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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
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OF THE SECURITIES EXCHANGE ACT OF 1934
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[X] Definitive Proxy Statement
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HANOVER DIRECT, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
HANOVER DIRECT, INC.------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
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HANOVER DIRECT, INC.
115 RIVER ROAD, BUILDING 10
EDGEWATER, NEW JERSEY 07020
(201) 863-7300
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 16, 200215, 2003
Dear Stockholders:
We will hold the 20022003 Annual Meeting of Stockholders of Hanover Direct,
Inc., a Delaware corporation (the "Company"), at the Sheraton Suites on the
Hudson, 500 Harbor Boulevard, Weehawken, New Jersey 07087 on Thursday, May 16,
200215,
2003 at 9:30 a.m., local time. The meeting's purpose is to:
1. Elect 5 directors;
2. Delegate to the Audit Committee of the Board of Directors authority to
select the Company's independent auditors for the fiscal year ending
December 28, 2002, after
review by the Audit Committee of the Board of Directors,27, 2003 from amongst established national audit firms; 3. Ratify the 2002 Stock Option Plan for Directors; and
4.3. Consider any other matters that are properly presented at the Annual
Meeting of Stockholders and any adjournment.
You may vote at the Annual Meeting of Stockholders if you were a stockholderholder of
the Company's Common Stock, par value $0.66 2/3 per share (the "Common Stock"),
or the Company's Series B Participating Preferred Stock, par value $0.01 per
share (the "Series B Preferred Stock" and, together with the Common Stock, the
"Voting Stock"), at the close of business on Monday, March 25, 2002.Wednesday, April 2, 2003.
Along with the attached Proxy Statement, we are also enclosing a copy of
the Company's 20012003 Annual Report to Stockholders, which includes our financial
statements.
All stockholders of record of Voting Stock are cordially invited to attend.
Whether or not you expect to attend the Annual Meeting, please vote.
Stockholders of record of the Company's Common Stock may vote their shares by
completing and returning the enclosed proxy card or may vote via the Internet or
by telephone. Instructions for shareholders of Common Stock to vote via the
Internet or by telephone are in the enclosed Proxy Statement. Your proxy is
being solicited by the Board of Directors.
In accordance with Delaware corporate law, the Company will make available
for examination by any stockholder entitled to vote at the Annual Meeting, for
any purpose germane to the Annual Meeting, during ordinary business hours, for
at least 10 days prior to the Annual Meeting, at the offices of Hanover Direct,
Inc., 1500 Harbor Boulevard, Weehawken,115 River Road, Edgewater, New Jersey 07087,07020, a complete list of the
stockholders entitled to vote at the Annual Meeting, arranged in alphabetical
order.
PLEASE VOTE -- YOUR VOTE IS IMPORTANT
Charles F. MessinaLOGO
Brian C. Harriss
Secretary
April 12, 20027, 2003
HANOVER DIRECT, INC.
115 RIVER ROAD, BUILDING 10
EDGEWATER, NEW JERSEY 07020
(201) 863-7300
PROXY STATEMENT FOR THE 20022003 ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON MAY 16, 200215, 2003
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
ANNUAL MEETING: May 16, 200215, 2003 Sheraton Suites on the Hudson
9:30 a.m., local time 500 Harbor Boulevard
Weehawken, New Jersey 07087
RECORD DATE: Close of business on Monday, March 25, 2002.Wednesday, April 2, 2003. If you were a stockholderholder at
RECORD DATE: that time of the Company's Common Stock or the Company's Series B
Preferred Stock, you may vote at the Annual Meeting. Each share of Common
Stock is entitled to one (1) vote. Each share of Series B Preferred Stock
is entitled to ten (10) votes. All shares of Common Stock and all shares
of Series B Preferred Stock will vote together on all issues at the
Annual
Meeting.meeting. On the record date, we had 138,215,800138,315,800 shares of our Common Stock
outstanding and 1,622,111 shares of Series B Preferred Stock outstanding.
As of March 25, 2002,the record date, Richemont Finance S.A., a Luxembourg company
("Richemont"), beneficially owned 28,691,88829,446,888 shares of Common Stock
(approximately 20.8%21.3% of the outstanding Common Stock) and 1,622,111 shares
of Series B Preferred Stock, collectively representing approximately 29.1%29.6%
of the combined voting power of the Voting Stock. As of the record date,
Regan Partners, L.P. and Basil P. Regan owned 38,795,017 shares of Common
Stock (approximately 28.0% of the outstanding Common Stock).
MAILING DATE: On or about Friday,Monday, April 12, 2002.7, 2003.
AGENDA: 1. Elect 5 directors.
2. Delegate to the Audit Committee of the Board of Directors authority to
select the Company's independent auditors for the fiscal year ending
December 28, 2002,
after review by the Audit Committee of the Board of Directors,27, 2003 from amongst established national audit firms.
3. Ratify the 2002 Stock Option Plan for Directors.
4. Any other proper business.
VOTE REQUIRED: Proposal 1: The affirmative vote of the holders of a
Elect 5 directors plurality of the combined voting power of all
shares of Voting Stock voted at the Annual
Meeting, whether in person or by proxy, whether
by mail, Internet or telephone, and voting
together as a single class, is required to elect
directors. Each share of Common Stock has one (1)
vote and each share of Series B Preferred Stock
has ten (10) votes. So, if you do not vote for a
nominee, your vote will not count either for or
against the nominee.
Proposal 2: The affirmative vote of the holders of the
Selection of Auditors majority of the combined voting power of the
Voting Stock voted at the Annual Meeting, whether
in person or by proxy, and whether by mail,
Internet or telephone, is required to delegate
authority to the Audit Committee of the Board of
Directors with respect to the selection of the
auditors. Each share of Common Stock has one (1)
vote and each share of Series B Preferred Stock
has ten (10) votes. So, if you abstain from
voting, your vote will not count either for or
against the proposal.
Proposal 3: The affirmative vote of the holders of the
Ratify the 2002 Stock majority of the combined voting power of the
Option Plan for Voting Stock voted at the Annual Meeting, whether
Directors in person or by proxy, and whether by mail,
Internet or telephone, is required to ratify the
plan. Each share of Common Stock has one (1)
vote and each share of Series B Preferred Stock
has ten (10) votes. So, if you abstain from
voting, your vote will not count either for or
against the proposal.
BROKER NON-VOTES: If your broker does not vote on anyeither of the 32 proposals, it will have no
effect on the votes with respect to anyeither of the 32 proposals.
PROXIES:
Please vote; your vote is important. Prompt return of your proxy will help
PROXIES: reduce the costs of resolicitation. In addition, stockholders of record of
the Company's Common Stock can simplify their voting and reduce the
Company's costs by voting their shares of Common Stock via the Internet or
by telephone. The Internet and telephone voting procedures are designed to
authenticate stockholders' identities, to allow stockholders of record of
the Company's Common Stock to vote their shares, and to confirm that their
instructions have been properly recorded. If your shares of Common Stock
are held in the
name of a bank or broker, the availability of Internet and telephone
voting will depend on the policies of the bank or broker. Therefore, it is
recommended that you follow the voting instructions on the form that you
receive. If you do not choose to vote via the Internet or by telephone,
please date, sign, and return the proxy card by mail.
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Unless you tell us on the proxy card to vote differently, we will vote
signed returned proxies "FOR" the Board's nominees for directors and "FOR"
the delegationratification of authority for the appointment of the auditors and "FOR"
the 2002 Stock Option Plan for Directors.auditors.
If any nominee cannot or will not serve as a director, your proxy will
vote in accordance with his or her best judgment. At the time we began
printing this proxy statement, we did not know of any matters that needed
to be acted upon at the Annual Meeting other than those discussed in this
proxy statement. However, if any additional matters are presented to the
Annual Meeting for action, your proxy will vote in accordance with his or
her best judgment.
PROXIES SOLICITED BY: The Board of Directors.
BY:
2
REVOKING YOUR PROXY: You may revoke your proxy or your vote via the Internet or by telephone
before it is voted at the meeting. You may revoke any of the above if you
either:
- deliver a signed, written revocation letter, dated later than this
proxy, to: Charles F. Messina,Brian C. Harriss, Secretary, at Hanover Direct, Inc., 115 River
Road, Edgewater, New Jersey 07020;
- deliver another signed proxy, dated later than this proxy, to Mr.
Messina,Harriss, Secretary, at the address above, or vote again at a later date
via the Internet or vote again at a later date by telephone; or
- attend the Annual Meeting, inform Mr. Messina,Harriss, Secretary, of your desire
to vote in person or by another proxy, and then vote in person or by
another proxy at the Annual Meeting. Please note that attending the Annual
Meeting alone will not revoke your proxy or your vote via the Internet or
by telephone.
COST OF The Company will pay all costs, estimated at $45,000 in the aggregate, of
SOLICITATION:COST OF soliciting these proxies. Although we are mailing these proxy materials,
SOLICITATION: our directors, officers and employees may also solicit proxies by
telephone, telegram, facsimile, mail, e-mail or personal contact. Such
persons will receive no additional compensation for such services, but the
Company may reimburse them for reasonable out-of-pocket expenses. We will
also furnish copies of solicitation materials to fiduciaries, custodians,
nominees and brokerage houses for forwarding to beneficial owners of
shares of Common Stock held in their names, and the Company will reimburse
them for reasonable out-of-pocket expenses. American Stock Transfer &
Trust Company, the Company's transfer agent, is assisting us in the
solicitation of proxies in connection with the Annual Meeting for no
additional fee.
YOUR COMMENTS: Your comments about any aspects of our business are welcome. You may use
the space provided on the proxy card for this purpose, if desired.
Although we may not respond on an individual basis, your comments help us
to measure your satisfaction and we may benefit from your suggestions.
3
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS:
Directors
Please see "Proposal 1 -- Election of Directors" for the names, ages and
business experience of each of the Company's directors, each of whom has been
nominated for election at the Annual Meeting.
Executive Officers
Pursuant to the Company's Bylaws, its officers are chosen annually by the
Board of Directors and hold office until their respective successors are chosen
and qualified. Effective January 28, 2002, Edward M. Lambert was appointed to
succeed Brian C. Harriss as Executive Vice President and Chief Financial Officer
of the Company and Mr. Harriss was appointed as Executive Advisor to the
Chairman of the Company coincident with his resignation as Executive Vice
President and Chief Financial Officer of the Company. During September 2002,
Charles F. Messina resigned as Executive Vice President, Chief Administrative
Officer and Secretary of the Company. Effective December 2, 2002, Brian C.
Harriss was appointed Executive Vice President -- Human Resources and Legal and
Secretary of the Company.
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THOMAS C. SHULL...........
AGE 5051 President and Chief Executive Officer and a member of
the Board of Directors since December 5, 2000, and2000.
Chairman of the Board since January 10, 2002. In
1990, Mr. Shull co-founded Meridian Ventures, a
venture management and turnaround firm presently
based in Connecticut, and has served as chief
executive officer since its inception. From 1997 to
1999, he served as President and Chief Executive
Officer of Barneys New York, a leading luxury
retailer, where he led them out of bankruptcy. From
1992 to 1994, Mr. Shull was Executive Vice President
of the R.H. Macy Company, Inc., where he was responsible
for human resources, information technology, business
development, strategic planning and merchandise
distribution and led the merger negotiations with
Federated Department Stores. Prior to that, he served
as a consultant with McKinsey & Company and in the
early 1980s as a member of the National Security
Council Staff in the Reagan White House.
EDWARD M. LAMBERT.........
AGE 4142 Executive Vice President and Chief Financial Officer
since January 28, 2002. From July 2001 until January
28, 2002, Mr. Lambert served as an advisor to the
Company. In 1990, Mr. Lambert co-founded Meridian
Ventures, a venture management and turnaround firm
presently based in Connecticut, and served as a
Managing Director until December 2000. From 1998 to
1999, he served as Chief Financial Officer of Barneys
New York, a leading luxury retailer, and from 1993 to
1994, he served as Executive Vice President of
Tecstar, Inc.,Applied Solar Energy Corporation, a space systems
manufacturer.
Mr.
Lambert is a graduate of the California Institute of
Technology (Cal Tech) and holds a M.B.A. from the
Harvard Business School.
MICHAEL D. CONTINO........
AGE 4142 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.
4
CHARLES F. MESSINA........BRIAN C. HARRISS..........
AGE 5854 Executive Vice President Chief Administrative
Officer-- Human Resources and Legal
and Secretary since April 25, 2001. GroupDecember 2002. Executive Advisor
to the Chairman of the Company from January 28, 2002
to December 2002, and Executive Vice President since November 2001.and
Chief Financial Officer from June 1999 to January 28,
2002. From December1998 to 1999, until December 2000, Mr. MessinaHarriss was a Managing
Director of Dailey Capital Management, LP, a venture
capital fund, and Chief Operating Officer of
E-Bidding Inc., an Internet e-commerce freight Web
site. From 1997 to 1998, Mr. Harriss served as the
Vice President of Human Resources for Hanover Brands,Corporate Development at the
Reader's Digest Association, Inc. From 1994 to 1996,
Mr. Messina joined the Company in August 1999. Before
joining the Company, Mr. MessinaHarriss was the Vice
President for Specialty Retail, International
Sourcing and Human Resources with Meldisco, a
divisionChief Financial Officer of the
Melville Corporation,Thompson Minwax Company. Prior thereto, Mr. Harriss
held various financial positions with Cadbury
Schweppes PLC, Tambrands, Inc. and prior to
that, Mr. Messina served as the Vice President of
Human Resources for the Children's Place.PepsiCo, Inc.
WILLIAM C. KINGSFORD......
AGE 5556 Vice President and Corporate Controller since May
1997. Prior to May 1997, Mr. Kingsford was Vice
President and Chief Internal Auditor at
4
Melville Corporation. Mr. Kingsford filed a petition
under Chapter 13 of the United States Bankruptcy Code
during March 2001.
FRANK J. LENGERS..........
AGE 4546 Vice President, Treasurer since October 2000. Mr.
Lengers joined the Company in November 1988 as an
Internal Audit Manager. From 1990 to 1994, Mr.
Lengers served as Manager of Corporate Treasury
Operations. In 1994, he was promoted to Director of
Treasury Operations and in 1997 to Assistant
Treasurer, a position he held until October 2000.
Prior to joining the Company, Mr. Lengers held
various audit positions with R.H. Macy Company, Inc.
and The Metropolitan Museum of Art.
STEVEN LIPNER.............
AGE 5354 Vice President, Taxation since October 2000. Mr.
Lipner served as Director of Taxes from February 1984
to October 2000. Prior thereto, he served as Director
of Taxes at Avnet, Inc. and held various positions in
public accounting. He holds a license as a Certified
Public Accountant in New York.
Code of Ethics
The Company has adopted a code of ethics that applies to the Company's
principal executive officer, principal financial officer and principal
accounting officer and other persons performing similar functions. A copy of the
code of ethics has been filed as an Exhibit to the Company's most recent Annual
Report on Form 10-K for the fiscal year ended December 28, 2002.
5
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE COMPENSATION:
The following table shows salaries, bonuses, and long-term compensation
paid during the last three years for the Chief Executive Officer and our four
next most highly compensated executive officers who were serving as executive
officers at the end of the Company's 20012002 fiscal year.
LONG TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
----------------------- -------
SECURITIES
ANNUAL COMPENSATION ------------RESTRICTED UNDERLYING
NAME AND FISCAL ---------------------- OTHER ANNUAL OPTIONSSTOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARDED (#)AWARDS(S) SARS PAYOUTS COMPENSATION
($)
------------------ ---------- -------- ---------- --------- ---------------- ------------ -------------------------- ---------- ------- ------------
Thomas C. Shull(1)....... 2001 $900,000(2) $600,000(2) $180,000(7) 500,000(11)........... 2002 $905,923(2) $1,327,500(2) $165,000(8) -- -- None $ 2,116(15)
President and Chief 20002001 $900,000(3) $ 75,000(2)600,000(3) $180,000(8) -- $ 15,000(7) 2,700,000(12)500,000(11) None --
Executive Officer 19992000 $ 75,000(3) -- $ 15,000(8) -- 2,700,000(12) None --
Edward M. Lambert(1)......... 2002 $361,539 $ 685,000(4) -- -- 1,000,000(13) None $142,570(16)
Executive Vice President and 2001 -- -- -- -- 300,000(14) None --
Chief Financial Officer 2000 -- -- -- -- -- None --
Brian C. Harriss(1)...... 2001 $335,192 $375,000(3).......... 2002 $459,226 $ 12,000(8)287,503(5) $ 12,000(9) -- $4,089(16)600,000(13) None $ 10,001(17)
Executive Vice President -- 2001 $335,192 $ 375,000(5) $ 12,000(9) -- -- None $ 4,089(18)
Human Resources and Legal, 2000 $296,154 $129,500(3) $ 12,000(8)129,500(5) $ 12,000(9) -- 100,000(13) $3,421(17)None $ 3,421(19)
and Chief Financial 1999 $140,000 -- $ 6,000(8) 400,000(14) $ 88(18)
OfficerSecretary
Michael D. Contino(1).... 2001 $317,115 $350,000(4)........ 2002 $382,270 $ 12,000(9)565,988(6) $ 4,000(10) -- $3,876(19)1,000,000(13) None $ 9,873(20)
Executive Vice President 2000 $243,269 $124,692(4)and 2001 $317,115 $ 12,000(9) 150,000(13) $3,253(20)
and350,000(6) $ 12,000(10) -- -- None $ 3,876(21)
Chief Information Officer 1999 $197,533 $182,718(4)2000 $243,269 $ 12,000(9) 100,000(15) $3,080(21)
Charles F. Messina(1).... 2001 $233,076 $300,000(5)182,718(6) $ 12,000(10) -- $4,080(22)
Executive150,000(13) None $ 3,253(22)
William C. Kingsford......... 2002 $169,390 $ 81,452(7) -- -- 125,000(13) None $ 7,285(23)
Vice President 2000 $179,438and Controller 2001 $168,000 $ 75,273(5) -- 100,000(13) $1,773(23)
Chief Administrative 199921,156(7) -- -- -- -- --
Officer and Secretary
William C. 2001 $168,000None $ 21,156(6) -- -- $1,340(24)
Kingsford(1)...........
Vice President and1,340(24)
2000 $166,260 $ 34,273(6)34,273(7) -- -- 41,000(13) $1,040(25)
Controller 1999 $155,000None $ 67,813(6) -- -- $ 565(26)1,040(25)
- ---------------
(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, Charles F. Messina
became Executive Vice President, Chief Administrative Officer and Secretary
of the Company, and William C. Kingsford became Vice President and
Controller of the Company. Effective
January 28, 2002, Mr. Harriss resigned as Executive Vice President and
Chief Financial Officer of the Company. 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.
(2) Paid$276,923 of salary and a $450,000 stay bonus was paid to Mr. Shull under an
Employment Agreement between Mr. Shull and the Company, dated as of
September 1, 2002, as amended by Amendment No. 1 thereto dated as of
September 1, 2002 (as amended, the "2002 Employment Agreement"), pursuant
to which Mr. Shull is employed by the Company as its President and Chief
Executive Officer. 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 ServiceServices Agreement, dated as of December 14, 2001, as
amended effective
6
April 12,2, 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-ControlChange
in Control Arrangements."
(3) Paid to Meridian Ventures, LLC under the Services Agreements.
(4) Includes the following payments made by the Company on behalf of 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.
(5) Includes the following payments made by the Company on behalf of Mr.
Harriss: for 2002, a $287,503 performance bonus paid in 2003; for fiscal
2001, a $375,000 2001 performance bonus paid in 2002; and for fiscal 2000,
a $129,500 2000 performance bonus paid in 2001.
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(4) Includes the following payments made by the Company on behalf of Mr.
Contino: for fiscal year 2001 a $350,000 2001 performance bonus paid in
2002; for fiscal 2000, a $124,692 2000 performance bonus paid in 2001; and
for fiscal 1999, a $182,718 1999 performance bonus paid in 2000.
(5) Includes the following payments made by the Company on behalf of Mr.
Messina: for fiscal year 2001, a $300,000 2001 performance bonus paid in
2002; and for fiscal 2000, a $72,273 2000 performance bonus paid in 2001.
(6) Includes the following payments made by the Company on behalf of Mr.
Contino: for fiscal 2002, a $565,988 2002 performance bonus paid in 2003;
for fiscal year 2001, a $350,000 2001 performance bonus paid in 2002; and
for fiscal 2000, a $182,718 2000 performance bonus paid in 2001.
(7) Includes the following payments made by the Company on behalf of Mr.
Kingsford: for fiscal 2002, a $81,452 2002 performance bonus paid in 2003;
for fiscal year 2001, a $21,156 2001 performance bonus paid in 2002; and
for fiscal 2000, a $34,273 2000 performance bonus paid in 2001; and
for fiscal 1999, a $67,813 performance bonus paid in 2000.
(7)2001.
(8) Paid to Meridian pursuant to the Services Agreements, and is deemed to
cover Meridian's over-head (including legal and accounting), health care
costs, payroll costs, and other expenses relating to Mr. Shull. See
"Employment Contracts, Termination of Employment and Change-in-ControlChange in Control
Arrangements."
(8)(9) Includes the following payments made by the Company on behalf of Mr.
Harriss: $12,000 in car allowance and related benefits in 2001;2002; $12,000 in
car allowance and related benefits in 2000;2001; and $6,000$12,000 in car allowance
and related benefits in 1999.
(9)2000.
(10) Includes the following payments made by the Company on behalf of Mr.
Contino: $4,000 in car allowance and related benefits in 2002; $12,000 in
car allowance and related benefits in 2001; $12,000 in
car allowance and related benefits in 2000; and $12,000 in car allowance
and related benefits in 1999.
(10) Includes the following payments made by the Company on behalf of Mr.
Messina: $12,000 in car allowance and related benefits in 2001.2000.
(11) Granted pursuant to the December 2001 Services Agreement and allocated to
Mr. Shull. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements."
(12) Granted pursuant to the December 2000 Services Agreement and allocated to
Mr. Shull. See "Employment Contracts, Termination of Employment and Change-in-ControlChange
in Control Arrangements."
(13) Issued by the Company pursuant to the Company's 2000 Management Stock
Option Plan. See "Report of the Stock Option and Executive Compensation
Committee on Executive Compensation -- 2000 Management Stock Option Plan."
(14) Issued byOptions to purchase 100,000 shares issued to Mr. Harriss during 2000 were
forfeited during 2002 following his resignation as Executive Vice President
and Chief Financial Officer of the Company effective January 28, 2002.
(14) Granted pursuant to the December 2001 Services Agreement under the
Company's 19962000 Management Stock Option Plan.Plan and allocated to Mr. Lambert.
See "Report of the Stock Option and Executive Compensation Committee on
Executive Compensation -- 19962000 Management Stock Option Plan."
(15) These options were granted effective November 3, 1999Includes 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 become
exercisable after four years.disability insurance premiums; $50 in core
7
life insurance premiums; $44 in dental insurance premiums; $49 in long-term
disability premiums; and $1,876 in health care insurance premiums.
(16) 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.
(17) 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.
(18) Includes the following payments made by the Company on behalf of Mr.
Harriss in 2001: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $770 in long-term disability premiums; $439 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(17)(19) Includes the following payments made by the Company on behalf of Mr.
Harriss in 2000: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $110 in long-term disability premiums; $438 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(18)(20) Includes the following payments made by the Company on behalf of Mr.
HarrissContino in 1999: $372002: $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; $41$5,589 in term lifehealth care insurance premiums; $3,333 in
matching contributions under the Company's 401(k) Savings Plan; and $10 of accidental death insurance$2 in
vision plan premiums.
7
(19)(21) Includes the following payments made by the Company on behalf of Mr.
Contino in 2001: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $722 in long-term disability premiums; $281 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(20)(22) Includes the following payments made by the Company on behalf of Mr.
Contino in 2000: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $110 in long-term disability premiums; $270 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(21) Includes the following payments made by the Company on behalf of Mr.
Contino in 1999: $2,666 in matching contributions under the Company's
401(k) Savings Plan; $110 in long-term disability premiums; $264 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(22) Includes the following payments made by the Company on behalf of Mr.
Messina in 2001: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $530 in long-term disability premiums; $677 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(23) Includes the following payments made by the Company on behalf of Mr.
MessinaKingsford in 2000: $1,2372002: $516 in matching contributions under the Company's
401(k) Savings Plan;group term life insurance premiums; $40 in
accidental death and $536disability insurance premiums; $162 in core life
insurance premiums; $105 in dental insurance premiums; $265 in long-term
disability premiums; $6,195 in health care insurance premiums; and $2 in
vision plan premiums.
(24) Includes the following payments made by the Company on behalf of Mr.
Kingsford in 2001: $237 in matching contributions under the Company's
401(k) Savings Plan; $386 in long-term disability premiums; $677 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(25) Includes the following payments made by the Company on behalf of Mr.
Kingsford in 2000: $764 in matching contributions under the Company's
401(k) Savings Plan; and $276 in term life insurance premiums.
(26) Includes the following payments made by the Company on behalf of Mr.
Kingsford in 1999: $139 in matching contributions under the Company's
401(k) Savings Plan; and $426 in term life insurance premiums.
8
STOCK OPTIONS:OPTIONS AND STOCK APPRECIATION RIGHTS:
The following table contains information concerning options and stock
appreciation rights ("SARs") granted to the Chief Executive Officer and our four
next most highly compensated executive officers who were serving as executive
officers at the end of the Company's 2002 fiscal 2001.
OPTIONyear. There were no SARs
granted during fiscal 2002 to the Chief Executive Officer or our four next most
highly compensated executive officers who were serving as executive officers at
the end of the Company's 2002 fiscal year.
OPTION/SAR GRANTS IN FISCAL 20012002
INDIVIDUAL GRANTS
----------------------------------------------------------------------------
NUMBER OF
SHARES PERCENTSECURITIES PERCENTAGE OF
UNDERLYING TOTAL OPTIONS
OPTIONSOPTIONS/
OPTIONS/ SARS GRANTED EXERCISE MARKET PRICE GRANT DATE
SARS TO
GRANTED IN EMPLOYEES IN EXPIRATION EXERCISE GRANT VALUEOR BASE ON DATE OF PRESENT
NAME GRANTED FISCAL YEAR FISCAL YEAR (%)2002 PRICE GRANT EXPIRATION DATE PRICE ($) DATE ($VALUE($)
---- ----------- --------------- ---------- --------- --------------------------- -------- ------------ ------------------ ----------
Thomas C. Shull(1).............. 500,000 50% (2) $0.30 $ 81,000(3)
Brian C. Harriss................Shull........ 0 0% -- -- -- $ 0
Edward M. Lambert(1)... 1,000,000 14.79% $0.24 $0.24 August 8, 2012(2) $181,600(3)
Brian C. Harriss(1).... 600,000 8.88% $0.27 $0.27 October 2, 2012(2) $123,660(4)
Michael D.
Contino.............. 0 0% -- -- --
Charles F. Messina.............. 0 0% -- -- --Contino(1)........... 1,000,000 14.79% $0.24 $0.24 August 8, 2012(2) $181,600(3)
William C.
Kingsford............ 0 0% -- -- --Kingsford(1)......... 125,000 1.85% $0.24 $0.24 August 8, 2012(2) $ 22,700(3)
- ---------------
(1) Stock options granted to Thomas C. ShullMr. Lambert, Mr. Harriss, Mr. Contino and Mr.
Kingsford during fiscal 20012002 are subject to the terms and conditions of the
December 2001 Services Agreement.Company's 2000 Management Stock Option Plan. See "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements."
(2) These options expire onten years after the second anniversarydate of the termination of
the December 2001 Services Agreement.grant. See "Employment
Contracts, Termination of Employment and Change-in-Control Arrangements."
(3) The fair value of each option granted to Mr. ShullLambert, Mr. Contino and
Mr. Kingsford during fiscal 20012002 is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk free
interest rate of 2.82%3.87%, expected lives of 1.256 years, expected volatility of
129.73%89.36%, and no expected dividends.
(4) The fair value of each option granted to Mr. Harriss during fiscal 2002
is estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions: risk free interest rate of 3.18%, expected life
of 6 years, expected volatility of 91.84%, and no expected dividends.
9
The following table contains information concerning the fiscal 20012002
year-end values of all options and SARs granted to the Chief Executive Officer
and our four next most highly compensated executive officers who were serving as
executive officers at the end of the Company's 2002 fiscal 2001.year. No SARs have
been granted to the Chief Executive Officer or our four next most highly
compensated executive officers who were serving as executive officers at the end
of the Company's 2002 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN 2002 FISCAL YEAR-END OPTIONYEAR
AND DECEMBER 28, 2002 OPTION/SAR VALUES
NUMBER OF SHARES
UNDERLYING UNEXERCISEDSECURITIES VALUE OF UNEXERCISED
OPTIONSUNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT IN-THE-MONEY OPTIONSOPTIONS/SARS AT
DECEMBER 28, 2002 DECEMBER 28, 2002
----------------------- --------------------
SHARES FISCAL YEAR-END (#) FISCAL YEAR-END (#)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ --------------------------- ----------- ------------- ----------- ------------------------------------ --------------------
Thomas C. Shull(1)........ Shull.......... None None 3,200,000 options(1) $0/$0
$0 1,350,000 1,850,000 $135,000 $160,00084.38% exercisable
15.62% unexercisable
Edward M. Lambert........ None None 1,300,000 options(1)(2) $0/$0
none exercisable
100% unexercisable
Brian C. Harriss(2)....... Harriss......... None None 600,000 options(2) $0/$0
$0 291,667 208,333 0 0none exercisable
100% unexercisable
Michael D. Contino(2)..... Contino....... None None 1,450,000 options(2) $0/$0
$0 287,500 162,500 0 0
Charles F. Messina(2)..... 0 $0 25,000 75,000 0 024.14% exercisable
75.86% unexercisable
William C. Kingsford(2)... Kingsford..... None None 235,117 options(2) $0/$0
$0 79,367 30,750 0 038.12% exercisable
61.88% unexercisable
- ---------------
(1) 2,700,000 options were awarded to Mr. Shull under the December 2000 Services
Agreement. OfAll of such options 1,350,000 arewere exercisable on December 28, 2002 and
the remaining
1,350,000 are exercisableexpire on June 30, 2002, or
9
earlier under certain circumstances. These options expire on the second
anniversary of the termination of the December 2001 Services Agreement. An
additional2005. 500,000 options were awarded to Mr. Shull, and
300,000 options were awarded to Mr. Lambert, under the December 2001
Services Agreement. These options were not exercisable on December 28, 2002;
Mr. Lambert's options are exercisable on March 31, 2003 or
earlier under certain circumstances, and expire on the third anniversary of
the termination of the December 2001 Services Agreement.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 400,000 options for Mr. Harriss and 69,117 options for Mr. Kingsford
represent options granted pursuant to the 1996 Stock Option Plan. Under this
plan, these options become exercisable after three years and expire after
six years from the date of grant. Additionally, 150,000600,000 options for Mr.
Harriss, 1,150,000 options for Mr. Contino, 100,0001,000,000 options for Mr.
Messina, 100,000
options for Mr. HarrissLambert and 41,000166,000 options for Mr. Kingsford represent options granted
pursuant to the 2000 Management Stock Option Plan. Under this plan, these
options become exercisable after four years and expire after ten years from
the date of grant. An additional 100,000 options for Mr. Contino represents
options granted effective November 3, 1999. These options become fully
exercisable after four years.
10
LONG-TERM INCENTIVE PLANS:
No awards under long-term incentive plans were granted in fiscal 2002 to
the Chief Executive Officer or our four next most highly compensated executive
officers who were serving as executive officers at the end of the Company's 2002
fiscal year.
DEFINED BENEFIT OR ACTUARIAL PLANS:
The Company has no defined benefit or actuarial plans under which benefits
are determined primarily by final compensation (or average final compensation)
and years of service.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS:
December 2000 Services2002 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 "December 2001"2001 Services Agreement"), among
Mr. Shull, Meridian, and the Company. The 2001 Services Agreement was replaced
effective September 1, 2002 by an Employment Agreement between Mr. Shull and the
Company, dated as of September 1, 2002, as amended by Amendment No. 1 thereto,
dated as of September 1, 2002 (as amended, the "2002 Employment Agreement"),
pursuant to which Mr. Shull is employed by the Company as its President and
Chief Executive Officer, as described below.
PursuantThe term of the 2002 Employment Agreement began on September 1, 2002 and
will terminate on September 30, 2004 (the "2002 Employment Agreement Term").
Under the 2002 Employment Agreement, Mr. Shull is to receive from the
Company base compensation equal to $900,000 per annum, payable at the rate of
$75,000 per month ("Base Compensation"). Mr. Shull is to be provided with
participation in the Company's employee benefit plans, including but not limited
to the Company's Key Executive Eighteen Month Compensation Continuation Plan
(the "Change of Control Plan") and its transaction bonus program. The Company is
also to reimburse Mr. Shull for his reasonable out-of-pocket expenses incurred
in connection with his employment by the Company.
Under the 2002 Employment Agreement, the Company paid the remaining unpaid
$300,000 of Mr. Shull's fiscal 2001 bonus under the Company's 2001 Management
Incentive Plan in December 2002. Mr. Shull shall receive the same bonus amount
for fiscal 2002 under the Company's 2002 Management Incentive Plan as all other
Level 8 participants (as defined in such plan) receive under such plan for such
period, subject to all of the terms and conditions applicable generally to Level
8 participants thereunder. Mr. Shull shall earn annual bonuses for fiscal 2003
and 2004 under such plans as the Company's Compensation Committee may approve in
a manner consistent with bonuses awarded to other senior executives under such
plans.
Under the 2002 Employment Agreement, the Company made two installment
payments in September and November to satisfy the obligation of $450,000 to Mr.
Shull previously due to be paid to Meridian on June 30, 2002. In addition, the
Company has agreed to make two equal lump sum cash payments of $225,000 each to
Mr. Shull on March 31, 2003 and September 30, 2004, provided the 2002 Employment
Agreement has not terminated due to Willful Misconduct (as defined in the 2002
Employment Agreement) or material breach thereof by Mr. Shull, or Mr. Shull's
death or permanent disability. Such payments shall be made
11
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.
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.
Under the 2002 Employment Agreement, additional amounts are payable to Mr.
Shull by the Company under certain circumstances upon the termination of the
2002 Employment Agreement. If the termination is on account of the expiration of
the 2002 Employment Agreement Term, Mr. Shull shall be entitled to receive such
amount of bonus as may be payable pursuant to the Company's applicable bonus
plan as well as employee benefits such as accrued vacation and insurance in
accordance with the Company's customary practice. If the termination is on
account of the Company's material breach of the 2002 Employment Agreement or the
Company's termination of the 2002 Employment Agreement where there has been no
Willful Misconduct (as defined in the 2002 Employment Agreement) or material
breach thereof by Mr. Shull, Mr. Shull shall be entitled to receive (i) a lump
sum payment equal to the aggregate amount of Base Compensation to which he would
have otherwise been entitled through the end of the 2002 Employment Agreement
Term (not to exceed 18 months of such Base Compensation), plus (ii) such
additional amount, if any, in severance pay which, when combined with the amount
payable pursuant to clause (i) equals 18 months of Base Compensation and such
amount of bonus as may be payable pursuant to the Company's 2002 Management
Incentive Plan or other bonus plan, as applicable (based upon the termination
date and the terms and conditions of the applicable bonus plan), as described in
paragraph 4(b), as well as 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
12
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.
Under the 2002 Employment Agreement, the Company is required to maintain
directors' and officers' liability insurance for Mr. Shull during the 2002
Employment Agreement Term. The Company is also required to indemnify Mr. Shull
in certain circumstances.
Amended Thomas C. Shull Stock Option Award Agreements. During December
2000, the Company entered into a stock option agreement with Thomas C. Shull to
evidence the grant to Mr. Shull of an option to purchase 2.7 million shares of
the Company's Common Stock (the "Shull 2000 Stock Option Agreement"). Effective
as of September 1, 2002, the Company has amended the Shull 2000 Stock Option
Agreement to (i) extend the final expiration date for the stock option under the
Shull 2000 Stock Option Agreement to June 30, 2005, and (ii) replace all
references therein to the December 2000 Services Agreement with references to
the 2002 Employment Agreement.
During December 2001, the Company grantedentered into a stock option agreement
with Mr. Shull andto evidence the consultants stock options (the "Meridian Options") forgrant to Mr. Shull of an aggregate four million (4,000,000)option to purchase
500,000 shares of the Company's Common Stock.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.
Issuance of Stock Options. On August 8, 2002, the Company issued options
to purchase 3,750,000 shares of the Company's Common Stock to certain Management
Incentive Plan ("MIP") Level 7 and 8 employees, including various executive
officers, at a price of $0.24 per share under the Company's 2000 Management
Stock Option Plan. In addition, on August 8, 2002, the Company authorized the
President to grant options to purchase up to an aggregate of 1,045,000 and
1,366,000 shares of the Company's Common Stock to certain MIP Level 4 and MIP
Level 5 and 6 employees, respectively, at a price of $0.24 per share under the
Company's 2000 Management Stock Option Plan.
On October 2, 2002, the Company issued options to purchase 600,000 shares
of the Company's Common Stock to an Executive Vice President at a price of $0.27
per share under the Company's 2000 Management Stock Option Plan.
13
Charles F. Messina. During September 2002, Charles F. Messina resigned as
Executive Vice President, Chief Administrative Officer and Secretary of the
Company. In connection with such resignation, the Company and Mr. Messina
entered into a severance agreement dated September 30, 2002 providing for cash
payments of $884,500 and other benefits which were accrued in the fourth quarter
of 2002.
Brian C. Harriss. Brian C. Harriss was appointed as Executive Vice
President -- Human Resources and Legal and Secretary of the Company effective
December 2, 2002. Prior to January 2002, Mr. Harriss had served the Company as
Executive Vice President and Chief Financial Officer. In connection with the
December 2002 appointment, Mr. Harriss and the Company have terminated a
severance agreement entered into during January 2002 at the time of Mr. Harriss'
resignation from the Company during January 2002, and Mr. Harriss has waived his
rights to certain payments under such severance agreement.
Other Executives. In October 2002, the Company entered into arrangements
with Edward M. Lambert, Brian C. Harriss and Michael D. Contino (the
"Compensation Continuation Agreements") pursuant to which it agreed to provide
eighteen months of severance pay, COBRA reimbursement and Exec-U-Care plan
coverage in the event their employment with the Company is terminated either by
the Company "For Cause" or by them "For Good Reason" (as such terms are
defined).
On November 6, 2002, the Company entered into an arrangement with Frank
Lengers pursuant to which it agreed to provide twelve months of severance pay,
COBRA reimbursement and Exec-U-Care plan coverage in the event his employment
with the Company is terminated either by the Company "For Cause" or by Mr.
Lengers "For Good Reason" (as such terms are defined).
Hanover Direct, Inc. Key Executive Eighteen-Month Compensation Continuation
Plan. Effective April 27, 2001, the Company terminated the Hanover Direct, Inc.
Key Executive Thirty-Six Month Compensation Continuation Plan and the Hanover
Direct, Inc. Key Executive Twenty-Four Month Compensation Continuation Plan. Effective April
27, 2001, the Company established the Hanover Direct, Inc. Key Executive
Eighteen Month Compensation Continuation Plan (the "Executive Plan") for its
Chief Executive Officer, corporate executive vice presidents, corporate senior
vice presidents, strategic unit presidents, and other employees selected by its
Chief Executive Officer. The purpose of the Executive Plan is to attract and
retain key management personnel by reducing uncertainty and providing greater
personal security in the event of a Change of Control. For purposes of the
Executive Plan, a "Change of Control" will occur: (i) when any person becomes,
through an acquisition, the beneficial owner of shares of the Company having at
least 50% of the total number of votes that may be cast for the election of
directors of the Company (the "Voting Shares"); provided, however, that the
following acquisitions shall not constitute a Change of Control: (a) if a person
owns less than 50% of the voting power of the Company and that person's
ownership increases above 50% solely by virtue of an acquisition of stock by the
Company, then no Change of Control will have occurred, unless and until that
person subsequently acquires one or more additional shares representing voting
power of the Company; or (b) any acquisition by a person who as of the date of
the establishment of the Executive Plan owned at least 33% of the Voting Shares;
(ii)(a) notwithstanding the foregoing, a Change of Control will occur when the
stockholdersshareholders of the Company approve any of the following (each, a
"Transaction"): (I) any reorganization, merger, consolidation or other business
combination of the Company; (II) any sale or series of sales since April 27,
2001 involving an aggregate of 50% or more of the market value of
the Company's assets 10
(for this purpose, such 50% amount is deemed to be $107.6 million) (an "Asset
Sale");million; or
(III) a complete liquidation or dissolution of the Company; (b) notwithstanding
(ii)(a), stockholdershareholder approval of either of the following types of Transactions
will not give rise to a Change of Control: (I) a Transaction involving only the
Company and one or more of its subsidiaries; or (II) a Transaction (other than an Asset Sale) immediately
following which the stockholdersshareholders 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
14
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(for
purposes of (iii), any Director who was not a Director as of the effective date
of the Executive Plan will be deemed to be an Incumbent Director if such
Director was elected to the Board of Directors by, or on the recommendation of,
or with the approval of, at least a majority of the members of the Board of
Directors or the nominating committee who, at the time of the vote, qualified as
Incumbent Directors either actually or by prior operation of (iii), and any
persons (and their successors from time to time) who are designated by a holder
of 33% or more of the Voting Shares to stand for election and serve as Directors
in lieu of other such designees serving as Directors on the effective date of
the Executive Plan shall be considered Incumbent Directors. Notwithstanding the
foregoing, any director elected to the Board of Directors to avoid or settle a
threatened or actual proxy contest shall not, under any circumstances, be deemed
to be an Incumbent Director); or (iv) when the Company sells, assigns or
transfers more than 50% of its interest in, or the assets of, one or more of its
subsidiaries (each, a "Sold Subsidiary" and, collectively, the "Sold
Subsidiaries"); provided, however, that such a sale, assignment or transfer will
constitute a Change of Control only for: (a) the Executive Plan participants who
are employees of that Sold Subsidiary; and (b) the Executive Plan participants
who are employees of a direct or indirect parent company of one or more Sold
Subsidiaries, and then only if: (I) the gross assets of such parent company's
Sold Subsidiaries constitute more than 50% of the gross assets of such parent
company (calculated on a consolidated basis with the direct and indirect
subsidiaries of such parent company and with reference to the most recent
balance sheets of the Sold Subsidiaries and the parent company); (II) the
property, plant and equipment of such parent company's Sold Subsidiaries
constitute more than 50% of the property, plant and equipment of such parent
company (calculated on a consolidated basis with the direct and indirect
subsidiaries of such parent company and with reference to the most recent
balance sheets of the Sold Subsidiaries and the parent company); or (III) in the
case of a publicly-traded parent company, the ratio (as of the date a binding
agreement for the sale is entered) of (x) the capitalization (based on the sale
price) of such parent company's Sold Subsidiaries, to (y) the market
capitalization of such parent company, is greater than 0.50. (For purposes of
(iv), a Transaction shall be deemed to involve the sale of more than 50% of a
company's assets if: (a) the gross assets being sold constitute more than 50% of
the gross assets of the Company as stated on the most recent balance sheet of
the Company; (b) the property, plant and equipment being sold constitute more
than 50% of the property, plant and equipment of the Company as stated on the
most recent balance sheet of the Company; or (c) in the case of a
publicly-traded company, the ratio (as of the date a binding agreement for the
sale is entered) of (x) the capitalization (based on the sale price) of the
division, subsidiary or business unit being sold, to (y) the market
capitalization of the Company, is greater than 0.50. For purposes of this (iv),
no Change of Control will be deemed to have occurred if, immediately following a
sale, assignment or transfer by the Company of more than 50% of its interest in,
or the assets of, a Sold Subsidiary, any stockholdershareholder of the Company owning 33%
or more of the voting power of the Company immediately prior to such
transaction,transactions, owns no less than the equivalent percentage of the voting power of
the Sold Subsidiary.)
11
Under the Executive Plan, an Executive Plan participant shall be entitled
to Change of Control Benefits under the Executive Plan solely if there occurs a
Change of Control and thereafter the Company terminates his/her employment other
than For Cause (as defined in the Executive Plan) or the participant voluntarily
terminates his/her employment with the Company For Good Reason (as defined in
the Executive Plan), in either case, solely during the 2-year period immediately
following the Change of Control. A participant will not be entitled to Change of
Control Benefits under the Executive Plan if: (i) he/she voluntarily terminates
his/her employment with the Company or has his/her employment with the Company
terminated by the
15
Company, in either case, prior to a Change of Control, (ii) he/she voluntarily
terminates employment with the Company following a Change of Control but other
than For Good Reason, (iii) he/she is terminated by the Company following a
Change of Control For Cause, (iv) has his/her employment with the Company
terminated solely on account of his/her death, (v) he/she voluntarily or
involuntarily terminates his/her employment with the Company following a Change
of Control as a result of his/her Disability (as defined in the Executive Plan),
or (vi) his/her employment with the Company is terminated by the Company upon or
following a Change of Control but where he/she receives an offer of comparable
employment, regardless of whether the participant accepts the offer of
comparable employment.
The Change of Control Benefits under the Executive Plan are as follows: (i)
an amount equal to 18 months of the participant's annualized base salary; (ii)
an amount equal to the product of 18 multiplied by the applicable monthly
premium that would be charged by the Company for COBRA continuation coverage for
the participant, the participant's spouse and the dependents of the participant
under the Company's group health plan in which the participant was participating
and with the coverage elected by the participant, in each case immediately prior
to the time of the participant's termination of employment with the Company;
(iii) an amount equal to 18 months of the participant's car allowance then in
effect as of the date of the termination of the participant's employment with
the Company; and (iv) an amount equal to the cost of 12 months of
executive-level outplacement services at a major outplacement services firm.
Transaction Bonus Letters. During May 2001, each of Charles F. Messina,
Thomas C. Shull, Jeffrey Potts, Brian C. Harriss and Michael D. Contino and,
during November 2002, each of Edward M. Lambert and Brian C. Harriss (each, a
"Participant") entered into a letter agreement with the Company (a "Transaction
Bonus Letter") under which the Participant would be paid a bonus on the
occurrence of certain transactions involving the sale of certain of the
Company's businesses. In addition, Mr. Shull is a party to a "Letter Agreement"
with the Company, dated April 30, 2001, pursuant to which, following the
termination of the 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"). TheEffective June 1, 2001, the
Company has amended the Executive Plan to provide that, notwithstanding anything to
the contrary contained in the Executive Plan, Section 10.2 of the Executive Plan
shall not be effective with respect to the payment of (i) a Participant's
"Transaction Bonuses," and/or (ii) the Shull Termination Payment. The payment of
any such "Transaction Bonus" to any of the Participants, and/or the payment of
the Shull Termination Payment, shall be paid in addition to, and not in lieu of,
any Change of Control Benefit payable to any Participant or Mr. Shull pursuant
to the terms of the Executive Plan. In conjunction with his resignation as
Executive Vice President and Chief Financial Officer, Mr. Harriss released any
claims that he may have against the Company under his May 2001 Transaction Bonus
Letter. The remaining Transaction Bonus Letters, other than the Transaction
Bonus Letter with respect to Mr. Harriss,Potts and Mr. Messina, remain in effect.
Letter Agreement with Mr. Shull and Meridian. On April 30, 2001, Mr.
Shull, Meridian and the Company entered into a letter agreement (the "Letter
Agreement") specifying Mr. Shull's rights under the Executive Plan, which is
discussed above. Under the Letter Agreement, Mr. Shull and Meridian agreed that,
so long as the Executive Plan is in effect and Mr. Shull is a Participant
thereunder, Meridian and Mr. Shull will accept the Change in Control Benefits
provided for in the Executive Plan in lieu of the compensation contemplated by
the December 2000 Services Agreement between them (which benefits amounts will
not be 12
offset against the December 2000 flat fee provided for in the December
2000 Services Agreement and shall be payable at such times and in such amounts
as provided in the Executive Plan rather than in a lump sum payable within five
business days after the termination date of the December 2000 Services Agreement
as
16
contemplated by the December 2000 Services Agreement). For purposes of the
change in control benefits under the Executive Plan and the Letter Agreement,
Mr. Shull's annualized base salary is $600,000. In addition to the benefits
provided by the December 2000 Services Agreement, Mr. Shull and those persons
named in the December 2000 Services Agreement shall also be entitled to the
optional cash out of stock options as provided in the Executive Plan. Under the
Letter Agreement, Mr. Shull is also entitled to payment of one year annual base
salary in the event he is terminated without cause during any period of his
continued employment as the Chief Executive Officer of the Company following the
termination of the December 2000 Services Agreement. The participation and
benefits to which Mr. Shull is entitled under the Executive Plan shall also
survive the termination of the December 2000 Services Agreement pursuant to the
terms thereof in the event that Mr. Shull is still employed as the Chief
Executive Officer of the Company and is a Participant under the Executive Plan.
Should the Executive Plan no longer be in effect or Mr. Shull no longer be a
Participant thereunder, Meridian and Mr. Shull shall continue to be entitled to
the compensation contemplated by the December 2000 Services Agreement. August 2001 Services Agreement. As of August 1, 2001, Mr. Shull, Meridian
and the Company entered into the August 2001 Services Agreement, which replaced
the December 2000 Services Agreement which was to expire in December 2001. The
August 2001 ServicesLetter Agreement was replacedsuperseded by the December2002 Employment Agreement.
Hanover Direct, Inc. Directors Change of Control Plan. Effective May 3,
2001, Services
Agreement, as described below.
December 2001 Services Agreement. Asthe Company's Board of December 14, 2001, Mr. Shull,
Meridian andDirectors established the Company entered into the December 2001 Services Agreement,
which replaced the August 2001 Services Agreement which was to expire in June
30, 2002. The December 2001 Services Agreement was amended on April 12, 2002.
Under the December 2001 Services Agreement, Meridian will provideHanover Direct, Inc.
Directors Change of Control Plan (the "Directors Plan") for the
benefitall Directors of the
Company the services of Mr. Shull. The term of the December 2001
Services Agreement, and the termexcept for the services of Mr. Shull began on December
14, 2001 and will terminate on March 31, 2003 (the "December 2001 Agreement
Term"). On or prior to February 1, 2003, the Company may extend the December
2001 Agreement Term on a day to day basis upon written notice to Mr. Shull, and
thereafter, either Mr. Shull or the Company may terminate the December 2001
Services Agreement and the December 2001 Agreement Term with 60 days notice to
the other.
Under the December 2001 Services Agreement, Meridian is to receive from the
Company $75,000 per month for the services of Mr. Shull (the "December 2001 Base
Fee"). The Company also is required to pay Meridian $15,000 per month during the
December 2001 Agreement Term (the "December 2001 Flat Fee"). The Company also
reimburses Mr. Shull for reasonable out-of-pocket expenses incurred on behalf of
the Company.
Under the December 2001 Services Agreement, the Company shall make a lump
sum cash payment of $450,000 to Meridian on June 30, 2002, provided the December
2001 Services Agreement is then in effect. This payment will be made by the end
of 2002.
Under the December 2001 Services Agreement, the Company guaranteed Mr.
Shull a target bonus for the Company's 2001 fiscal year pursuant to the
Company's 2001 Management Incentive Plan equal to $300,000, which was paid
during the first quarter of 2002. In addition, Mr. Shull has earned a maximum
bonus for the Company's 2001 fiscal year pursuant to the Company's 2001
Management Incentive Plan equal to $600,000 (including the above-described
target bonus). This payment will be made by the end of 2002.
13
Mr. Shull shall receive the same bonus amount for fiscal 2002 under the
Company's 2002 Management Incentive Plan as all other Class 8 participants (as
defined in such Plan) receive under such Plan for such period, subject to all of
the terms and conditions applicable generally to Class 8 participants
thereunder.
The Company also acknowledged in the December 2001 Services Agreement that
it has extended the benefits of its Executive Plan, and its transaction bonus
program, to Mr. Shull.
Under the December 2001 Services Agreement, upon the closing of any
transaction which constitutes a Change of Control (as defined in the December
2001 Services Agreement), provided that Mr. Shull is then employed by the
Company, the Company shall make a lump sum cash payment to Meridian on the date
of such closing of $900,000 pursuant to the Executive Plan, $300,000 pursuant to
the Company's transaction bonus program and at least $300,000 in target bonus
(plus any amount of maximum bonus) payable pursuant to the Company's 2001
Management Incentive Plan. Any such lump sum payment would be in lieu of (i) any cash payment under the December 2001 Services Agreement as a result of a
termination of the December 2001 Services Agreement upon the first day after the
acquisitionDirector who is also an employee of the Company (whetherfor
purposes of the Federal Insurance Contributions Act; or (ii) any persons (and
their successors from time to time) who are designated by merger or the acquisitiona holder of
all of its
outstanding capital stock) or the tenth day after the sale or series of sales
since April 27, 2001 involving an aggregate of 50%thirty-three percent (33%) or more of the market valueVoting Shares to stand for election
and serve as a Director. For purposes of the Company's assets (for this purposeDirectors Plan, a "Change of
Control" will occur upon the occurrence of any of the events specified in item
(i), (ii) or (iii) of the definition of "Change in Control" under the December 2001 Services
Agreement, such 50% amount shall be deemed to be $107.6 million), and (ii)Executive
Plan, as discussed above.
A participant in the aggregate amount of December 2001 Base Fees and December 2001 Flat Fees to which
Meridian would have otherwise been entitled through the end of the December 2001
Agreement Term.
Pursuant to the December 2001 Services Agreement, the Company has granted
to Mr. Shull and the Consultants options for an aggregate of 1,000,000 shares of
the Company's Common Stock with an exercise price equal to the closing price on
December 14, 2001 (the "2001 Options"). Edward M. Lambert, the Company's
Executive Vice President and Chief Financial Officer, was a Consultant at the
time of the December 2001 Services Agreement and was awarded 300,000 of the 2001
Options.
Under the December 2001 Services Agreement, additional amounts are payable
to Meridian by the Company under certain circumstances upon the termination of
the December 2001 Services Agreement. If the termination is on account of the
expiration of the December 2001 Agreement Term, MeridianDirectors Plan shall be entitled to receive a lump sum payment equal to $450,000 in severance payChange
of Control Payment under the Directors Plan if there occurs a Change of Control
and at least
$300,000 in target or maximum bonus pursuant tohe/she is a Director on the Company's 2001 Management
Incentiveeffective date of such Change of Control. A
Change of Control Payment under the Directors Plan or 2002 Management Incentive Plan, as applicable. If the
termination is on account of the Company's material breach of the December 2001
Services Agreement or the Company's termination of the engagement of Meridian
and Mr. Shull where there has been no Willful Misconduct (as defined in the
December 2001 Services Agreement) or material breach thereof by either Mr. Shull
or Meridian, Meridian shall be entitled to receive (i) a lump sum payment equal
to the aggregatean amount of December 2001 Base Fees and December 2001 Flat Fees
to which it would have otherwise been entitled through the end of the December
2001 Agreement Term, plus (ii) $600,000 in severance pay and at least $300,000
in target or maximum bonus pursuant to the Company's 2001 or 2002 Management
Incentive Plan, as applicable. If the termination is on account of the
acquisition of the Company (whether by merger or the acquisition of all of its
outstanding capital stock) or the sale or series of sales since April 27, 2001
involving an aggregate of 50% or more of the market value of the Company's
assets (for this purpose under the December 2001 Services Agreement, such 50%
amount shall be deemed to be $107.6 million) (an "Asset Sale") and the amount
realized in the transaction is less than $0.50 per common share (or the
equivalent of $0.50 per common share), and if and only if the Company's
Executive Plan shall not then be in effect, Meridian shall be entitled to
receive a lump sum payment equal to the aggregate amount of December 2001 Base
Fees and December 2001 Flat Fees to which it would have otherwise been entitled
through the end of the December 2001 Agreement Term. If the termination is on
14
account of the acquisition of the Company (whether by merger or the acquisition
of all of its outstanding capital stock) or the sale or series of sales since
April 27, 2001 involving an aggregate of 50% or more of the market value of the
Company's assets (for this purpose under the December 2001 Services Agreement,
such 50% amount shall be deemed to be $107.6 million) and the amount realized in
the transaction equals or exceeds $0.50 per common share (or the equivalent of
$0.50 per common share), and if and only if the Company's Executive Plan shall
not then be in effect, Meridian shall be entitled to receive a lump sum payment equal to
the greater of (i) $40,000 or (ii) 150% of the aggregate amountsum of December 2001 Base Feesthe annual retainer fee,
meeting fees and December 2001 Flat Feesper diem fees paid to which it would have otherwise been entitled througha Director for his/her service on the
Board of Directors of the Company during the 12-month period immediately
preceding the effective date of the Change of Control.
2002 Directors' Option Plan. Effective January 1, 2003, the 2002 Stock
Option Plan for Directors was amended to increase the annual service award for
Directors who are not employees of the Company from 25,000 to 35,000 options to
purchase shares of Common Stock.
REPRICING OF OPTIONS/SARS:
During fiscal 2002, the Company did not adjust or amend the exercise price
of stock options or SARs previously awarded to the Chief Executive Officer or
our four next most highly compensated executive officers who were serving as
executive officers at the end of the December 2001 Agreement Term or $1,000,000. If the termination is
on account of an acquisition or sale of the Company (whether by merger or the
acquisition of all of its outstanding capital stock) or the sale or series of
sales since April 27, 2001 involving an aggregate of 50% or more of the market
value of the Company's assets (for this purpose under the December 2001 Services
Agreement, such 50% amount shall be deemed to be $107.6 million) and the
Company's Executive Plan shall then be in effect, Mr. Shull shall be entitled to
receive his benefit under the Company's Executive Plan plus a lump sum cash
payment on the date of closing of such sale or acquisition of $300,000 pursuant
to the Company's transaction bonus program and at least $300,000 in target bonus
(plus any amount of maximum bonus) payable pursuant to the Company's 2001
Management Incentive Plan or 2002 Management Incentive Plan, as applicable.
Under the December 2001 Services Agreement, the Company is required to
maintain directors' and officers' liability insurance during the December 2001
Agreement Term. The Company is also required to indemnify Meridian, Mr. Shull or
any member, officer or employee of, or consultant, contractor or subcontractor
to, Meridian who serves as a Consultant to the Company.
The Transaction Bonus Letter between the Company and Mr. Shull remains
valid and in effect, pursuant to which the Company shall pay Mr. Shull a lump
sum transaction bonus equal to $300,000 on the date of closing of any
transaction which constitutes a Change of Control (as defined in the Company's
Executive Plan) provided that he is actively employed by the Company on the date
the Change of Control occurs. Mr. Shull's voluntary termination or involuntary
termination for cause shall cause such transaction bonus to become null and
void.fiscal year.
STOCK OPTION AND EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION:
At various times duringDuring the fiscal year ended December 29, 2001,28, 2002, the Stock Option and
Executive Compensation Committee of the Board of Directors of the Company
consisted of Alan Grieve,E. Pendleton James, Kenneth J. Krushel Alan G. Quasha, Eloy Michotte
and Ralph Destino.Basil P. Regan. None of
such persons was, during such fiscal year or formerly, an officer or employee of
the Company or any of its subsidiaries or had any relationship with the Company
other than serving as a Director of the Company. During the 20012002 fiscal year, no
executive officer of the Company served as a
17
member of the compensation committee (or other board committee performing
equivalent functions or, in the absence of such committee, the entire board of
directors) of another entity, one of whose executive officers served as a member
of the Stock Option and Executive Compensation Committee. During the 20012002 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 20012002 fiscal year, no executive
officer of the Company served as a member of the compensation committee (or
other board committee performing equivalent functions or, in the absence of such
committee, the entire board of directors) of another entity, one of whose
executive officers served as a Director of the Company.
15
REPORT OF THE STOCK OPTION AND EXECUTIVE COMPENSATION COMMITTEE ON EXECUTIVE
COMPENSATION:
The Stock Option and Executive Compensation Committee (the "Compensation
Committee"), currently consisting of Kenneth J. Krushel (Chairman), E. Pendleton
James (Chairman), Kenneth
Krushel and Basil P. Regan,Robert H. Masson, each an outside director, has the responsibility,
under delegated authority from the Company's Board of Directors, for developing,
administering and monitoring the executive compensation policies of the Company
and making recommendations to the Company's Board of Directors with respect to
these policies. The Board of Directors has accepted the Compensation Committee's
recommendations for 20012002 compensation.
Executive Compensation Philosophy
The Compensation Committee's executive compensation philosophy supports the
Company's overall business strategy and has at its core a strong link between
pay, performance and retention. The philosophy emphasizes recognition of
achievement at both the Company and individual level. A significant portion of
compensation delivered to executives to reflect such achievement is intended to
be in the form of long-term incentives. This long-term focus emphasizes
sustained performance and encourages retention of executive talent. In addition,
executives are encouraged to hold a significant ownership stake in the Company
so that their interests are closely aligned with those of the stockholders in
terms of both risk and reward.
The specific executive compensation plans are designed to support the
executive compensation philosophy. Compensation of the Company's executives
consists of three components, which are discussed below: salary, annual
incentive awards and long-term incentive awards. Base salary levels have been
established in order to attract and retain key executives, commensurate with
their level of responsibility within the organization. Annual incentives closely
link executive pay with performance in areas that are critical to the Company's
short-term operating success. Long-term incentives motivate executives to make
decisions that are in the best interests of the Company's owners and reward them
for the creation of stockholder value. It is the intent of both the Company and
the Compensation Committee that the components of the executive compensation
program will support the Company's compensation philosophy, reinforce the
Company's overall business strategy, and ultimately drive stockholder value
creation.
Base Salaries
Individual salaries for executives of the Company, other than Mr. Shull,
are generally influenced by several equally weighted factors: the qualifications
and experience of the executive, the executive's level of responsibility within
the organization, pay levels at firms which compete with the Company for
executive talent, individual performance, and performance-related factors used
by the Company to determine annual incentive awards. Mr. Shull's compensation
and other benefits are specified in the December 2001 Services Agreement which
was the product of arm's-length negotiations.2002 Employment Agreement. See
"Employment Contracts, Termination of Employment and Change-in-Control
Arrangements."
18
The base salaries of the Company's executives are subject to periodic
review and adjustment. Annual salary adjustments are made based on the factors
described above.
Annual Incentive Awards
In addition to base salaries, each of the Company's executives and selected
key managers participate in the Company's Management Incentive Plan. Currently,
approximately 215217 executives and key managers are eligible to participate in the
annual Management Incentive Plan. Under this plan, each participant is assigned
a target bonus, expressed as a percentage of his/her base salary, which is paid
if all performance targets are
16
fully met. It is the policy of the Compensation
Committee to position target bonuses at competitive levels. Individual target
bonuses are based on the person's responsibility level in the organization and
the bonus award opportunity at the other organizations included in the
performance chart. Target bonus levels range from 5% to 100% of salary. Target
bonus opportunities for Messrs. Contino, Harriss, MessinaLambert and Shull for fiscal
year 20012002 were 50%100% of salary while maximum bonuses were 100%150% of salary. For
purposes of the 2002 Management Incentive Plan, Mr. Shull's base salary was
deemed to be $600,000. Mr. Kingsford's target bonus for fiscal year 2002 was 25%
of salary while his maximum bonus was 50% of salary.
Participants are eligible to receive an annual bonus depending upon the
extent to which certain goals are achieved. As in past years, performance goals
for 20012002 were based on Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA), net sales, variable contribution and other business
objectives. Goals are set at both the corporate and business unit levels,
depending on the participant's scope of responsibility thus encouraging teamwork
amongst the Company's employees. The importance of each goal in determining a
participant's bonus award also depends on his/her scope of responsibility.
Actual bonus levels vary depending upon the degree of achievement in
relationship to the performance goals.
Payouts of awards have been determined based on the Company's performance
during fiscal 2001.2002. Payments to the Chief Executive Officer and the four next
most highly compensated executive officers under the 20012002 Management Incentive
Plan for the fiscal year 2002 aggregated $1,646,156.$2,197,443. One hundred percent of
awards made under the bonus plan are currently paid in cash, in some cases on a
deferred basis.
Long-Term Incentive Awards
1993 Executive Equity Incentive Plan
The 1993 Executive Equity Incentive Plan terminated in accordance with its
terms on December 31, 1996. Such plan provided executives and other key
employees with incentives to maximize the long-term creation of stockholder
value. The long-term incentive plan encouraged executives to acquire and retain
a significant ownership stake in the Company. Under the plan, executives were
given an opportunity to purchase shares of Common Stock with up to 80% of the
purchase price financed with a full recourse Company loan. For each share of
stock an employee purchased, he/she received an option to acquire two additional
shares of Common Stock, to a maximum of 250,000 shares in the aggregate, which
vest after three years and expire after six years. By creating this opportunity,
the Company encouraged executives to own Common Stock thereby aligning
executives' interests with those of the stockholders. The number of shares
offered for purchase to each executive and the corresponding number of tandem
options increased with the executive's level of responsibility within the
organization.
In December 1999, the rights of certain participants in this plan expired.
These participants had cumulative promissory notes of approximately $1.0 million
payable to the Company, comprised of $0.8 million of principal and $0.2 million
of interest, on the expiration date. Accordingly, collateral encompassing 20,000
19
shares, 80,00020,000 shares and 294,24980,000 shares of the Company's Common Stock in fiscal
years 2002, 2001, 2000 and 19992000 respectively, held in escrow on behalf of each
participant, was transferred to and retained by the Company in satisfaction of
the aforementioned promissory notes, which were no longer required to be
settled. The Company recorded these shares as treasury stock. Furthermore, these
participants forfeited their initial 20% cash down payment, which was required
for entry into the 1993 Executive Equity Incentive Plan.
At December 28, 2002, current and former officers and executives of the
Company owed the Company approximately $0.3 million, excluding accrued interest,
under the 1993 Executive Equity Incentive Plan. These amounts due to the Company
bear interest at rates ranging from 5.54% to 7.75% and are due or will be due
during 2003.
As of December 28, 2002, no stock options remained outstanding or
exercisable under the 1993 Executive Entity Incentive Plan.
1996 Stock Option Plan
The purpose of the 1996 Stock Option Plan is to provide employees of the
Company and its subsidiaries with a larger personal and financial interest in
the success of the Company through the grant of stock-based incentive
compensation. Under the plan, employees may be granted options to purchase
shares of Common 17
Stock at the fair market value on the date of grant. The total
options granted to an employee is one-half performance-based. The 1996 Stock
Option Plan provides that options may be granted for terms of not more than 10
years.
All employeesEmployees are no longer eligible to participate in the 1996 Stock Option
Plan. During 2001,2002, no options to purchase shares of Common Stock were granted
pursuant to the 1996 Stock Option Plan. However, as of December 28, 2002,
options to purchase 1,337,270 shares of Common Stock remained outstanding under
the 1996 Stock Option Plan.
2000 Management Stock Option Plan
The purpose of the 2000 Management Stock Option Plan is to advance the
interests of the Company and its stockholders by providing employees of the
Company, through the grant of options to purchase shares of Common Stock, with a
larger personal and financial interest in the success of the Company. Under the
terms of the plan, officers, directors, agents, and employees of the Company and
consultants to the Company or of any subsidiary of the Company may be granted
options to purchase shares of Common Stock at their fair market value on the
date of grant. The plan provides that options may be granted for terms of not
more than 10 years and shall vest according to the terms of the grant of the
options. In addition, options may not be exercised more than 30 days after a
participant ceases to be an employee of the Company, except in the case of
death, disability or retirement, in which cases options may be exercised within
90 days after the date of death, disability or retirement.
During 2002, 6,761,000 options to purchase shares of Common Stock were
granted to employees (including the 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
20
Common Stock, with a larger personal and financial interest in the success of
the Company. Under the terms of the plan, directors who are neither employees of
the Company nor nonresident aliens shall be granted an option to purchase 50,000
shares of Common Stock as of the effective date of his or her initial
appointment or election to the Board or, if later, the effective date of the
plan, and shall be granted an option to purchase 10,000 shares of Common Stock
on August 4, 2000 and August 3, 2001, provided that such directors continue to
serve as directors on such dates. The price at which shares of Common Stock may
be purchased upon the exercise of the options granted under the plan shall be
the fair market value of such shares on the date of grant of the options. The
plan provides that options shall be granted for terms of 10 years and shall vest
one-third, one-third and one-third on the first, second and third anniversaries
of the date of grant. In addition, options may not be exercised more than 3
months after a participant ceases to be a director of the Company, except in the
case of death or disability, in which cases options may be exercised within 12
months after the date of such death or disability.
During 2001,2002, a total of 80,00050,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the 1999 Stock Option
Plan for Directors. During 2002, no options to purchase shares of Common Stock
under the 1999 Stock Option Plan for Directors were exercised. A total of
250,000 options to purchase shares of Common Stock which were granted to
eligible directors under the 1999 Stock Option Plan for Directors have expired
following the resignation of such directors from the Company's Board of
Directors or such director declining to stand for reelection.Directors. As of December 29, 2001, 370,00028, 2002, 420,000 options to purchase Common Stock
under the 1999 Stock Option Plan for Directors were outstanding, of which
253,332316,667 options were exercisable.
During 2002, 50,000No additional options to purchase shares of Common Stock werewill be granted
to one eligible director in accordance withunder the 1999 Stock Option Plan for Directors.
2000 Management Stock Option Plan
The purpose of the 2000 Management Stock Option Plan is to advance the
interests of the Company and its stockholders by providing employees of the
Company, through the grant of options to purchase shares of Common Stock, with a
larger personal and financial interest in the success of the Company. Under the
terms of the plan, officers, directors, agents, and employees of the Company and
consultants to the Company or of any subsidiary of the Company may be granted
options to purchase shares of Common Stock at their fair market value on the
date of grant. The plan provides that options may be granted for terms of not
more than 10 years and shall vest according to the terms of the grant of the
options. In addition, options may not be exercised more than 30 days after a
participant ceases to be an employee of the Company, except in the case of
death, disability or retirement, in which cases options may be exercised within
90 days after the date of death, disability or retirement.
18
During 2001 and to date during 2002, no options to purchase shares of
Common Stock were granted in accordance with the 2000 Management Stock Option
Plan. During 2001, 30,000 options to purchase shares of Common Stock were
granted to three former Directors of the Company serving as consultants in
accordance with the 2000 Management Stock Option Plan.
2002 Stock Option Plan for Directors
The purpose of the 2002 Stock Option Plan for Directors which is subject
to ratification by stockholders at the Annual Meeting, is to advance the
interests of the Company by providing non-employee directors of the Company,
through the grant of options to purchase shares of Common Stock, with a larger
personal and financial interest in the success of the Company. Under the terms
of the plan, directors who are neither employees of the Company nor nonresident
aliens shall be granted an option to purchase 50,000 shares of Common Stock as
of the effective date of his or her initial appointment or election to the Board
or, if later, the effective date of the plan, and shall be granted an option to
purchase 25,000 shares of Common Stock on August 2, 2002, 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 in thirdsone-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
casecases options may be exercised within 12 months after the date of such death or
disability.
See
Proposal 3 -- Ratification ofEffective 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.
During 2002, a total of 100,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the 2002 Stock Option
Plan for Directors. During 2002, no options to purchase shares of Common Stock
under the 2002 Stock Option Plan for Directors were exercised. No options to
21
purchase shares of Common Stock which were granted to eligible directors under
the 2002 Stock Option Plan for Directors have expired following the resignation
of such directors from the Company's Board of Directors. As of December 28,
2002, 100,000 options to purchase Common Stock under the 2002 Stock Option Plan
for Directors were outstanding, none of which were exercisable.
Chief Executive Officer Compensation
On December 5, 2000, Thomas C. Shull was named President and Chief
Executive Officer and was elected to the Board of Directors of the Company.
Effective on that date, Mr. Shull, Meridian and the Company entered into the
December 2000 Services Agreement. Under the December 2000 Services Agreement,
Meridian will provideprovided for the benefit of the Company the services of Mr. Shull and
certain persons providing consulting services to the Consultants.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, pursuant to
whichAgreement. Effective
September 1, 2002, the term of the services ofCompany and Mr. Shull andentered into the Consultants began2002 Employment
Agreement, which replaced the August 2001 Services Agreement. The 2002
Employment Agreement will expire on December 14, 2001 and will terminate on March 31, 2003.September 30, 2004. See "Employment
Contracts, Termination of Employment and Change-in-Control Arrangements."
Nondeductible Compensation
Section 162(m) of the Internal Revenue Code, as amended (the "Code"),
generally disallows a tax deduction to public companies for compensation over
$1,000,000 (the "$1 Million Limit")Limit) paid to a company's chief executive officer
and four other most highly compensated executive officers, as reported in its
proxy statement. Qualifying performance-based compensation is not subject to the
deduction limit, if certain requirements are met. The Company has not structured
certain aspects of the performance-based portion of the compensation for its
executive officers (which currently includes awards under performance based
annual management incentive plans) in a manner that complies with the statute.
Payments of compensation in 2001
19
2002 relating to Thomas C. Shull, Edward Lambert and
Michael Contino exceeded the $1 Million Limit; consequently, in each case, the
excess of such payments over the $1 Million Limit iswas not deductible.
Respectfully Submitted,
The Stock Option and Executive
Compensation Committee
Kenneth J. Krushel (Chairman)
E. Pendleton James
(Chairman)
Kenneth J. Krushel
Basil P. ReganRobert H. Masson
22
REPORT OF THE AUDIT COMMITTEE:
The Audit Committee has reviewed and discussed with management and Arthur
AndersenKPMG
LLP, ("AA"), the Company's independent auditors, the Company's audited financial
statements as of and for the year ended December 29, 2001. The Audit
Committee is aware that the Company has obtained a letter of representation from
AA that such audit was subject to AA's quality control system for the U.S.
accounting and auditing practice to provide reasonable assurance that the
engagement was conducted in compliance with professional standards and that
there was appropriate continuity of AA personnel working on audits and
availability of national office consultation.28, 2002.
The Audit Committee has discussed with the independent auditors the matters
required to be discussed by Statement on Auditing Standards ("SAS") No. 61,
Communication with Audit Committees, as amended by SAS 90.
The Audit Committee has received and reviewed the written disclosures and
the letter from the independent auditors required by Independence Standard No.
1, Independence Discussions with Audit Committees, as amended, by the
Independence Standards Board, and has discussed with the auditors the auditors'
independence.
Based on the review and discussions referred to above, we recommend to the
Board of Directors that the financial statements referred to above be included
in the Company's Annual Report on Form 10-K for the year ended December 29,
2001.28,
2002.
Respectfully Submitted,
The Audit Committee
J. David HakmanRobert H. Masson (Chairman)
E. Pendleton James
Kenneth J. Krushel
E. Pendleton James
2023
PERFORMANCE GRAPH:
The following graph compares the yearly percentage change in the cumulative
total stockholder return on the Company's Common Stock for each of the Company's
last five fiscal years with the cumulative total return (assuming reinvestment
of dividends) of (i) the Standard & Poor's 500 Stock Index (which includes the
Company) and (ii) peer issuers from the Company's line of business selected by
the Company in good faith.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG HANOVER DIRECT, INC., THE S&P 500 INDEX AND A PEER GROUP
[COMPARISION GRAPH]
Cumulative Total Return
---------------------------------------------------------
- --------------------------------------------------------------------------------
12/96
12/97 12/98 12/99 12/00 12/01 12/02
- --------------------------------------------------------------------------------
HANOVER DIRECT,
INC. $100.00 $400.00 $458.33 $483.33 $50.00 $ 49.33100.00 114.58 120.83 12.50 12.33 6.33
S&P & P 500 $100.00 $119.26 $157.14 $177.69 $97.48 $191.80100.00 128.58 155.64 141.46 124.65 97.10
PEER GROUP $100.00 $133.36 $171.47 $207.56 $188.66 $166.24100.00 172.48 186.68 90.72 177.12 214.36
* Direct Marketing Peer Group consists of direct merchandising companies that
market their products through alternative distribution channels, such as mail,
Internet or television media; peer companies include Blair, Lands' End, Lillian Vernon,
Spiegel and Williams Sonoma. Damark International, Inc.Land's End was acquired by Sears and was removed
from the Direct Marketing Peer Group in 2001.2002.
NOTE: Assumes $100 invested on December 31, 19961997 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.
2124
DIRECTOR COMPENSATION:
Standard Arrangements. Non-employee directors of the Company or its
subsidiaries receive an annual cash fee of $40,000. During fiscal year 2001,2002,
certain directors received per diem fees for extraordinary services not
exceeding $60,000$40,000 in the aggregate per person. Commencing October 1, 2002,
non-employee directors of the Company will receive an additional $16,000,
$8,000, $8,000, $8,000 and $8,000 annual cash fee for serving as the Chairman of
the Audit, Compensation, Transaction, Executive and Nominating Committees,
respectively, of the Board of Directors. In addition, such directors participate
in the Eighteen Month Compensation Continuation Plan for Directors, the 1999
Stock Option Plan for Directors and the 2002 Stock Option Plan for Directors.
See "Employment Contracts, Termination of Employment and Change-in-
ControlChange-in-Control
Arrangements." The Company does not compensate its employees, or employees of
its subsidiaries, who serve as directors. During fiscal 2001,2002, the Company
provided $50,000 of term life insurance for each director.
During 2001,2002, a total of 80,00050,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the 1999 Stock Option
Plan for Directors. During 2001, 10,0002002, no options to purchase shares of Common Stock
under the 1999 Stock Option Plan for Directors were exercised. A total of
250,000 options to purchase shares of Common Stock which were granted to
eligible directors under the 1999 Stock Option Plan for Directors have expired
following the resignation of such directors from the Company's Board of
Directors. As of December 29, 2001, 370,00028, 2002, 420,000 options to purchase Common Stock
under the 1999 Stock Option Plan for Directors were outstanding, of which
253,332316,667 options were exercisable.
During 2002, 50,000a total of 100,000 options to purchase shares of Common Stock
were granted to one eligible directordirectors all in accordance with the 19992002 Stock Option
Plan for Directors. During 2002, no options to purchase shares of Common Stock
under the 2002 Stock Option Plan for Directors were exercised. No options to
purchase shares of Common Stock which were granted to eligible directors under
the 2002 Stock Option Plan for Directors have expired following the resignation
of such directors from the Company's Board of Directors. As of December 28,
2002, 100,000 options to purchase Common Stock under the 2002 Stock Option Plan
for Directors were outstanding, none of which were exercisable.
Effective January 1, 2003, the 2002 Stock Option Plan for Directors was
amended to increase the annual service award for directors who are not employees
of the Company from 25,000 to 35,000 options to purchase shares of Common Stock.
Hanover Direct, Inc. Directors Change of Control Plan. Effective May 3,
2001, the Company's Board of Directors established the Hanover Direct, Inc.
Directors Change of Control Plan (the "Directors Plan") for all Directors of the
Company except for (i) any Director who is also an employee of the Company for
purposes of the Federal Insurance Contributions Act; or (ii) any persons (and
their successors from time to time) who are designated by a holder of
thirty-three percent (33%) or more of the Voting Shares to stand for election
and serve as a Director. For purposes of the Directors Plan, a "Change of
Control" will occur upon the occurrence of any of the events specified in item
(i), (ii) or (iii) of the definition of "Change in Control" under the Executive
Plan, as discussed above.
A participant in the Directors Plan shall be entitled to receive a Change
of Control Payment under the Directors Plan if there occurs a Change of Control
and he/she is a Director on the effective date of such Change of Control. A
Change of Control Payment under the Directors Plan shall be an amount equal to
the greater of (i) $40,000 or (ii) 150% of the sum of the annual retainer fee,
meeting fees and per diem fees paid to a Director for his/her service on the
Board of Directors of the Company during the 12-month period immediately
preceding the effective date of the Change of Control.
25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
At March 25,December 28, 2002, Richemont Finance S.A. ("Richemont"), a Luxembourg
company, owned approximately 20.8%21.3% of the Company's Common Stock outstanding and
100% of the ofCompany's Series B Preferred Stock outstanding (collectively representing
approximately 29.1% of the combined voting power of Voting Stock), through direct and indirect
ownership.
At December 29, 2001,28, 2002, current and former officers and executives of the
Company (which did not include the Chief Executive Officer or any of the 4 most
highly compensated executive officers) owed the Company approximately $0.3 million, excluding accrued interest,
under the 1993 Executive Equity Incentive
22
Plan. These amounts due to the Company
bear interest at rates ranging from 5.54% to 7.75% and are due or will be due
during 2003.
During November 2002, the Company entered into Transaction Bonus Letters
with each of Mr. Lambert and Mr. Harriss.
On November 6, 2002, the Company entered into a Compensation Continuation
Arrangement with Mr. Lengers.
During October 2002, the Company entered into the Compensation Continuation
Agreements with Mr. Lambert, Mr. Harriss and Mr. Contino.
On October 2, 2002, the Company issued options to purchase 600,000 shares
of the Company's common stock to an Executive Vice President at a price of $0.27
per share under the Company's 2000 Management Stock Option Plan.
During September 2002, Charles F. Messina resigned as Executive Vice
President, Chief Administrative Officer and Secretary of the Company. In
connection with such resignation, the Company and Mr. Messina entered into a
severance agreement dated September 30, 2002 providing for cash payments of
$884,500 and other benefits which were accrued in the fourth quarter of 2002.
As of September 1, 2002, Mr. Shull and the Company entered into the 2002
Employment Agreement, which replaced the December 2001 Services Agreement. As of
September 1, 2002, Mr. Shull and the Company amended the Shull 2000 Stock Option
Agreement, the Shull 2001 Stock Option Agreement and the Shull Transaction Bonus
Letter.
On August 8, 2002, the Company issued options to purchase 3,750,000 shares
of the Company's Common Stock to certain Management Incentive Plan ("MIP") Level
7 and 8 employees, including various executive officers, at a price of $0.24 per
share under the Company's 2000 Management Stock Option Plan. In addition, on
August 8, 2002, the Company authorized the President to grant options to
purchase up to an aggregate of 1,045,000 and 1,366,000 shares of the Company's
common stock to certain MIP Level 4 and MIP Level 5 and 6 employees,
respectively, at a price of $0.24 per share under the Company's 2000 Management
Stock Option Plan.
During January 2002, at the time of Mr. Harriss' resignation from the
Company as Executive Vice President and Chief Financial Officer, the Company and
Mr. Harriss entered into a severance agreement. In connection with Mr. Harriss'
appointment as Executive Vice President -- Human Resources and Legal and
Secretary of the Company effective December 2, 2002, Mr. Harriss waived his
rights to certain payments under such severance agreement.
On December 19, 2001, the Company consummated a transaction with Richemont
(the "Richemont Transaction"). In the Richemont Transaction, the Company
repurchased from Richemont all of the outstanding shares of the Series A
Preferred Stock and 74,098,769 shares of the Common Stock of the
26
Company held by Richemont in return for the issuance to Richemont of 1,622,111
shares of newly-creatednewly created Series B Preferred Stock and the reimbursement of
expenses of $1 million to Richemont. Richemont agreed, as part of the
transaction, to forego any claim it had to the accrued but unpaid dividends on
the Series A Preferred Stock. The Richemont Transaction was made pursuant to an
Agreement (the "Agreement"), dated as of December 19, 2001, between the Company
and Richemont. As part of the Richemont Transaction, the Company (i) released
Richemont, the individuals appointed by Richemont to the Board of Directors of
the Company and certain of their respective affiliates and representatives
(collectively, the "Richemont Group") from any claims by or in the right of the
Company against any member of the Richemont Group which arise out of Richemont's
acts or omissions as a stockholder of or lender to the Company or the acts or
omissions of any Richemont board designee in his capacity as such and (ii)
entered into an Indemnification Agreement with Richemont pursuant to which the
Company agreed to indemnify each member of the Richemont Group from any losses
suffered as a result of any third party claim which is based upon Richemont's
acts as a stockholder or lender of the Company or the acts or omissions of any
Richemont board designee in his capacity as such.
As of December 14, 2001, Mr. Shull, Meridian and the Company entered into
the December 2001 Services Agreement which replaced the August 2001 Services
Agreement.
The December 2001 Services Agreement was amended on April 12, 2002.
As of August 1, 2001, Mr. Shull, Meridian and the Company entered into the
August 2001 Services Agreement which replaced the December 2000 Services
Agreement.
During May 2001, the Company entered into Transaction Bonus Letters with
each of Mr. Shull, Mr. Messina, Mr. Potts, Mr. Harriss and Mr. Contino.
On April 30, 2001, the Company and Mr. Shull entered into the Letter
Agreement, relating to certain termination payments under the Executive Plan.
As of December 5, 2000, Mr. Shull, Meridian and the Company entered into the
December 2000 Services Agreement.
Diana Quasha, the wife of Alan Quasha, a former Director of the Company,
entered into an employment agreement (the "Henre Employment Agreement") with
Henre, Inc. ("Henre"), a subsidiary of the Company. Pursuant to the Henre
Employment Agreement, Ms. Quasha served as President of Henre. Ms. Quasha
resigned as President of Henre effective January 5, 2001, and the Henre
Employment Agreement has terminated. The Company paid Ms. Quasha $4,423 as final
salary through her termination date of January 5, 2001 and, pursuant to an
Agreement and General Release of Claims between the Company and Ms. Quasha, the
Company paid Ms. Quasha discretionary severance of $57,500 during 2001.
Paul Quattro, the brother-in-law of Michael Contino, Executive Vice
President and Chief Operating Officer of the Company, was hired by the Company
in May 2000 as an independent contractor. Mr. Quattro held various project
manager positions at Desius LLC in the internet group. Mr. Quattro's
relationship with the Company as an independent contractor was terminated on
January 5, 2001 in connection with the Company's cessation of operations with
respect to Desius LLC. Mr. Quattro was paid $68,214.93 for his eight
23
(8) months of service to the Company. During 2001, the Company paid Mr. Quattro
an additional $7,200, representing $2,400 for services performed up to the
termination of his relationship with the Company as an independent contractor
and $4,800 as a termination payment in lieu of notice.
John F. Shull, the brother of Thomas C. Shull, the President and Chief
Executive Officer of the Company, actsacted as a consultant under the December 2001
Services Agreement, and has received an option to purchase 100,000 shares of the
Company's Common Stock under the December 2001 Services Agreement.
Michael G. Lutz, the former Executive Vice PresidentAgreement and Chief Operating
Officer of the Company, purchasedan option
to purchase 500,000 shares of the Company's Common Stock pursuant
tounder the 1993 Executive Equity Incentive Plan. Pursuant to such plan,December 2000
Services Agreement.
In January 1998, the Company andmade a $75,000 non-interest bearing loan to
Mr. Lutz entered intoContino for the purchase by Mr. Contino of a Tandem Note, whereby Mr. Lutz financed 80%new principal residence in the
State of New Jersey. The terms of the purchase priceloan agreement included a provision for
the Company to forgive the original amount of the shares he purchased with a full recourse Company loan due
in 2001. On February 10, 2002, Mr. Lutz tendered such shares back toprincipal on the Company
in exchange for cancellationfifth
anniversary of the Tandem Note.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.
Either the Company's Board of Directors, a committee of the Company's Board
of Directors, or the stockholders have approved these relationships and
transactions and, to the extent that such arrangements are available from non-affiliatednon
affiliated parties, all relationships and transactions are on terms no less
favorable to the Company than those available from non-affiliatednon affiliated parties.
2427
PRINCIPAL HOLDERS OF VOTING SECURITIES OF THE COMPANY
CERTAIN BENEFICIAL OWNERS:
The following table lists the beneficial owners known by management of at
least 5% of the Company's Common Stock or 5% of the Company's Series B Preferred
Stock as of March 25, 2002.April 2, 2003. Information in the table is based on information
furnished to the Company by such persons or groups and statements filed with the
Securities and Exchange Commission (the "Commission").
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIPOWNERSHIP(1) CLASS(1)
- -------------- ------------------- ------------------------------------------- ----------
Series B Richemont Finance S.A. ........................... 1,622,111(1)......................... 1,622,111(2) 100%
Participating 35 Boulevard Prince Henri
Preferred Stock L 1724 Luxembourg
Common Stock Richemont Finance S.A. ........................... 28,691,888(1) 20.8%......................... 29,446,888(2) 21.3%
35 Boulevard Prince Henri
L 1724 Luxembourg
Common Stock Regan Partners, L.P. and Basil P. Regan........... 38,795,016(2) 28.1%
600 Madison AvenueRegan......... 38,745,017(3) 28.0%
32 East 57th Street
New York, New York 10022
Common Stock Theodore Kruttschnitt............................. 10,144,000(3)Kruttschnitt........................... 10,144,000(4) 7.3%
1730 South El Camino Real
Suite 400
San Mateo, California 94402
- ---------------
(1) In the case of Common Stock, includes shares of Common Stock issued upon
exercise of options or warrants exercisable within 60 days for the subject
individual only. Percentages of Common Stock are computed on the basis of
138,315,800 shares of Common Stock outstanding as of April 2, 2003.
(2) Information concerning the number of shares beneficially owned has been
taken from Amendment No. 45 to the Statement on Schedule 13D filed by
Richemont on December 28, 2001March 21, 2003 with the Commission.
(2)(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 1,004,900954,900 shares of Common Stock.
Also includes options to purchase 16,66616,667 shares exercisable within 60 days.
(3)(4) Information concerning the number of shares beneficially owned has been
taken from the Amendment No. 1314 to Statement on Schedule 13D filed by Mr.
Kruttschnitt on June 16, 1997May 28, 2002 with the Commission. The Schedule 13D indicates
that Mr. Kruttschnitt had sole voting and sole dispositive power with
respect to 10,074,000 shares of Common Stock. The Schedule 13D also
indicates that Mr. Kruttschnitt is a member of a group which includes Mr.
Hakman, who beneficially owns 334,390 shares (which includes 36,666 fully
vested unexercised options and options to purchase 23,332 shares exercisable
within 60 days). Also includes fully vested options held by
Mr. Kruttschnitt to purchase 70,000 shares.
25shares exercisable within 60 days.
28
SECURITY OWNERSHIP OF MANAGEMENT OF THE COMPANY
MANAGEMENT OWNERSHIP:
No director or executive officer owns any shares of Series B Preferred
Stock.
The following table lists share ownership of the Common Stock as of March
25, 2002.April 2,
2003. The information includes beneficial ownership by each of our current
directors and executive officers and by all directors and executive officers as
a group. Except as noted below, to our knowledge, each person named in the table
has sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by him.them.
SHARES OF PERCENT OF
NAME OF BENEFICIAL OWNER COMMON STOCKSTOCK(1) CLASS(1)
- ------------------------ --------------------------- ----------
J. David Hakman(2).......................................... 334,390(3)Robert H. Masson.......................................... 0 *
Kenneth Krushel............................................. 59,998(4)J. Krushel........................................ 60,000(2) *
E. Pendleton James.......................................... 0Pendelton James........................................ 16,667(3) *
Basil P. Regan(5)........................................... 38,795,016(5) 28.1%Regan(4)......................................... 38,745,017(4) 28.0%
Thomas C. Shull............................................. 1,350,000(6) *Shull........................................... 3,200,000(5) 2.3%
Michael D. Contino.......................................... 327,400(7)Contino........................................ 389,900(6) *
Brian C. Harriss.......................................... 53,600 *
William C. Kingsford........................................ 120,500(8)Kingsford...................................... 99,867(7) *
Edward M. Lambert........................................... 0Lambert......................................... 300,000(8) *
Frank J. Lengers............................................ 16,000(9)Lengers.......................................... 19,000(9) *
Steven Lipner............................................... 22,174(10) *
Charles B. Messina.......................................... 55,000(11)Lipner............................................. 26,174(10) *
Directors and executive officers as a group (11
persons).... 41,080,478 29.7%................................................ 42,910,225(11) 31.0%
- ---------------
* Less than 1%
(1) Includes in each case shares of Common Stock issuable upon exercise of
options or warrants exercisable within 60 days for the subject individual
only. Percentages are computed on the basis of 138,215,800138,315,800 shares of Common
Stock outstanding as of March 25, 2002.April 2, 2003.
(2) An Amendment No. 13 to the Statement on Schedule 13D filed by Mr.
Kruttschnitt on June 16, 1997 with the Commission indicates that Theodore
Kruttschnitt is a member of a group which includes Mr. Hakman, who
beneficially owns 334,390 shares (which includes 36,666 fully vested
unexercised options andRepresents options to purchase 23,332 shares exercisable
within 60 days).
(3) Includes 36,666 fully vested unexercised options and options to purchase
23,33260,000 shares exercisable within 60 days.
(4) Includes 36,666 fully vested unexercised options and(3) Represents options to purchase 23,33216,667 shares exercisable within 60 days.
(5)(4) Mr. Regan and Regan Partners L.P. have shared voting and dispositive power
with respect to 37,773,450 shares of Common Stock and Mr. Regan has sole
voting and dispositive power with respect to 1,004,900954,900 shares of Common
Stock. Also includes options to purchase 16,66616,667 shares exercisable within
60 days.
(5) IncludesRepresents options to purchase 16,6663,200,000 shares exercisable within 60 days.
(6) Includes options to purchase 387,500 shares exercisable within 60 days.
(7) Represents 1,350,000 fully vested unexercised options.
(7) Includes 325,000 fully vested unexercised options.options to purchase 99,867 shares exercisable within 60 days.
(8) Represents 89,617 fully vested unexercised options.options to purchase 300,000 shares exercisable within 60 days.
(9) Includes 16,000 fully vested unexercised options.Represents options to purchase 19,000 shares exercisable within 60 days.
(10) Includes 20,000 fully vested unexercised options.options to purchase 25,000 shares exercisable within 60 days.
(11) Includes 50,000 fully vested unexercised options.
26options to purchase 4,124,701 shares exercisable within 60 days.
29
PROPOSAL I
ELECTION OF DIRECTORS
GENERALLY:
The Board of Directors currently consists of 5 members. The Board of
Directors amended the Company's Bylaws, effective on the date of the 2001 Annual
Meeting of Stockholders of the Company (May 31, 2001), to reduce the size of the
Company's Board of Directors to 6six Directors. On January 10, 2002, the Board of
Directors announced the reduction of the number of Directors of the Company from
6six to 5.five. On January 10, 2002, the Board of Directors announced the
appointment of Thomas C. Shull as Chairman of the Company's Board of Directors
and the election of E. Pendleton James as a member of the Company's Board of
Directors, each filling the vacancies created by the resignation of Eloy
Michotte the former
Chairman of the Board, and Alan Grieve and each to serve until the Company's next annual
meeting of stockholders. On December 20, 2002, the Board of Directors announced
the election of Robert H. Masson as a member of the Company's Board of Directors
effective January 1, 2003, filling the vacancy created by the resignation of J.
David Hakman effective December 31, 2002.
The Board has nominated 5 directors for election at the Annual Meeting. All
of them are currently serving as directors. If you elect the 5 directors
nominated for election at the Annual Meeting, they will hold office until the
next annual meeting of stockholders or until their successors have been elected
or until their earlier death, resignation, retirement, disqualification or
removal as provided in the Company's Certificate of Incorporation and Bylaws.
NOMINEES:
THOMAS C. SHULL...........
AGE 5051 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 OfficerCEO of Barneys New York, a leading luxury
retailer, where he led them out of bankruptcy. From
1992 to 1994, Mr. Shull was Executive Vice President
of the R.H. Macy Company, Inc., where he was responsible
for human resources, information technology, business
development, strategic planning and merchandise
distribution and led the merger negotiations with
Federated Department Stores. Prior to that, he served
as a consultant with McKinsey & Company and in the
early 1980s as a member of the National Security
Council Staff in the Reagan White House.
E. PENDLETON JAMES........
AGE 7273 E. Pendleton James has been a director of the Company
since January 2002. Mr. James has over thirty years
experience in executive search and recently merged
his firm, Pendleton James Associates, with Whitehead
Mann. He currently serves on the Board of the
Citizens for Democracy Corps and is a Trustee for the
Center for the Study of the Presidency. Mr. James
served as an assistant to Presidents Nixon and
Reagan. He is a former member of the Board of
Directors of Comsat Corporation, the Metropolitan
Life Series Fund, the White House Fellows Commission,
the Ronald Reagan Foundation and the USO World Board
of Governors.
2730
J. DAVID HAKMAN...........
AGE 60 J. David Hakman has been the President and Chief
Executive Officer of Hakman Capital Corporation,
Burlingame, California, an investment and merchant
banking firm, since 1980. Mr. Hakman also serves as a
director of Concord Camera Corp., a firm which
manufactures and distributes cameras. Mr. Hakman was
originally appointed a director of the Company in May
1989 pursuant to a nomination and standstill
agreement among the Company and Theodore H.
Kruttschnitt, Edmund Manwell, and himself and was
elected a director of the Company in October 1991.
KENNETH J. KRUSHEL........
AGE 4951 Kenneth J. Krushel has been the Executive Vice
President of Strategic and Business Development of
Blackboard Inc., a provider of e-education software
and commerce and access systems, since December 2000.
From October 1999 to December 2000, Mr. Krushel was
the Chairman and Chief Executive Officer of College
Enterprises, Inc. From 1996 to 1999, Mr. Krushel was
the Senior Vice President of Strategic Development
for NBC Corp. and from 1994 to 1996 was Senior Vice
President, Business Development, for King World
Productions. Formerly, Mr. Krushel was President and
Chief Operating Officer of Think Entertainment and
Vice-President of Programming and Marketing for
American Cablesystems. Mr. Krushel was elected a
director of the Company in May 1999.
ROBERT H. MASSON..........
AGE 67 Robert H. Masson served as Senior Vice President,
Finance and Administration and Vice President and
Chief Financial Officer of Parsons & Whittemore,
Inc., a global pulp and paper manufacturer, from May
1990 until his retirement June 30, 2002. Prior
thereto, Mr. Masson held various executive, financial
and treasury roles with The Ford Motor Company,
Knutson Construction Company, Ellerbe, PepsiCo, Inc.
and Combustion Engineering (now part of the ABB
Group). Mr. Masson 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 6162 Basil P. Regan has been the General Partner of Regan
Partners, L.P., a limited partnership whichthat invests
primarily in turnaround companies and special
situations, since December 1989. He has been
President of Regan Fund Management Ltd. since October
1995, which manages Regan Partners, L.P., Regan Fund
International, L.P. and Super Hedge Fund, L.P. From
1986 to 1989, Mr. Regan was Vice President and
Director of Equity Research of Reliance Group
Holdings. Mr. Regan was elected a director of the
Company in August 2001.
BOARD MEETINGS:
In 2001,2002, the Board held 119 meetings in person or by conference telephone and
took action by written consent on 104 occasions. Each incumbent director attended
at least 75% of the aggregate number of the Company's Board Meetings and his
committee meetings.
BOARD COMMITTEES:
The Board has standing Executive, Audit, Stock Option and Executive
Compensation, Nominating, and Transactions Committees.
The Executive Committee.Committee
- At various times during 2001,During 2002, Messrs. Eloy Michotte, Alan G. Quasha,Basil P. Regan, Thomas C. Shull Alan Grieve and Robert F. WrightKenneth J.
Krushel were members of the Executive Committee. Currently, Messrs. Basil
P. Regan (Chairman), Thomas C. Shull and Kenneth J. Krushel are members
of the Executive Committee.
28
- The duties of the Executive Committee include:
- recommending actions to the Board; and
31
- acting on behalf of the Board on certain operating matters requiring
Board approval when the Board is not in session.
- The Executive Committee held 75 meetings in person or by conference call
in 2001.2002 and took action by written consent on 1 occasion in 2002.
The Audit Committee.
- At various times during 2001,2002, Messrs. Robert F. Wright, J. David Hakman, Basil P. ReganKenneth J. Krushel
and Kenneth KrushelE. Pendleton James were members of the Audit Committee. Currently,
Messrs. J. David HakmanRobert H. Masson (Chairman), Kenneth J. Krushel and E. Pendleton
James are members of the Audit Committee. Each of the members of the
Audit Committee is independent, as defined in Rule Section 121(A) of the
American Stock Exchange's listing standards.
- The duties of the Audit Committee include:
- monitoring the integrity of the Company's financial reporting process
and systems of internal controls regarding finance, accounting, and
legal compliance;
- 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 advisinginternal auditing department and advise
the Board;
- reviewing and approving all related-party transactions after such
transactions have been reviewed and approved by the Transactions
Committee of the Board;
- monitoring the independence and performance of the Company's independent
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 previous fiscal years;
- establishing procedures for the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
accounting controls or auditing matters and the confidential, anonymous
submission by employees of the Company of concerns regarding
questionable accounting or auditing matters;
- providing an avenue of communication among the independent auditors,
management, the internal auditing department and the Board of Directors;
- reviewing and reassessing the adequacy of its charter at least annually;
- reviewing the Company's annual audited financial statements prior to
filing or distribution;
32
- in consultation with the management, the independent auditors and the
internal auditors, considering the integrity of the Company's financial
reporting processes and controls and significant risk exposures;
- reviewing with financial management and the independent auditors the
Company's quarterly financial results prior to the release of earnings
and/or the Company's quarterly financial statements prior to filing or
distribution;
- reviewing the performance, independence and compensation of the
independent auditors and approving, appointing and/or discharging
auditors on an annual basis. Reviewing the independent auditor's plan,
discussing yearly audit results with auditors prior to release, and
considering independent auditors' judgments with respect to the quality
and appropriateness of the Company's accounting methods;
and
- reviewing the internal organizational structure and qualifications, as
needed; reviewing the annual audit scope and plan; reviewing the
appointment, annual performance reviews and replacement of internal
audit executives; reviewing summary findings and management's response;
and reviewing 29
annually, with the Company's counsel, any legal matters
that could have a significant impact on the Company's financial
statements.statements;
- annually assessing its performance of the duties specified in the
charter of the Audit Committee and reporting its findings to the Board;
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 which was previouslyis filed with the Commission as Appendix A to the Company'sthis Proxy
Statement for the 2001 annual
meeting of the Company's stockholders.Statement.
- The Audit Committee held 46 meetings in 2001 in person or by conference call.call in
2002 and took action by written consent on 1 occasion in 2002.
- The Company's Board of Directors has determined that the Company has at
least one "audit committee financial expert" serving on the Audit
Committee of the Board of Directors who is "independent" of management
within the definition of such term in the Securities Exchange Act of
1934, as amended, and the listing requirements of the American Stock
Exchange. Robert H. Masson, a member of the Board of Directors and the
Chairman of its Audit Committee, is the "audit committee financial
expert" serving on the Company's Audit Committee.
The Stock Option and Executive Compensation Committee.
- At various times during 2001, Mr. Alan Grieve,2002, Messrs. E. Pendleton James, Kenneth J.
Krushel Alan G.
Quasha, Eloy Michotte and Ralph DestinoBasil P. Regan were members of the Stock Option and Executive
Compensation Committee. Currently, Messrs. Kenneth J. Krushel (Chairman),
E. Pendleton James (Chairman), Kenneth Krushel and Basil P. ReganRobert H. Masson are members of the Stock Option
and Executive Compensation Committee.
- The duties of the Stock Option and Executive Compensation Committee
include:
-include reviewing and making recommendations for approval by the Board of
remuneration arrangements for directors and members of management.
- The Stock Option and Executive Compensation Committee did not hold any
meetingsheld 1 meeting in
20012002 in person or by conference call and took action by written consent
on 1 occasion9 occasions in 2001.2002.
33
The Nominating Committee.
- At various times during 2001,2002, Messrs. Thomas C. Shull, Ralph Destino, J. David Hakman
and Alan Grieve and Ms. June KleinE. Pendleton James were members of the Nominating Committee.
Currently, Messrs. Thomas C. Shull (Chairman), J.
David Hakman and E. Pendleton James (Chairman), Basil P. Regan and
Robert H. Masson are members of the Nominating Committee.
- The duties of the Nominating Committee include:
- evaluating and recommending candidates for election to the Board.
- The Nominating Committee held 2no meetings in 2001person or by conference
call in 2002 and took action by written consent on 1 occasion in 2001.2002.
- The Bylaws of the Company require advance notice of nominations for
election to the Board, other than those made by the Board. Unless waived
by the Board, a notice of nomination must be received by the Company at
least 75 days before initiation of solicitation to the stockholders for
election in the event of an election other than at an annual meeting of
stockholders, and at least 75 days before the date that corresponds to
the record date of the prior year's annual meeting of stockholders in
the event of an election at an annual meeting of stockholders, and in
all events must include certain required information. The Nominating
Committee will consider nominees recommended by stockholders in
accordance with the Company's Bylaws.
The Transactions Committee.
- At various times during 2001,2002, Messrs. J. David Hakman, Kenneth J. Krushel
Theodore H. Kruttschnitt and Robert F. Wright and Ms. June KleinE. Pendleton James were members of the Transactions Committee.
Currently, 30
Messrs. Kenneth J. Krushel (Chairman), J. David HakmanRobert H. Masson and E.
Pendleton James are members of the Transactions Committee.
- The duties of the Transactions Committee include:
- Providing assistance to the directors in fulfilling their responsibility
to the stockholders by recommending appropriate actions to the Board of
Directors or acting on behalf of the Board of Directors on a matter
which requires Board approval involving any of the following:
(a) A material transaction with: (1) a person who (or an entity which)
may possess control of the Company by virtue of contract, ownership
of securities or otherwise; (2) a director or stockholder owning
more than ten percent (10%) of the voting securities of the Company;
or (3) a person who is related by blood or marriage to a director or
stockholder owning more than ten percent (10%) of the voting
securities of the Company;
(b) A material transaction or series of transactions pursuant to which,
or as a result of which it is reasonably foreseeable that, a person
or entity described in subparagraph (a) above would (1) obtain
consideration which is either more favorable or materially different
than the consideration to be received by, or is at the expense of,
other holders of the same class of stock of the Company, or (2) have
interests materially different than or adverse to the interests of
the other holders of the same or any other class of stock of the
Company; or
(c) A material transaction or series of transactions that the Board of
Directors determines to refer to the Transactions Committee.
- The Transactions Committee held 22 meetings in 20011 meeting in person or by conference call.call
in 2002 and took no action by written consent in 2002.
INDEMNIFICATION OF OFFICERS AND DIRECTORS:
We indemnify our executive officers and directors to the fullest extent
permitted by applicable law against liabilities incurred as a result of their
service to the Company and directors, in particular, against liabilities
incurred as a result of their service as directors of other corporations when
serving at the request of the
34
Company. We have a directors and officers liability insurance policies,
underwritten by Excel SpecialtyGreenwich Insurance Company, Zurich American Insurance Company
and National Union Fire Insurance Company of Pittsburgh, PA, in the aggregate
amount of $30,000,000.$25,000,000. As to reimbursements by the insurer of the Company's
indemnification expenses, the policies have a $250,000 deductible for securities
claims against the Company and a $150,000 deductible for all other indemnifiable
losses. The policy terms are from June 1, 20012002 to June 1, 2002.2003.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE:
Section 16(a) of the Securities Exchange Act of 1934 requires officers,
directors and beneficial owners of more than 10% of the Company's shares to file
reports with the Securities and Exchange Commission and the American Stock
Exchange. Based solely on a review of the reports and representations furnished
to the Company during the last fiscal year by such persons, the Company believes
that each of these persons is in compliance with all applicable filing
requirements.
31
requirements except for Messrs. Kingsford, Lengers and Lipner, who each failed
to file one report in a timely fashion.
VOTE REQUIRED:
The affirmative vote of the holders of a plurality of the combined voting
power of all shares of Voting Stock voted at the Annual Meeting, whether in
person or by proxy, whether by mail, Internet or telephone, and voting together
as a single class, is required to elect directors. Each share of Common Stock
has one (1) vote and each share of Series B Preferred Stock has ten (10) votes.
The enclosed proxy allows you to vote for the election of all of the nominees
listed, to withhold authority to vote for one or more of such nominees or to
withhold authority to vote for all of such nominees.
If you do not vote for a nominee, your vote will not count either for or
against the nominee. Also, if your broker does not vote on any of the nominees,
it will have no effect on the election.
The persons named in the enclosed proxy intend to vote FOR the election of
all of the nominees. Each of the nominees currently serves as a director and has
consented to be nominated. We do not foresee that any of the nominees will be
unable or unwilling to serve, but if such a situation should arise your proxy
will vote in accordance with his or her best judgment.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION
OF THE NOMINEES FOR DIRECTOR.
3235
PROPOSAL 2
SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
INDEPENDENT PUBLIC ACCOUNTANTS:
During February 2002, the Company's Board of Directors authorized
management to proceed with Arthur Andersen LLP ("AA") as the independent public
accountants to audit the Company's financial statements for the fiscal year
ending December 28, 2002, and to retain other auditors if AA could not
efficiently and effectively prepare their opinion relating to such audit. AA
audited the Company's financial statements for the fiscal year ended December
29, 2001. However, given the uncertainty and pace of developments related to
AA's recent indictment, the Company is reviewing its options regarding the
retention of independent public accountants to audit the Company's financial
statements for the fiscal year ending December 28, 2002.
Ratification of the Company's selection of independent auditors by the
Company's stockholders is not required and no recommendation of independent
auditors is being made to stockholders at this time. Instead, we are asking you
to delegate to the Audit Committee of the Board of Directors authority to select
the Company's independent auditors for the fiscal year ending December 28, 2002, after review by the Audit Committee of the
Board of Directors,27, 2003
from amongst established national audit firms.
Representatives of AAKPMG LLP ("KPMG"), which audited the Company's financial
statements for the fiscal year ended December 28, 2002, are expected to be
present at the Annual Meeting with the opportunity to make a statement if they
desire to do so and to respond to appropriate questions. If, before the Annual
Meeting, the Board of Directors selects anotheran independent auditor other than KPMG
for the fiscal year ending December 28,
2002,27, 2003, it is expected that
representatives of such audit firm will be present at the Annual Meeting with
the opportunity to make a statement if they desire to do so and to respond to
appropriate questions.
FEES AND INDEPENDENCE:
Audit Fees. AAKPMG billed the Company an aggregate of $759,360$613,501 for
professional services rendered for the audit of the Company's financial
statements for fiscal year ended December 29, 200128, 2002 and its reviews of the
Company's financial statements included in the Company's Forms 10-Q for the 20012002
fiscal year. Arthur Andersen LLP billed the Company an aggregate of $29,800 for
professional services rendered for its reviews of the Company's financial
statements included in the Company's Form 10-Q for the first quarter of the 2002
fiscal year.
Financial Information Systems Design and Implementation Fees. During the
fiscal year ended December 29, 2001, AA28, 2002, KPMG provided no services and therefore
billed no fees to the Company in connection with financial information systems
design and implementation.
All Other Fees. During the fiscal year ended December 29, 2001, AA28, 2002, KPMG
billed the Company an aggregate of $743,392$151,955 for services renderedother than services
specified in connection with
tax assistance, advisory services and internal audit support and development
consulting.the preceding paragraphs.
The Audit Committee of the Board of Directors has considered whether the
provision of services by AAKPMG described in the preceding two paragraphs are
compatible with maintaining AA'sKPMG's independence as the Company's principal
accountant.
33CHANGES IN INDEPENDENT PUBLIC ACCOUNTANTS:
The Company's Board of Directors, upon recommendation of its Audit
Committee, ended the engagement of Arthur Andersen LLP ("Arthur Andersen") as
the Company's independent public accountants, effective on the filing on May 14,
2002 of the Company's Form 10-Q for the fiscal quarter ended March 30, 2002, and
authorized the engagement of KPMG to 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.
During the Company's fiscal years ended December 30, 2000 and December 29,
2001, and the subsequent interim period through May 14, 2002, there were no
disagreements between the Company and Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to Arthur Andersen's
satisfaction, would
36
have caused Arthur Andersen to make reference to the subject matter of the
disagreement in connection with its reports.
The audit reports of Arthur Andersen on the consolidated financial
statements of the Company and subsidiaries as of and for the fiscal years ended
December 30, 2000 and December 29, 2001 did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles.
The Company has provided Arthur Andersen with a copy of the foregoing
disclosures.
None of the reportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred within the Company's fiscal years ended December 30,
2000 and December 29, 2001 and the subsequent interim period through May 14,
2002.
During the Company's fiscal years ended December 29, 2001, and the
subsequent interim period through May 14, 2002, the Company did not consult with
KPMG regarding any of the matters or events set forth in Item 304(a)(2)(i) and
(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
VOTE REQUIRED:
The affirmative vote of the holders of the majority of the combined voting
power of the Voting Stock voted at the Annual Meeting, whether in person or by
proxy, and whether by mail, Internet or telephone, is required to delegate
authority with respect to the selection of auditors. Each share of Common Stock
has one (1) vote and each share of Series B Preferred Stock has ten (10) votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" DELEGATION TO THE AUDIT
COMMITTEE OF THE BOARD OF DIRECTORS OF AUTHORITY TO SELECT THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 28, 2002, AFTER REVIEW BY THE
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS,27, 2003,
FROM AMONGST ESTABLISHED NATIONAL AUDIT FIRMS.
34
PROPOSAL 3
RATIFICATION OF THE 2002 STOCK OPTION PLAN FOR DIRECTORS
GENERALLY:
We are asking you to ratify the Compensation Committee's adoption of the
2002 Stock Option Plan for Directors (the "Plan"). The purpose of the Plan is to
advance the interests of the Company, through the grant of options to purchase
shares of Common Stock, by providing non-employee directors of the Company
(other than directors who are non-resident United States aliens), with a larger
personal and financial interest in the success of the Company. The following is
a brief summary of the Plan. The complete text of the Plan is attached hereto as
Appendix A.
GENERAL INFORMATION:
Persons Eligible To Participate. Each director of the Company who is
neither an employee of the Company nor a United States non-resident alien (an
"Eligible Director").
Effective Date and Duration of Plan. The Plan became effective on the date
of its adoption by the Compensation Committee, subject to the ratification of
the Plan by the affirmative vote or consent of holders of a majority of the
issued and outstanding shares of Common Stock, and will terminate 10 years from
the date of its adoption or such earlier date as the Board may determine.
Administration of Plan. The Plan is administered by a committee (the
"Committee") consisting of at least two members of the Board. The Committee
shall have full power and authority to interpret the Plan, to establish such
rules and regulations as it deems appropriate for the administration of the
Plan, and to take such other action as it deems necessary or desirable for the
administration of the Plan.
Status of Options. Options granted under the Plan are nonqualified options
not qualifying as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended.
Shares Subject to Options Granted Under Plan. The maximum number of shares
of Common Stock that may be delivered or purchased under the Plan is 500,000,
subject to adjustment to preserve the value of an option grant in the event of
any change in the outstanding Common Stock by reason of any stock dividend,
stock split, combination of shares, recapitalization or other similar change in
the capital stock of the Company, or in the event of the merger or consolidation
of the Company with or into any other corporation or the reorganization of the
Company.
The shares of Common Stock to be issued in connection with the exercise of
stock options granted under the Plan may be authorized but unissued shares of
Common Stock that are not reserved for any other purpose or previously issued
shares acquired by the Company and held in its treasury. If, as a result of the
termination or expiration of an option granted under the Plan, certain shares
are no longer subject to an option granted under the Plan, such shares will
again be available for future option grants under the Plan.
Amendment of Plan. The Plan may be amended by the Board or a duly
authorized committee thereof as the Board or such committee deems advisable.
However, no Plan amendment will become effective unless approved by affirmative
vote of the Company's stockholders if such approval is necessary or desirable
for the continued validity of the Plan or if the failure to obtain such approval
would adversely affect the compliance of the Plan with Rule 16b-3 or any
successor rule under the Securities Exchange Act of 1934 or any other rule or
regulation. No Plan amendment may impair the rights of any Plan participant
under any option previously
35
granted under the Plan without a participant's consent. The Board or a duly
authorized committee thereof has the power, in the event of any disposition of
substantially all of the assets of the Company, its dissolution, any merger or
consolidation of the Company with or into any other corporation, or the merger
or consolidation of any other corporation into the Company, to amend all
outstanding options granted under the Plan so as to terminate them upon such
effectiveness. If the Board or such committee exercises such power, all options
then outstanding shall be deemed to terminate upon such effectiveness.
Interested Persons. E. Pendleton James, J. David Hakman, Kenneth J.
Krushel and Basil P. Regan all have an interest in the approval of the Plan by
the Company's stockholders by virtue, as described below, of their entitlement
to option grants under the Plan as of the date of their appointment to the
Company's Board and on August 2, 2002, August 1, 2003 and August 3, 2004,
provided that each such person continues to serve as a director of the Company
on each such date.
AWARDS AVAILABLE UNDER PLAN:
Pursuant to the Plan, each Eligible Director is granted an option to
purchase 50,000 shares of Common Stock as of the effective date of his or her
initial appointment or election to the Board (or, if later, the effective date
of the Plan) (the "Initial Appointment Date"). In addition, on each of August 2,
2002, August 1, 2003 and August 3, 2004, provided that each such date occurs
after the Initial Appointment Date, each Eligible Director whose Initial
Appointment Date preceded such date will be granted an option to purchase an
additional 25,000 shares of Common Stock provided that he or she is a director
of the Company on such date. In the event of any change in the outstanding
Common Stock by reason of any merger, share exchange, reorganization,
consolidation, recapitalization, stock dividend, stock split, combination of
shares, split-up, spin-off, or other similar transaction or event, the Committee
may, to the extent it deems appropriate, make substitutions or adjustments in
the aggregate number and kind of shares of Common Stock reserved for issuance
under the Plan, in the number, kind and price of shares of Common Stock subject
to outstanding options and in the option limits under the Plan (or make
provision for cash payments to the holders of options granted under the Plan).
All options granted under the Plan will be evidenced by option agreements.
Each option shall be granted for a term of 10 years. Each option will be
exercisable in accordance with the terms and conditions set forth in the option
agreements evidencing the grant of such options. However, each option granted
under the Plan will become exercisable at a rate of no less than 33 1/3% per
year from its date of grant, with the exception that all options granted under
the Plan will become immediately and fully exercisable upon the occurrence of a
"Change of Control" (as defined in the Hanover Direct, Inc. Key Executive
Twenty-Four Month Compensation Continuation Plan). Options granted under the
Plan may not be exercised more than 3 months after a participant ceases to be a
director of the Company, except in the case of the participant's death or
disability, in which case options may be exercised within 12 months after the
date of such death or disability.
The price at which shares of Common Stock may be purchased upon the
exercise of an option granted under the Plan is the fair market value of such
shares on the date of grant of such option. For purposes of the Plan, the fair
market value of a share of Common Stock is deemed to be the average of the
closing price of the Common Stock on the date of grant, the ten trading days
immediately preceding such date, and the ten trading days immediately following
such date.
Full payment of the purchase price for shares of Common Stock purchased
upon the exercise, in whole or part, of an option granted under the Plan must be
made at the time of such exercise. The Plan provides that the option exercise
price may be paid in cash or in shares of Common Stock valued at their fair
market value
36
on the date of exercise. Alternatively, an option granted under the Plan may be
exercised in whole or in part by delivering a properly executed exercise notice
together with irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds necessary to pay the option exercise
price, and such other documents as the Committee may determine.
During a participant's lifetime, options granted under the Plan may be
exercised only by such participant and may not be transferred, other than by
will or by the laws of descent and distribution, except that a participant may
transfer any option granted under the Plan to his or her spouse, children,
grandchildren, parents, and/or siblings or to one or more trusts for the benefit
of such family members, provided that the participant does not receive any
consideration for the transfer. Any option so transferred will be subject to the
same terms and conditions that applied to such option immediately prior to its
transfer, except that it will not be further transferable by the transferee
during such transferee's lifetime.
FEDERAL INCOME TAX CONSEQUENCES:
For the federal income tax purposes, the grant of an option granted under
the Plan will have no immediate tax consequences to the participant. The
exercise of the option by the participant will result in taxable income to the
participant, as compensation, in an amount equal to the amount by which the fair
market value of the acquired shares on the exercise date exceeds the option
price. Upon a subsequent sale or taxable exchange of such shares, such
participant will recognize long or short-term capital gain or loss equal to the
difference between the amount realized on the sale and the tax basis of such
shares.
The Company will be entitled to a deduction in the amount of any
compensation income that a participant recognizes in connection with an option.
37
NEW PLAN BENEFITS:
The following table summarizes the option grants that may be awarded under
the 2002 Stock Option Plan for Directors during the term thereof, assuming the
2002 Stock Option Plan for Directors is ratified by the Company's stockholders.
2002 STOCK OPTION PLAN FOR DIRECTORS
NUMBER OF SHARES
NAME AND POSITION DOLLAR VALUE ($) SUBJECT TO OPTIONS
- ----------------- ---------------- ------------------
Thomas C. Shull(1).................................. 0 None
Brian C. Harriss(1)................................. 0 None
Michael D. Contino(1)............................... 0 None
Charles F. Messina(1)............................... 0 None
William C. Kingsford(1)............................. 0 None
Executive Group(1).................................. 0 None
Non-Executive Director Group........................ Unknown(2) Up to 500,000
in the aggregate
Non-Executive Officer Employee Group(1)............. 0 None
- ---------------
(1) Pursuant to the terms of the 2002 Stock Option Plan for Directors, only
those directors of the Company who are neither an employee of the Company
nor a United States non-resident alien are eligible to participate.
(2) The price at which shares of Common Stock may be purchased upon the exercise
of an option granted under the Plan will be the fair market value of such
shares on the date of grant of such option. For purposes of determining the
price under the plan, the fair market value of a share of Common Stock shall
be deemed to be the average of the closing price of the Common Stock on the
date of grant, the ten trading days immediately preceding such date, and the
ten trading days immediately following such date.
VOTE REQUIRED:
The affirmative vote of the holders of the majority of the combined voting
power of the Voting Stock voted at the Annual Meeting, whether in person or by
proxy, whether by mail, Internet or telephone, is required to ratify the 2002
Stock Option Plan for Directors. Each share of Common Stock has one (1) vote and
each share of Series B Preferred Stock has ten (10) votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE RATIFICATION
OF THE 2002 STOCK OPTION PLAN FOR DIRECTORS.
38
STOCKHOLDER PROPOSALS FOR THE 20032004 ANNUAL MEETING
If you wish to submit proposals to be presented at the 20032004 Annual Meeting
of Stockholders of the Company, they must be received by the Company no later
than January 4,December 7, 2003 for them to be included in the Company's proxy material
for that meeting.
DISCRETIONARY AUTHORITY
If the Company did not receive notice of any matter that is to come before
the stockholders at the 20022003 Annual Meeting of Stockholders on or before
March
20, 2002,February 21, 2003, which corresponds to forty-five (45) days before the date on
which the Company first mailed this proxy statement, the proxy for the 20022003
Annual Meeting of Stockholders may, pursuant to Rule 14a-4(c) of the Proxy Rules
under the Securities Exchange Act of 1934, as amended, confer discretionary
authority to vote on the matters presented.
OTHER MATTERS
The Board of Directors does not know of any other matters to be presented
at the Annual Meeting. If any additional matters are properly presented to the
Annual Meeting for action, the persons named in the enclosed proxy and acting
thereunder will have discretion to vote on such matters in accordance with their
own judgment.
YOU MAY OBTAIN A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 29, 200128, 2002, FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION WITHOUT CHARGE (EXCEPT FOR EXHIBITS TO SUCH ANNUAL REPORT, WHICH WILL
BE FURNISHED UPON PAYMENT OF THE COMPANY'S REASONABLE EXPENSES IN FURNISHING
SUCH EXHIBITS) BY WRITING TO: INVESTOR RELATIONS, HANOVER DIRECT, INC., 115
RIVER ROAD, EDGEWATER, NEW JERSEY 07020.07020, OR FROM THE COMPANY'S WEB SITE AT
WWW.HANOVERDIRECT.COM.
By Order of the Board of Directors
Charles F. MessinaLOGO
Brian C. Harriss
Secretary
Dated: April 12, 20027, 2003
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND
RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE OR
VOTE BY THE INTERNET OR BY TELEPHONE.
PLEASE VOTE -- YOUR VOTE IS IMPORTANT
3938
APPENDIX A
HANOVER DIRECT, INC.
2002 STOCK OPTION PLAN FORCHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
1. PURPOSE. The purposeORGANIZATION:
There shall be a committee of the Hanover Direct, Inc. 2002 Stock Option
Plan forBoard of Directors (the "Plan") is to advancebe known as the
interests of Hanover Direct,
Inc. (the "Company") by providing non-employee directors of the Company, through
the grant of options to purchase shares of Common Stock (as hereinafter
defined), with a larger personal and financial interest in the Company's
success.
2. ADMINISTRATION.Audit Committee. The PlanAudit Committee shall be administered by a committee (the
"Committee") consistingconsist of at least twothree (3) members
of the Board of Directors and shall have a Chairman, who shall be elected by a
majority of the members of the Board of Directors. The members of the Audit
Committee shall be appointed by the Board of Directors. The members of the Audit
Committee may be removed for cause by a majority of the Board of Directors.
The members of the Audit Committee shall meet the independence, financial
sophistication and literacy, experience and other requirements of the American
Stock Exchange, the Securities and Exchange Commission and any other applicable
requirements. The Chairman of the Audit Committee shall meet the requirements of
the American Stock Exchange, the Securities and Exchange Commission and any
other applicable requirements.
The Audit Committee may form and delegate authority to subcommittees, when
appropriate.
STATEMENT OF POLICY:
The Audit Committee shall provide assistance to the Company's directors in
fulfilling their responsibility to shareholders and the investment community
relating to (1) the corporate accounting and reporting practices of the Company,
(the "Board"). The Committee shall have full power(2) the quality and authority to
interpret the Plan, to establish such rules and regulations as it deems
appropriate for the administrationintegrity of the Plan, and to take such other action as
it deems necessary or desirable for the administration of the Plan. The
Committee's interpretation and construction of any provision of the Plan or the
terms of any Option (as hereinafter defined) shall be conclusive and binding on
all parties.
3. PARTICIPANTS. Each directorfinancial reports of the Company, who(3) the
independent auditor's qualifications, independence and performance, (4) the
performance of the Company's internal audit function and (5) the compliance by
the Company with legal and regulatory requirements. In so doing, it is neitherthe
responsibility of the Audit Committee to maintain free and open means of
communication among the directors, the independent auditor, the internal
auditors, and the financial management of the Company. Notwithstanding the
foregoing, the independent auditor of the Company shall be ultimately
accountable and shall report directly to the Audit Committee.
MEETINGS:
The Audit Committee shall meet at least four times a year on a quarterly
basis, or more frequently as circumstances require. The Chairman of the Audit
Committee will preside at each meeting of the Audit Committee and, in
consultation with the other members of the Audit Committee, shall set the
frequency and length of each meeting. The Chairman of the Audit committee shall
set the agenda of items to be addressed at each upcoming meeting after
consultation with the chief financial officer, the head of internal audit, the
independent auditor and the Company's inside and outside counsel. The Chairman
of the Audit Committee shall ensure that the agenda for each upcoming meeting of
the Audit Committee is circulated to each member of the Audit Committee.
RESPONSIBILITIES AND RESOURCES:
As the independent auditor is ultimately accountable to the Audit
Committee, the Audit Committee shall be directly responsible for the
appointment, compensation and oversight of the work of the independent auditor
employed by the Company for the purpose of preparing or issuing an audit report
or related work on
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behalf of the Company. The Audit Committee must meet privately with the
independent auditor from time to time. The Audit Committee shall consult with
management but shall not delegate these responsibilities.
The Audit Committee has the authority to conduct any investigation
appropriate to fulfilling its responsibilities.
The Audit Committee may request any officer or employee of the Company nor an Ineligible Director (as hereinafter defined) (a
"Non-Employee Director")or
the Company's outside counsel or independent auditor to attend a meeting of the
Audit Committee, or to meet with any members of, or consultants to, the Audit
Committee. The Audit Committee may also meet with the Company's investment
bankers or financial analysts who follow the Company.
The Audit Committee has the authority to retain, at the Company's expense,
independent legal counsel and other advisors as it determines necessary to carry
out its duties.
The Audit Committee shall be eligibledetermine the extent of funding necessary for
payment of compensation to be granted Options(a) the independent auditor for the purpose of
rendering or issuing the annual audit report and (b) to purchase
shares of Common Stock ("Options")any independent legal
counsel or other advisors retained under the Plan. An "Ineligible Director"
means any directorpreceding paragraph to advise 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 who is a nonresident alien.
Nothing contained inthat 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 rightcorporate accounting and reporting practices 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,are
in the aggregate, of not more than 500,000 shares of common
stock, par value $0.66 2/3 per share,accordance with all requirements and are of the Company ("Common Stock") (subjecthighest 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 adjustment pursuant to Section 13). Such shares of Common Stock may be set
aside outinsure and monitor the independence and performance of the
authorized but unissued sharesCompany's external auditor and internal auditing department and advise the Board
of Common Stock not reserved for
any other purpose or out of previously issued shares acquiredDirectors.
3. Review and approve all related-party transactions after such
transactions have been reviewed and approved by the Company and
held in its treasury. Any shares of Common Stock which, by reason of the
termination or expiration of an Option or otherwise, are no longer subject to
purchase pursuant to an Option granted under the Plan, may again be subjected to
an Option under the Plan.
5. OPTION GRANTS. Options shall be evidenced by Option agreements which
shall be subject to the terms and conditions set forth in the Plan and such
other terms and conditions not inconsistent herewith as theTransactions Committee may
approve.
(a) INITIAL APPOINTMENT AWARDS. As of the effective date of his or
her initial appointment or election to the Board (or, if later, the
effective date of the Plan) (the "Initial Appointment Date"), a
Non-Employee Director shall receive a grant of an Option to purchase 50,000
shares of Common Stock (subject to adjustment pursuant to Section 13).
(b) ANNUAL SERVICE AWARDS. On each Award Date (as hereinafter
defined) occurring after a Non-Employee Director's Initial Appointment
Date, such Non-Employee Director shall be granted, provided he or she
continues to serve as a member of
the Board on such date, an Option to
purchase 25,000 shares of Common Stock (subject to serve as a memberDirectors.
INDEPENDENT AUDITOR:
4. Be directly responsible for the appointment, compensation and oversight
of the Board on such date, an Option to purchase 25,000 shares of Common Stock
(subject to adjustment pursuant to Section 13). An "Award Date" means
August 2, 2002, August 1, 2003 and August 3, 2004.
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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 averagework of the closing pricesindependent auditor (including resolution of the
Common Stock on the Award Date, the 10 trading days immediately preceding the
Award Date,disagreements
between management and the 10 trading days immediately followingindependent auditor regarding financial reporting)
for the Award Date.
7. TERM AND EXERCISABILITY OF OPTIONS. Options shallpurpose 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 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 Committeeindependent
auditor 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,(b) all permitted non-audit services 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 otherwisebe provided by the
Committeeindependent auditor, 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 ceasesconnection therewith to be a directorapprove all fees and other
terms of the Company. If a
participant ceasesengagement. The authority to be a director of the Company by reason of death or
disability, any Options held by him or hergrant pre-approvals may be exercised within 12 months
after the date he or she ceases to be a director of the Company. In no event may
an Option be exercised after the expiration of the term of such Option.
9. PAYMENT. Full payment of the purchase price for shares of Common Stock
purchased upon the exercise, in whole or in part, of an Option granted under the
Plan shall be made at the time of such exercise. The Option Price may be paid in
cash or in shares of Common Stock valued at their fair market value on the date
of exercise. Alternatively, an Option may be exercised in whole or in part by
delivering a properly executed exercise notice together with irrevocable
instructions to a broker to deliver promptly to the Company the amount of sale
or loan proceeds necessary to pay the Option Price, and such other documents as
the Committee may determine.
No shares of Common Stock shall be issued or transferred to a participant
until full payment therefor has been made, and a participant shall have none of
the rights of a stockholder until shares are issued or transferred to him or
her.
10. NONTRANSFERABILITY. Options granted under the Plan shall not be
transferable other than by will ordelegated by
the laws of descent and distribution, and,
during a participant's lifetime, shall be exercisable only by him or her.
Notwithstanding the foregoing, a participant may transfer any Option granted
under the Plan to the participant's spouse, children, grandchildren, parents,
and/or siblings orAudit Committee to one or more trusts forof its members. However, any decision made by
these members must be presented to the benefit of such family members,
if the agreement evidencing such Option so providesfull Audit Committee at Audit Committee
meetings.
6. Review and the participant does not
receive any consideration for the transfer. Any Option so transferred shall
continueapprove disclosures required regarding non-audit services to
be subject to the same termsincluded in Securities and conditions that applied to such
Option immediately prior to its transfer (except that such transferred Option
shall not be further transferable by the transferee during the transferee's
lifetime).
11. ISSUANCE OF SHARES. If a participant so requests, shares purchased
upon the exercise of an Option may be issued or transferred in the name of the
participant and another person jointly with the right of survivorship.
12. STATUS OF OPTIONS. Options granted under the Plan are nonqualified
options not qualifying as incentive stock optionsExchange Commission periodic reports filed under
Section 42213(a) of the
Internal Revenue Code of 1986, as amended.
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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.
7. Review the performance of the independent auditor annually.
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8. Ensure that the independent auditor submits to the Audit Committee on
an annual basis a written statement consistent with Independent Standards Board
Standard No. 1, discuss with the independent auditor any disclosed relationships
or services that may impact the objectivity and independence of the 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.
WITH RESPECT TO THE ANNUAL FINANCIAL STATEMENTS:
18. Review and discuss with management, the internal audit department and
the independent auditor the Company's annual audited financial statements prior
to submission to stockholders, any governmental body, any stock exchange or the
public.
19. Discuss with the independent auditor the matters required to be
discussed by AICPA Statement on Auditing Standards No. 61, as amended, relating
to the conduct of the audit.
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20. Prepare the report to shareholders required by the Securities and
Exchange Commission to be included in the Company's annual proxy statement and
any other rulereports of the Audit Committee required by applicable securities laws
or regulation. No
amendment may, withoutstock exchange listing requirements or rules.
21. Review with management and the consentindependent auditor the certification
by the Chief Executive Officer and the Chief Financial Officer 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 haveCompany's
annual financial statements and the power,management's discussion and analysis section
in the event ofCompany'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 disposition of substantially allgovernmental 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 assetsCompany'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.
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.
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32. Review the appointment, annual performance reviews, and replacement of
the senior internal audit executive.
33. In consultation with the independent auditor and the internal audit
department, review the adequacy of the Company's 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 dissolution,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.
42. Review and approve (a) any mergerchange or consolidationwaiver in the Company's Corporate
Code of Conduct for principal executives and senior financial officers and (b)
any disclosures made on Form 8-K regarding such change or waiver.
OTHER AUDIT COMMITTEE RESPONSIBILITIES:
43. Maintain minutes of meetings and regularly report to the Board of
Directors on the Committee's activities after each Audit Committee meeting.
44. Review and reassess the adequacy of this Charter at least annually and
recommend any proposed changes to the Board of Directors for approval. Submit
the Charter to the Board of Directors for approval, and have the document
published, at least every three years, in the Company's proxy statement in
accordance with regulations of the Securities and Exchange Commission.
45. Annually assess its performance of the duties specified in this
Charter and report its findings to the Board of Directors.
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46. Perform any other activities consistent with this Charter, the
Company's by-laws and governing law, as the Audit Committee or the Board of
Directors deems necessary or appropriate.
* * *
While the Audit Committee has the responsibilities and powers set forth in
this Charter, the role of the Audit Committee is oversight. The members of the
Audit Committee are not full-time employees of the Company and 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 or intogenerally 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, other corporation,between management and the independent auditor 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,regulations 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 caseCompany's Corporate Code
of the exercise of an Option by a person or estate acquiring
the right to exercise the Option by bequest or inheritance, the Committee may
require reasonable evidence as to the ownership of the Option and may require
consents and releases of taxing authorities that it may deem advisable.
A-3Conduct.
A-6
APPENDIX B
HANOVER DIRECT, INC.
PROXY FOR COMMON STOCKHOLDERS FOR
THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON THURSDAY, MAY 16, 200215, 2003
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned common stockholder of Hanover Direct, Inc. (the "Company")
hereby appoints each of WilliamEdward M. Lambert and Brian C. Kingsford and Charles F. Messina,Harriss, attorneys and
proxies, each with full power of substitution, to represent the undersigned and
vote all shares of the common stock of the Company which the undersigned is
entitled to vote, with all powers the undersigned would possess if personally
present, at the Annual Meeting of Stockholders of the Company to be held at the
Sheraton Suites on the Hudson, 500 Harbor Boulevard, Weehawken, New Jersey 07087
on Thursday, May 16, 200215, 2003 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 ELECTION OF ALL
NOMINEES AS DIRECTORS OF THE COMPANY, "FOR" THE DELEGATION TO THE AUDIT
COMMITTEE OF THE BOARD OF DIRECTORS OF AUTHORITY TO SELECT THE COMPANY'S INDEPENDENT AUDITORS FOR THE
FISCAL YEAR ENDING DECEMBER 28, 2002 AFTER REVIEW BY THE AUDIT COMMITTEE OF THE
BOARD OF DIRECTORS, FROM AMONGST ESTABLISHED NATIONAL AUDIT FIRMS, "FOR" THE
RATIFICATION OF THE 2002 STOCK OPTION PLAN FOR DIRECTORSCOMPANY AND IN THE DISCRETION OF THE PROXIES WITH RESPECT TO ALL OTHER MATTERS
WHICH MAY PROPERLY COME BEFORE THE ANNUAL MEETING AND ANY ADJOURNMENTS THEREOF.
THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF THE ACCOMPANYING NOTICE OF ANNUAL
MEETING AND PROXY STATEMENT.
IMPORTANT: SIGNATURE AND DATE REQUIRED ON REVERSE SIDE
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APLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR
VOTE IN BLUE OR BLACK INK AS SHOWN HERE [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)ALL NOMINEES
[ ] WITHHOLD AUTHORITY to vote for all nominees listed at rightFOR ALL NOMINEES
[ ] FOR ALL EXCEPT (See instructions below)
NOMINEES: J. David Hakman,o Thomas C. Shull
o E. Pendleton James
o Kenneth J. Krushel
Thomas C. Shull,o Robert H. Masson
o Basil P. Regan
and E. Pendleton James
(INSTRUCTION:INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's namenominee(s), mark
"FOR ALL EXCEPT" and fill in the space provided below.)circle next to each nominee you wish to
withhold, as shown here: -
2. DELEGATE TO THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS AUTHORITY TO
SELECT THE COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING
DECEMBER 28, 2002, AFTER
REVIEW BY THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS,27, 2003 FROM AMONGST ESTABLISHED NATIONAL AUDIT FIRMS.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. RATIFICATION OF THE 2002 STOCK OPTION PLAN FOR DIRECTORS.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. IN THEIR DISCRETION, THE ABOVE NAMED PROXIES ARE AUTHORIZED TO VOTE IN
ACCORDANCE WITH THEIR OWN JUDGMENT ON SUCH OTHER BUSINESS AS MAY PROPERLY
COME BEFORE THE MEETING.
The undersigned herebyherby acknowledges receipt of a copy of the accompanying Notice
of Annual Meeting of Stockholders and Proxy Statement and hereby revokes any
Proxy or Proxies heretofore given. You may strike out the persons named as
proxies and designate a person of your choice, and may send this Proxy directly
to such person.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY FORM PROMPTLY USING THE ENCLOSED
ENVELOPE.To change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that changes
to the registered name(s) on the account may not be submitted via this
method. [ ]
--------------------------------------
Signature of Common Stockholder(s)Shareholder
Date: ----------
--------------------------------------
NameSignature of Common Stockholder(s)
Dated:
----------------, 2002Shareholder
Date: ----------
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NOTE: Please complete, date and sign exactly as your name appears hereon.or names appear on this Proxy. When
signing as attorney, administrator, executor, guardian, trustee or corporate
official, please add your title. If
shares are held jointly, each holder should sign. When signing as executor,
administrator, attorney, trustee or guardian, please give full title as such. If
the signer is a corporation, please sign full corporate name by duly authorized
officer, giving full title as such. If signer is a partnership, please sign in
partnership name by authorized person.
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