PROPOSAL 5 -- Amendments
to 2002 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 the first 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.
35
The Recapitalization transaction was a "Change of Control" for purposes of
the Directors Plan. The Company was permitted to make payments thereunder on or
after the closing of the Recapitalization. On December 18, 2003, each of the
eight non-employee directors (Messrs. Brown, James, Krushel, Sonnenfeld, Masson,
Regan, Garten and Edelman) received a payment in the amount of $87,000 under the
terms of the Directors Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 10, 2003, the Company entered into a Memorandum of
Understanding (the "MOU") with Chelsey and Regan Partners. On November 18, 2003,
the Company and Chelsey entered into the Recapitalization Agreement. The
Recapitalization Agreement sets forth the terms and conditions of the
Recapitalization transaction, including the terms of the Series C Preferred
Stock and the reconstituted board of directors. The Recapitalization was a
"Change of Control" for purposes of all of the Company's existing Compensation
Continuation (Change of Control) Plans, the 2002 Employment Agreement, and the
Transaction Bonus Letters between the Company and its executive officers. The
Company was permitted to make any payments required thereunder on or after the
Closing of the Recapitalization. See the disclosure under the caption
"Employment Contracts, Termination of Employment and Change-in-Control
Arrangements." The Closing of the Recapitalization occurred on November 30,
2003. In the MOU and the Recapitalization Agreement, the Company acknowledged
that Chelsey is the lawful and bona fide owner of 29,446,888 shares of Common
Stock and 1,622,111 shares of Series B Preferred Stock. At the Closing of the
Recapitalization, the Company and Chelsey agreed to release each other from all
claims, filed or that could have been filed, as of the date of such release, and
each of the Company and Chelsey discontinued, with prejudice, all pending
litigation between such parties. In the MOU and the Recapitalization Agreement,
the Company agreed that, prior to the expiration of one hundred fifty (150) days
from the execution of the Recapitalization Agreement (or April 16, 2004), it
would not (a) sell, other than in the ordinary course of business, the
inventory, trademarks or customer lists associated with The Company Store
division of the Company or (b) terminate the employment of the Chief Executive
Officer of the Company, unless, in either case, such action has been approved by
the Board of Directors pursuant to an affirmative vote of at least six (6)
members of the Board of Directors. The Company agreed to pay (a) the reasonable
legal fees and disbursements in connection with the preparation and negotiation
of the MOU, the Recapitalization Agreement and all related documentation on
behalf of Chelsey and (b) the reasonable fees of any financial advisors engaged
by Chelsey or Chelsey's legal counsel not to exceed $20,000 in the aggregate
relating to compliance with the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, including, without limitation, a valuation by such financial
advisors of the securities to be received by Chelsey pursuant to the
Recapitalization. Pursuant to the Recapitalization Agreement, the following
additional documents were executed: (i) a certificate of designations setting
forth the terms and conditions of the Series C Preferred Stock which was filed
with the Delaware Secretary of State, (ii) a voting agreement setting forth
certain voting arrangements among Chelsey, Stuart Feldman, Regan Partners and
Basil Regan, (iii) a registration rights agreement providing for registration
rights with respect to resales by Chelsey and Stuart Feldman of all shares of
Common Stock owned by Chelsey and Mr. Feldman, and (iv) a corporate governance
agreement between the Company, Chelsey, Stuart Feldman, Regan Partners, Regan
Fund and Basil Regan setting forth the corporate governance provisions in the
Recapitalization Agreement. For a further discussion of the terms and conditions
of the MOU, the Recapitalization Agreement and the Recapitalization, see
"DIRECTORS AND EXECUTIVE OFFICERS--The Recapitalization" above.
At December 28, 2002, Richemont Finance S.A., a Luxembourg company
("Richemont"), owned approximately 21.3% of the Company's Common Stock
outstanding and 100% of the Company's Series B Preferred Stock through direct
and indirect ownership. Pursuant to the terms and conditions of that certain
36
Purchase and Sale Agreement, dated as of May 19, 2003, between Richemont and
Chelsey, Chelsey purchased all of Richemont's securities in the Company,
consisting of 29,446,888 shares of Common Stock and 1,622,111 shares of Series B
Preferred Stock, for a purchase price of $40,000,000. The Company was not a
party to such transaction. As a result of this transaction, on such date,
Chelsey became the beneficial owner of 21.3% of the Company's Common Stock and
100% of the Company's Series B Preferred Stock.
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.
John F. Shull, the brother of Thomas C. Shull, the President and Chief
Executive Officer of the Company, acted as a consultant under the December 2001
Services Agreement, and received an option to purchase 100,000 shares of the
Company's Common Stock under the December 2001 Services Agreement and an option
to purchase 500,000 shares of the Company's Common Stock under the December 2000
Services Agreement.
In January 1998, the Company made a $75,000 non-interest bearing loan to
Mr. Contino for the purchase by Mr. Contino of a new principal residence in the
State of New Jersey. The terms of the loan agreement included a provision for
the Company to forgive the original amount of the principal on the fifth
anniversary of the loan. The loan was secured by the residence which the
proceeds were used to purchase. The loan was forgiven in full in accordance with
its terms during January 2003. In addition to the loan forgiveness, the Company
paid all applicable withholding taxes totaling $64,063.
At December 27, 2003, current and former officers and executives of the
Company owed the Company approximately $0.3 million, excluding accrued interest,
under the 1993 Executive Equity Incentive Plan. These amounts due to the Company
bear interest at rates ranging from 5.54% to 7.75% and are due or will be due
during 2004.
See also "Stock Options and Stock Appreciation Rights" and "Employment
Contracts, Termination of Employment and Change-in-Control Arrangements" for
additional information on relationships and related-party transactions.
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
nonaffiliated parties, all relationships and transactions are on terms no less
favorable to the Company than those available from non affiliated parties.
37
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 C Preferred
Stock as of March 27, 2004. The information is determined in accordance with
Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), based upon information furnished by the persons listed or
contained in filings made by them with the Commission. Except as noted below, to
the Company's knowledge, each person named in the table will have sole voting
and investment power with respect to all shares of Common Stock and Series C
Preferred Stock shown as beneficially owned by them.
<Table>
<Caption>
PERCENTAGE
NAME AND ADDRESS AMOUNT AND NATURE OF OF
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS(1)
- -------------- ------------------- ----------------------- ----------
Series C Chelsey Direct, LLC,........................... 564,819(2) 100%
Participating William B. Wachtel and
Preferred Stock Stuart Feldman
c/o Wachtel & Masyr, LLP
110 East 59th Street
New York, New York 10022
Common Stock Chelsey Direct, LLC,........................... 111,465,621(2) 51%
William B. Wachtel and
Stuart Feldman
c/o Wachtel & Masyr, LLP
110 East 59th Street
New York, New York 10022
Common Stock Regan Partners, L.P. and Basil P. Regan........ 38,821,683(3) 18%
32 East 57th Street
New York, New York 10022
</Table>
- ---------------
(1) In the case of Common Stock, includes shares of Common Stock issued upon
exercise of options or warrants exercisable within 60 days for the subject
individual only. Percentages of Common Stock are computed on the basis of
220,173,633 shares of Common Stock and 564,819 shares of Series C Preferred
Stock outstanding as of March 27, 2004.
(2) Information concerning the number of shares beneficially owned has been
taken from Amendment No. 9 to the Statement on Schedule 13D filed by Chelsey
Direct, LLC on December 4, 2003 with the Commission. Chelsey is the record
holder of 111,304,721 shares of Common Stock and 564,819 shares of Series C
Preferred Stock. Chelsey Capital Profit Sharing Plan (the "Chelsey Plan") is
the sole member of Chelsey and Mr. Wachtel is the Manager of Chelsey. The
sponsor of the Chelsey Plan is DSJ International Resources Ltd. ("DSJI").
Mr. Feldman is the sole officer and director of DSJI and a principal
beneficiary of the Chelsey Plan. Mr. Feldman is also the owner of 160,900
shares of Common Stock. Mr. Wachtel, in his capacity as the Manager of
Chelsey, will have sole voting and dispositive
38
power with respect to 111,304,721 shares of Common Stock and 564,819 shares
of Series C Preferred Stock owned by Chelsey, and Mr. Feldman will have sole
voting and dispositive power with respect to 160,900 shares of Common Stock
owned by him. Each of Messrs. Wachtel and Feldman have options to purchase
50,000 shares of Common Stock exercisable within 60 days. The shares of
Common Stock and Series C Preferred Stock which are owned by Chelsey and
Messrs. Wachtel and Feldman collectively represent approximately 61% of the
combined voting power of the Company's securities.
(3) Information concerning the number of shares beneficially owned has been
taken from Amendment No. 3 to the Statement on Schedule 13D filed by Regan
Partners L.P. on June 5, 2003 with the Commission. 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 1,048,233 shares of Common Stock
(including options to purchase 83,333 shares exercisable within 60 days).
39
SECURITY OWNERSHIP OF MANAGEMENT OF THE COMPANY
MANAGEMENT OWNERSHIP
The following table lists share ownership of the Company's Common Stock and
Series C Preferred Stock as of March 27, 2004. The information includes
beneficial ownership by (i) each of the Company's directors and nominees for
director and executive officers and (ii) all directors and executive officers as
a group. The information is determined in accordance with Rule 13d-3 promulgated
under the Exchange Act based upon information furnished by the persons listed or
contained in filings made by them with the Commission. Except as noted below, to
the Company's knowledge, each person named in the table will have sole voting
and investment power with respect to all shares of Common Stock and Series C
Preferred Stock shown as beneficially owned by them.
<Table>
<Caption>
AMOUNT AND NATURE OF PERCENTAGE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS(1)
- ------------------------ ----------------------- -------------
Robert H. Masson.................................... 85,000(2) *
Basil P. Regan...................................... 38,821,683(3) 17.6%
Thomas C. Shull..................................... 3,250,000(4) 1.5%
Wayne P. Garten..................................... 51,905(5) *
A. David Brown...................................... 85,000(6) *
Michael D. Contino.................................. 1,452,400(7) *
Charles E. Blue..................................... 294,000(8) *
Steven Lipner....................................... 71,174(9) *
William B. Wachtel.................................. 111,354,721(10) 51%
564,819(10) 100%
Stuart Feldman...................................... 111,465,621(10) 51%
564,819(10) 100%
Donald Hecht........................................ 0(11) *
Paul S. Goodman..................................... 0 *
William C. Kingsford................................ 235,117(12) *
Directors and Executive Officers as a
Group (12 persons).................................. 155,861,900(13) 71%
564,819(14) 100%
</Table>
- ---------------
* Less than one percent
(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 220,173,633 shares of Common
Stock and 564,819 shares of Series C Preferred Stock outstanding as of
March 27, 2004.
(2) Represents options to purchase 85,000 shares exercisable within 60 days.
(3) 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 1,048,233 shares (including
options to purchase 83,333 shares exercisable within 60 days) of Common
Stock.
(4) Includes options to purchase 3,200,000 shares exercisable within 60 days.
(5) Includes options to purchase 50,000 shares exercisable within 60 days.
40
(6) Represents options to purchase 85,000 shares exercisable within 60 days.
(7) Includes options to purchase 1,450,000 shares exercisable within 60 days.
(8) Represents options to purchase 294,000 shares exercisable within 60 days.
(9) Includes options to purchase 70,000 shares exercisable within 60 days.
(10) Chelsey is the record holder of 111,304,721 shares of Common Stock and
564,819 shares of Series C Preferred Stock. Chelsey Capital Profit Sharing
Plan (the "Chelsey Plan") is the sole member of Chelsey and Mr. Wachtel is
the Manager of Chelsey. The sponsor of the Chelsey Plan is DSJ
International Resources Ltd. ("DSJI"). Mr. Feldman is the sole officer and
director of DSJI and a principal beneficiary of the Chelsey Plan. Mr.
Feldman is also the owner of 160,900 shares of Common Stock. Mr. Wachtel,
in his capacity as the Manager of Chelsey, has sole voting and dispositive
power with respect to 111,304,721 shares of Common Stock and 564,819 shares
of Series C Preferred Stock owned by Chelsey, and Mr. Feldman has sole
voting and dispositive power with respect to 160,900 shares of Common Stock
owned by him. Each of Messrs. Wachtel and Feldman have options to purchase
50,000 shares of Common Stock exercisable within 60 days. The shares of
Common Stock and Series C Preferred Stock owned by Chelsey and Messrs.
Wachtel and Feldman collectively represent approximately 61% of the
combined voting power of the Company's securities.
(11) Excludes options to purchase 50,000 shares which are not exercisable within
60 days.
(12) Includes options to purchase 235,117 shares exercisable within 60 days.
(13) Shares of Common Stock; includes options to purchase 5,417,333 shares
exercisable within 60 days.
(14) Shares of Series C Preferred Stock.
41
PROPOSAL 1
ELECTION OF DIRECTORS
INTRODUCTION:
The Board of Directors currently consists of the following (8) members:
Thomas C. Shull; A. David Brown; Stuart Feldman; Wayne P. Garten; Donald Hecht;
Robert H. Masson; Basil P. Regan; and William B. Wachtel. A majority of the
Board of Directors is independent as defined in Rule Section 121(A) of the
American Stock Exchange's listing standards.
At the 2003 Annual Meeting of Stockholders of the Company held on May 15,
2003, the five (5) members of the Board of Directors in office at such time were
re-elected to the Board of Directors. On July 17, 2003, the size of the Board of
Directors was increased from five (5) to seven (7) members and A. David Brown
and Jeffrey A. Sonnenfeld were elected as members of the newly-expanded Board of
Directors, subject to the fulfillment of certain conditions precedent which were
fulfilled on July 29, 2003. On September 29, 2003, Martin Edelman and Wayne
Garten were elected to the Board of Directors by Chelsey, as holder of the
Series B Preferred Stock, as the result of the Company's failure to redeem any
shares of the Series B Preferred Stock on or prior to August 31, 2003, and the
Board expanded to nine (9) members. On November 18, 2003, the date of signing of
the Recapitalization Agreement, E. Pendleton James, Kenneth J. Krushel and
Jeffrey A. Sonnenfeld resigned from the Board of Directors. Also on November 18,
2003, the date of signing of the Recapitalization Agreement, the size of the
Board of Directors was changed from nine (9) to eight (8) members and Stuart
Feldman and William B. Wachtel were elected as members of the Board of
Directors. Pursuant to the Recapitalization Agreement, upon completion of the
Recapitalization on November 30, 2003, the number of directors was fixed at nine
(9) and Donald Hecht was elected as a member of the Board of Directors. Martin
Edelman resigned from the Board of Directors effective February 15, 2004. On
March 23, 2004, Paul S. Goodman was designated by Chelsey to fill the vacancy
created by Mr. Edelman's resignation effective April 12, 2004.
Pursuant to the Corporate Governance Agreement, dated as of November 30,
2003, by and among the Company, Chelsey, Stuart Feldman, Regan Partners, L.P.,
Regan International Fund Limited and Basil P. Regan, the parties agreed that,
for a period of two years from the closing of the Recapitalization, five of the
nine directors of the Company will at all times be directors of the Company
designated by Chelsey (who initially were Martin L. Edelman, William Wachtel,
Stuart Feldman, Wayne Garten and Donald Hecht) and one of the nine directors of
the Company will at all times be a director of the Company designated by Regan
Partners (who initially was Basil Regan) and one of the directors of the Company
will at all times by the CEO of the Company. The right of Regan Partners to
designate a nominee to the Board of Directors shall terminate if Regan Partners
ceases to own at least 75% of the outstanding shares of Common Stock (as
adjusted for stock splits, reverse stock splits and the like) owned by Regan
Partners as of November 10, 2003. In connection with the closing of the
transactions contemplated by the Recapitalization Agreement, Chelsey, Stuart
Feldman, Regan Partners and Basil Regan entered into a Voting Agreement, dated
as of November 30, 2003, providing that each of them will vote any shares of the
Company beneficially owned by them or any entity affiliated with them to elect
the nominees to the Board of Directors of Chelsey and Regan Partners designated
pursuant to the Recapitalization Agreement for a period of two years unless
sooner terminated. All shares for which the Company's management or Board of
Directors hold proxies (including undesignated proxies) will be voted in favor
of the addition of such designees of Chelsey and Regan Partners, except as may
otherwise be provided by stockholders submitting such proxies. In the event that
any Chelsey or Regan Partners designee shall cease to serve as a director of the
Company for any reason, the Company will cause the
42
vacancy resulting thereby to be filled by a designee of Chelsey or Regan
Partners, as the case may be, reasonably acceptable to the Board of Directors as
promptly as practicable. Chelsey may nominate or propose for nomination or elect
any persons to the Board of Directors, without regard to the foregoing
limitations, after the Series C Preferred Stock is redeemed in full. The right
of Regan Partners to designate a nominee to the Board of Directors shall
terminate if Regan Partners ceases to own at least 75% of the outstanding shares
of Common Stock (as adjusted for stock splits, reverse stock splits and the
like) owned by Regan Partners as of November 10, 2003.
The Board has nominated eight (9) directors for election at the Annual
Meeting. Four of them have been designated by Chelsey and one of them has been
designated by Regan Partners pursuant to the Corporate Governance Agreement
discussed above. The Corporate Governance Agreement also requires that the Board
of Directors designate the Chief Executive Officer of the Company to serve as a
member of the Board of Directors. Messrs. Brown and Masson were nominated by the
Nominating Committee. All of them are currently serving as directors. If you
elect the nine (9) 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. A majority of the directors nominated for election
at the Annual Meeting are independent as defined in Rule Section 121(A) of the
American Stock Exchange's listing standards.
NOMINEES:
THOMAS C. SHULL...........
AGE 52 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 CEO of Barneys New York, a leading luxury
retailer, where he led them out of bankruptcy. From
1992 to 1994, Mr. Shull was Executive Vice President
of the R.H. Macy Company, Inc., where he was
responsible for human resources, information
technology, business development, strategic planning
and merchandise distribution and led the merger
negotiations with Federated Department Stores. Prior
to that, he served as a consultant with McKinsey &
Company and in the early 1980s as a member of the
National Security Council Staff in the Reagan White
House.
A. DAVID BROWN............
AGE 61 Mr. Brown is the co-founder of Bridge Partners LLC, a
consumer financial services and diversity headhunting
firm. Prior to co-founding Bridge Partners, Mr. Brown
served as a Managing Director of Whitehead Mann after
having served as Vice President of the Worldwide
Retail/Fashion Specialty Practice at Korn/Ferry
International. Previously, Mr. Brown served for 12
years as Senior Vice President for Human Resources at
R.H. Macy & Co. He was responsible for human
resources and labor relations for 50,000 employees in
five U.S. divisions and 17 foreign buying offices
around the world. He serves on the Boards of Zale
Corporation and Selective Insurance Group, Inc. He is
a member of the Board of Trustees of
43
Morristown Memorial Hospital, Drew University and the
Jackie Robinson Foundation. Mr. Brown was elected a
director of the Company effective July 29, 2003.
STUART FELDMAN............
AGE 44 Mr. Feldman has been a principal of Chelsey Capital,
LLC, a private hedge fund, for more than the past
five years. Mr. Feldman is the principal beneficiary
of the Chelsey Capital Profit Sharing Plan, which is
the sole member of Chelsey. Mr. Feldman was elected a
director of the Company effective November 18, 2003,
the date of signing of the Recapitalization
Agreement. Mr. Feldman was elected a director of the
Company on November 18, 2003, the date of the signing
of the Recapitalization Agreement.
WAYNE P. GARTEN...........
AGE 51 Mr. Garten has served as the President of
Caswell-Massey Ltd., Inc., a retailer and direct
marketer of fragrance and other personal care
products, since January 2004. Prior thereto, Mr.
Garten was a financial consultant specializing in the
direct marketing industry. He was Chief Executive
Officer and President of Popular Club, Inc., a direct
selling, catalog marketer of apparel and general
merchandise products, from 2001 to 2003. From 1997 to
2000, he was Executive Vice President and Chief
Financial Officer of Micro Warehouse, Inc., an
international catalog reseller of computer products.
From 1983 to 1996, Mr. Garten held various financial
positions at Hanover Direct and its predecessor, The
Horn & Hardart Company, including Executive Vice
President and Chief Financial Officer from 1989 to
1996. Mr. Garten is a Certified Public Accountant.
Mr. Garten was elected a director of the Company by
Chelsey effective September 29, 2003.
PAUL S. GOODMAN...........
AGE 50 Mr. Goodman is the Chief Executive Officer of Chelsey
Broadcasting Company, LLC, which position he has held
since January 2003. Chelsey Broadcasting is the owner
of middle market network-affiliated television
stations. Until October 2002, Mr. Goodman had served
as a director of Benedek Broadcasting Corporation
from November 1994 and as a director of Benedek
Communications Corporation from its inception. Until
October 2002, Mr. Goodman was also corporate counsel
to Benedek Broadcasting since 1983 and Benedek
Communications since its formation in 1996. From
April 1993 to December 2002, Mr. Goodman was a member
of the law firm of Shack Siegel Katz Flaherty &
Goodman, P.C. From January 1990 to April 1993, Mr.
Goodman was a member of the law firm of Whitman &
Ransom. Mr. Goodman became a director of the Company
effective April 12, 2004.
DONALD HECHT..............
AGE 70 Mr. Hecht has, since 1966, together with his brother,
Michael Hecht, managed Hecht & Company, an accounting
firm. Mr. Hecht was elected a director of the Company
effective November 30, 2003, the date of the closing
of the Recapitalization.
ROBERT H. MASSON..........
AGE 68 Robert H. Masson served as Senior Vice President,
Finance and Administration and Vice President and
Chief Financial Officer of Parsons &
44
Whittemore, Inc., a global pulp and paper
manufacturer, from May 1990 until his retirement June
30, 2002. Prior thereto, Mr. Masson held various
executive, financial and treasury roles with The Ford
Motor Company, Knutson Construction Company, Ellerbe,
PepsiCo, Inc. and Combustion Engineering (now part of
the ABB Group). Mr. Masson currently serves as a
Trustee and as the Chairman of the Finance Committee
of The Naval Aviation Museum Foundation, Inc. in
Pensacola, Florida. Mr. Masson was elected a director
of the Company effective January 1, 2003.
BASIL P. REGAN............
AGE 63 Basil P. Regan has been the General Partner of Regan
Partners, L.P., a limited partnership that invests
primarily in turnaround companies and special
situations, since December 1989. He has been
President of Regan Fund Management Ltd. since October
1995, which manages Regan Partners, L.P., Regan Fund
International, L.P. and Super Hedge Fund, L.P. From
1986 to 1989, Mr. Regan was Vice President and
Director of Equity Research of Reliance Group
Holdings. Mr. Regan was elected a director of the
Company in August 2001.
WILLIAM B. WACHTEL........
AGE 49 Mr. Wachtel has been a managing partner of Wachtel &
Masyr, LLP, or its predecessor law firm (Gold &
Wachtel, LLP), since its founding in August 1984. He
is the co-founder of the Drum Major Institute, a
not-for-profit organization carrying forth the legacy
of Dr. Martin Luther King, Jr. Mr. Wachtel is the
Manager of Chelsey. Mr. Wachtel was elected a
director of the Company effective November 18, 2003,
the date of signing of the Recapitalization
Agreement. Mr. Wachtel was elected a director of the
Company on November 18, 2003, the date of the signing
of the Recapitalization Agreement.
CORPORATE GOVERNANCE
Board of Directors Meetings
In 2003, the Board of Directors held fifteen meetings in person or by
conference telephone and took action by written consent on three occasions. Each
incumbent director attended at least 75% of the aggregate number of the
Company's Board of Directors Meetings and his committee meetings except for Mr.
Garten. While the Company encourages all members of the Board of Directors to
attend the Annual Meeting, there is no formal policy as to their attendance at
each of the annual meetings of stockholders. All of the members of the Board of
Directors attended the 2003 annual meeting of stockholders. The Company holds
meetings of its Board of Directors on at least a quarterly basis.
Board of Director Independence
Each year, the Board of Directors reviews the relationships that each
director has with the Company and with other parties. Only those directors who
do not have any of the categorical relationships that preclude them from being
independent as defined in Rule Section 121(A) of the American Stock Exchange's
listing standards, and who the Board of Directors affirmatively determines have
no relationships that would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director, are considered to be
independent directors. The Board of Directors has reviewed a number of factors
to evaluate the independence of each of its members. These factors include its
members' current and historic relationships
45
with the Company and its competitors, suppliers and customers; their
relationships with management and other directors and shareholders; the
relationships their current and former employers have with the Company; and the
relationships between the Company and other companies of which the Company's
board members are directors or executive officers. After evaluating these
factors the Board of Directors has determined that a majority of its members are
independent directors of the Company within the meaning of applicable American
Stock Exchange rules.
Independent members of the Board of Directors of the Company meet in
executive session without management present, and are scheduled to do so at
least annually.
Stockholder Communications
The Company's stockholders may communicate directly with the members of the
Board of Directors or the individual chairman of standing Board of Directors
committees by writing directly to those individuals at the following address:
Hanover Direct, Inc., 115 River Road, Building 10, Edgewater, New Jersey 07020.
The Company's general policy is to forward, and not to intentionally screen, any
mail received at the Company's corporate office that is sent directly to an
individual unless the Company believes the communication may pose a security
risk.
Code of Ethics
The Company has adopted a code of ethics that applies to the Company's
principal executive officer, principal financial officer and principal
accounting officer and other persons performing similar functions. A copy of the
code of ethics has been filed with the Securities & Exchange Commission as an
exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 2002. The Company has also adopted a Code of Conduct that applies
to the Company's directors, officers and employees. A copy of the Code of
Conduct has been filed with the Securities & Exchange Commission as an Exhibit
to the Company's Annual Report on Form 10-K for the fiscal year ended December
27, 2003.
BOARD COMMITTEES
The Board of Directors has standing Executive, Audit, Stock Option and
Executive Compensation, Nominating, Transactions and Corporate Governance
Committees.
The Executive Committee.
- During 2003, Messrs. Kenneth J. Krushel (Chairman), Basil P. Regan,
Thomas C. Shull, Robert H. Masson and Jeffrey A. Sonnenfeld were members
of the Executive Committee. Upon execution of the Recapitalization
Agreement, the members of the Executive Committee became Stuart Feldman
(Chairman), Martin Edelman and Basil Regan. The current members of the
Executive Committee are Stuart Feldman (Chairman) and Basil Regan.
- The duties of the Executive Committee include:
- recommending actions to the Board of Directors; and
- acting on behalf of the Board of Directors on certain operating matters
requiring Board of Director approval when the Board of Directors is not
in session.
46
- The Executive Committee held five meetings in person or by conference
call in 2003 and took action by written consent on two occasions in 2003.
The Audit Committee.
- At various times during 2003, Messrs. Robert H. Masson (Chairman),
Kenneth J. Krushel and E. Pendleton James were members of the Audit
Committee. Upon execution of the Recapitalization Agreement, the members
of the Audit Committee became Robert Masson (Chairman), Wayne P. Garten
and A. David Brown. Donald Hecht was added to the Audit Committee at the
same time he was added to the Board of Directors. The current members of
the Audit Committee are Messrs. Masson (Chairman), Garten, Brown and
Hecht. Each of the members of the Audit Committee is independent, as
defined in Rule Section 121(A) of the American Stock Exchange's listing
standards.
- The duties of the Audit Committee include:
- monitoring the integrity of the Company's financial reporting process
and systems of internal controls regarding finance, accounting and legal
compliance;
- responsibility for the appointment, compensation and oversight of the
work of the independent auditor (including resolution of disagreements
between management and the independent auditor regarding financial
reporting) for the purpose of preparing its audit report or any related
work;
- determining the extent of funding necessary for payment of compensation
to the independent auditor for the purpose of rendering or issuing the
annual audit report and to any independent legal counsel or other
advisors retained under the preceding paragraph to advise the Audit
Committee;
- seeking to insure and monitor the independence and performance of the
Company's external auditors and internal auditing department and advise
the Board of Directors;
- reviewing and approving all related-party transactions;
- monitoring the independence and performance of the Company's independent
auditors and internal auditing department;
- ensuring that the independent auditor submits to the Audit Committee on
an annual basis a written statement consistent with Independent
Standards Board Standard No. 1, discussing with the independent auditor
any disclosed relationships or services that may impact the objectivity
and independence of the independent auditor, and satisfying itself as to
the independent auditor's independence;
- confirming that the independent auditor does not violate the audit
rotation requirements of Section 203 of the Sarbanes-Oxley Act of 2002,
which provides that the auditor may not perform audit services for the
Company if the lead audit partner or the audit partner responsible for
reviewing the audit has performed audit services for the Company for
each of the five (5) previous fiscal years;
- establishing procedures for the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
accounting controls or auditing matters and the confidential, anonymous
submission by employees of the Company of concerns regarding
questionable accounting or auditing matters;
47
- 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;
- 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 annually, with the Company's counsel, any legal matters
that could have a significant impact on the Company's financial
statements;
- annually assessing its performance of the duties specified in the
charter of the Audit Committee and reporting its findings to the Board
of Directors; and
- performing any other activities consistent with the charter of the Audit
Committee, the Company's By-Laws and governing law as the Audit
Committee or the Company's Board of Directors deems necessary or
appropriate.
- The Company's Board of Directors has adopted a written charter for the
Audit Committee. A copy of the Charter is filed as Appendix C to this
Proxy Statement.
- The Audit Committee held five meetings in person or by conference call in
2003 and took action by written consent on two occasions in 2003.
- The Company's Board of Directors has determined that the Company has at
least one "audit committee financial expert" who is financially
sophisticated serving on the Audit Committee of the Board of Directors
who is "independent" of management within the definition of such term in
the Exchange Act and the listing requirements of the American Stock
Exchange. Robert H. Masson, a member of the Board of Directors and the
Chairman of its Audit Committee, is the "audit committee financial
expert" serving on the Company's Audit Committee.
Pre-Approval Policy. The Audit Committee has policies and procedures that
require the pre-approval by the Audit Committee of all fees paid to, and all
services performed by, our independent auditors. Each year, the Audit Committee
approves the proposed services, including the nature, type and scope of services
contemplated and the related fees, to be rendered by our accountants during the
year. In addition, Audit Committee pre-approval is also required for those
engagements that may arise during the course of the year that are outside the
scope of the initial services and fees pre-approved by the Audit Committee.
48
The Stock Option and Executive Compensation Committee.
- At various times during 2003, Messrs. Jeffrey A. Sonnenfeld (Chairman),
A. David Brown and Robert H. Masson were members of the Stock Option and
Executive Compensation Committee. Upon execution of the Recapitalization
Agreement, the members of the Stock Option and Executive Compensation
Committee became A. David Brown (Chairman), Wayne Garten and Stuart
Feldman who are the current members of the Stock Option and Executive
Compensation Committee. Each of the members of the Stock Option and
Executive Committee is independent, as defined in Rule Section 121(A) of
the American Stock Exchange's listing standards, except for Mr. Feldman.
The Amex rules provide that the Compensation Committee be composed solely
of independent directors unless the Board of Directors, under exceptional
and limited circumstances, determines that membership on the Compensation
Committee of one director that is not independent is in the best
interests of the Company. The Board has determined that Mr. Feldman's
service on the Compensation Committee was and is in the best interest of
the Company due to his business experience and his perspective as the
beneficial owner of 61% of the combined voting power of the Company's
Voting Stock as well as the Company's contractual obligation under the
Recapitalization Agreement which was entered into prior to the effective
date of the Amex rules to include Mr. Feldman as a member of the
Compensation Committee.
- The duties of the Stock Option and Executive Compensation Committee
include reviewing and making recommendations for approval by the Board of
Directors of remuneration arrangements for directors and members of
management including the chief executive officer and the other executive
officers.
- The Stock Option and Executive Compensation Committee did not hold
meetings in 2003 in person or by conference call and took action by
written consent on six occasions in 2003.
The Nominating Committee.
- At various times during 2003, Messrs. E. Pendleton James (Chairman),
Jeffrey A. Sonnenfeld, A. David Brown, Robert H. Masson and Basil P.
Regan were members of the Nominating Committee. Upon execution of the
Recapitalization Agreement, the members of the Nominating Committee
became William Wachtel (Chairman), Wayne Garten and Thomas Shull who are
the current members of the Nominating Committee. Each of the members of
the Nominating Committee is independent, as defined in Rule Section
121(A) of the American Stock Exchange's listing standards, except for
Messrs. Shull and Wachtel. The Amex rules provide that the Nominating
Committee be composed solely of independent directors unless the Board of
Directors, under exceptional and limited circumstances, determines that
membership on the Nominating Committee of one director that is not
independent is in the best interests of the Company. The Board has
determined that Mr. Wachtel's service on the Nominating Committee was and
is in the best interest of the Company due to his business experience and
his personal contacts and his perspective as an affiliate of the holder
of 61% of the combined voting power of the Company's Voting Stock as well
as the Company's contractual obligation under the Recapitalization
Agreement which was entered into prior to the effective date of the Amex
rules to include Mr. Wachtel as a member of the Nominating Committee. Mr.
Shull will be replaced as a member of the Nominating Committee by an
independent director at the annual meeting of the Board of Directors
immediately following the Annual Meeting of Stockholders.
49
- The duties of the Nominating Committee include evaluating and
recommending candidates for election or reelection to the Board of
Directors and its committees, including those recommendations submitted
by stockholders.
- It is a policy of the Nominating Committee that candidates for director
are at least 18 years of age and possess the highest personal and
professional integrity, have demonstrated exceptional ability and
judgment, and have skills and expertise appropriate for the Company and
serving the long-term interest of the Company's stockholders. The
committee's process for identifying and evaluating nominees is as
follows: (1) in the case of incumbent directors whose terms of office are
set to expire, the committee reviews such directors' overall service to
the Company during their term, including the number of meetings attended,
level of participation, quality of performance, and any related party
transactions with the Company during the applicable time period; and (2)
in the case of new director candidates, the committee first conducts any
appropriate and necessary inquiries into the backgrounds and
qualifications of possible candidates after considering the function and
needs of the Board of Directors. The committee meets to discuss and
consider such candidates' qualifications, including whether the nominee
is independent for purposes of the American Stock Exchange rules, and
then selects a candidate for recommendation to the Board of Directors by
majority vote. In seeking potential nominees, the Nominating Committee
uses its network of contacts to compile a list of potential candidates,
but may also engage, if it deems appropriate, a professional search firm.
To date, the Nominating Committee has not paid a fee to any third party
to assist in the process of identifying or evaluating director
candidates, nor has the committee rejected a timely director nominee from
a stockholder(s) holding more than 5% of the Company's voting stock.
The Nominating Committee is mindful of the Company's contractual
obligations under the Corporate Governance Agreement to nominate five
persons designated by Chelsey, one person designated by Regan Partners and
the Chief Executive Officer of the Company for election to the Board of
Directors as discussed below.
The Nominating Committee will consider director candidates recommended by
stockholders provided the stockholders follow the procedures set forth
below. The committee does not intend to alter the manner in which it
evaluates candidates, including the criteria set forth above, based on
whether the candidate was recommended by a stockholder or otherwise.
- The bylaws of the Company require advance notice of nominations for
election to the Board of Directors, other than those made by the Board of
Directors. Unless waived by the Board of Directors, 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
information required pursuant to the Exchange Act and the rules and
regulations promulgated thereunder.
- The Company's Board of Directors has adopted a written charter for the
Nominating Committee, a copy of which is attached as Appendix D to this
Proxy Statement.
- The Nominating Committee held one meeting in person in 2003 and took
action by written consent on two occasions in 2003.
50
Upon completion of the Recapitalization, the Company entered into a
Corporate Governance Agreement dated as of November 30, 2003, with Chelsey,
Stuart Feldman, Regan Partners, Regan International Fund Limited and Basil Regan
(the "Corporate Governance Agreement"). Pursuant to the terms of the Corporate
Governance Agreement, for a period of two (2) years from the completion of the
Recapitalization, five (5) of the nine (9) directors of the Company will at all
times be directors of the Company designated by Chelsey (which initially were
Martin Edelman, Stuart Feldman, Wayne Garten, Donald Hecht and William Wachtel),
one (1) of the nine (9) directors of the Company will at all times be a director
of the Company designated by Regan Partners (which initially was Basil Regan)
and one (1) director will be the Chief Executive Officer of the Company. The
right of Regan Partners to designate a nominee to the Board of Directors shall
terminate if Regan Partners ceases to own at least 75% of the outstanding shares
of Common Stock (as adjusted for stock splits, reverse stock splits and the
like) owned by Regan Partners as of November 10, 2003. All shares for which the
Company's management or Board of Directors hold proxies (including undesignated
proxies) will be voted in favor of the election of such designees of Chelsey and
Regan Partners, except as may otherwise be provided by stockholders submitting
such proxies. In the event that any Chelsey or Regan Partners designee shall
cease to serve as a director of the Company for any reason, the Company will
cause the vacancy resulting thereby to be filled by a designee of Chelsey or
Regan Partners, as the case may be, reasonably acceptable to the Board of
Directors as promptly as practicable. Chelsey may nominate or propose for
nomination or elect any persons to the Board of Directors, without regard to the
foregoing limitations, after the Series C Preferred Stock is redeemed in full.
The Transactions Committee.
- At various times during 2003, Messrs. Kenneth J. Krushel (Chairman),
Robert H. Masson, E. Pendleton James, Jeffrey A. Sonnenfeld and A. David
Brown were members of the Transactions Committee. Upon execution of the
Recapitalization Agreement, and until the earlier of (i) two (2) years
from the closing of the Recapitalization and (ii) the redemption in full
of the Series C Preferred Stock, the Transactions Committee will consist
of three (3) members: one (1) designated by Chelsey (initially Martin
Edelman), one (1) designated by Regan Partners (initially Basil Regan)
and an independent member to be unanimously designated by Chelsey and
Regan Partners (initially David Brown). The right of Regan Partners to
designate a member of the Transactions Committee will terminate if Regan
Partners ceases to own at least 75% of the outstanding shares of Common
Stock owned by Regan Partners as November 10, 2003. The current members
of the Transactions Committee are Basil Regan and David Brown. Each of
the members of the Transactions Committee is independent, as defined in
Rule Section 121(A) of the American Stock Exchange's listing standards
and as determined by the Board of Directors.
- Until the closing of the Recapitalization on November 30, 2003, the
duties of the Transactions Committee included:
- 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 of Directors 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;
51
(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.
- Following the closing of the Recapitalization, the Audit Committee
assumed the responsibilities of the Transactions Committee described
above.
- Upon execution of the Recapitalization Agreement, and until the earlier
of (i) two (2) years from the closing of the Recapitalization and (ii)
the redemption in full of the Series C Preferred Stock, the duties of the
Transactions Committee include passing on redemptions of the Series C
Preferred Stock, including transactions that pursuant to the terms of the
Series C Preferred Stock would require the Company to redeem any shares
of the Series C Preferred Stock (consistent with applicable laws or
agreements). The Board of Directors, in the reasonable exercise of its
business judgment, will determine if any such transaction is reasonably
likely to require the Company to redeem any shares of the Series C
Preferred Stock, and, if the Board of Directors determines that a
redemption is reasonably likely, such matter shall then be submitted to
the Transactions Committee.
- A unanimous vote of the three-member Transactions Committee is required
for the above actions. A unanimous vote of the Transactions Committee
cannot be overturned by the Board of Directors. If the Transactions
Committee is unable to decide unanimously on any matter before the
Transactions Committee during the first five (5) months following the
execution of the Recapitalization Agreement (or April 16, 2004), such
matter will be decided by a vote of at least five (5) members of the
Board of Directors while the Board of Directors has eight (8) members and
six (6) members of the Board of Directors while the Board of Directors
has nine (9) members, and thereafter such matter will be decided by a
majority of the Board of Directors.
- The Transactions Committee held five meetings in person or by conference
call in 2003 and took action by written consent on no occasions in 2003.
The Corporate Governance Committee.
- The Company established a Corporate Governance Committee in December
2003. Messrs. A. David Brown, William Wachtel, Robert H. Masson and
Martin Edelman (Chairman) were the initial members of the Corporate
Governance Committee. The current members of the Corporate Governance
Committee are Messrs. Brown, Masson and Wachtel.
- The duties of the Corporate Governance Committee include: (i) developing
and recommending to the Board standards to be applied in making
determinations as to the absence of material relationships between the
Company and a director or a member of senior management; (ii)
establishing procedures for the committee to exercise oversight of the
evaluation of the Board and management including, reporting to the Board
following the end of each fiscal year with an assessment of the Board's
and management's performance of its duties and responsibilities during
the preceding fiscal year with the objective of improving the
effectiveness of the Board and management; (iii) making recommendations
52
to the Board with respect to potential successors to the Chief Executive
Officer and with the participation of the Chief Executive Officer
developing and recommending to the Board management succession and career
development plans with respect to the Company's senior management; (iv)
developing and recommending to the Board a set of corporate governance
principles applicable to the Company, and reviewing those principles at
least once a year; and (v) reviewing and publishing the Company's code of
conduct and ethics as required by the American Stock Exchange and
applicable securities laws.
- The Corporate Governance Committee held no meetings in 2003 in person or
by conference call and took no action by written consent in 2003.
LEGAL PROCEEDINGS INVOLVING DIRECTORS AND EXECUTIVE OFFICERS
On July 17, 2003, the Company filed an action in the Supreme Court of the
State of New York, County of New York (Index No. 03/602269) against Richemont
Finance S.A., a societe anonyme organized under the laws of the Grand Duchy of
Luxembourg ("Richemont"), and Chelsey, seeking a declaratory judgment as to
whether Richemont improperly transferred all of Richemont's securities in the
Company consisting of 29,446,888 shares of Common Stock and 1,622,111 shares of
Series B Preferred Stock (collectively, the "Shares") to Chelsey on or about May
19, 2003 and whether the Company could properly recognize the transfer of those
Shares from Richemont to Chelsey under federal and/or state law. On July 29,
2003, Chelsey answered the Company's complaint, alleged certain affirmative
defenses and raised three counterclaims against the Company, including Delaware
law requiring the registration of the Shares, damages, including attorney's
fees, for the failure to register the Shares, and tortious interference with
contract. Chelsey also moved for a preliminary injunction directing the Company
to register the ownership of the Shares in Chelsey's name. Chelsey later moved
for summary judgment dismissing the Company's complaint. Subsequently, Chelsey
moved to compel production of certain documents and for sanctions and/or costs.
On August 28, 2003, Richemont moved to dismiss the Company's complaint. It
subsequently filed a motion seeking sanctions and/or costs against the Company.
On October 27, 2003, the Court granted Chelsey's motion for summary judgment and
Richemont's motion to dismiss and ordered that judgment be entered dismissing
the case in its entirety. The Court also denied Chelsey's and Richemont's
motions for sanctions and Chelsey's motion to compel production of certain
documents.
Pursuant to the terms and conditions of the MOU and the Recapitalization
Agreement, the Company acknowledged that Chelsey is the lawful and bona fide
owner of the Shares and the Company and Chelsey executed a Stipulation of
Discontinuance for filing with the Supreme Court of the State of New York in
connection with the litigation between the Company and Chelsey.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The Company indemnifies its directors and executive officers 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. The Company had directors and officers
liability insurance policies, underwritten by Greenwich Insurance Company,
Zurich American Insurance Company and National Union Fire Insurance Company of
Pittsburgh, PA, in the aggregate amount of $25,000,000 which terminated on the
closing of the Recapitalization by their terms. As to reimbursements by the
insurer of the Company's indemnification expenses, the policies had a $250,000
deductible for securities claims against the Company and a $150,000 deductible
for all other indemnifiable losses. The policy terms were from June 1, 2003 to
June 1, 2004. The Company also
53
purchased a supplemental policy issued by the National Union Fire Insurance
Company (AIG) to cover independent directors in the amount of $15,000,000, which
expired on the closing of the Recapitalization by its terms. Such policies were
replaced on the closing of the Recapitalization with a policy written by
National Union Fire Insurance Co. for a limit of $15,000,000. In addition, the
Company purchased a tail policy of insurance issued by National Union Fire
Insurance Co. providing for coverage in the amount of $15,000,000 for a period
of six years for actions occurring prior to the closing of the Recapitalization
Agreement for a one time premium of approximately $625,000.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act 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.
VOTING 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 C Preferred Stock has one hundred
(100) 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. Pursuant to
the terms of the Voting Agreement described above under the caption "The
Recapitalization", the election of the director nominees is assured.
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. Other than Mr. Goodman, each of the nominees currently
serves as a director and has consented to be nominated. We do not foresee that
any of the nominees will be unable or unwilling to serve, but if such a
situation should arise your proxy will vote in accordance with his or her best
judgment.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION
OF THE NOMINEES FOR DIRECTOR.
54
PROPOSAL 2
AMENDING CERTIFICATE OF INCORPORATION TO REDUCE PAR VALUE OF COMMON STOCK
GENERALLY
The Board is submitting to you an amendment to the Company's Certificate of
Incorporation that would reduce the par value of the Common Stock from $.66 2/3
per share to $.01 per share and to reclassify the outstanding shares of Common
Stock into such lower par value shares. The Board has already adopted a
resolution declaring the advisability of the amendment.
REASONS FOR PROPOSAL
Pursuant to the terms and conditions of the Recapitalization Agreement, the
Company, acting through its Board of Directors and in accordance with its
charter and bylaws and applicable law, has agreed to present to the Company's
stockholders a proposal to reduce the par value of the Common Stock from
$.66 2/3 per share to $.01 per share and to reclassify the outstanding shares of
Common Stock into such lower par value shares. The Board recommends that the par
value per share of Common Stock be decreased to $.01 to allow the Board to
reduce the Company's capital in order to facilitate the redemption of the
Company's Series C Preferred Stock under the DGCL.
"Par value" is a dollar value assigned to shares of capital stock by the
corporation's incorporators. There is no minimum or maximum value requirement
for par value under the DGCL, and the Board believes the prevailing current
practice of public companies is to have shares with nominal par value (such as
$0.01 per share). However, under the current DGCL, and notwithstanding the fact
that par value has limited significance, once a par value is assigned to the
shares of capital stock of a Delaware corporation, such corporation cannot issue
shares of capital stock for a consideration having a value below par, except out
of treasury shares.
Since the average quoted price for the Company's common stock is
substantially below the current par value attributed to such stock on March 26,
2004, the closing sale price of the Company's common stock was $0.26 per share
and the par value of the Company's Common Stock is currently set forth at
$.66 2/3 per share), the Board has determined that such par value restricts the
Company's ability to (i) pursue its restructuring strategy, which may involve
the issuance by the Company of shares of Common Stock or options to purchase
such shares for nominal consideration, and (ii) incentivize management, as the
Company may not issue stock in respect of options with an exercise price for the
underlying shares of Common Stock below par, including with respect to options
previously granted to management, except out of treasury shares. The Board
recommends that the par value per share of Common Stock be reduced to $.01 to
allow the Board greater flexibility in setting the consideration that may be
paid for its issuance of shares of Common Stock or securities exercisable for or
convertible into shares of Common Stock.
In addition, reducing par value of the Company's Common Stock may decrease
the Company's franchise taxes depending on the method of calculating franchise
taxes used by the Company. A reduction in the par value of the Company's Common
Stock will not otherwise affect the rights of the Company's stockholders. There
are no arrears in dividends with respect to the Company's Common Stock.
55
PRINCIPAL EFFECTS ON OUTSTANDING COMMON STOCK
If Proposal 2 is approved, the Board will be authorized to file a
certificate of amendment with the Delaware Secretary of State that will reset
the par value of the Common Stock to $.01 per share and reclassify the
outstanding shares of common stock into such lower par value shares. As a
result, the Company may make appropriate adjustment to its stockholders' equity
accounts on its balance sheet. For example, if the Company had effected the
reduction in par value on December 27, 2003, the amount of the Company's stated
capital could have been reduced to approximately $2,228,612 and its additional
paid-in capital account could have been increased by approximately $145,958,609.
If approved by the Company's stockholders, the reduction in par value and
the reclassification of the outstanding shares of common stock into such lower
par value shares would become effective as soon as reasonably practicable after
the Annual Meeting by the Company's filing of a Certificate of Amendment to its
Certificate of Incorporation with the Delaware Secretary of State. The Company
anticipates that the reduction in par value, if approved by its stockholders,
would be implemented by the same certificate of amendment as the change in
authorized shares contemplated by Proposal 3, to the extent that proposal is
approved by the Company's stockholders.
VOTE REQUIRED
The affirmative "FOR" votes of the holders of (a) a majority of the
outstanding shares of Common stock, voting separately as a class, (b) at least
two-thirds of the outstanding shares of Series C Preferred Stock, voting
separately as a class, and (c) a majority of the outstanding shares of Common
Stock and Series C Preferred Stock, voting together as a class, are required for
approval of Proposal 2. Pursuant to the terms of the Voting Agreement described
above under the caption "The Recapitalization," the approval of Proposal 2 is
assured.
In addition, as of the record date, Chelsey, beneficially owned 111,304,721
shares of Common Stock (approximately 51% of the outstanding Common Stock) and
564,819 shares of Series C Preferred Stock, collectively representing
approximately 61% of the combined voting power of the Voting Stock. Accordingly,
Chelsey alone will be able to control the outcome of all matters upon which it
votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE AMENDMENT
TO THE CERTIFICATE OF INCORPORATION TO REDUCE THE PAR VALUE OF THE
COMPANY'S COMMON STOCK TO $.01 AND RECLASSIFY THE OUTSTANDING SHARES
OF COMMON STOCK INTO SUCH LOWER PAR VALUE SHARES.
56
PROPOSAL 3
AMENDING CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF SHARES OF STOCK
WHICH THE COMPANY WOULD HAVE AUTHORITY TO ISSUE
GENERALLY
The Board is submitting to you an amendment to the Company's Certificate of
Incorporation that would increase the number of shares of Additional Preferred
Stock which the Company would have authority to issue from 5,000,000 shares to
15,000,000 shares and make a corresponding change in the total number of shares
of all classes of stock which the Corporation has authority to issue. All of the
additional 10,000,000 shares would be allocated to the number of shares of
Additional Preferred Stock that the Company would have authority to issue. As of
March 27, 2004, 5,000,000 shares of Additional Preferred Stock were authorized,
of which 564,819 shares of the Company's Series C Participating Preferred Stock
were outstanding. The Board has no current plans for the issuance of such
additional shares of Additional Preferred Stock.
If approved by the Company's stockholders, the increase in authorized
additional shares would become effective as soon as reasonably practicable after
the Annual Meeting by filing a Certificate of Amendment to the Company's
Certificate of Incorporation with the Delaware Secretary of State. The Company
anticipates that the increase in authorized shares, if approved by its
stockholders, would be implemented by the same certificate of amendment as the
reduction in par value contemplated by Proposal 2, to the extent that proposal
is approved by the Company's stockholders. The Board believes that the amendment
will benefit the Company and you and, thus, recommends approval of the
amendment. The Board has already adopted a resolution declaring the advisability
of the amendment.
REASONS FOR PROPOSAL
Pursuant to the terms and conditions of the Recapitalization Agreement, the
Company, acting through its Board of Directors and in accordance with its
charter and bylaws and applicable law, has agreed to present to the Company's
stockholders a proposal to increase the number of shares of all classes of stock
which the Company would have authority to issue by 10,000,000 shares from
318,172,403 shares to 328,172,403, of which all 10,000,000 shares would be
allocated to the number of shares of Additional Preferred Stock which the
Company would have authority to issue. The Additional Preferred Stock may be
issued in classes and series with rights and preferences determined by the
Company's Board of Directors, without further action by Company's stockholders.
Under the DGCL, the Company is required to obtain approval from its
stockholders to amend its charter to increase the number of shares of capital
stock authorized for issuance. After taking into consideration the Company's
current outstanding equity obligations, together with its obligations under the
Recapitalization Agreement and related documents in connection with the
Recapitalization described earlier in this Proxy Statement, the Board has
determined that it is desirable to increase the number of shares of Additional
Shares of Preferred Stock, and the total number of shares of all classes of
stock, authorized for issuance by 10,000,000. The additional shares of
Additional Preferred Stock will be available for general corporate purposes, as
determined by the Board, without (except as otherwise provided by law) further
authority from you. The Company has no current plans for the issuance of such
shares.
57
PRINCIPAL EFFECTS OF THE INCREASE IN AUTHORIZED SHARES
The following table illustrates the principal effects of the increase in
authorized shares discussed in this Proposal on the Company's capitalization:
<Table>
<Caption>
NUMBER OF SHARES
NUMBER OF SHARES SUBSEQUENT TO
PRIOR TO INCREASE INCREASE IN
IN AUTHORIZED AUTHORIZED
CLASS OF SHARES SHARES(1) SHARES
- --------------- ----------------- ----------------
Common Stock Authorized:.................................... 300,000,000 300,000,000
Common Stock Outstanding (2):............................... 220,173,633 220,173,633
Common Stock Reserved for Issuance Pursuant to
Options:(3)............................................... 40,621,251 40,621,251
Common Stock Available for Future Issuance:................. 39,205,116 39,205,116
Additional Preferred Stock Authorized:...................... 5,000,000 15,000,000
Additional Preferred Stock Outstanding(4):.................. 564,819 564,819
Class B 8% Cumulative Preferred Stock Authorized:........... 40,000 40,000
Class B 8% Cumulative Preferred Stock Outstanding:.......... 0 0
7.5% Cumulative Convertible Preferred Stock Authorized:..... 861,900 861,900
7.5% Cumulative Convertible Preferred Stock Outstanding:.... 0 0
Class B Common Stock Authorized:............................ 12,270,503 12,270,503
Class B Common Stock Outstanding:........................... 0 0
Total Number of Shares of All Classes of the Company's Stock
Authorized:............................................... 318,172,403 328,172,403
</Table>
- ---------------
(1) At March 27, 2004.
(2) Excludes 2,120,929 shares of Treasury Stock.
(3) Includes 2,120,929 shares of Treasury Stock.
(4) Represents 564,819 shares of Series C Preferred Stock outstanding. There is
no other series of preferred stock outstanding.
VOTE REQUIRED
The affirmative "FOR" vote of the holders of (a) at least two-thirds of the
outstanding shares of Series C Preferred Stock, voting separately as a class,
and (b) a majority of the outstanding shares of Common Stock and Series C
Preferred Stock, voting together as a class, are required for approval of
Proposal 3. Pursuant to the terms of the Voting Agreement described above under
the caption "The Recapitalization," the approval of Proposal 3 is assured.
In addition, as of the record date, Chelsey, beneficially owned 111,304,721
shares of Common Stock (approximately 51% of the outstanding Common Stock) and
564,819 shares of Series C Preferred Stock, collectively representing
approximately 61% of the combined voting power of the Voting Stock. Accordingly,
Chelsey alone will be able to control the outcome of all matters upon which it
votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE AMENDMENT
TO THE CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF SHARES
OF ADDITIONAL PREFERRED STOCK AND THE TOTAL NUMBER OF SHARES OF ALL
CLASSES OF STOCK WHICH THE COMPANY WOULD HAVE AUTHORITY TO ISSUE.
58
PROPOSAL 4
RATIFICATION AND APPROVAL OF THE ADOPTION OF THE
2004 STOCK OPTION PLAN FOR DIRECTORS
GENERALLY
The Company is asking you to ratify and approve the adoption of the
Company's 2004 Stock Option Plan for Directors (the "2004 Plan"). The purpose of
the 2004 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 2004 Plan. The complete text of the 2004
Plan, as in effect on the date hereof, is attached hereto as Appendix A.
SUMMARY OF THE 2004 PLAN
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") is eligible to participate in the 2004 Plan.
Effective Date and Duration of 2004 Plan. The 2004 Plan became effective
on the date of its adoption by the Compensation Committee, subject to the
ratification of the 2004 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 2004 Plan. The 2004 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 2004 Plan, to establish
such rules and regulations as it deems appropriate for the administration of the
2004 Plan, and to take such other action as it deems necessary or desirable for
the administration of the 2004 Plan.
Status of Options. Options granted under the 2004 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 2004 Plan. The maximum number of
shares of Common Stock that may be delivered or purchased under the 2004 Plan is
currently 1,000,000, 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 2004 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 2004 Plan, certain shares are no longer subject to an option
granted under the 2004 Plan, such shares will again be available for future
option grants under the 2004 Plan.
Amendment of 2004 Plan. The 2004 Plan may be amended by the Board or a
duly authorized committee thereof as the Board or such committee deems
advisable. However, no 2004 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 2004 Plan or if the failure to
obtain such approval
59
would adversely affect the compliance of the 2004 Plan with Rule 16b-3 or any
successor rule under the Exchange Act or any other rule or regulation. No 2004
Plan amendment may impair the rights of any 2004 Plan participant under any
option previously granted under the 2004 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 2004 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. A. David Brown, Stuart Feldman, Wayne P. Garten,
Donald Hecht, Robert H. Masson, Basil P. Regan and William B. Wachtel all have
an interest in the approval of the amendment of the 2004 Plan by the Company's
stockholders by virtue, as described below, of their entitlement to option
grants under the 2004 Plan on August 3, 2004 (to the extent the 2004 Stock
Option Plan for Directors does not have enough remaining shares), August 3, 2005
and August 3, 2006 provided that each such person continues to serve as a
director of the Company on each such date.
AWARDS AVAILABLE UNDER THE 2004 PLAN
Pursuant to the 2004 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 2004 Plan) (the "Initial Appointment Date"). In addition, on August 3,
2004 (to the extent the 2002 Stock Option Plan for Directors does not have
enough remaining shares), August 3, 2005 and August 3, 2006, provided that 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 35,000 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 2004 Plan, in the number, kind and price of
shares of Common Stock subject to outstanding options and in the option limits
under the 2004 Plan (or make provision for cash payments to the holders of
options granted under the 2004 Plan).
All options granted under the 2004 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 2004 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 2004 Plan will become immediately and fully exercisable upon
the occurrence of a "Change of Control" (as defined in the Hanover Direct, Inc.
Directors Change of Control Plan). Options granted under the 2004 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 2004 Plan is the fair market value of
such shares on the date of grant of such option. For purposes of the 2004 Plan,
the fair market value of a share of Common Stock is deemed to be the average of
the closing
60
price of the Common Stock on the date of grant, the ten trading days immediately
preceding such date, and the two 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 2004 Plan
must be made at the time of such exercise. The 2004 Plan provides that the
option exercise price may be paid in cash, in shares of Common Stock valued at
their fair market value on the date of exercise or by any other form of
compensation permissible for such purposes under Delaware law, as determined by
the Committee. Alternatively, an option granted under the 2004 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 2004 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 2004 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 2004 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. The participant will have a tax basis in the acquired shares in an amount
equal to the fair market value of the shares on the date of exercise. 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.
61
NEW PLAN BENEFITS
The following table summarizes the option grants that may be awarded under
the 2004 Stock Option Plan for Directors during the term thereof, assuming the
2004 Stock Option Plan for Directors is approved and adopted by the Company's
stockholders.
<Table>
<Caption>
NUMBER OF SHARES
NAME AND POSITION DOLLAR VALUE($) SUBJECT TO OPTIONS
- ----------------- --------------- ------------------
Thomas C. Shull, Chief Executive Officer(1)................ 0 None
Michael D. Contino, Executive Vice President and Chief
Operating Officer(1)..................................... 0 None
William C. Kingsford, Senior Vice President, Treasury and
Control (Corporate Controller)(1)........................ 0 None
Charles E. Blue, Senior Vice President and Chief Financial
Officer(1)............................................... 0 None
Executive Group(1)......................................... 0 None
Non-Executive Director Group............................... Unknown(2) Up to 1,000,000 in
the aggregate
Non-Executive Officer Employee Group(1).................... 0 None
</Table>
- ---------------
(1) Pursuant to terms of the 2004 Plan, 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 2004 Plan is the fair market value of such
shares on the date of grant of such option. For purposes of determining the
price under the 2004 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
two trading days immediately following such date.
VOTE REQUIRED
The affirmative "FOR" vote of the holders of a majority of the outstanding
shares of Common Stock and Series C Preferred Stock present or represented by
proxy and entitled to vote at the Annual Meeting, voting together as a class, is
required for approval of Proposal 4.
As of the record date, Chelsey beneficially owned 111,304,721 shares of
Common Stock (approximately 51% of the outstanding Common Stock) and 564,819
shares of Series C Preferred Stock, collectively representing approximately 61%
of the combined voting power of the Voting Stock. Accordingly, Chelsey alone
will be able to control the outcome of all matters upon which it votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE ADOPTION
OF THE 2004 STOCK OPTION PLAN FOR DIRECTORS.
62
PROPOSAL 5
AMENDMENTS TO THE 2002 STOCK OPTION PLAN FOR DIRECTORS
The Board of Directors is submitting two amendments to the 2002 Stock
Option Plan for Directors (the "2002 Plan") described herein to stockholders for
their approval. The purpose of the 2002 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.
Up to 9 directors are eligible to participate in the 2002 Plan. During
2003, options to purchase an aggregate of 610,000 shares of Common Stock were
granted under the 2002 Plan. During 2003, no options to purchase Common Stock
granted under the 2002 Plan expired unexercised.
The following is a brief summary of the 2002 Plan and the proposed
amendments to the 2002 Plan.
SUMMARY OF THE 2002 PLAN
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") is eligible to participate in the 2002 Plan.
Effective Date and Duration of 2002 Plan. The 2002 Plan became effective
on the date of its adoption by the Compensation Committee, was ratified by the
affirmative vote of holders of a majority of the issued and outstanding shares
of Common Stock at the 2002 Annual Meeting of Stockholders, and will terminate
10 years from the date of its adoption or such earlier date as the Board may
determine.
Administration of 2002 Plan. The 2002 Plan is administered by a committee
(the "Committee") consisting of at least two members of the Board. The Committee
has full power and authority to interpret the 2002 Plan, to establish such rules
and regulations as it deems appropriate for the administration of the 2002 Plan,
and to take such other action as it deems necessary or desirable for the
administration of the 2002 Plan.
Status of Options. Options granted under the 2002 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 2002 Plan. The maximum number of
shares of Common Stock that may be delivered or purchased under the 2002 Plan
was originally 500,000 and was increased by the Board of Directors in November
2003 to 900,000, 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. See "Plan Amendments," below. The shares of
Common Stock to be issued in connection with the exercise of stock options
granted under the 2002 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 2002 Plan, certain
shares are no longer subject to an option granted under the 2002 Plan, such
shares will again be available for future option grants under the 2002 Plan.
63
Amendment of 2002 Plan. The 2002 Plan may be amended by the Board or a
duly authorized committee thereof as the Board or such committee deems
advisable. However, no 2002 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 2002 Plan or if the failure to
obtain such approval would adversely affect the compliance of the 2002 Plan with
Rule 16b-3 or any successor rule under the Exchange Act or any other rule or
regulation. No 2002 Plan amendment may impair the rights of any 2002 Plan
participant under any option previously granted under the 2002 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
2002 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. A. David Brown, Stuart Feldman, Wayne P. Garten,
Donald Hecht, Robert H. Masson, Basil P. Regan and William B. Wachtel all have
an interest in the approval of the amendments of the 2002 Plan by the Company's
stockholders by virtue, as described below, of their entitlement to options
previously granted under the 2002 Plan and to be granted under the 2002 Plan, in
the case of Paul S. Goodman on his Initial Appointment Date or on August 3,
2004, provided that each such person continues to serve as a director of the
Company on each such date.
AWARDS AVAILABLE UNDER THE 2002 PLAN
Pursuant to the 2002 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 (the "Initial Appointment Date").
In addition, on August 2, 2002, August 1, 2003 and August 3, 2004 (an "Award
Date"), provided that 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 35,000 shares of Common Stock
(increased from 2002 shares of Common Stock by an amendment of the 2002 Plan in
November 2002) provided that he or she is a director of the Company on such
date. See "Plan Amendments," below. 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 2002 Plan, in the number, kind and price of
shares of Common Stock subject to outstanding options and in the option limits
under the 2002 Plan (or make provision for cash payments to the holders of
options granted under the 2002 Plan).
All options granted under the 2002 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 2002 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 2002 Plan will become immediately and fully exercisable upon
the occurrence of a "Change of Control" (as defined in the Hanover Direct, Inc.
Directors Change of Control Plan) which occurred for the current participants in
the 2002 Plan on November 30, 2003 on the closing of the Recapitalization.
Options granted under the 2002 Plan may not be exercised more than 3 months
after a
64
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 2002 Plan is the fair market value of
such shares on the date of grant of such option. For purposes of the 2002 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 2002 Plan
must be made at the time of such exercise. The 2002 Plan provides that the
option exercise 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
granted under the 2002 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 2002 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 2002 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 2002 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. The participant will have a tax basis in the acquired shares in an amount
equal to the fair market value of the shares on the date of exercise. 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.
PLAN AMENDMENTS
The Board has amended the 2002 Plan (i) to increase the maximum number of
shares of Common Stock that may be delivered or purchased under the 2002 Plan
from 500,000 to 900,000 and (ii) to increase the number of shares of Common
Stock for which a Non-Employee Director will be granted an option on each annual
Award Date from 25,000 to 35,000. Such amendments are shown in bold-faced type
in the full text of the 2002 Plan attached hereto as Appendix B.
65
The following table summarizes the option grants that may be awarded under
the 2002 Plan during the term thereof, assuming the proposed amendments to the
2002 Plan are approved and adopted by the Company's stockholders.
<Table>
<Caption>
DOLLAR NUMBER OF SHARES
NAME AND POSITION VALUE($) SUBJECT TO OPTIONS
- ----------------- ---------- ------------------
Thomas C. Shull, Chief Executive Officer(1)........... 0 None
Michael D. Contino, Executive Vice President and Chief
Operating Officer(1)................................ 0 None
William C. Kingsford, Senior Vice President, Treasury
and Control (Corporate Controller)(1)............... 0 None
Charles E. Blue, Senior Vice President and Chief
Financial Officer(1)................................ 0 None
Executive Group(1).................................... 0 None
Non-Executive Director Group.......................... Unknown(2) Up to 900,000 in
the aggregate
Non-Executive Officer Employee Group(1)............... 0 None
</Table>
- ---------------
(1) Pursuant to the terms of the 2002 Plan, 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 2002 Plan is the fair market value of such
shares on the date of grant of such option. For purposes of determining the
price under the 2002 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 the grant, the ten trading days immediately preceding such date, and
the ten trading days immediately following such date.
VOTE REQUIRED
The affirmative "FOR" vote of the holders of a majority of the outstanding
shares of Common Stock and Series C Preferred Stock present or represented by
proxy and entitled to vote at the Annual Meeting, voting together as a class, is
required for approval of Proposal 5.
As of the record date, Chelsey, beneficially owned 111,304,721 shares of
Common Stock (approximately 51% of the outstanding Common Stock) and 564,819
shares of Series C Preferred Stock, collectively representing approximately 61%
of the combined voting power of the Voting Stock. Accordingly, Chelsey alone
will be able to control the outcome of all matters upon which it votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE AMENDMENTS
TO THE 2002 STOCK OPTION PLAN FOR DIRECTORS.
66
PROPOSAL 6
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
GENERALLY
Ratification of the Company's selection of independent auditors by the
Company's stockholders is not required by the Company's by-laws or other
applicable legal requirements and no recommendation of independent auditors is
being made to stockholders at this time. Instead, we are asking you to delegate
to the Audit Committee of the Board of Directors authority to select the
Company's independent auditors for the fiscal year ending December 25, 2004 from
amongst established national audit firms.
Representatives of KPMG LLP are expected to attend the Annual Meeting. They
will have an opportunity to make a statement if they desire to do so and will be
available to respond to appropriate stockholder questions.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There were no disagreements with accountants on accounting and financial
disclosure.
The Board of Directors of the Company, upon recommendation of its Audit
Committee, ended the engagement of Arthur Andersen LLP as the Company's
independent public accountants, effective after Arthur Andersen's review of the
Company's financial results for the fiscal quarter ended March 30, 2002 and the
filing of this Quarterly Report on Form 10-Q for such quarter, and authorized
the engagement of KPMG LLP to serve as the Company's independent public
accountants for the fiscal year ending December 28, 2002. Arthur Andersen's
report on the Company's 2001 financial statements was issued on March 16, 2002,
in conjunction with the filing of the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 2001.
FEES AND INDEPENDENCE
KPMG LLP provided audit services to the Company consisting of the annual
audit of the Company's 2003 and 2002 consolidated financial statements contained
in the Company's Annual Report on Form 10-K for each year and reviews of the
financial statements contained in the Company's Quarterly Reports on Form 10-Q
for the 2003 fiscal year and the final three quarters of the 2002 fiscal year.
Arthur Anderson LLP billed the Company an aggregate of $29,800 for audit and
audit-related fees for its review of the financial statements contained in the
Company's Quarterly Report on Form 10-Q for the first quarter of the 2002 fiscal
year. The following table shows the fees that were billed to the Company by KPMG
LLP for professional services rendered for the fiscal years ended December 27,
2003 and December 28, 2002.
<Table>
<Caption>
FEE CATEGORY FISCAL YEAR 2003 % OF TOTAL FISCAL YEAR 2002 % OF TOTAL
- ------------ ---------------- ---------- ---------------- ----------
Audit Fees(1).............................. $689,500 82.7% $632,801 77.9%
Audit-Related Fees(2)...................... 111,189 13.3% 107,150 13.2%
Tax Fees(3)................................ 14,500 1.8% 36,975 4.6%
All Other Fees(4).......................... 18,500 2.2% 35,130 4.3%
Total Fees................................. $833,869 100.0% $812,056 100.0%
</Table>
67
- ---------------
(1) Audit Fees are fees for professional services performed for the audit of the
Company's annual financial statements and review of financial statements
included in the Company's 10-Q filings, and services that are normally
provided in connection with statutory and regulatory filings or engagements.
(2) Audit-Related Fees are fees for assurance and related services that are
reasonably related to the performance of the audit or review of the
Company's financial statements. This includes: employee benefit and
compensation plan audits; due diligence related to mergers and acquisitions;
auditor attestations that are not required by statute or regulation; and
consulting on financial accounting/ reporting standards.
(3) Tax Fees are fees for professional services performed with respect to tax
compliance, tax advice and tax planning. For fiscal year 2003, tax fees of
$14,500 are related to tax compliance billings. For fiscal year 2002, tax
fees of $6,825 are related to tax compliance billings and $30,150 are
related to tax consultation and planning.
(4) All Other Fees are fees for other permissible work that does not meet the
above category descriptions, including consulting services regarding the
evaluation of stock option grants and employee agreements.
KPMG LLP did not provide any services related to financial information
systems design and implementation during the 2003 and 2002 fiscal years.
The Audit Committee of the Board of Directors has considered whether the
provision of services by KPMG described above are compatible with maintaining
KPMG's independence as the Company's principal accountant.
PRE-APPROVAL POLICY
The Audit Committee has policies and procedures that require the
pre-approval by the Audit Committee of all fees paid to, and all services
performed by, our independent auditors. Each year, the Audit Committee approves
the proposed services, including the nature, type and scope of services
contemplated and the related fees, to be rendered by our accountants during the
year. In addition, Audit Committee pre-approval is also required for those
engagements that may arise during the course of the year that are outside the
scope of the initial services and fees pre-approved by the Audit Committee.
All of the fees and services provided as noted in the table above were
authorized and approved by the Audit Committee in compliance with the
pre-approval policies and procedures described herein.
VOTE REQUIRED
The affirmative "FOR" vote of the holders of a majority of the outstanding
shares of Common Stock and Series C Preferred Stock present or represented by
proxy and entitled to vote at the Annual Meeting, voting together as a class, is
required for approval of Proposal 6.
As of the record date, Chelsey, beneficially owned 111,304,721 shares of
Common Stock (approximately 51% of the outstanding Common Stock) and 564,819
shares of Series C Preferred Stock, collectively representing approximately 61%
of the combined voting power of the Voting Stock. Accordingly, Chelsey alone
will be able to control the outcome of all matters upon which it votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" RATIFICATION OF
THE DELEGATION TO THE AUDIT COMMITTEE OF AUTHORITY TO SELECT
THE COMPANY'S AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 25, 2004.
68
STOCKHOLDER PROPOSALS FOR THE 2005 ANNUAL MEETING
If you wish to submit proposals to be presented at the 2005 Annual Meeting
of Stockholders of the Company, they must be received by the Company no later
than December 13, 2004 for them to be included in the Company's proxy material
for that meeting. In order for a proposal to be included in the proxy statement,
the stockholder submitting the proposal must meet certain eligibility standards
and must comply with certain procedures established by the Commission, and the
proposal must comply with the requirements as to form and substance established
by applicable laws and regulations.
DISCRETIONARY AUTHORITY
If the Company did not receive notice of any matter that is to come before
the stockholders at the 2004 Annual Meeting of Stockholders on or before March
11, 2004, which corresponds to forty-five (45) days before the date on which the
Company first mailed this proxy statement, the proxy for the 2004 Annual Meeting
of Stockholders may, pursuant to Rule 14a-4(c) of the proxy rules under the
Exchange Act confer discretionary authority to vote on the matters presented.
INCORPORATION OF DOCUMENTS BY REFERENCE
Items 6 through 9 of Part II of the Company's Annual Report on Form 10-K
for the fiscal year ended December 27, 2003 filed by the Company with the
Commission are incorporated herein by reference. A copy of the Company's 2003
Form 10-K is included within the Company's 2003 Annual Report to Stockholders
enclosed herewith.
Representatives of KPMG LLP, the Company's independent auditors, are
expected to attend the Annual Meeting. They will have an opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate stockholder questions.
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.
69
YOU MAY OBTAIN AN ADDITIONAL COPY OF THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED DECEMBER 27, 2003 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, OR FROM THE COMPANY'S WEBSITE
AT WWW.HANOVERDIRECT.COM.
By Order of the Board of Directors
Charles E. Blue
Secretary
Dated: [April 26], 2004
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
70
APPENDIX A
HANOVER DIRECT, INC.
2004 STOCK OPTION PLAN FOR DIRECTORS
1. PURPOSE. The purpose of the Hanover Direct, Inc. 2004 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 1,000,000 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 (to the extent the
2002 Stock Option Plan for Directors does not have enough remaining
shares), an Option to purchase 35,000 shares of Common Stock (subject to
adjustment pursuant to Section 13). An "Award Date" means August 3, 2004,
August 3, 2005 and August 3, 2006.
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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 2 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. Directors Change of Control 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, in shares of Common Stock valued at their fair market value on the date of
exercise or with any other form of compensation permissible for such purposes
under Delaware law, as determined by the Committee in its judgment.
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.
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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, as amended, 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.
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APPENDIX B
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 1,00,000 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 (35,000 SHARES OF COMMON STOCK ON
AUGUST 1, 2003 AND AUGUST 3, 2004) (subject to adjustment pursuant to
Section 13). An "Award Date" means August 2, 2002, August 1, 2003 and
August 3, 2004.
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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.
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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
amendmentmay, 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.
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APPENDIX C
HANOVER DIRECT, INC.
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
ORGANIZATION:
There shall be a committee of the Board of Directors to be known as the
Audit Committee. The Audit Committee shall consist of at least three (3) members
of the Board of Directors and shall have a Chairman, who shall be elected by a
majority of the members of the Board of Directors. The members of the Audit
Committee shall be appointed by the Board of Directors. The members of the Audit
Committee may be removed for cause by a majority of the Board of Directors.
The members of the Audit Committee shall meet the independence, financial
sophistication and literacy, experience and other requirements of the American
Stock Exchange, the Securities and Exchange Commission and any other applicable
requirements. The Chairman of the Audit Committee shall meet the requirements of
the American Stock Exchange, the Securities and Exchange Commission and any
other applicable requirements.
The Audit Committee may form and delegate authority to subcommittees, when
appropriate.
STATEMENT OF POLICY:
The Audit Committee shall provide assistance to the Company's directors in
fulfilling their responsibility to shareholders and the investment community
relating to (1) the corporate accounting and reporting practices of the Company,
(2) the quality and integrity of the financial reports of the Company, (3) the
independent auditor's qualifications, independence and performance, (4) the
performance of the Company's internal audit function and (5) the compliance by
the Company with legal and regulatory requirements. In so doing, it is the
responsibility of the Audit Committee to maintain free and open means of
communication among the directors, the independent auditor, the internal
auditors, and the financial management of the Company. Notwithstanding the
foregoing, the independent auditor of the Company shall be ultimately
accountable and shall report directly to the Audit Committee.
MEETINGS:
The Audit Committee shall meet at least four times a year on a quarterly
basis, or more frequently as circumstances require. The Chairman of the Audit
Committee will preside at each meeting of the Audit Committee and, in
consultation with the other members of the Audit Committee, shall set the
frequency and length of each meeting. The Chairman of the Audit committee shall
set the agenda of items to be addressed at each upcoming meeting after
consultation with the chief financial officer, the head of internal audit, the
independent auditor and the Company's inside and outside counsel. The Chairman
of the Audit Committee shall ensure that the agenda for each upcoming meeting of
the Audit Committee is circulated to each member of the Audit Committee.
RESPONSIBILITIES AND RESOURCES:
As the independent auditor is ultimately accountable to the Audit
Committee, the Audit Committee shall be directly responsible for the
appointment, compensation, retention, termination and oversight of the work of
the independent auditor employed by the Company for the purpose of preparing or
issuing an audit
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report or related work on behalf of the Company. The Audit Committee must meet
privately with the independent auditor from time to time. The Audit Committee
shall consult with management but shall not delegate these responsibilities.
The Audit Committee has the authority to conduct any investigation
appropriate to fulfilling its responsibilities.
The Audit Committee may request any officer or employee of the Company or
the Company's outside counsel or independent auditor to attend a meeting of the
Audit Committee, or to meet with any members of, or consultants to, the Audit
Committee. The Audit Committee may also meet with the Company's investment
bankers or financial analysts who follow the Company.
The Audit Committee has the authority to retain, at the Company's expense,
independent legal counsel and other advisors as it determines necessary to carry
out its duties.
The Audit Committee shall determine the extent of funding necessary for
payment of compensation (a) to the independent auditor for the purpose of
rendering or issuing the annual audit report or to perform other audit, review
or attest services for the Company, (b) to any independent legal counsel or
other advisors retained under the preceding paragraph to advise the Audit
Committee and (c) for ordinary administrative expenses of the Audit Committee.
In carrying out its responsibilities, the Audit Committee shall establish
and maintain flexible policies and procedures, in order to best react to
changing conditions and to ensure to the directors and shareholders of the
Company that the corporate accounting and reporting practices of the Company are
in accordance with all requirements and are of the highest quality.
In carrying out these responsibilities, the Audit Committee will:
GENERAL:
1. Monitor the Company's financial reporting process and systems of
internal controls regarding finance, accounting, and legal compliance.
2. Seek to insure and monitor the independence and performance of the
Company's external auditor and internal auditing department and advise the Board
of Directors.
3. Review and approve all related-party transactions.
INDEPENDENT AUDITOR:
4. Be directly responsible for the appointment, compensation, retention,
termination and oversight of the work of the independent auditor (including
resolution of disagreements between management and the independent auditor
regarding financial reporting) for the purpose of preparing its audit report or
any related work.
5. Have the authority to review in advance, and grant any appropriate
pre-approvals, of (a) all audit services to be provided by the independent
auditor and (b) all permitted non-audit services to be provided by the
independent auditor, and in connection therewith to approve all fees and other
terms of engagement. The authority to grant pre-approvals may be delegated by
the Audit Committee to one or more of its members. However, any decision made by
these members must be presented to the full Audit Committee at Audit Committee
meetings.
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6. Review and approve disclosures required regarding non-audit services to
be included in Securities and Exchange Commission periodic reports filed under
Section 13(a) of the Securities Exchange Act of 1934, as amended.
7. Review the performance of the independent auditor annually.
8. Ensure that the independent auditor submits to the Audit Committee on an
annual basis a written statement consistent with Independent Standards Board
Standard No. 1, discuss with the independent auditor any disclosed relationships
or services that may impact the objectivity and independence of the independent
auditor and satisfy itself as to the independent auditor's independence.
9. Obtain and review an annual report, at a minimum, on an annual basis,
from the independent auditor describing (a) the independent auditor's internal
quality control procedures and (b) any material issues raised by the most recent
internal quality control review, or peer review, of the independent auditor, or
by any inquiry or investigation by governmental or professional authorities,
within the preceding five years, with respect to one or more independent audits
carried out by the independent auditor, and any steps taken to deal with any
such issues.
10. Confirm that the auditor that is to perform the audit services for the
Company does not violate the audit rotation requirements of Section 203 of the
Sarbanes-Oxley Act of 2002, which provides that the auditor may not perform
audit services for the Company if the lead audit partner or the audit partner
responsible for reviewing the audit has performed audit services for the Company
for each of the five previous fiscal years.
11. Review all reports that the federal securities laws require the
independent auditor to submit to the Audit Committee.
12. Meet with the independent auditor prior to the audit to review the
planning and staffing of the audit. Discuss general audit approach, scope,
staffing, locations, and reliance upon management and internal audit.
13. Consider the independent auditor's judgments about the quality and
appropriateness of the Company's accounting principles and disclosures as
applied in its financial reporting.
14. Obtain from the independent auditor assurance that Section 10A of the
Securities Exchange Act of 1934, as amended, relating to "Audit Requirements"
has not been implicated.
15. Review with the independent auditor any management letter provided by
the independent auditor and with management the Company's response to that
letter. Such review should include:
(a) any difficulties encountered in the course of the audit work, including
any restrictions on the scope of activities or access to required information,
and any disagreements with management; and
(b) any changes required in the planned scope of the internal audit.
16. Review with the independent auditor and the internal audit department
any significant disagreement between management and the independent auditor or
the internal audit department in connection with the preparation of the
financial statements.
17. Meet at least quarterly with the independent auditor in separate
executive sessions.
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WITH RESPECT TO THE ANNUAL FINANCIAL STATEMENTS:
18. Review and discuss with management, the internal audit department and
the independent auditor the Company's annual audited financial statements prior
to submission to stockholders, any governmental body, any stock exchange or the
public.
19. Discuss with the independent auditor the matters required to be
discussed by AICPA Statement on Auditing Standards No. 61, as amended, relating
to the conduct of the audit.
20. Prepare the report to shareholders required by the Securities and
Exchange Commission to be included in the Company's annual proxy statement and
any other reports of the Audit Committee required by applicable securities laws
or stock exchange listing requirements or rules.
21. Review with management and the independent auditor the certification by
the Chief Executive Officer and the Chief Financial Officer of the Company's
annual financial statements and the management's discussion and analysis section
in the Company's Annual Report on Form 10-K.
WITH RESPECT TO THE QUARTERLY FINANCIAL STATEMENTS:
22. Review and discuss with management, the internal audit department and
the independent auditor the Company's quarterly financial statements prior to
submission to stockholders, any governmental body, any stock exchange or the
public.
23. Review with management and the independent auditor the certification by
the Chief Executive Officer and the Chief Financial Officer of the Company's
quarterly financial statements and the management's discussion and analysis
section in the Company's Quarterly Reports on Form 10-Q.
PERIODIC REVIEWS:
24. Discuss at least quarterly with the independent auditor, without
management being present, (a) its judgments about the quality and
appropriateness of the Company's accounting principles and financial disclosure
practices as applied in its financial reporting and (b) the completeness and
accuracy of the Company's financial statements.
25. Consider and approve, as appropriate, significant changes to the
Company's accounting principles and financial disclosure practices as suggested
by the independent auditor, management or the internal audit department and any
items required to be communicated by the independent auditor in accordance with
AICPA SAS No. 61 (see item 18 above). Review with the independent auditor,
management and the internal audit department, at appropriate intervals, the
extent to which any changes or improvements in accounting or financial
practices, as approved by the Audit Committee, have been implemented.
26. Periodically review and discuss with management, the internal audit
department and the independent auditor, as appropriate, any legal, regulatory or
compliance matters that could have a significant impact on the Company's
financial statements, including applicable changes in accounting standards or
rules.
27. Review and reassess the Company's directors' and officers' liability
insurance.
28. Review and discuss with management the Company's major risk exposures
and the steps management has taken to monitor, control and manage such
exposures, including the Company's risk assessment and risk management
guidelines and policies.
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29. Review and discuss with management the Company's earnings press
releases, including the use of "pro forma" or "adjusted" non-GAAP information,
as well as financial information and earnings guidance provided to analysts and
rating agencies. At least the chairman of the audit committee should review the
Company's earnings press releases before they are released to the public.
INTERNAL AUDIT DEPARTMENT:
30. Review the organizational structure and qualifications of the internal
audit department, as needed.
31. Review, based upon the recommendation of the independent auditor and
the chief internal auditor, the scope and plan of the work to be done by the
internal audit department.
32. Review the appointment, annual performance reviews, and replacement of
the senior internal audit executive.
33. In consultation with the independent auditor and the internal audit
department, review the adequacy of the Company's internal control structure and
procedures designed to insure compliance with laws and regulations, and discuss
the responsibilities, budget and staffing needs of the internal audit
department.
34. Establish procedures for (a) the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal accounting
controls or auditing matters and (b) the confidential, anonymous submission by
employees of the Company of concerns regarding questionable accounting or
auditing matters.
35. Review the significant reports to management prepared by the internal
auditing department and management's responses.
36. On a regular basis, review summaries of findings prepared by the
internal audit department, together with management's response and follow-up to
these reports.
LEGAL COMPLIANCE:
37. Periodically review with the Company's in house and independent counsel
any legal matters that could have a significant impact on the Company's
financial statements, the Company's compliance with applicable laws and
regulations, and any material reports or inquiries received from regulators or
governmental agencies.
38. Obtain timely reports from management and the Company's senior internal
auditing executive and Counsel that the Company and its subsidiaries are in
conformity with applicable legal requirements and the Company's Corporate Code
of Conduct, including disclosures of insider and affiliated party transactions.
39. Advise the Board of Directors with respect to the Company's policies
and procedures regarding compliance with applicable laws and regulations and
with the Company's Corporate Code of Conduct.
40. Review and approve the Company's Corporate Code of Conduct, as it may
be amended and updated from time to time, and ensure that management has
implemented a compliance program to enforce such Code. Ensure that such
compliance program includes reporting violations of such Code of Conduct to the
Audit Committee.
41. Review reported violations of the Company's Corporate Code of Conduct.
CC-5
42. Review and approve (a) any change or waiver in the Company's Corporate
Code of Conduct for principal executives and senior financial officers and (b)
any disclosures made on Form 8-K regarding such change or waiver.
OTHER AUDIT COMMITTEE RESPONSIBILITIES:
43. Maintain minutes of meetings and regularly report to the Board of
Directors on the Committee's activities after each Audit Committee meeting.
44. Review and reassess the adequacy of this Charter at least annually and
recommend any proposed changes to the Board of Directors for approval. Submit
the Charter to the Board of Directors for approval, and have the document
published, at least every three years, in the Company's proxy statement in
accordance with regulations of the Securities and Exchange Commission.
45. Annually assess its performance of the duties specified in this Charter
and report its findings to the Board of Directors.
46. Perform any other activities consistent with this Charter, the
Company's by-laws and governing law, as the Audit Committee or the Board of
Directors deems necessary or appropriate.
* * *
While the Audit Committee has the responsibilities and powers set forth in
this Charter, the role of the Audit Committee is oversight. The members of the
Audit Committee are not full-time employees of the Company and may or may not be
accountants or auditors by profession or experts in the fields of accounting or
auditing and, in any event, do not serve in such capacity. Consequently, it is
not the duty of the Audit Committee to conduct audits or to determine that the
Company's financial statements and disclosures are complete and accurate and are
in accordance with generally accepted accounting principles and applicable rules
and regulations. These are the responsibility of management and the independent
auditor. Nor is it the duty of the Audit Committee to conduct investigations, to
resolve disagreements, if any, between management and the independent auditor or
to assure compliance with laws and regulations and the Company's Corporate Code
of Conduct.
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APPENDIX D
HANOVER DIRECT, INC.
NOMINATING COMMITTEE CHARTER
I. PURPOSES OF COMMITTEE
The purposes of the Nominating Committee (the "Committee") of the Board of
Directors (the "Board") of Hanover Direct, Inc. (the "Company") are to (i)
identify and recommend individuals to the Board for nomination as members of the
Board and its committees (including this Committee), and (ii) oversee the
evaluation of the Board and management.
II. COMMITTEE MEMBERSHIP AND REMOVAL
The Committee shall consist solely of three or more members of the Board,
each of whom the Board has determined has no material relationship with the
Company that would interfere with the exercise of independent judgment and each
of whom is otherwise "independent" under the rules of the American Stock
Exchange ("Amex") unless the Board of Directors, under exceptional and limited
circumstances, determines that membership on the Nominating Committee of one
director that is not independent is in the best interests of the Company.
The initial members of the Committee shall be appointed by the Board.
Candidates to fill subsequent vacancies in the Committee shall be nominated by
the Committee as set forth below and appointed by the Board. Members shall serve
at the pleasure of the Board and for such term or terms as the Board may
determine.
III. COMMITTEE STRUCTURE AND OPERATIONS
The Committee shall designate one member of the Committee as its
chairperson by a majority vote of the full Committee membership. The Committee
shall meet in person or telephonically at least once a year at a time and place
determined by the Committee chairperson, with further meetings to occur, or
actions to be taken by unanimous written consent, when deemed necessary or
desirable by the Committee or its chairperson.
IV. COMMITTEE DUTIES AND RESPONSIBILITIES
The following are the duties and responsibilities of the Committee:
1. To make recommendations to the Board from time to time as to
changes that the Committee believes to be desirable to the size of the
Board or any committee thereof.
2. To identify individuals believed to be qualified to become Board
members (including conducting the appropriate and necessary inquiries into
the backgrounds and qualifications of possible candidates), to recommend to
the Board the nominees to stand for election as directors at the annual
meeting of stockholders or, if applicable, at a special meeting of
stockholders, and in each case to provide to the Board the Committee's
assessment whether such individual would be considered independent. In the
case
DD-1
of a vacancy in the office of a director (including a vacancy created by an
increase in the size of the Board), the Committee shall recommend to the
Board an individual to fill such vacancy. In nominating candidates, the
Committee shall take into consideration the criteria set forth in the
Company's Corporate Governance Guidelines adopted by the Corporate
Governance Committee, which include judgment, skill, diversity, experience
with businesses and other organizations of comparable size, the interplay
of the candidate's experience with the experience of other Board members,
and the extent to which the candidate would be a desirable addition to the
Board and any committees of the Board. The Corporate Governance Guidelines
shall set forth the Company's nomination process. The Committee will
consider nominations submitted by stockholders so long as such nominations
are made in accordance with the procedures set forth in the Company's
by-laws and the Corporate Governance Guidelines. The Committee may also
consider candidates proposed by management.
3. To develop and recommend to the Board standards to be applied in
making the initial assessment as to whether a director is otherwise
independent under the rules of the Amex. The Committee will also recommend
to the Board any modifications to these standards that the Committee deems
desirable, and provide to the Board the Committee's assessment of which
directors should be deemed independent under any recommended modifications
of the standards.
4. To identify Board members qualified to fill vacancies on any
committee of the Board (including the Committee) and to recommend that the
Board appoint the identified member or members to the respective committee.
In nominating a candidate for committee membership, the Committee shall
take into consideration the factors set forth in the charter of that
committee, if any, as well as any other factors it deems appropriate,
including, without limitation, the consistency of the candidate's
experience with the goals of the committee and the interplay of the
candidate's experience with the experience of other committee members.
5. Review a director's continuation on the Board in the event that
(i) a director's principal occupation or business association changes
substantially from the position he or she held when originally invited to
join the Board, (ii) a director becomes involved in a current or potential
conflict of interest or (iii) a director becomes unable to spend the time
required to carry out his or her responsibilities as a director or becomes
disabled and recommend to the Board whether, under the circumstances, such
director should continue to serve on the Board.
6. Prepare and issue the evaluation required under "Performance
Evaluation" below.
7. Review and reassess the adequacy of this charter annually and
recommend to the Board any changes deemed appropriate by the Committee.
8. Any other duties or responsibilities expressly delegated to the
Committee by the Board from time to time.
Since the Company is required by contract to provide third parties with the
ability to nominate directors and such obligation pre-dates December 1, 2003,
then the selection and nomination of such directors need not be subject to the
nomination process described in this Charter.
DD-2
V. DELEGATION TO SUBCOMMITTEE
The Committee may, in its discretion, delegate all or a portion of its
duties and responsibilities to a subcommittee of the Committee.
VI. PERFORMANCE EVALUATION
The Committee shall produce and provide to the Board an annual performance
evaluation of the Committee, which evaluation shall compare the performance of
the Committee with the requirements of this charter. The performance evaluation
shall also recommend to the Board any improvements to the Committee's charter
deemed necessary or desirable by the Committee. The performance evaluation by
the Committee shall be conducted in such manner as the Committee deems
appropriate. The report to the Board may take the form of an oral report by the
chairperson of the Committee or any other member of the Committee designated by
the Committee to make this report.
VII. RESOURCES AND AUTHORITY OF THE COMMITTEE
The Committee shall have the resources and authority appropriate to
discharge its duties and responsibilities, including the authority to select,
retain, terminate and approve the fees and other retention terms of special
counsel or other experts or consultants, as it deems appropriate, without
seeking approval of the Board or management. With respect to consultants or
search firms used to identify director candidates, this authority shall be
vested solely in the Committee.
DD-3
HANOVER DIRECT, INC.
PROXY FOR
THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON THURSDAY, JUNE 3, 2004
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned common stockholder of Hanover Direct, Inc. (the "Company")
hereby appoints each of Charles E. Blue and William C. Kingsford, 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, June 3, 2004 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 COMMON STOCKHOLDER. UNLESS OTHERWISE SPECIFIED, THIS PROXY
WILL BE VOTED "FOR" THE APPROVAL OF THE SIX PROPOSALS SET FORTH IN THE PROXY
STATEMENT.
IMPORTANT: SIGNATURE AND DATE ON REVERSE SIDE
[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: Thomas C. Shull, A. David Brown, Stuart Feldman, Wayne P. Garten, Paul
S. Goodman, Donald Hecht, Robert H. Masson, Basil P. Regan and William B.
Wachtel.
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.)
2. AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION THAT WOULD REDUCE
THE PAR VALUE OF EACH SHARE OF COMMON STOCK FROM $0.66 2/3 PER SHARE TO
$0.01 PER SHARE AND TO RECLASSIFY THE OUTSTANDING SHARES OF COMMON STOCK
INTO SUCH LOWER PAR VALUE SHARES
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION THAT WOULD INCREASE
THE NUMBER OF SHARES OF ADDITIONAL PREFERRED STOCK WHICH THE COMPANY WOULD
HAVE AUTHORITY TO ISSUE FROM 5,000,000 SHARES TO 15,000,000 SHARES AND MAKE
A CORRESPONDING CHANGE IN THE TOTAL NUMBER OF SHARES OF ALL CLASSES OF STOCK
WHICH THE CORPORATION HAS AUTHORITY TO ISSUE
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. RATIFICATION AND ADOPTION OF THE 2004 STOCK OPTION PLAN FOR DIRECTORS
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. RATIFICATION AND ADOPTION OF CERTAIN AMENDMENTS TO 2002 STOCK OPTION PLAN
FOR DIRECTORS DESCRIBED IN THE PROXY STATEMENT
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. RATIFICATION OF THE DELEGATION OF AUTHORITY TO THE AUDIT COMMITTEE OF THE
COMPANY'S BOARD OF DIRECTORS TO SELECT THE COMPANY'S INDEPENDENT AUDITORS
FOR THE FISCAL YEAR ENDING DECEMBER 25, 2004
[ ] FOR [ ] AGAINST [ ] ABSTAIN
7. 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.
YOUR VOTE IS IMPORTANT
VOTE BY MAIL, INTERNET OR TELEPHONE
MAIL -- Please complete, date, sign and mail this proxy form
promptly using the enclosed envelope
COMPANY NUMBER:
TELEPHONE -- Call toll-free 1-800-PROXIES from any
touch-tone telephone and follow the instructions. Have your
proxy card available when you call
ACCOUNT NUMBER:
INTERNET -- Access "www.Vote proxy.com" and follow the
on-screen instructions. Have your proxy card available when you
access the web page
------------------------------------
Signature of Common Stockholders(s)
------------------------------------
Name of Common Stockholder(s)
Date: ---------- , 2004
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 a corporation, please sign full corporate
name by authorized officer. If shares are held jointly, each holder should sign.