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- --------------------------------------------------------------------------------UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission Only
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[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HANOVER DIRECT, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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 15, 2003AUGUST 12, 2004
Dear Stockholders:
We will hold the 20032004 Annual Meeting of Stockholders of Hanover Direct,
Inc., a Delaware corporation (the "Company"), at the Sheraton Suites on the
Hudson, 500 Harbor Boulevard, Weehawken,Meadowlands Hotel
and Conference Center, 2 Meadowlands Plaza, East Rutherford, New Jersey 0708707073 on
Thursday, May 15,
2003August 12, 2004 at 9:30 a.m., local time. The meeting's purpose is to:
1. Elect 58 directors;
2. Approve an amendment to the Company's Certificate of Incorporation to
effect a one-for-ten reverse stock split of the Company's Common Stock,
par value $0.66 2/3 per share (the "Common Stock");
3. Approve an amendment to the Company's Certificate of Incorporation to
reduce the par value of each share of Common Stock from $0.66 2/3 per
share to $0.01 per share and reclassify the outstanding shares of Common
Stock into such lower par value shares;
4. Approve an amendment to the Company's Certificate of Incorporation to
increase the number of shares of Additional Preferred Stock (the
"Additional Preferred Stock") which the Company would have authority to
issue from 5,000,000 shares to 15,000,000 shares and make a
corresponding change to the aggregate number of shares of all classes of
stock in the aggregate which the Company would have authority to issue;
5. Ratify and approve the adoption of the 2004 Stock Option Plan for
Directors;
6. Ratify and approve certain amendments to the 2002 Stock Option Plan for
Directors as described in the accompanying Proxy Statement;
7. Delegate to the Audit Committee of the Board of Directors authority to
select the Company's independent auditors for the fiscal year ending
December 27, 200325, 2004 from amongst established national audit firms;
8. Ratify and 3.approve the adoption of the Company's Stock Option Agreement
with Wayne P. Garten, President and Chief Executive Officer of the
Company;
9. Approve an amendment to the Company's Certificate of Incorporation,
after giving effect to the one-for-ten reverse split of the Company's
Common Stock, to increase the number of shares of Common Stock which the
Company would have authority to issue from 30,000,000 shares to
50,000,000 shares and make a corresponding change to the aggregate
number of shares of all classes of stock in the aggregate which the
Company would have authority to issue;
10. Approve (i) the issuance and potential issuance of a Common Stock
Purchase Warrant by the Company to Chelsey Finance, LLC, and (ii) the
issuance and potential issuance under the Common Stock Purchase Warrant
of 30% of the Company's issued and outstanding Common Stock on a fully
diluted basis; and
11. 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 holderstockholder
of the Company's Common Stock par value $0.66 2/3 per share (the "Common Stock"),
or the Company's Series BC Participating Preferred
Stock par value $0.01 per
share (the "Series B Preferred Stock" and, together with the Common Stock, the
"Voting Stock"), at the close of business on Wednesday, April 2, 2003.
Along with the attached Proxy Statement, we are also enclosing aFriday, July 9, 2004.
A copy of the Company's 2003 Annual Report to Stockholders, which includes
our financial statements.statements, was previously mailed to you.
All stockholders of record of Voting Stockvoting 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.proxy card. Your proxy is being
solicited by the Board of Directors.
In accordance with Delaware corporate law, the Company will make available
for examination by any stockholder entitled to vote at the Annual Meeting, for
any purpose germane to the Annual Meeting, during ordinary business hours, for
at least 10 days prior to the Annual Meeting, at the offices of Hanover Direct,
Inc., 115 River Road, Building 10, Edgewater, New Jersey 07020, a complete list
of the stockholders entitled to vote at the Annual Meeting, arranged in
alphabetical order.
PLEASE VOTE -- YOUR VOTE IS IMPORTANT
LOGO
Brian C. Harriss-s- Charles E. Blue
Charles E. Blue
Secretary
April 7, 2003July 13, 2004
HANOVER DIRECT, INC.
115 RIVER ROAD, BUILDING 10
EDGEWATER, NEW JERSEY 07020
(201) 863-7300
PROXY STATEMENT FOR THE 20032004 ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON MAY 15, 2003AUGUST 12, 2004
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
ANNUAL MEETING: May 15, 2003August 12, 2004 Sheraton Suites on the HudsonMeadowlands Hotel and Conference
Center
9:30 a.m., local time 500 Harbor Boulevard
Weehawken,2 Meadowlands Plaza
East Rutherford, New Jersey 0708707073
RECORD DATE: Close of business on Wednesday, April 2, 2003.Friday, July 9, 2004.
If you were a holder at
RECORD DATE: that timestockholder as of the record date of the Company's
SHARES ENTITLED TO VOTE: Common Stock, par value $0.66 2/3 per share (the "Common Stock"), or
the Company's Series BC Participating Preferred Stock, par value
$0.01 per share (the "Series C Preferred Stock" and, together with
the Common Stock, the "Voting Stock"), you may vote at the Annual
Meeting. Each share of Common Stock is entitled to one (1) vote.
Each share of Series BC Preferred Stock is entitled to ten (10)one hundred
(100) votes. AllOn the record date, the Company had 224,518,395 shares
of Common Stock outstanding (excluding treasury shares) and all564,819
shares of Series B Preferred Stock will vote together on all issues at the
meeting. On the record date, we had 138,315,800 shares of our Common Stock
outstanding and 1,622,111 shares of Series BC Preferred Stock outstanding. As of the record
date, Richemont Finance S.A.,Chelsey Direct, LLC, a LuxembourgDelaware limited liability company
("Richemont"Chelsey"), beneficially owned 29,446,888115,810,383 shares of Common Stock
(approximately 21.3%51.6% of the outstanding Common Stock) and 1,622,111564,819
shares of Series BC Preferred Stock, collectively representing
approximately 29.6%61.3% of the combined voting power of the Voting
Stock. As of the record date, Regan Partners, L.P. ("Regan
Partners"), Regan International Fund Limited and Basil P. Regan
beneficially owned 38,795,01738,728,350 shares of Common Stock (approximately
28.0%17.2% of the outstanding Common Stock).
MAILING DATE: On or about Monday, April 7, 2003.July 13, 2004.
AGENDA: 1. Elect 5 directors.8 directors;
2. Approve an amendment to the Company's Certificate of
Incorporation to effect a one-for-ten reverse stock split of the
Company's Common Stock;
3. Approve an amendment to the Company's Certificate of
Incorporation to reduce the par value of each share of Common Stock
from $0.66 2/3 per share to $0.01 per share and reclassify the
outstanding shares of Common Stock into such lower par value
shares;
4. Approve an amendment to the Company's Certificate of
Incorporation to increase the number of shares of Additional
Preferred Stock which the Company would have authority to issue
from 5,000,000 shares to 15,000,000 shares and make a
corresponding change to the aggregate number of shares of all
classes of stock in the aggregate which the Company would have
authority to issue;
5. Ratify and approve the adoption of the 2004 Stock Option Plan
for Directors;
6. Ratify and approve certain amendments to the 2002 Stock Option
Plan for Directors described in this Proxy Statement;
7. Delegate to the Audit Committee of the Board of Directors
authority to select the Company's independent auditors for the
fiscal year ending December 27, 200325, 2004 from amongst established
national audit firms.
3.firms;
8. Ratify and approve the adoption of the Company's Stock Option
Agreement with Wayne P. Garten, President and Chief Executive
Officer of the Company;
9. Approve an amendment to the Company's Certificate of
Incorporation, after giving effect to the one-for-ten reverse split
of the Company's Common Stock, to increase the number of shares
of Common Stock which the Company would have authority to issue
from 30,000,000 shares to 50,000,000 shares and make a
corresponding change to the aggregate number of shares of all
classes of stock in the aggregate which the Company would have
authority to issue;
10. Approve (i) the issuance and potential issuance of a Common
Stock Purchase Warrant by the Company to Chelsey Finance, LLC, and
(ii) the issuance and potential issuance under the Common Stock
Purchase Warrant of 30% of the Company's issued and outstanding
Common Stock on a fully diluted basis; and
11. Any other proper business.
VOTE REQUIRED: Proposal 1: The affirmative vote of the holders of a Elect 5 directors plurality of the combined
PROPOSAL 1: voting power of all shares of Voting Stock voted at the Annual
ELECT 8 DIRECTORS Meeting, whether in person or by proxy, whether by mail, Internet or
telephone, and voting together as a single class, is required to
elect directors. 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:Each share of
Common Stock has one (1) vote and each share of Series C Preferred
Stock has one hundred (100) votes.
2
The affirmative vote of the holders of (a) a majority of the
SelectionPROPOSAL 2: APPROVE AN outstanding shares of AuditorsCommon Stock, voting separately as a single
AMENDMENT TO THE COMPANY'S class, and (b) a majority of the combined voting power of all shares
CERTIFICATE OF INCORPORATION of Voting Stock outstanding, voting together as a single class,
THAT WOULD EFFECT A ONE-FOR-TEN whether in person or by proxy, whether by mail, Internet or
REVERSE STOCK SPLIT OF THE telephone, is required to approve Proposal 2. So, if you abstain
COMPANY'S COMMON STOCK from voting, it has the same effect as if you voted against the
proposal. Each share of Common Stock has one (1) vote and each share
of Series C Preferred Stock has one hundred (100) votes. If the
reverse split is approved by shareholders, once implemented, Chelsey
will hold approximately 86.4% of the combined voting power of the
Voting Stock. See "PROPOSAL 2 -- AMENDING CERTIFICATE OF
INCORPORATION TO EFFECT A ONE-FOR-TEN REVERSE SPLIT OF COMMON
STOCK -- Effect of Reverse Split on Voting Power of Holders of
Common Stock."
The affirmative vote of the holders of (a) a majority of the
PROPOSAL 3: APPROVE AN outstanding shares of Common Stock, voting separately as a single
AMENDMENT TO THE COMPANY'S class, (b) at least two-thirds of the outstanding shares of Series C
CERTIFICATE OF INCORPORATION Preferred Stock, voting separately as a class, and (c) the holders
THAT WOULD REDUCE THE PAR VALUE of the majority of the combined voting power of the Voting Stock
OF EACH SHARE OF COMMON STOCK outstanding, voting together as a single class, is required to
FROM $0.66 2/3 PER SHARE TO approve Proposal 3. Abstentions and broker non-votes will have the
$0.01 PER SHARE same effect as if you voted against the proposal. Each share of
Common Stock has one (1) vote and each share of Series C Preferred
Stock has one hundred (100) votes.
PROPOSAL 4: APPROVE AN The affirmative vote of the holders of (a) at least two-thirds of
AMENDMENT TO THE COMPANY'S the outstanding shares of Series C Preferred Stock, voting
CERTIFICATE OF INCORPORATION TO separately as a class, and (b) a majority of the combined voting
INCREASE THE NUMBER OF SHARES power of all shares of Voting Stock outstanding, voting together as
OF ADDITIONAL PREFERRED STOCK single class, is required to approve Proposal 4. Abstentions and
WHICH THE COMPANY WOULD HAVE broker non-votes will have the same effect as if you voted against
AUTHORITY TO ISSUE AND MAKE A the proposal. Each share of Common Stock has one (1) vote and each
CORRESPONDING CHANGE TO THE share of Series C Preferred Stock has one hundred (100) votes.
AGGREGATE NUMBER OF SHARES OF
ALL CLASSES OF STOCK WHICH THE
COMPANY WOULD HAVE AUTHORITY TO
ISSUE
PROPOSAL 5: RATIFY AND APPROVE The affirmative vote of the holders of the majority of the combined
THE ADOPTION OF THE 2004 STOCK voting power of the Voting Stock voted at the Annual Meeting,
OPTION PLAN FOR DIRECTORS whether in person or by proxy, and whether by mail, Internet or
telephone, is required to delegate
authority toapprove Proposal 5. Abstentions and broker
non-votes will not have any effect on the Audit Committee of the Board of
Directors with respect to the selection of the
auditors.proposal. Each share of
Common Stock has one (1) vote and each share of Series BC Preferred
Stock has ten (10)one hundred (100) votes.
3
PROPOSAL 6: RATIFY AND APPROVE The affirmative vote of the holders of the majority of the combined
CERTAIN AMENDMENTS TO THE 2002 voting power of the Voting Stock voted at the Annual Meeting,
STOCK OPTION PLAN FOR DIRECTORS whether in person or by proxy, and whether by mail, Internet or
AS DESCRIBED IN THIS PROXY telephone, is required to approve Proposal 6. Abstentions and broker
STATEMENT non-votes will not have any effect on the proposal. Each share of
Common Stock has one (1) vote and each share of Series C Preferred
Stock has one hundred (100) votes.
The affirmative vote of the holders of the majority of the combined
PROPOSAL 7: DELEGATE TO THE voting power of the Voting Stock voted at the Annual Meeting,
AUDIT COMMITTEE OF THE BOARD OF whether in person or by proxy, and whether by mail, Internet or
DIRECTORS AUTHORITY TO SELECT telephone, is required to ratify the selection of auditors.
THE COMPANY'S INDEPENDENT Abstentions and broker non-votes will not have any effect on the
AUDITORS FOR THE FISCAL YEAR proposal. So, if you abstain from voting, your vote will not count
ENDING DECEMBER 25, 2004 FROM either for or against the proposal. Each share of Common Stock has
AMONGST ESTABLISHED NATIONAL one (1) vote and each share of Series C Preferred Stock has one
AUDIT FIRMS hundred (100) votes.
PROPOSAL 8: RATIFY AND APPROVE The affirmative vote of the holders of the majority of the combined
THE ADOPTION OF THE COMPANY'S voting power of the Voting Stock voted at the Annual Meeting,
STOCK OPTION AGREEMENT WITH whether in person or by proxy, and whether by mail, Internet or
WAYNE P. GARTEN, PRESIDENT AND telephone, is required to ratify and approve Proposal 8. Abstentions
CHIEF EXECUTIVE OFFICER OF THE and broker non-votes will not have any effect on the proposal. So,
COMPANY if you abstain from voting, your vote will not count either for or
against the proposal. BROKER NON-VOTES: If your broker does notEach share of Common Stock has one (1) vote
on eitherand each share of Series C Preferred Stock has one hundred (100)
votes.
The affirmative vote of the holders of (a) a majority of the
PROPOSAL 9: APPROVE AN outstanding shares of Common Stock, voting separately, as a single
AMENDMENT TO THE COMPANY'S class, (b) at least two-thirds of the outstanding shares of Series C
CERTIFICATE OF INCORPORATION, Preferred Stock, voting separately as a class, and (c) a majority of
AFTER GIVING EFFECT TO THE the combined voting power of all shares of Voting Stock outstanding,
ONE-FOR-TEN REVERSE SPLIT OF voting together as a single class, whether in person or by proxy,
THE COMPANY'S COMMON STOCK, TO whether by mail, Internet or telephone, is required to approve
INCREASE THE NUMBER OF SHARES Proposal 9. So, if you abstain from voting, it has the same effect
OF COMMON STOCK WHICH THE as if you voted against the proposal. Each share of Common Stock has
COMPANY WOULD HAVE AUTHORITY TO one (1) vote and each share of Series C Preferred Stock has one
ISSUE AND MAKE A CORRESPONDING
CHANGE TO THE AGGREGATE NUMBER hundred (100) votes.
OF SHARES OF ALL CLASSES OF
STOCK WHICH THE COMPANY WOULD
HAVE AUTHORITY TO ISSUE
4
The affirmative vote of the holders of (a) a majority of the
PROPOSAL 10. APPROVE (I) THE outstanding shares of Common Stock, voting separately, as a single
ISSUANCE AND POTENTIAL ISSUANCE class, (b) at least two-thirds of the outstanding shares of Series C
OF A COMMON STOCK PURCHASE Preferred Stock, voting separately as a class, and (c) a majority of
WARRANT BY THE COMPANY TO the combined voting power of all shares of Voting Stock outstanding,
CHELSEY FINANCE, LLC, AND (II) voting together as a single class, whether in person or by proxy,
THE ISSUANCE AND POTENTIAL whether by mail, Internet or telephone, is required to approve
ISSUANCE UNDER THE COMMON STOCK Proposal 10. So, if you abstain from voting, it has the same effect
PURCHASE WARRANT OF 30% OF THE as if you voted against the proposal. Each share of Common Stock has
COMPANY'S ISSUED AND one (1) vote and each share of Series C Preferred Stock has one
OUTSTANDING COMMON STOCK ON A
FULLY DILUTED BASIS hundred (100) votes.
In connection with the recapitalization of the Company described
VOTE ASSURED: below, Chelsey, Stuart Feldman (a principal of Chelsey Capital, LLC
and a director of the Company), Regan Partners, Regan International
Fund Limited and Basil P. Regan (a director of the Company) entered
into a voting agreement providing that each of them will vote any
shares of the Company beneficially owned by them or any entity
affiliated with them (i) to effectuate the amendments to the
Company's Certificate of Incorporation described in Proposals 2, proposals,3
and 4 and (ii) for their nominees to the Board of Directors
described in Proposal 1. See "PROPOSAL 1 -- ELECTION OF
DIRECTORS -- Introduction." As of the record date, Chelsey
beneficially owned 115,810,383 shares of Common Stock (approximately
51.6% of the outstanding Common Stock) and 564,819 shares of Series
C Preferred Stock, collectively representing approximately 61.3% of
the combined voting power of the Voting Stock. As of the record
date, Regan Partners, Regan International Fund Limited and Basil P.
Regan beneficially owned 38,728,350 shares of Common Stock
(approximately 17.2% of the outstanding Common Stock). Accordingly,
the approval of Proposals 1, 2, 3 and 4 is assured. Furthermore,
based upon the voting power of Chelsey described above, Chelsey
alone will be able to control the outcome of all matters upon which
it votes, including Proposals 5, 6, 7, 8, 9 and 10.
5
The Company's bylaws provide that the holders of a majority of the
QUORUM: outstanding shares or of the voting power, as the case may be, shall
constitute a quorum at a meeting of stockholders for the transaction
of any business, unless the action to be taken at the meeting shall
require a greater proportion. Therefore, shares representing a
majority of the votes entitled to be cast by the holders of Common
Stock and Series C Preferred Stock outstanding on the record date,
voting together as a class, are required to be present in person or
by proxy at the Annual Meeting in order to constitute a quorum to
transact business with regard to each of the proposals. In addition,
shares representing at least two-thirds of the votes entitled to be
cast by the holders of Series C Preferred Stock outstanding on the
record date, voting separately as a class, must be present in person
or by proxy at the Annual Meeting in order to constitute a quorum to
transact business with regard to Proposals 2, 3 and 4 and shares
representing a majority of the votes entitled to be cast by the
holders of Common Stock outstanding on the record date, voting
separately as a class, must be present in person or by proxy at the
Annual Meeting in order to constitute a quorum to transact business
with regard to Proposal 3. Shares as to which holders abstain from
voting as to a particular matter, and shares held in "street name"
by brokers or nominees who indicate on their proxies that they do
not have discretionary authority to vote those shares as to a
particular matter (that is, broker non-votes), will be counted in
determining whether there is a quorum of stockholders present at the
Annual Meeting for all matters.
ABSTENTIONS Abstentions and broker non-votes will have no effect onwith respect to
AND BROKER NON-VOTES: Proposals 1, 5, 6, 7, 8, 9 and 10. Abstentions and broker non-votes,
however, will have the effect of negative votes with respect to
either of theProposals 2, proposals.3 and 4.
Please vote; your vote is important. Prompt return of your proxy
PROXIES: 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 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.
6
Unless you tell us on the proxy card to vote differently, wethe
Company will vote signed returned proxies "FOR""for" the Board's nominees
for directors, "for" the approval of the amendment to the
Certificate of Incorporation that would effect a one-for-ten reverse
stock split of the Company's Common Stock, "for" the approval of the
amendment to the Certificate of Incorporation that would reduce the
par value per share of the Company's Common Stock, "for" the
approval of the amendment to the Certificate of Incorporation that
would increase the number of shares of Additional Preferred Stock
which the Company would have authority to issue and "FOR"increase the
number of shares of all classes of stock which the Company would
have authority to issue, "for" the ratification and approval of the
adoption of the 2004 Stock Option for Directors, "for" the
ratification and approval of the amendments to the 2002 Stock Option
Plan for Directors described herein, "for" the ratification of the
appointmentdelegation of authority to the Audit Committee to select the
Company's independent auditors, "for" the ratification and approval
of the auditors.adoption of the Company's Stock Option Agreement with Wayne
P. Garten, "for" the approval of the amendment to the Certificate of
Incorporation, after giving effect to the one-for-ten reverse stock
split, that would increase the number of shares of Common Stock
which the Company would have authority to issue and increase the
number of shares of all classes of stock which the Company would
have authority to issue, and "for" the approval of the issuance and
potential issuance of the Common Stock Purchase Warrant to Chelsey
Finance, LLC and the issuance and potential issuance under the
Common Stock Purchase Warrant of 30% of the Company's issued and
outstanding Common Stock on a fully diluted basis.
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
wethe Company began printing this proxy statement, weProxy Statement, it did not know of
any matters that needed to be acted upon at the Annual Meeting other
than those discussed in this proxy statement.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 thisyour
proxy, to: Brian C. Harriss,Charles E. Blue, Secretary, at Hanover Direct, Inc.,
115 River Road, Building 10, Edgewater, New Jersey 07020;
- deliver another signed proxy, dated later than thisyour proxy, to
Mr. Harriss,Blue, Secretary, at the address above, or vote again at a
later date via the Internet or vote again at a later date via the Internet or vote again at a later date by
telephone; or
7
- attend the Annual Meeting, inform Mr. Harriss,Blue, Secretary, of your
desire to vote in person or by another proxy, and then vote
in person or by another proxy at the Annual Meeting. Please
note that attending the Annual Meeting alone will not revoke
your proxy or your vote via the Internet or by telephone.
The Company will pay all costs, estimated at $45,000$70,000 in the
COST OF SOLICITATION: aggregate, of COST OF soliciting these proxies.proxies for the Annual Meeting. Although
we arethe Company is mailing these proxy materials, SOLICITATION: ourthe Company's
directors, officers and employees may also solicit proxies by
telephone, telegram, facsimile, mail, e-mail or personal contact.
Such persons will receive no additional compensation for such
services, but the Company may reimburse them for reasonable
out-of-pocket expenses. WeThe Company will also furnish copies of
solicitation materials to fiduciaries, custodians, nominees and
brokerage houses for forwarding to beneficial owners of shares of
Common Stock held in their names, and the Company will reimburse
them for reasonable out-of-pocket expenses. American Stock Transfer
& Trust Company, the Company's transfer agent, is assisting us in
the solicitation of proxies in connection with the Annual Meeting
for no additional fee.
YOUR COMMENTS: Your comments about any aspects of ourthe Company's business are
welcome. You may use the space provided on the proxy card for this
purpose, if desired. Although wethe Company may not respond on an
individual basis, your comments help usthe Company to measure your
satisfaction and weit may benefit from your suggestions.
EXCEPT AS OTHERWISE PROVIDED IN THIS PROXY, ALL REFERENCES TO SHARES OF COMMON
STOCK OF
THE COMPANY ARE WITHOUT GIVING EFFECT TO THE ONE-FOR-TEN REVERSE STOCK SPLIT OF
THE
COMPANY'S COMMON STOCK DESCRIBED IN PROPOSAL 2.
8
DIRECTORS AND EXECUTIVE OFFICERS
THE RECAPITALIZATION
On November 30, 2003, the Company consummated the transactions contemplated
by the Recapitalization Agreement, dated as of November 18, 2003, with Chelsey
(the "Recapitalization Agreement") and recapitalized the Company, completed the
reconstitution of the Board of Directors of the Company and settled certain
outstanding litigation between the Company and Chelsey (the "Recapitalization").
Immediately prior to the consummation of the transactions contemplated by the
Recapitalization Agreement, Chelsey was the holder of 29,446,888 shares of
Common Stock of the Company, or approximately 21.3% of the Common Stock, and
1,622,111 shares of the Company's Series B Participating Preferred Stock, having
a par value of $0.01 per share and ten votes per share (the "Series B Preferred
Stock"), consisting of all of the issued and outstanding shares of preferred
stock of the Company, and with its Common Stock collectively representing
approximately 29.6% of the combined voting power of the Company's securities.
Prior to the consummation of the Recapitalization, Regan Partners was the holder
of 38,795,017 shares of Common Stock of the Company, or approximately 28.0% of
the outstanding Common Stock.
Pursuant to the Recapitalization Agreement, Chelsey exchanged all of the
1,622,111 shares of Series B Preferred Stock held by it for the issuance to it
of 564,819 shares of newly-created Series C Preferred Stock and 81,857,833
additional shares of Common Stock. The shares of Series C Preferred Stock are
entitled to vote with the shares of Common Stock on all matters on which the
Common Stock votes and are entitled to one hundred (100) votes per share plus
that number of votes as shall equal the dollar value of any accrued, unpaid and
compounded dividends with respect to such shares. The Series C Preferred Stock
is also entitled to vote as a class on any matter that would adversely affect
such Series C Preferred Stock.
The Board of Directors of the Company was reconstituted, simultaneously
with the execution of the Recapitalization Agreement on November 18, 2003, so
that the number of directors comprising the Board of Directors of the Company
was fixed at eight, four of whom were designated by Chelsey. Upon the closing of
the Recapitalization, the number of directors comprising the Board of Directors
of the Company was fixed at nine, five of whom were designated by Chelsey. The
Committees of the Board of Directors were also reconstituted, simultaneously
with the execution of the Recapitalization Agreement on November 18, 2003, and
again on the closing of the Recapitalization.
Upon the issuance of the Series C Preferred Stock and the additional shares
of Common Stock to Chelsey pursuant to the Recapitalization Agreement, Chelsey
became the owner of 111,304,721 shares of Common Stock constituting
approximately 51% of the outstanding Common Stock, and 564,819 shares of Series
C Preferred Stock, constituting all of the outstanding shares of preferred stock
and with its Common Stock collectively representing approximately 61% of the
combined voting power of the Company. Regan Partners continued to be the holder
of 38,728,350 shares of Common Stock of the Company, or approximately 17.2% of
the outstanding Common Stock. Upon the reconstitution of the Board of Directors
pursuant to the Recapitalization Agreement, Chelsey had the ability to designate
a majority of the members of the Board of Directors and Regan had the ability to
designate one member of the Board of Directors for a period of two years. The
Recapitalization was a "change in control" of the Company.
Pursuant to the Recapitalization Agreement, the Company, acting through its
Board of Directors and in accordance with its charter and bylaws and applicable
law, agreed to recommend the following amendments to its Certificate of
Incorporation, which are the subject of Proposals 2, 3 and 4 included in this
Proxy Statement (the "Charter Amendments"), to effectuate the following: (i) a
reverse split of its Common Stock in a ratio of 10 for 1, (ii) a reduction in
the par value per share of Common Stock from $0.66 2/3 per share to $0.01 per
9
share and (iii) an increase by 10 million shares of the number of authorized
shares of preferred stock of the Company, all of such shares to be issuable by
the Board of Directors in one or more series. The Company has no current plans
for the issuance of such shares of preferred stock.
In connection with the Recapitalization, Chelsey, Stuart Feldman, Regan
Partners and Basil Regan entered into a Voting Agreement dated as of November
30, 2003 (the "Voting Agreement") providing that each of them will vote any
shares of the Company beneficially owned by them or any entity affiliated with
them to effectuate the Recapitalization and the Charter Amendments and to elect
the nominees to the Board of Directors of Chelsey and Regan Partners designated
pursuant to the Recapitalization Agreement for a period of two years unless
sooner terminated.
Additional information about the Recapitalization is contained in the
Company's Current Reports on Form 8-K, dated November 10, 2003, November 18,
2003 and November 30, 2003, which were filed with the Securities and Exchange
Commission (the "Commission") on November 10, 2003, November 19, 2003 and
December 1, 2003, respectively, and in the Company's Annual Report on Form 10-K
for the fiscal year ended December 27, 2003, as amended. See also "Certain
Relationships and Related Transactions." All of the Company's filings, and
exhibits thereto, may be inspected without charge at the public reference
section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of this material also may be obtained from the
Commission at prescribed rates. The Commission also maintains a website that
contains reports, proxy and information statements and other information
regarding public companies that file reports with the Commission. Copies of the
Company's filings may be obtained from the Commission's website at
http://www.sec.gov. Copies of the Company's filings may also be obtained from
the offices of the American Stock Exchange at 20 Broad Street, New York, New
York.
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS:OFFICERS
Directors
Directors hold office until the next annual meeting or until their
successors have been elected or until their earlier death, resignation,
retirement, disqualification or removal as provided in the Company's Certificate
of Incorporation and bylaws.
The Board of Directors of the Company was reconstituted, simultaneously
with the execution of the Recapitalization Agreement on November 18, 2003, so
that the number of directors comprising the Board of Directors of the Company
was fixed at eight, consisting of Martin Edelman, Wayne Garten, Stuart Feldman,
William Wachtel, Basil Regan, Thomas Shull, David Brown and Robert Masson, four
of whom (Messrs. Edelman, Garten, Feldman and Wachtel) were designated by
Chelsey and one of whom was designated by Regan Partners (Basil Regan). Upon the
closing of the Recapitalization, the number of directors comprising the Board of
Directors of the Company was fixed at nine, five of whom were designated by
Chelsey, including Donald Hecht who joined the Board on the closing of the
Recapitalization as a designee of Chelsey, and one of whom was designated by
Regan Partners. The Committees of the Board of Directors were also
reconstituted, simultaneously with the execution of the Recapitalization
Agreement on November 18, 2003, and again on the closing of the
Recapitalization.
The Corporate Governance Agreement, dated as of November 30, 2003, executed
in connection with the Recapitalization Agreement provides that, for a period of
two years from the closing of the Recapitalization, in the event that Messrs.
Edelman, Garten, Feldman, Wachtel or Hecht or their respective successors are
unable or unwilling to serve as a director or committee member for any reason,
Chelsey will designate a director or committee member, as applicable, in place
of such person. The Corporate Governance Agreement further provides that in the
event Mr. Regan or his successor is unable or unwilling to serve as a director
or committee
10
member for any reason, Regan Partners will designate a director or committee
member, as applicable, in place of such person. The Corporate Governance
Agreement also provides that in the event that the Company's Chief Executive
Officer, or his successor, is unable or unwilling to serve as a director for any
reason, the Board of Directors will designate the Chief Executive Officer of the
Company to serve on the Board of Directors in place of such person. In the event
that Messrs. Brown or Masson or their respective successors are unable or
unwilling to serve as a director or committee member for any reason, the Board
of Directors (acting without the participation of Messrs. Wachtel and Feldman)
will designate a director or committee member, as applicable, in place of such
person. Notwithstanding the foregoing, any such substitute person not designated
by the Board of Directors must be reasonably acceptable to the Board of
Directors.
With the exception of Martin L. Edelman who resigned from the Board of
Directors effective February 15, 2004 and Thomas C. Shull who resigned from the
Board effective May 5, 2004, the Board of Directors of the Company currently
consists of the individuals named above plus Paul S. Goodman who was designated
by Chelsey to fill the vacancy on the Board effective April 12, 2004 due to Mr.
Edelman's resignation. On May 5, 2004, Wayne Garten took the Chief Executive
Officer's seat on the Board which was vacated by Mr. Shull, and Mr. Garten's
seat on the Board became vacant. Chelsey has indicated that it does not
presently intend to fill the vacancy on the Board created by Mr. Garten taking
the Chief Executive Officer's seat on the Board.
Please see "Proposal"PROPOSAL 1 -- Election of Directors" for the names, ages and
business experience of each of the Company's directors including Mr. Goodman,
each of whom has been nominated for election at the Annual Meeting.
Executive Officers
Pursuant to the Company's Bylaws,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,On May 5, 2004, Thomas C. Shull resigned as Chairman of the Board,
President and Chief Executive Officer of the Company and William B. Wachtel was
elected as Chairman of the Board and Wayne P. Garten was elected as President
and Chief Executive Officer of the Company, effective immediately. On November
3, 2003, Charles E. Blue was appointed Chief Financial Officer of the Company
effective November 11, 2003 replacing Edward M. Lambert as Chief Financial
Officer effective on such date in connection with the Company's ongoing
strategic business realignment program. Mr. Blue joined the Company in 1999 and
had most recently served as Senior Vice President, Finance, a position
eliminated by the strategic business realignment program. Mr. Lambert continued
to serve as Executive Vice President of the Company until January 2, 2004. Also
effective November 11, 2003, Brian C. Harriss was appointed Executive Vice
President, Finance and Administration of the Company. Effective February 13,
2004, the position of Executive Vice President, Finance and Administration held
by Brian C. Harriss was eliminated in connection with the Company's ongoing
strategic business realignment program. On such date, Mr. Blue was appointed to
succeed Brian C.Mr. Harriss as Secretary of the Company.
11
Set forth below is certain information regarding the current executive
officers of the Company:
WAYNE P. GARTEN...........
AGE 52 Mr. Garten has served as the President and Chief
Executive Officer of the Company since May 5, 2004.
Mr. Garten served as the President of Caswell-Massey
Ltd., Inc., a retailer and direct marketer of
fragrance and other personal care products, from
January 2004 to May 2004. Prior thereto, Mr. Garten
was a financial consultant specializing in the direct
marketing industry. He was Chief Executive Officer
and President of Popular Club, Inc., a direct
selling, catalog marketer of apparel and general
merchandise products, from 2001 to 2003. From 1997 to
2000, he was Executive Vice President and Chief
Financial Officer of theMicro Warehouse, Inc., an
international catalog reseller of computer products.
From 1983 to 1996, Mr. Garten held various financial
positions at Hanover Direct and its predecessor, The
Horn & Hardart Company, and Mr. Harriss was appointed as Executive Advisor to the
Chairman of the Company coincident with his resignation asincluding Executive Vice
President and Chief Financial Officer from 1989 to
1996. Mr. Garten is a Certified Public Accountant.
Mr. Garten was elected a director of the Company. DuringCompany by
Chelsey effective 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.
3
THOMAS C. SHULL...........
AGE 51 President and Chief Executive Officer and a member of
the Board of Directors since December 5, 2000.
Chairman of the Board since January 10, 2002. In
1990, Mr. Shull co-founded Meridian Ventures, a
venture management and turnaround firm presently
based in Connecticut, and has served as chief
executive officer since its inception. From 1997 to
1999, he served as President and Chief Executive
Officer of Barneys New York, a leading luxury
retailer, where he led them out of bankruptcy. From
1992 to 1994, Mr. Shull was Executive Vice President
of R.H. Macy Company, Inc., where he was responsible
for human resources, information technology, business
development, strategic planning and merchandise
distribution and led the merger negotiations with
Federated Department Stores. Prior to that, he served
as a consultant with McKinsey & Company and in the
early 1980s as a member of the National Security
Council Staff in the Reagan White House.
EDWARD M. LAMBERT.........
AGE 42 Executive Vice President and Chief Financial Officer
since January 28, 2002. From July 2001 until January
28, 2002, Mr. Lambert served as an advisor to the
Company. In 1990, Mr. Lambert co-founded Meridian
Ventures, a venture management and turnaround firm
presently based in Connecticut, and served as a
Managing Director until December 2000. From 1998 to
1999, he served as Chief Financial Officer of Barneys
New York, a leading luxury retailer, and from 1993 to
1994, he served as Executive Vice President of
Applied Solar Energy Corporation, a space systems
manufacturer.29, 2003.
MICHAEL D. CONTINO........
AGE 4243 Executive Vice President and Chief Operating Officer
since April 25, 2001. Senior Vice President and Chief
Information Officer from December 1996 to April 25,
2001 and President of Keystone Internet Services,
Inc. (now Keystone Internet Services, LLC) since
November 2000. Mr. Contino joined the Company in 1995
as Director of Computer Operations and
Telecommunications. Prior to 1995, Mr. Contino was
the Senior Manager of IS Operations at New Hampton,
Inc., a subsidiary of Spiegel, Inc.
BRIAN C. HARRISS..........CHARLES E. BLUE...........
AGE 54 Executive Vice President -- Human Resources and Legal
and Secretary since December 2002. Executive Advisor
to the Chairman of the Company from January 28, 2002
to December 2002, and Executive44 Senior Vice President and Chief Financial Officer
from Juneeffective November 11, 2003 and Secretary effective
February 13, 2004. Mr. Blue joined the Company in
1999 to January 28,
2002. From 1998 to 1999, Mr. Harriss was a Managing
Director of Dailey Capital Management, LP, a venture
capital fund, and Chief Operating Officer of
E-Bidding Inc., an Internet e-commerce freight Web
site. From 1997 to 1998, Mr. Harrisshad most recently served as the Company's
Senior Vice President, Finance. Before joining the
Company, he held the positions of Corporate Development at the
Reader's Digest Association, Inc. From 1994 to 1996,
Mr. Harriss was the Chief Financial OfficerDirector of
the
Thompson Minwax Company. Prior thereto, Mr. Harriss
held various financial positions with Cadbury
Schweppes PLC, Tambrands,Planning and Treasury for Genesis Direct, Inc. and
PepsiCo, Inc.Director of Strategic Planning for The Copeland
Companies.
WILLIAM C. KINGSFORD......
AGE 5657 Senior Vice President, Treasury and Control
(Corporate Controller) since May 2003. Vice President
and Corporate Controller sincefrom May 1997.1997 to May 2003.
Prior to May 1997, Mr. Kingsford was Vice President
and Chief Internal Auditor at
4
Melville Corporation.
Mr. Kingsford filed a petition under Chapter 13 of
the United States Bankruptcy Code during March 2001.
FRANK J. LENGERS..........
AGE 46 Vice President, Treasurer since October 2000. Mr.
Lengers joined the Company in November 1988 as an
Internal Audit Manager. From 1990 to 1994, Mr.
Lengers served as Manager of Corporate Treasury
Operations. In 1994, he was promoted to Director of
Treasury Operations and in 1997 to Assistant
Treasurer, a position he held until October 2000.
Prior to joining the Company, Mr. Lengers held
various audit positions with R.H. Macy Company, Inc.
and The Metropolitan Museum of Art.
STEVEN LIPNER.............
AGE 5455 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.
512
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE COMPENSATION:COMPENSATION
The following table shows salaries, bonuses, and long-term compensation
paid during the last three years for the Chief Executive Officer and ourthe
Company's four (4) next most highly compensated executive officers who were
serving as executive officers at the end of the Company's 20022003 fiscal year.
LONG TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
----------------------- -------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
NAME AND ---------------------------------------------- OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS(S) SARS PAYOUTS COMPENSATION
------------------ ---- ------------------ ---------- ------------ ---------- ---------- ------- ------------
Thomas C. Shull(1)........... 2002 $905,923(2) $1,327,500(2) $165,000(8) -- -- None......... 2003 $ 2,116(15)
President and Chief 2001 $900,000(3) $ 600,000(3) $180,000(8) -- 500,000(11) None --
Executive Officer 2000 $ 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).......... 2002 $459,226 $ 287,503(5) $ 12,000(9) -- 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(5) $ 12,000(9) -- 100,000(13) None $ 3,421(19)
and Secretary
Michael D. Contino(1)........ 2002 $382,270 $ 565,988(6) $ 4,000(10) -- 1,000,000(13) None $ 9,873(20)
Executive Vice President and 2001 $317,115 $ 350,000(6) $ 12,000(10) -- -- None $ 3,876(21)
Chief Information Officer 2000 $243,269 $ 182,718(6) $ 12,000(10) -- 150,000(13) None $ 3,253(22)
William C. Kingsford......... 2002 $169,390 $ 81,452(7) -- -- 125,000(13) None $ 7,285(23)
Vice President and Controller 2001 $168,000 $ 21,156(7)915,588(2) $2,250,000(2) -- -- -- None $ 1,340(24)
2000 $166,26012,369(18)
President and Chief 2002 $ 34,273(7)905,923(3) $1,327,500(3) $165,000(10) -- -- 41,000(13) None $ 1,040(25)2,116(19)
Executive Officer 2001 $ 900,000(4) $ 600,000(4) $180,000(10) -- 500,000(14) None --
Edward M. Lambert(1)....... 2003 $1,046,923(5) $ 72,516(5) -- -- -- None $101,486(20)
Executive Vice President 2002 $ 361,539 $ 685,000(6) -- -- 1,000,000(15) None $142,570(21)
2001 -- $ -- -- -- 300,000(17) None --
Brian C. Harriss(1)........ 2003 $ 357,902 $ 228,595(7) -- -- -- None $ 12,164(22)
Executive Vice President, 2002 $ 459,226 $ 287,503(7) $ 12,000(11) -- 600,000(15) None $ 10,001(23)
Finance and Administration 2001 $ 335,192 $ 375,000(7) $ 12,000(11) -- -- None $ 4,089(24)
and Secretary
Michael D. Contino(1)...... 2003 $ 393,698 $ 263,659(8) -- -- -- None $151,282(25)
Executive Vice President 2002 $ 382,270 $ 565,988(8) $ 4,000(12) -- 1,000,000(15) None $ 9,873(26)
and Chief Operating Officer 2001 $ 317,115 $ 350,000(8) $ 12,000(12) -- -- None $ 3,876(27)
Charles E. Blue(1)......... 2003 $ 231,096 $ 51,780(9) -- -- -- None $ 12,219(28)
Senior Vice President 2002 $ 197,000 $ 206,938(9) $ 4,000(13) -- 250,000(16) None $ 9,873(29)
and Chief Financial Officer 2001 $ 175,858 $ 92,500(9) $ 8,733(13) -- -- None $ 3,992(30)
- ---------------
(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. Mr. Shull
resigned from all positions with the Company effective May 5, 2004. On
April 25, 2001, Brian C. Harriss became Executive Vice President and Chief
Financial Officer of the Company and Michael D. Contino became Executive
Vice President and Chief Operating Officer of the Company. Effective
January 28, 2002, Mr. Harriss resigned as Executive Vice President and
Chief Financial Officer of the Company. Effective January 28, 2002, Edward
M. Lambert was appointed to succeed Brian C. Harriss as Executive Vice
President and Chief Financial Officer of the Company and Mr. Harriss was
appointed as Executive Advisor to the Chairman of the Company coincident
with his resignation as Executive Vice President and Chief Financial
Officer of the Company. Effective December 2, 2002, Mr. Harriss was
appointed Executive Vice President, -- Human Resources and Legal and Secretary
of the Company. Effective November 11, 2003, Charles E. Blue was appointed
Senior Vice President and Chief Financial Officer of the Company replacing
Edward M. Lambert as Chief Financial Officer effective on such date in
connection with the Company's strategic business realignment program. Mr.
Lambert continued to serve as an Executive Vice President of the Company
until January 2, 2004. Also effective November 11, 2003, Brian C. Harriss
was appointed Executive Vice President, Finance and Administration.
Effective February 13, 2004, Mr. Harriss resigned from all positions held
with the Company as part of the Company's strategic business realignment
program and Mr. Blue was appointed to succeed Mr. Harriss as Secretary of
the Company.
(2) $276,923$915,588 of salary, and a $450,000 stay bonus and a $1,350,000 change of
control payment was paid to Mr. Shull under an Employment Agreement between
Mr. Shull and the Company, dated as of
13
September 1, 2002, as amended by Amendment No. 1 thereto dated as of
September 1, 2002, Amendment No. 2 thereto dated as of June 23, 2003, and
Amendment No. 3 thereto dated as of August 3, 2003 (as amended, the "2002
Employment Agreement"), pursuant to which Mr. Shull iswas employed by the
Company as its President and Chief Executive Officer. A $450,000
transaction bonus was paid to Mr. Shull under the Shull Transaction Bonus
Letter (as defined below).
(3) $276,923 of salary and a $450,000 stay bonus was paid to Mr. Shull under
the 2002 Employment Agreement between Mr. Shull and the Company. Includes a
$877,500 performance bonus for 2002 paid in 2003 under the 2002 Employment
Agreement. The remaining $629,000 of salary and bonus was paid to Meridian
Ventures, LLC, a limited liability company controlled by Mr. Shull
("Meridian"), in consideration for providing the services of Mr. Shull
pursuant to the provisions of a Services Agreement, dated as of December 5,
2000 (the "December 2000 Services Agreement"), a Services Agreement, dated
as of August 1, 2001 (the "August 2001 Services Agreement"), or a Services
Agreement, dated as of December 14, 2001, as amended effective 6
April 2,
2002 (the "December 2001 Services Agreement" and, together with the
December 2000 Services Agreement and the August 2001 Services Agreement,
the "Services Agreements"), each among Meridian, the Company and Mr. Shull.
See "Employment Contracts, Termination of Employment and Change
in ControlChange-in-Control
Arrangements."
(3)(4) Paid to Meridian Ventures, LLC under the Services Agreements.
(4)(5) $406,923 of salary and $640,000 of severance was paid to Mr. Lambert in
connection with a severance agreement with the Company dated November 4,
2003. A bonus of approximately $72,516 related to fiscal year 2003 is
scheduled to be paid to Mr. Lambert in the summer of 2004 under the
Company's 2003 Management Incentive Plan.
(6) Includes the following payments made by the Company on behalf ofto 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)(7) Includes the following payments made by the Company on behalf ofto Mr. Harriss: for
fiscal 2003, a $168,500 transaction bonus and a bonus of approximately
$61,095 scheduled to be paid to Mr. Harriss in the summer of 2004 under the
Company's 2003 Management Incentive Plan: for fiscal 2002, a $287,503 2002
performance bonus paid in 2003; and for fiscal 2001, a $375,000 2001
performance bonus paid in 2002; and for fiscal 2000,
a $129,500 2001 performance bonus paid in 2001.
(6)2002.
(8) Includes the following payments made by the Company on behalfto Mr. Contino: for
fiscal 2003, a $193,500 transaction bonus and a bonus of approximately
$70,159 scheduled to be paid to Mr. Contino:Contino in the summer of 2004 under the
Company's 2003 Management Incentive Plan: for fiscal 2002, a $565,988 2002
performance bonus paid in 2003; and for fiscal year 2001, a $350,000 2001
performance bonus paid in 2002; and
for fiscal 2000, a $182,718 2000 performance bonus paid in 2001.
(7)2002.
(9) Includes the following payments made by the Company on behalfto Mr. Blue: for fiscal
2003, a bonus of approximately $51,780 scheduled to be paid in the summer
of 2004 to Mr. Kingsford:Blue under the Company's 2003 Management Incentive Plan: for
fiscal 2002, a $81,452 2002$206,938 performance bonus for 2002 paid in 2003; for fiscal year 2001, a $21,156 2001 performance bonus paid in 2002; and for
fiscal 2000,2001, a $34,273 2000$92,500 performance bonus for 2001 paid in 2001.
(8)2002.
(10) Paid to Meridian pursuant to the Services Agreements, and is deemed to
cover Meridian's over-head (including legal and accounting), health care
costs, payroll costs, and other expenses relating to Mr. Shull. See
"Employment Contracts, Termination of Employment and Change in Control
Arrangements."
(9)14
(11) Includes the following payments made by the Company on behalf of Mr.
Harriss: $12,000 in car allowance and related benefits in 2002; $12,000 in
car allowance and related benefits in 2001; and $12,000
in car allowance and related benefits in 2000.
(10)2001.
(12) Includes the following payments made by the Company on behalf of Mr.
Contino: $4,000 in car allowance and related benefits in 2002; $12,000 in
car allowance and related benefits in 2001; and $12,000
in car allowance and related benefits in 2000.
(11)2001.
(13) Includes the following payments made by the Company on behalf of Mr. Blue:
$4,000 in car allowance and related benefits in 2002; and $8,733 in car
allowance and related benefits in 2001.
(14) Granted pursuant to the December 2001 Services Agreement and allocated to
Mr. Shull. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements."
(12) Granted pursuant to the December 2000 Services Agreement and allocated to
Mr. Shull. See "Employment Contracts, Termination of Employment and Change
in Control Arrangements."
(13)(15) Issued by the Company pursuant to the Company's 2000 Management Stock
Option Plan. See "Report of the Stock Option and Executive Compensation
Committee on Executive Compensation -- 2000 Management Stock Option Plan."
Options to purchase 100,000 shares issued to Mr. Harriss during 2000 were
forfeited during 2002 following his resignation as Executive Vice President
and Chief Financial Officer of the Company effective January 28, 2002.
(14)(16) Issued by the Company pursuant to the Company's 2000 Management Stock
Option Plan.
(17) Granted pursuant to the December 2001 Services Agreement under the
Company's 2000 Management Stock Option Plan and allocated to Mr. Lambert.
See "Report of the Stock Option and Executive Compensation Committee on
Executive Compensation -- 2000 Management Stock Option Plan."
(15)(18) Includes the following payments made by the Company on behalf of Mr. Shull
in 2003: $276 in group term life insurance premiums; $40 in accidental
death and disability insurance premiums; $162 in core life insurance
premiums; $205 in dental insurance premiums; $158 in long-term disability
premiums; $8,195 in health care insurance premiums; and $3,333 in matching
contributions under the Company's 401(k) Savings Plan.
(19) Includes the following payments made by the Company on behalf of Mr. Shull
in 2002: $85 in group term life insurance premiums; $12 in accidental death
and disability insurance premiums; $50 in core 7
life insurance premiums; $44
in dental insurance premiums; $49 in long-term disability premiums; and
$1,876 in health care insurance premiums.
(16)(20) Includes the following payments made by the Company on behalf of Mr.
Lambert in 2003: $125 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $205 in dental insurance premiums; $158 in long-term
disability premiums; $8,195 in health care insurance premiums; $3,333 in
matching contributions under the Company's 401(k) Savings Plan; and $89,268
in a gross-up for income tax purposes of travel expenses.
(21) Includes the following payments made by the Company on behalf of Mr.
Lambert in 2002: $79 in group term life insurance premiums; $26 in
accidental death and disability insurance premiums; $106 in core life
insurance premiums; $44 in dental insurance premiums; $191 in long-term
disability premiums; $1,876 in health care insurance premiums; $3,333 in
matching contributions under the Company's 401(k) Savings Plan; and
$136,915 in a gross-up for income tax purposes of travel expenses.
(17)(22) Includes the following payments made by the Company on behalf of Mr.
Harriss in 2003: $287 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $159 in long-term disability premiums; $8,195 in health
care insurance premiums; and $3,321 in matching contributions under the
Company's 401(k) Savings Plan.
(23) Includes the following payments made by the Company on behalf of Mr.
Harriss in 2002: $276 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $38 in dental insurance premiums; $561 in long-term
disability premiums;
15
$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)(24) Includes the following payments made by the Company on behalf of Mr.
Harriss in 2001: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $770 in long-term disability premiums; $439 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(19)(25) Includes the following payments made by the Company on behalf of Mr.
HarrissContino in 2000: $2,8332003: $125 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $205 in dental insurance premiums; $159 in long-term
disability premiums; $8,195 in health care insurance premiums; and $3,333
in matching contributions under the Company's 401(k) Savings Plan; $110Plan. Also
includes forgiveness of a $75,000 non-interest-bearing loan made by the
Company to Mr. Contino in long-term disability premiums; $438January 1998. The loan was forgiven in term
life insurance premiums; and $40 of accidental death insurance premiums.
(20)full in
accordance with its terms during January 2003. In addition to the loan
forgiveness, the Company paid all applicable withholding taxes totaling
$64,063.
(26) Includes the following payments made by the Company on behalf of Mr.
Contino in 2002: $120 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $143 in dental insurance premiums; $484 in long-term
disability premiums; $5,589 in health care insurance premiums; $3,333 in
matching contributions under the Company's 401(k) Savings Plan; and $2 in
vision plan premiums.
(21)(27) Includes the following payments made by the Company on behalf of Mr.
Contino in 2001: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $722 in long-term disability premiums; $281 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(22)(28) Includes the following payments made by the Company on behalf of Mr. ContinoBlue
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.
(23) Includes the following payments made by the Company on behalf of Mr.
Kingsford in 2002: $5162003: $125 in group term life insurance premiums; $40 in accidental
death and disability insurance premiums; $162 in core life insurance
premiums; $105$205 in dental insurance premiums; $265$159 in long-term disability
premiums; $6,195$8,195 in health care insurance premiums; and $2$3,333 in vision plan premiums.
(24)matching
contributions under the Company's 401(k) Savings Plan.
(29) Includes the following payments made by the Company on behalf of Mr. KingsfordBlue
in 2001: $2372002: $120 in group term life insurance premiums; $40 in accidental
death and disability insurance premiums; $162 in core life insurance
premiums; $143 in dental insurance premiums; $285 in long-term disability
premiums; $6,195 in health care insurance premiums; $3,265 in matching
contributions under the Company's 401(k) Savings Plan; $386and $2 in vision
plan premiums.
(30) Includes the following payments made by the Company on behalf of Mr. Blue
in 2001: $116 in group term life insurance premiums; $2,345 in matching
contributions under the Company's 401(k) Savings Plan; $403 in long-term
disability premiums; $677$162 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 $276 in term life insurance premiums.
816
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS:RIGHTS
The following table contains information concerning options and stock
appreciation rights ("SARs") granted to the Chief Executive Officer and ourthe
Company's four (4) next most highly compensated executive officers who were
serving as executive officers at the end of the Company's 20022003 fiscal year.
There were no SARs granted during fiscal 20022003 to the Chief Executive Officer or
ourthe Company's four (4) next most highly compensated executive officers who were
serving as executive officers at the end of the Company's 20022003 fiscal year.
OPTION/SAR GRANTS IN FISCAL 20022003
INDIVIDUAL GRANTS
----------------------------------------------------------------------------
NUMBER OF GRANT DATE
SECURITIES PERCENTAGE OF VALUE
UNDERLYING TOTAL OPTIONS/ ----------
OPTIONS/ SARS GRANTED EXERCISE MARKET PRICE GRANT DATE
SARS TO EMPLOYEES IN OR BASE ON DATE OF PRESENT
NAME GRANTED FISCAL YEAR 20022003 PRICE GRANT EXPIRATION DATE VALUE($)
---- ---------- ---------------- -------- ------------ --------------------------------- ----------
Thomas C. Shull........ 0 0% -- -- -- $ 0-- -- --
Edward M. Lambert(1)... 1,000,000 14.79% $0.24 $0.24 August 8, 2012(2) $181,600(3)Lambert...... -- -- -- -- -- --
Brian C. Harriss(1).... 600,000 8.88% $0.27 $0.27 October 2, 2012(2) $123,660(4)Harriss....... -- -- -- -- -- --
Michael D. Contino(1)........... 1,000,000 14.79% $0.24 $0.24 August 8, 2012(2) $181,600(3)
William C.
Kingsford(1)......... 125,000 1.85% $0.24 $0.24 August 8, 2012(2) $ 22,700(3)Contino..... -- -- -- -- -- --
Charles E. Blue........ -- -- -- -- -- --
- ---------------
(1) Stock options granted to Mr. Lambert, Mr. Harriss, Mr. Contino and Mr.
Kingsford during fiscal 2002 are subject to the terms and conditions of the
Company's 2000 Management Stock Option Plan. See "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements."
(2) These options expire ten years after the date of grant. See "Employment
Contracts, Termination of Employment and Change-in-Control Arrangements."
(3) The fair value of each option granted to Mr. Lambert, Mr. Contino and
Mr. Kingsford during fiscal 2002 is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk free
interest rate of 3.87%, expected lives of 6 years, expected volatility of
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.
917
The following table contains information concerning the fiscal 20022003
year-end values of all options and SARs granted to the Chief Executive Officer
and ourthe Company's four (4) next most highly compensated executive officers who
were serving as executive officers at the end of the Company's 20022003 fiscal year.
No SARs have been granted to the Chief Executive Officer or ourthe Company's four
(4) next most highly compensated executive officers who were serving as
executive officers at the end of the Company's 20022003 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN 20022003 FISCAL YEAR
AND DECEMBER 28, 200227, 2003 OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
DECEMBER 28, 200227, 2003 DECEMBER 28, 200227, 2003
----------------------- --------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------------------- --------------------
Thomas C. Shull.......... None None 3,200,000 options(1) $0/$0
84.38%100% exercisable
15.62% unexercisable
Edward M. Lambert........ None None 1,300,000 options(1)(2) $0/$0
none100% exercisable
100% unexercisable
Brian C. Harriss......... None None 600,000 options(2) none $0/$0
none100% exercisable
100% unexercisable
Michael D. Contino....... None None 1,450,000 options(2) $0/$0
24.14%100% exercisable
75.86% unexercisable
William C. Kingsford.....Charles E. Blue.......... None None 235,117 options(2)294,000 options $0/$0
38.12%100% exercisable
61.88% unexercisable
- ---------------
(1) 2,700,000 options were awarded to Mr. Shull under the December 2000 Services
Agreement. All of such options were exercisable on December 28, 2002 and
expire on June 30, 2005.March 31, 2006. 500,000 options were awarded to Mr. Shull, and
300,000 options were awarded to Mr. Lambert, under the December 2001
Services Agreement. These options were not exercisable on December 28, 2002;
Mr. Lambert's options arewere exercisable on March 31, 2003
and expire on March 31, 2006, while Mr. Shull's options arewere 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 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, 600,000 options for Mr. Harriss, 1,150,000 options for Mr.
Contino, 1,000,000 options for Mr. Lambert, and 166,000235,117 options for Mr. KingsfordBlue
represent options granted pursuant to the 2000 Management Stock Option Plan.
Under this plan, theseMr. Harriss' and Mr. Contino's options become exercisable
after four years and expire after ten years from the date of grant.grant; Mr.
Lambert's options became fully vested on January 2, 2004 and expired on
April 2, 2004. An additional 100,000 options for Mr. Contino representsrepresent
options granted effective November 3, 1999. These options becomebecame fully
exercisable after four years.
1018
EQUITY COMPENSATION PLAN INFORMATION TABLE
The following table provides information about the securities authorized
for issuance under the Company's equity compensation plans as of December 27,
2003:
(A) (B) (C)
-------------------- -------------------- ----------------------------
NUMBER OF NUMBER OF SECURITIES
SECURITIES TO BE REMAINING AVAILABLE FOR
ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER EQUITY
EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN(A))
------------- -------------------- -------------------- ----------------------------
Equity compensation plans approved
by security holders............... 11,551,446 $0.70 16,648,554
Equity compensation plans not
approved by security holders...... 2,700,000 0.25 2,700,000
---------- ----------
Total............................... 14,251,446 $0.62 19,348,554
========== ===== ==========
LONG-TERM INCENTIVE PLANS:PLANS
No awards under long-term incentive plans were granted in fiscal 20022003 to
the Chief Executive Officer or ourthe Company's four (4) next most highly
compensated executive officers who were serving as executive officers at the end
of the Company's 20022003 fiscal year.
DEFINED BENEFIT OR ACTUARIAL PLANS: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:
2002ARRANGEMENTS
Garten Employment Agreement. Effective May 5, 2004, Wayne P. Garten and
the Company entered into an Employment Agreement (the "Garten Employment
Agreement") pursuant to which Mr. Garten is employed by the Company as its
President and Chief Executive Officer, as described below. The term of the
Garten Employment Agreement began on May 5, 2004 and will terminate on May 5,
2006 (the "Garten Employment Agreement Term"). Under the Garten Employment
Agreement, Mr. Garten is to receive from the Company base compensation equal to
$600,000 per annum, payable in accordance with the Company's normal payroll
procedures ("Base Compensation"). Mr. Garten is to be provided with the employee
benefits the Company provides to its other senior executives, 4 weeks of paid
vacation per year and participation in such bonus plans with such targets as the
Compensation Committee of the Board of Directors may approve in its sole
discretion, determined in a manner consistent with bonus opportunities afforded
to other senior executives under such plans. The Company is to reimburse Mr.
Garten for his reasonable out-of-pocket expenses incurred in connection with his
employment by the Company. In addition, the Company is also to reimburse Mr.
Garten for up to $12,500 of attorney's fees incurred by him in connection with
legal advice relating to, and the negotiation of, the Garten Employment
Agreement.
Under the Garten Employment Agreement, upon the closing of any transaction
within the Garten Employment Agreement Term which constitutes a "change of
control" thereunder (as defined in the Garten Employment Agreement), the Company
will be required to make a lump sum cash payment to Mr. Garten in
19
the amount of 200% of his Base Compensation (a "Change of Control Payment")
within 30 days of the closing of the transaction resulting in the "change of
control."
Under the Garten Employment Agreement, additional amounts are payable to
Mr. Garten by the Company under certain circumstances upon the termination of
the Garten Employment Agreement. If the termination is on account of the
expiration of the Garten Employment Agreement Term and no "change of control"
has occurred thereunder, Mr. Garten shall be entitled to receive, subject to his
continued compliance with his confidentiality and nonsolicitation obligations
under the Garten Employment Agreement, monthly severance payments at the rate of
Mr. Garten's Base Compensation for a period of 18 months, payable in accordance
with the Company's normal payroll practices and policies and continued coverage
under the Company's health, life insurance and long-term disability benefit
plans for the 18-month period immediately following the end of the Garten
Employment Agreement Term. If the termination is on account of the Company's
termination of Mr. Garten's employment "For Cause," Mr. Garten's resignation
other than "For Good Reason," or on account of Mr. Garten's death or
"Disability" (all as defined in the Garten Employment Agreement), no additional
amount (other than payment of Base Compensation through the end of the month in
which the termination occurred) shall be payable to Mr. Garten. If the
termination is on account of Mr. Garten's resignation For Good Reason, or the
Company's termination of Mr. Garten's employment other than For Cause, and in
either such case Mr. Garten has not received or become entitled to receive a
Change of Control Payment, Mr. Garten shall receive, subject to his continued
compliance with his confidentiality and nonsolicitation obligations under the
Garten Employment Agreement, continued payments of his monthly Base Compensation
for a period equal to 18 months, payable in accordance with the Company's normal
payroll practices and policies, the pro rated portion of bonuses earned for the
fiscal year in which the effective date of termination occurs pursuant to the
Company's bonus plans, accrued vacation and continued coverage under the
Company's health, life insurance and long-term disability benefit plans for the
18-month period immediately following Mr. Garten's resignation or termination,
as applicable.
Under the Garten Employment Agreement, the Company is required to maintain
directors' and officers' liability insurance for Mr. Garten during the Garten
Employment Agreement Term. The Company is also required to indemnify Mr. Garten
in certain circumstances.
Under the Garten Employment Agreement, on May 5, 2004, the Company granted
Mr. Garten an option to purchase 1,000,000 shares of Common Stock under the
Company's 2000 Management Stock Option Plan at a price of $0.195 per share, and,
subject to approval by the shareholders (See PROPOSAL 8 -- "Ratification of the
Company's Stock Option Agreement with Wayne P. Garten, President and Chief
Executive Officer of the Company"), an additional option to purchase an
additional 1,000,000 shares of Common Stock at a price of $0.195 per share,
which option was granted under a Stock Option Agreement between the Company and
Mr. Garten outside the Company's 2000 Management Stock Option Plan (see Appendix
E). All such options vest over a 2-year period; one-third of such options vested
on the execution of the Garten Employment Agreement, one-third will vest on May
5, 2005 and the final one-third will vest on May 5, 2006; provided that all such
options will vest in their entirety and become fully exercisable upon the
earliest to occur of Mr. Garten's resignation "For Good Reason," the Company's
termination of Mr. Garten's services under the Garten Employment Agreement other
than "For Cause," or a "change of control" under the Garten Employment
Agreement.
Shull Severance Agreement. Effective May 5, 2004, Thomas C. Shull and the
Company entered into a General Release and Covenant Not to Sue (the "Shull
Severance Agreement") in conjunction with Mr. Shull's resignation from all
positions with the Company pursuant to which the Company agreed to pay to Mr.
Shull the sum of $900,000 ("Severance") in multiple installments, the first
installment in the amount of
20
$300,000 was paid on May 18, 2004 and the remaining amount of $600,000 to be
payable in 16 installments of $35,625 payable every two weeks commencing May 21,
2004 with a final payment in the amount of $30,000 to be payable on or about
December 31, 2004. In addition, the Company agreed to pay the cost of continuing
Mr. Shull's group health and dental benefits under COBRA and Exec-U-Care plan
coverage ("Benefits Continuation" and together with Severance, "Termination
Benefits") for a period of eighteen months. Under the Shull Severance Agreement,
the Company and Mr. Shull agreed that, except for the Termination Benefits and
the reimbursement of previously submitted out of pocket expenses, no other
monies or benefits will be due, become due or be paid to Mr. Shull by the
Company; provided that Mr. Shull's options remain vested and exercisable in
accordance with their terms. The Shull Severance Agreement contained a general
release by Mr. Shull in favor of the Company, and a limited release by the
Company of certain claims against Mr. Shull, and covenants not to sue.
Shull Employment Agreement. Effective December 5, 2000, Thomas C. Shull,
Meridian Ventures, LLC, a limited liability company controlled by Mr. Shull
("Meridian"), and the Company entered into a Services Agreement (the "December
2000 Services Agreement"). The December 2000 Services Agreement was replaced by
a subsequent services agreement, dated as of August 1, 2001 (the "August 2001
Services Agreement"), among Mr. Shull, Meridian and the Company, and a Services
Agreement, dated as of December 14, 2001 (the "2001 Services Agreement"), among
Mr. Shull, Meridian, and the Company. The 2001 Services Agreement was replaced
effective September 1, 2002 by an Employment Agreement between Mr. Shull and the
Company, dated as of September 1, 2002, as amended by Amendment No. 1 thereto,
dated as of September 1, 2002, Amendment No. 2 thereto, dated as of June 23,
2003, and Amendment No. 3 thereto, dated as of August 3, 2003 (as amended, the
"2002 Employment Agreement"), pursuant to which Mr. Shull iswas employed by the
Company as its President and Chief Executive Officer, as described below. The
term of the 2002 Employment Agreement began on September 1, 2002 and willwas to
terminate on September 30, 2004March 31, 2006 (the "2002 Employment Agreement Term"). but was
terminated effective May 5, 2004.
Under the 2002 Employment Agreement, Mr. Shull iswas to receive from the
Company base compensation equal to $900,000$855,000 per annum, payable at the rate of
$75,000$71,250 per month, subject to certain exceptions described in the 2002
Employment Agreement ("Base Compensation"). Mr. Shull iswas 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
iswas 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 receivealso received the same bonus amount
for fiscal 2002 under the Company's 2002 Management Incentive Plan as all other
Level 8 participants (as defined in such plan) receivereceived under such plan for such
period, subject to all of the terms and conditions applicable generally to Level
8 participants thereunder. Mr. Shull shall earnearned an annual bonusesbonus for fiscal 2003
andunder the Company's 2003 Management Incentive Plan consistent with bonuses
awarded to other senior executives under such plan. Mr. Shull was to earn an
annual bonus for fiscal 2004 under such plansplan as the Company's Compensation
Committee may approve in a manner consistent with bonuses awarded to other
senior executives under such plans.plan.
Under the 2002 Employment Agreement, the Company made two installment
payments in September and November 2002 to satisfy the obligation of $450,000 to
Mr. Shull previously due to be paid to Meridian on June 30, 2002. In addition,
the Company 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 hashad not
21
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 shallwere to 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. The Recapitalization constituted a "change of
control" under the 2002 Employment Agreement and Mr. Shull received a payment in
the amount of $225,000 in December 2003 under the terms of the 2002 Employment
Agreement, representing an acceleration of the cash payment due in September
2004.
Under the 2002 Employment Agreement, upon the closing of any transaction
which constitutes a "change of control" thereunder, provided that Mr. Shull iswas
then employed by the Company, the Company will bewas 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 wouldwas to be in lieu of (i) any cash payment under the 2002 Employment
Agreement as a result of a termination thereof upon the first day after the
acquisition of the Company (whether by merger or the acquisition of all of its
outstanding capital stock) or the tenth day after the sale or any series of
sales since April 27, 2001 involving an aggregate of 50% or more of the market
value of the Company's assets (for this purpose under the 2002 Employment
Agreement, such 50% amount shall be deemed to be $107.6 million), and (ii) the
aggregate amount of Base Compensation to which Mr. Shull would have otherwise
been entitled through the end of the 2002 Employment Agreement Term. The
Recapitalization constituted a "change of control" under the 2002 Employment
Agreement and Mr. Shull received payments on December 5, 2003 and December 12,
2003 in the aggregate amount of $1,575,000 under the terms of the 2002
Employment Agreement, representing a $1,350,000 change of control payment and
the acceleration of a $225,000 cash payment due in September 2004. These amounts
were recorded as compensation to Mr. Shull. Mr. Shull will not be entitled to
any additional change of control payments under the 2002 Employment Agreement
relating to the Recapitalization transaction.
Under the 2002 Employment Agreement, additional amounts arewere payable to Mr.
Shull by the Company under certain circumstances upon the termination of the
2002 Employment Agreement. If the termination iswas on account of the expiration
of the 2002 Employment Agreement Term, Mr. Shull shall bewas 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 iswas 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 hashad been no
Willful Misconduct (as defined in the 2002 Employment Agreement) or material
breach thereof by Mr. Shull, Mr. Shull shall bewas 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 iswas 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
22
only if the Change of Control Plan shall not then be in effect, Mr. Shull shall bewas
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 iswas 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
bewas 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 iswas 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 shallwas only be
entitled to receive his benefit under the Change of Control Plan. The
Recapitalization transaction was deemed a "change of control" for purposes of
the 2002 Employment Agreement and the Change of Control Plan. Under the
Recapitalization Agreement, the Company was permitted to make any payments under
the 2002 Employment Agreement and the Change In Control Plan on the closing of
the Recapitalization. Mr. Shull received payments on December 5, 2003 and
December 12, 2003 in the aggregate amount of $1,575,000 under the terms of the
2002 Employment Agreement, representing a $1,350,000 change of control payment
and the acceleration of a $225,000 cash payment due in September 2004. Mr. Shull
will not be entitled to any additional change of control payments under the 2002
Employment Agreement relating to the Recapitalization transaction.
Under the 2002 Employment Agreement, the Company iswas required to maintain
directors' and officers' liability insurance for Mr. Shull during the 2002
Employment Agreement Term. The Company iswas 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 Stockcommon 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. Effective as of August 3, 2003, the 2002
Employment Agreement was amended to extend the final expiration date for the
stock option under the Shull 2000 Stock Option Agreement to March 31, 2006.
During December 2001, the Company entered into a stock option agreement
with Mr. Shull to evidence the grant to Mr. Shull of an option to purchase
500,000 shares of the Company's Common Stock under the Company's 2000 Management
Stock Option Plan (the "Shull 2001 Stock Option Agreement"). Effective as of
September 1, 2002, the Company has amended the Shull 2001 Stock Option Agreement
to (i) provide that any shares purchased by Mr. Shull under the Shull 2001 Stock
Option Agreement would not be saleable until September 30, 2004, and (ii)
replace all references therein to the 2001 Services Agreement with references to
the 2002 Employment Agreement.
Amended Thomas C. Shull Transaction Bonus Letter. During May 2001, Thomas
C. Shull entered into a letter agreement with the Company (the "Shull
Transaction Bonus Letter") under which he would be paid a
23
bonus on the occurrence of certain transactions involving the sale of certain of
the Company's businesses. Effective as of September 1, 2002, the Company has amended
the Shull Transaction Bonus Letter to (i) increase the amount of Mr. Shull's
agreed to base salary for purposes of the transaction bonus payable thereunder
from $600,000 to $900,000, and (ii) replace all references therein to the
December 2000 Services Agreement with references to the 2002 Employment
Agreement.
The Recapitalization transaction was deemed a "change of control" for
purposes of the Shull Transaction Bonus Letter. Under the Recapitalization
Agreement, the Company was permitted to make any payments under the Shull
Transaction Bonus Letter on or after the closing of the Recapitalization. Mr.
Shull received an additional $450,000 payment on December 5, 2003 under the
terms of the Shull Transaction Bonus Letter.
Issuance of Stock Options. On August 8, 2002, the Company issued options
to purchase 3,750,000 shares of the Company's Common Stock to certain Management
Incentive Plan ("MIP") Level 7 and 8 employees, including various executive
officers, at a price of $0.24 per share and services rendered under the
Company's 2000 Management Stock Option Plan. In addition, on August 8, 2002, the
Company authorized the President to grant options to purchase up to an aggregate
of 1,045,000 and 1,366,000 shares of the Company's Common Stock to certain MIP
Level 4 and MIP Level 5 and 6 employees, respectively, at a price of $0.24 per
share and services rendered under the Company's 2000 Management Stock Option
Plan.
On October 2, 2002, the Company issued options to purchase 600,000 shares
of the Company's Common Stock to an Executive Vice President at a price of $0.27
per share and services rendered under the Company's 2000 Management Stock Option
Plan.
13
On September 29, 2003, the Company issued options to purchase an aggregate
of 100,000 shares of the Company's Common Stock to two newly-elected Board
members at a price of $0.27 per share and services rendered.
On August 1, 2003, the Company issued options to purchase an aggregate of
210,000 shares of the Company's Common Stock to the then existing six board
members at a price of $0.25 per share and services rendered and options to
purchase 35,000 shares at a price of $0.25 per share and services rendered to a
consultant to the Company per their agreement.
On July 29, 2003, the Company issued options to purchase an aggregate of
100,000 shares of the Company's Common Stock to two newly-elected Board members
at a price of $0.25 per share and services rendered.
On November 18, 2003, the Company issued options to purchase an aggregate
of 100,000 shares of the Company's Common Stock to two newly-elected Board
members at a price of $0.22 per share and services rendered.
On April 12, 2004, the Company issued options to purchase 50,000 shares of
the Company's Common Stock to a newly-appointed Board member at a price of $0.23
per share and services rendered.
Effective May 4, 2004, the Company issued options to purchase an aggregate
of 2,000,000 shares of the Company's Common Stock to Wayne P. Garten at a price
per share of $0.195 and services rendered.
Charles F. Messina. During September 2002, Charles F. Messina resigned as
Executive Vice President, Chief Administrative Officer and Secretary of the
Company. In connection with such resignation, the Company and Mr. Messina
entered into a severance agreement dated September 30, 2002 providing for cash
payments of $884,500 and other benefits which were accrued in the fourth quarter
of 2002.
24
Brian C. Harriss. Brian C. Harriss was appointed as Executive Vice
President, -- Human Resources and Legal and Secretary of the Company effective
December 2, 2002.2002 and as Executive Vice President, Finance and Administration
effective November 11, 2003. Prior to January 2002, Mr. Harriss had served the
Company as Executive Vice President and Chief Financial Officer. In connection
with the December 2002 appointment, Mr. Harriss and the Company 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. Effective February
15, 2004, the position of Executive Vice President, Finance and Administration
was eliminated in connection with the Company's ongoing strategic business
realignment program. In connection with such change, Mr. Harriss and the Company
entered into a severance agreement dated February 15, 2004 providing for
$545,000 of cash payments, as well as other benefits that were accrued and paid
in the first quarter of 2004. Mr. Harriss is also entitled to receive a payment
in the amount of approximately $61,095 under the Company's 2003 Management
Incentive Plan.
Chief Financial Officer. On November 3, 2003, Charles E. Blue was
appointed Chief Financial Officer of the Company effective November 11, 2003,
replacing Edward M. Lambert as Chief Financial Officer effective on such date in
connection with the Company's ongoing strategic business realignment program.
Mr. Blue joined the Company in 1999 and had most recently served as Senior Vice
President, Finance, a position eliminated by the strategic business realignment
program. Mr. Lambert continued to serve as Executive Vice President of the
Company until January 2, 2004. In connection with such change, Mr. Lambert and
the Company entered into a severance agreement dated November 4, 2003 providing
for $640,000 of cash payments, as well as other benefits that were accrued and
paid in the fourth quarter of 2003. Mr. Lambert is also entitled to receive a
payment in the amount of approximately $72,516 under the Company's 2003
Management Incentive Plan.
Other Executives. In October 2002, the Company entered into arrangements
with Edward M. Lambert, Brian C. Harriss and Michael D. Contino (the
"Compensation Continuation Agreements") pursuant to which it agreed to provide
eighteen months of severance pay, COBRA reimbursement and Exec-U-Care plan
coverage in the event their employment with the Company is terminated either by
the Company other than "For Cause" or by them "For Good Reason" (as such terms
are defined). On November 6, 2002, the Company also entered into an arrangementa Compensation
Continuation Agreement with Frank Lengers pursuant to which it agreed to provide
twelve months of severance pay, COBRA reimbursement and Exec-U-Care plan
coverage in the event his employment with the Company is terminated either by
the Company "For Cause" or by Mr. Lengers "For Good Reason" (as such terms are
defined).
Hanover Direct, Inc. Key Executive Eighteen-Month Compensation Continuation
Plan. Effective April 27, 2001, the Company terminated the Hanover Direct, Inc.
Key Executive Thirty-Six Month Compensation Continuation Plan and the Hanover
Direct, Inc. Key Executive Twenty-Four Month Compensation Plan. Effective April
27, 2001, the Company established the Hanover Direct, Inc. Key Executive
Eighteen Month Compensation Continuation Plan (the "Executive Plan") for its
Chief Executive Officer, corporate executive vice presidents, corporate senior
vice presidents, strategic unit presidents, and other 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
25
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 shareholdersstockholders of the Company approve any of the following
(each, a "Transaction"): (I) any reorganization, merger, consolidation or other
business combination of the Company; (II) any sale of 50% or more of the market
value of the Company's assets (for this purpose, 50% is deemed to be $107.6
million;million); or (III) a complete liquidation or dissolution of the Company; (b)
notwithstanding (ii)(a), shareholderstockholder approval of either of the following types
of Transactions will not give rise to a Change of Control: (I) a Transaction
involving only the Company and one or more of its subsidiaries; or (II) a
Transaction immediately following which the shareholdersstockholders 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
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 shareholderstockholder of the
26
Company owning 33% or more of the voting power of the Company immediately prior
to such transactions, owns no less than the equivalent percentage of the voting
power of the Sold Subsidiary.)
Under the Executive Plan, an Executive Plan participant shall be entitled
to Change of Control Benefits under the Executive Plan solely if there occurs a
Change of Control (which occurred on the closing of the Recapitalization) and
thereafter the Company terminates his/her employment other than For Cause (as
defined in the Executive Plan) or the participant voluntarily terminates his/her
employment with the Company For Good Reason (as defined in the Executive Plan),
in either case, solely during the 2-year period immediately following the Change
of Control. A participant will not be entitled to Change of Control Benefits
under the Executive Plan if: (i) he/she voluntarily terminates his/her
employment with the Company or has his/her employment with the Company
terminated by the
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, eachThe Recapitalization transaction was a "Change of Charles F. Messina,
Thomas C. Shull, Jeffrey Potts, Brian C. Harriss and Michael D. Contino and,
during November 2002, each of Edward M. Lambert and Brian C. Harriss (each, a
"Participant") entered into a letter agreement with the Company (a "Transaction
Bonus Letter") under which the Participant would be paid a bonus on the
occurrence of certain transactions involving the sale of certain of the
Company's businesses. In addition, Mr. Shull is a party to a "Letter Agreement"
with the Company, dated April 30, 2001, pursuant to which, following the
termination of the December 2000 Services Agreement, in the event he is
terminated without cause during any period of his continued employment as the
Chief Executive Officer of the Company, he shall be paid one year of his annual
base salary (the "Shull Termination Payment"). Effective June 1, 2001, the
Company amended the Executive Plan to provide that, notwithstanding anything to
the contrary contained in the Executive Plan, Section 10.2Control" for purposes of
the Executive Plan
shall not be effective with respect to the payment of (i) a Participant's
"Transaction Bonuses," and/or (ii) the Shull Termination Payment. The payment of
any such "Transaction Bonus" to any of the Participants, and/or the payment of
the Shull Termination Payment, shall be paid in addition to, and not in lieu of,
any Change of Control Benefit payable to any Participant or Mr. Shull pursuant
to the terms of the Executive Plan. In conjunction with his resignation as
Executive Vice President and Chief Financial Officer, Mr. Harriss released any
claims that he may have against the Company under his May 2001 Transaction Bonus
Letter. The remaining Transaction Bonus Letters, other than the Transaction
Bonus Letter with Mr. Potts and Mr. Messina, remain in effect.
Letter Agreement with Mr. Shull and Meridian. On April 30, 2001, Mr.
Shull, Meridian and the Company entered into a letter agreement (the "Letter
Agreement") specifying Mr. Shull's rights under the Executive Plan, which is
discussed above. Under the Letter Agreement, Mr. Shull and Meridian agreed that,
so long as the Executive Plan is in effect and Mr. Shull is a Participant
thereunder, Meridian and Mr. Shull will accept the Change in Control Benefits
provided for in the Executive Plan in lieu of the compensation contemplated by
the December 2000 Services Agreement between them (which benefits amounts will
not be offset against the December 2000 flat fee provided for in the December
2000 Services Agreement and shall be payable at such times and in such amounts
as provided in the Executive Plan rather than in a lump sum payable within five
business days after the termination date of the December 2000 Services Agreement
as
16
contemplated by the December 2000 Services Agreement). For purposes of the
change in control benefits under the Executive Plan and the Letter Agreement,
Mr. Shull's annualized base salary is $600,000. In addition to the benefits
provided by the December 2000 Services Agreement, Mr. Shull and those persons
named in the December 2000 Services Agreement shall also be entitled to the
optional cash out of stock options as provided in the Executive Plan. Under the
Letter Agreement, Mr. Shull is also entitled to payment of one year annual base
salary in the event he is terminated without cause during any period of his
continued employment as the Chief Executive Officer of the Company following the
termination of the December 2000 Services Agreement. The participation and
benefits to which Mr. Shull is entitled under the Executive Plan shall also
survive the termination of the December 2000 Services Agreement pursuant to the
terms thereof in the event that Mr. Shull is still employed as the Chief
Executive Officer of the Company and is a Participant under the Executive Plan.
Should the Executive Plan no longer be in effect or Mr. Shull no longer be a
Participant thereunder, Meridian and Mr. Shull shall continue to be entitled to
the compensation contemplated by the December 2000 Services Agreement. The
Letter Agreement was superseded by the 2002 Employment Agreement.
Hanover Direct, Inc. Directors Change of Control Plan. Effective May 3,
2001, the Company's Board of Directors established the Hanover Direct, Inc.
Directors Change of Control Plan (the "Directors Plan") for all Directors of the
Company except for (i) any Director who is also an employee of the Company for
purposes of the Federal Insurance Contributions Act; or (ii) any persons (and
their successors from time to time) who are designated by a holder of
thirty-three percent (33%) or more of the Voting Shares to stand for election
and serve as a Director. For purposes of the Directors Plan, a "Change of
Control" will occur upon the occurrence of the first of any of the events
specified in item (i), (ii) or (iii) of the definition of "Change in Control"
under the Executive Plan, as discussed above.
A participant in the Directors Plan shall be entitled to receive a Change
of Control Payment under the Directors Plan if there occurs a Change of Control
and he/she is a Director on the effective date of such Change of Control. A
Change of Control Payment under the Directors Plan shall be an amount equal to
the greater of (i) $40,000 or (ii) 150% of the sum of the annual retainer fee,
meeting fees and per diem fees paid to a Director for his/her service on the
Board of Directors of the Company during the 12-month period immediately
preceding the effective date of the Change of Control.
The Recapitalization transaction was a "Change of Control" for purposes of
the Directors Plan. Under the Recapitalization Agreement, the Company was
permitted to make all payments under the Directors Plan
27
on or after the closing of the Recapitalization. On December 18, 2003, each of
the eight non-employee directors (Messrs. Brown, James, Krushel, Sonnenfeld,
Masson, Regan, Garten and Edelman) received a payment in the amount of $87,000
under the terms of the Directors Plan.
Change in Control Payments. Pursuant to the Recapitalization Agreement,
upon completion of the Recapitalization, there was a "change in control" of the
Company for purposes of all of the Company's existing Compensation Continuation
(Change of Control) Plans, including the Directors Change of Control Plan, the
Employment Agreement, dated as of September 1, 2002, as amended, between the
Company and Mr. Shull and the Transaction Bonus Letters between the Company and
the following executive officers: Mr. Shull, Mr. Contino and Mr. Harriss. Mr.
Shull received payments on December 5, 2003 and December 12, 2003 in the
aggregate amount of $1,575,000 under the terms of the 2002 Employment Agreement.
See "Employment Contracts, Termination of Employment and Change-in-Control
Arrangements -- 2002 Employment Agreement." In December 2003, Messrs. Shull,
Harriss and Contino received payments in the amount of $450,000, $168,500 and
$193,500, respectively, under the terms of the Transaction Bonus Letters to
which they are a party. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements -- Transaction Bonus Letters." On December 18,
2003, each of the eight non-employee directors (Messrs. Brown, James, Krushel,
Sonnenfeld, Masson, Regan, Garten and Edelman) received a payment in the amount
of $87,000 under the terms of the Hanover Direct, Inc. Directors Change of
Control Plan. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements -- Hanover Direct, Inc. Directors Change of
Control Plan." All of such amounts were treated as compensation to the
recipients.
Transaction Bonus Letters. During May 2001, each of Thomas C. Shull,
Jeffrey Potts, Brian C. Harriss and Michael D. Contino and, during November
2002, each of Edward M. Lambert and Brian C. Harriss (each, a "Participant")
entered into a letter agreement with the Company (a "Transaction Bonus Letter")
under which the Participant would be paid a bonus on the occurrence of certain
transactions involving the sale of certain of the Company's businesses. In
addition, Mr. Shull was 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 was terminated without cause during any
period of his continued employment as the Chief Executive Officer of the
Company, he was to be paid one year of his annual base salary (the "Shull
Termination Payment"). Effective June 1, 2001, the Company amended the Executive
Plan to provide that, notwithstanding anything to the contrary contained in the
Executive Plan, Section 10.2 of the Executive Plan would 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,
was to 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 and later as Executive Vice President and Chief Administrative
Officer, Mr. Harriss released any claims that he may have against the Company
under his Transaction Bonus Letters, as did Messrs. Shull, Potts, Messina and
Lambert. The Transaction Bonus Letter with Mr. Contino remains in effect.
The Recapitalization transaction was deemed a "change of control" for
purposes of the Transaction Bonus Letters. Under the Recapitalization Agreement,
the Company was permitted to make all payments under the Transaction Bonus
Letters on the closing of the Recapitalization. On December 5 and 12, 2003,
Messrs. Shull, Harriss and Contino received payments in the aggregate amount of
$450,000, $168,500 and $193,500, respectively, under the terms of the
Transaction Bonus Letters to which they are a party. Mr. Lambert did not receive
any bonus payment in connection with the Recapitalization under the terms of
28
the Transaction Bonus Letter to which he is a party because he waived his rights
thereunder pursuant to his severance agreement with the Company.
Letter Agreement with Mr. Shull and Meridian. On April 30, 2001, Mr.
Shull, Meridian and the Company entered into a letter agreement (the "Letter
Agreement") specifying Mr. Shull's rights under the Executive Plan, which is
discussed above. Under the Letter Agreement, Mr. Shull and Meridian agreed that,
so long as the Executive Plan is in effect and Mr. Shull is a Participant
thereunder, Meridian and Mr. Shull would 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 would
not be offset against the December 2000 flat fee provided for in the December
2000 Services Agreement and would be payable at such times and in such amounts
as provided in the Executive Plan rather than in a lump sum payable within five
business days after the termination date of the December 2000 Services Agreement
as contemplated by the December 2000 Services Agreement). For purposes of the
change in control benefits under the Executive Plan and the Letter Agreement,
Mr. Shull's annualized base salary was $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 would also be entitled to the
optional cash out of stock options as provided in the Executive Plan. Under the
Letter Agreement, Mr. Shull was also entitled to payment of one year annual base
salary in the event he was 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 was entitled under the Executive Plan would 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 would continue to be entitled to
the compensation contemplated by the December 2000 Services Agreement. The
Letter Agreement was superseded by the 2002 Employment Agreement.
2002 Directors' Option Plan. Effective January 1, 2003, the 2002 Stock
Option Plan for Directors was amended to increase the annual service award for
Directors who are not employees of the Company from 25,000 to 35,000 options to
purchase shares of Common Stock. In November 2003, the 2002 Stock Option Plan
for Directors was amended to increase the maximum number of shares of Common
Stock that may be delivered or purchased under the plan from 500,000 to 900,000.
See "PROPOSAL 6 -- Amendments to 2002 Stock Option Plan for Directors."
Stock Option Plans. Pursuant to the Company's Compensation Continuation
(Change of Control) Plans, upon the closing of the Recapitalization on November
30, 2003, all stock options previously granted pursuant to the Company's stock
option plans to the Participants under such Change of Control Plans by the
Company became fully exercisable as of November 30, 2003 (the closing date of
the Recapitalization), whether or not otherwise exercisable and vested as of
that date.
Salary Reduction. The Company effected salary reductions of 5% of base pay
for participants in its 2003 Management Incentive Plan, including Executive
Officers, effective with the pay period starting August 3, 2003. These salary
reductions were restored to those participants at or below the Vice-President
level effective March 28, 2004.
Vacation and Sick Policies. During June 2003, the Company established and
implemented a new Company-wide vacation and sick policy applicable to all
employees, including Executive Officers, to better administer vacation and sick
benefits.
29
Michael D. Contino. In January 1998, the Company made a $75,000
non-interest bearing loan to Michael D. Contino, currently the Company's
Executive Vice President and Chief Operating Officer, for the purchase by Mr.
Contino of a new principal residence in the state of New Jersey. The terms of
the loan agreement, as amended, included a provision for the Company to forgive
the original amount of the principal on the fifth anniversary of the loan. The
loan was secured by the residence that the proceeds were used to purchase. The
loan was forgiven in full in accordance with its terms during January 2003. In
addition to the loan forgiveness, the Company paid all applicable withholding
taxes totaling $64,063.
REPRICING OF OPTIONS/SARS:SARS
During fiscal 2002,2003, the Company did not adjust or amend the exercise price
of stock options or SARs previously awarded to the Chief Executive Officer or
ourthe Company's four (4) next most highly compensated executive officers who were
serving as executive officers at the end of the Company's 20022003 fiscal year.
STOCK OPTION AND EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION:
During thePARTICIPATION
At various times during fiscal year ended December 28, 2002,27, 2003, Messrs.
Jeffrey A. Sonnenfeld (Chairman), A. David Brown and Robert H. Masson were
members of the Stock Option and Executive Compensation Committee. Upon execution
of the Recapitalization Agreement, the members of the Stock Option and Executive
Compensation Committee became A. David Brown (Chairman), Wayne Garten and Stuart
Feldman. The current members of the Board of Directors of the Company
consisted of E. Pendleton James, Kenneth J. KrushelStock Option and Basil P. Regan.Executive Compensation
Committee are A. David Brown (Chairman), Stuart Feldman and Donald Hecht, who
replaced Wayne Garten effective April 29, 2004. None of such persons was, during
suchthe 2003 fiscal year or formerly, an officer or employee of the Company or any
of its subsidiaries or had any relationship with the Company other than serving
as a Director of the Company except for Mr. Garten, who served in various
executive positions at the Company from 1983 to 1996 and became President and
Chief Executive Officer of the Company effective May 5, 2004, and Mr. Feldman,
who is a controlling shareholder of the Company. During the 20022003 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 20022003 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 20022003 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.
REPORT OF THE STOCK OPTION AND EXECUTIVE COMPENSATION COMMITTEE ON EXECUTIVE
COMPENSATION:COMPENSATION
The report of the Stock Option and Executive Compensation Committee (the
"Compensation Committee"), currently for the fiscal year ended December 27, 2003, is as
follows:
The Compensation Committee, consisting as of Kenneth J. Krushelthe date of this report for
the fiscal year ended December 27, 2003 of A. David Brown (Chairman), E. Pendleton
JamesStuart
Feldman and Robert H. Masson, each an outside director,Donald Hecht, 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 20022003
compensation.
30
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,the Chief
Executive Officer, 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 were specified in the 2002
Employment Agreement. Mr. Garten's compensation and other benefits are specified
in the 2002Garten 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,As of the
date of this report (June 2004), approximately 217212 executives and key managers
are eligible to participate in the annual Management Incentive Plan. Under this
plan, each participant is assigned a target bonus, expressed as a percentage of
his/her base salary, which is paid if all performance targets are fully met. It
is the policy of the Compensation Committee to position target bonuses at
competitive levels. Individual target bonuses are based on the person's
responsibility level in the organization and the bonus award opportunity at the
other organizations included in the performance chart. Target bonus levels for
executives range from 5%50% to 100%125% of salary. Target bonus opportunities for
Messrs. Contino, Harriss, Lambert, Blue and Shull for fiscal year 20022003 were 100%75%
of salary while maximum bonuses were 150%125% of salary. For purposes of the 20022003
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.31
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 20022003 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 2002.2003. Payments related to fiscal year 2003 are scheduled to be
made to the Chief Executive Officer and the four next(4) most highly compensated executive officers in the amount of
approximately $72,516 for Mr. Lambert, $61,095 for Mr. Harriss, $70,159 for Mr.
Contino and $51,780 for Mr. Blue under the 2003 Management Incentive Plan in the
summer of 2004. Mr. Shull waived his right to such a payment pursuant to the
Shull Severance Agreement. Payments to Messrs. Shull, Lambert, Harriss, Contino
and Blue under the 2002 Management Incentive Plan in the aggregate amount of
$2,322,929 for the fiscal year 2002 aggregated $2,197,443.were paid in fiscal year 2003. One hundred
percent of awards made under the bonus plan are currently paid in cash, in some
cases on a deferred basis.
Long-Term Incentive Awards
1993 Executive Equity Incentive Plan
The 1993 Executive Equity Incentive Plan terminated in accordance with its
terms on December 31, 1996. Such plan provided executives and other key
employees with incentives to maximize the long-term creation of stockholder
value. The long-term incentive plan encouraged executives to acquire and retain
a significant ownership stake in the Company. Under the plan, executives were
given an opportunity to purchase shares of Common Stock with up to 80% of the
purchase price financed with a full recourse Company loan. For each share of
stock an employee purchased, he/she received an option to acquire two additional
shares of Common Stock, to a maximum of 250,000 shares in the aggregate, which
vest after three (3) years and expire after six (6) years. By creating this
opportunity, the Company encouraged executives to own Common Stock thereby
aligning executives' interests with those of the stockholders. The number of
shares offered for purchase to each executive and the corresponding number of
tandem options increased with the executive's level of responsibility within the
organization.
In December 1999, the rights of certain participants in this plan expired.
These participants had cumulative promissory notes of approximately $1.0 million
payable to the Company, comprised of $0.8 million of principal and $0.2 million
of interest, on the expiration date. Accordingly, collateral encompassing 20,000
19
shares, 20,000 shares and 80,00020,000 shares of the Company's Common Stock in fiscal years 2002 2001, and
20002001, 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, 2002,27, 2003, current and former officers and executives of the
Company owed the Company approximately $0.3 million, excluding accrued interest,
under the 1993 Executive Equity Incentive Plan. These amounts due to the Company
bear interest at rates ranging from 5.54% to 7.75% and are due or will be due
during 2003.2004.
As of December 28, 2002,27, 2003, no stock options remained outstanding or
exercisable under the 1993 Executive Entity Incentive Plan.
32
1996 Stock Option Plan
The purpose of the 1996 Stock Option Plan is to provide employees of the
Company and its subsidiaries with a larger personal and financial interest in
the success of the Company through the grant of stock-based incentive
compensation. Under the plan, employees may be granted options to purchase
shares of Common Stock at the fair market value on the date of grant. The total
options granted to an employee is one-half performance-based. The 1996 Stock
Option Plan provides that options may be granted for terms of not more than 10
years.
Employees are no longer eligible to participate in the 1996 Stock Option
Plan. During 2002,2003, no options to purchase shares of Common Stock were granted
pursuant to the 1996 Stock Option Plan. However, as of December 28, 2002,27, 2003,
options to purchase 1,337,270872,446 shares of Common Stock remained outstanding under
the 1996 Stock Option Plan.Plan including options to purchase 110,000 shares held by
the executives named in the executive compensation table.
2000 Management Stock Option Plan
The purpose of the 2000 Management Stock Option Plan is to advance the
interests of the Company and its stockholders by providing employees of the
Company, through the grant of options to purchase shares of Common Stock, with a
larger personal and financial interest in the success of the Company. Under the
terms of the plan, officers, directors, agents, and employees of the Company and
consultants to the Company or of any subsidiary of the Company may be granted
options to purchase shares of Common Stock at their fair market value on the
date of grant. The plan provides that options may be granted for terms of not
more than 10 years and shall vest according to the terms of the grant of the
options. In addition, options may not be exercised more than 30 days after a
participant ceases to be an employee of the Company, except in the case of
death, disability or retirement, in which cases options may be exercised within
90 days after the date of death, disability or retirement.
During 2002, 6,761,0002003, 65,000 options to purchase shares of Common Stock were granted
to employees (includingin accordance with the 2000 Management Stock Option Plan. During
2003, no options were granted to executives named in the executive compensation
table)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
of Directors or, if later, the effective date of the plan, and shall be granted
an option to purchase 10,000 shares of Common Stock on August 4, 2000 and August
3, 2001, provided that such directors continue to serve as directors on such
dates. The price at which shares of Common Stock may be purchased upon the
exercise of the options granted under the plan shall be the fair market value of
such shares on the date of grant of the options. The plan provides that options
shall be granted for terms of 10 years and shall vest one-third, one-third and
one-third on the first, second and third anniversaries of the date of grant. In
addition, options may not be exercised more than 3 months after a participant
ceases to be a director of the Company,
33
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 2002, a total of 50,0002003, no options to purchase shares of Common Stock were granted to
eligible directors all in accordance with the 1999 Stock Option Plan for Directors.
During 2002,2003, no options to purchase shares of Common Stock under the 1999 Stock
Option Plan for Directors were exercised. A total of
250,000During 2003, no 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 directorsa director from the
Company's Board of Directors. As of December 28, 2002,27, 2003, 420,000 options to
purchase Common Stock under the 1999 Stock Option Plan for Directors were
outstanding, of which 316,667366,667 options were exercisable.
No additional options to purchase shares of Common Stock will be granted
under the 1999 Stock Option Plan for Directors.
2002 Stock Option Plan for Directors
The purpose of the 2002 Stock Option Plan for Directors is to advance the
interests of the Company by providing non-employee directors of the Company,
through the grant of options to purchase shares of Common Stock, with a larger
personal and financial interest in the success of the Company. Under the terms
of the plan, directors who are neither employees of the Company nor nonresident
aliens shall be granted an option to purchase 50,000 shares of Common Stock as
of the effective date of his or her initial appointment or election to the Board
of Directors or, if later, the effective date of the plan, and shall be granted
an option to purchase 25,000 shares of Common Stock on August 2, 2002, and an
option to purchase 35,000 shares of Common Stock on August 1, 2003 and August 3,
2004, provided that such directors continue to serve as directors on such dates.
The price at which shares of Common Stock may be purchased upon the exercise of
the options granted under the plan shall be the fair market value of such shares
on the date of grant of the options. The plan provides that options shall be
granted for terms of 10 years and shall vest one-third, one-third and one-third
on the first, second and third anniversaries of the date of grant. In addition,
options may not be exercised more than 3 months after a participant ceases to be
a director of the Company, except in the case of death or disability, in which
cases options may be exercised within 12 months after the date of such death or
disability.
Effective January 1, 2003, the 2002 Stock Option Plan for Directors was
amended to increase the annual service award for directors who are not employees
of the Company from 25,000 to 35,000 options to purchase shares of Common Stock.
In November 2003, the 2002 Stock Option Plan for Directors was amended to
increase the maximum number of shares of Common Stock that may be delivered or
purchased under the Plan from 500,000 to 900,000. See "PROPOSAL 6 -- Amendments
to 2002 Stock Option Plan for Directors."
During 2002,2003, a total of 100,000610,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the 2002 Stock Option
Plan for Directors. During 2002,2003, no options to purchase shares of Common Stock
under the 2002 Stock Option Plan for Directors were exercised. NoDuring 2003, 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 directorsa
director from the Company's Board of Directors. As of December 28,
2002, 100,00027, 2003, 710,000
options to purchase Common Stock under the 2002 Stock Option Plan for Directors
were outstanding, none471,666 of which were exercisable.
34
Chief Executive Officer Compensation
On December 5, 2000, Thomas C. Shull was named President and Chief
Executive Officer and was elected to the Board of Directors of the Company.
Effective on that date, Mr. Shull, Meridian and the Company entered into the
December 2000 Services Agreement. Under the December 2000 Services Agreement,
Meridian provided for the benefit of the Company the services of Mr. Shull and
certain persons providing consulting services to the Company thereunder (the
"Consultants"). The term of the December 2000 Services Agreement, and the term
for the services of Mr. Shull, began on December 5, 2000 and would have
terminated on December 4, 2001, while the term for the services of the
Consultants would have terminated on June 4, 2001. The December 2000 Services
Agreement was replaced by the August 2001 Services Agreement, pursuant to which
the term of the services of Mr. Shull and the Consultants began on August 1,
2001 and would have terminated on June 30, 2002. The August 2001 Services
Agreement was replaced by the December 2001 Services Agreement. Effective
September 1, 2002, the Company and Mr. Shull entered into the 2002 Employment
Agreement, which replaced the August 2001 Services Agreement. The 2002
Employment Agreement willwas to expire on September 30,March 31, 2006. Mr. Shull resigned as
President and Chief Executive Officer on May 5, 2004. See "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements."
Change in Control Payments
Pursuant to the Recapitalization Agreement, upon completion of the
Recapitalization, there was a "change in control" of the Company for purposes of
all of the Company's existing Compensation Continuation (Change of Control)
Plans, including the Directors Change of Control Plan, the 2002 Employment
Agreement between the Company and Mr. Shull and the Transaction Bonus Letters
between the Company and Mr. Shull, Mr. Contino and Mr. Harriss. Mr. Shull
received payments on December 5, 2003 and December 12, 2003 in the aggregate
amount of $1,575,000 under the terms of the 2002 Employment Agreement. See
"Employment Contracts, Termination of Employment and Change-in-Control
Arrangements -- 2002 Employment Agreement." In December 2003, Messrs. Shull,
Harriss and Contino received payments in the amount of $450,000, $168,500 and
$193,500, respectively, under the terms of the Transaction Bonus Letters to
which they are a party. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements -- Transaction Bonus Letters." On December 18,
2003, each of the eight non-employee directors (Messrs. Brown, James, Krushel,
Sonnenfeld, Masson, Regan, Garten and Edelman) received a payment in the amount
of $87,000 under the terms of the Hanover Direct, Inc. Directors Change of
Control Plan. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements -- Hanover Direct, Inc. Directors Change of
Control Plan."
35
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 (4) 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 20022003 relating to Thomas Shull and Edward
Lambert and
Michael Contino exceeded the $1 Million Limit; consequently, in each case, the excess of
such payments over the $1 Million Limit was not deductible.
Respectfully Submitted,
The Stock Option and Executive
Compensation
Committee Kenneth J. Krushel(June 2004)
A. David Brown (Chairman)
E. Pendleton James
Robert H. Masson
22
Stuart Feldman
Donald Hecht
REPORT OF THE AUDIT COMMITTEE:COMMITTEE
The Audit Committee has reviewed and discussed with management and KPMG
LLP, the Company's independent auditors, the Company's audited financial
statements as of and for the year ended December 28, 2002.27, 2003.
The Audit Committee has discussed with the independent auditors the matters
required to be discussed by Statement on Auditing Standards ("SAS") No. 61,
Communication with Audit Committees, as amended by SAS 90.
The Audit Committee has received and reviewed the written disclosures and
the letter from the independent auditors required by Independence Standard No.
1, Independence Discussions with Audit Committees, as amended, by the
Independence Standards Board, and has discussed with the auditors the auditors'
independence.
Based on the review and discussions referred to above, we recommend to the
Board of Directors that the financial statements referred to above be included
in the Company's Annual Report on Form 10-K for the year ended December 28,
2002.27,
2003.
Respectfully Submitted,
The Audit Committee (April 2004)
Robert H. Masson (Chairman)
E. Pendleton James
Kenneth J. Krushel
23A. David Brown
Wayne P. Garten
Donald Hecht
36
PERFORMANCE GRAPH: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](LINE GRAPH)
Cumulative Total Return
---------------------------------------------------------
- --------------------------------------------------------------------------------
12/97 12/98 12/99 12/00 12/01 12/02 12/03
- --------------------------------------------------------------------------------
HANOVER DIRECT, INC.INC 100.00 114.58 120.83 12.50 12.33 6.33105.45 10.91 10.76 5.53 6.40
S & P 500 100.00 128.58 155.64 141.46 124.65 97.10121.04 110.02 96.95 75.52 97.18
PEER GROUP 100.00 172.48 186.68 90.72 177.12 214.36110.57 53.08 105.94 129.50 164.07
* 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, Lillian Vernon, Spiegel and Williams
Sonoma. Land's End was acquired by Sears and was removed from the Direct
Marketing Peer Group in 2002. Lillian Vernon Corp. was acquired in July 2003
by Ripplewood Holdings and Zelnick Media and was removed from the Direct
Marketing Peer Group in 2003.
NOTE: Assumes $100 invested on December 31, 19971998 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.
2437
DIRECTOR COMPENSATION:COMPENSATION
Standard Arrangements. Non-employee directors of the Company or its
subsidiariescurrently
receive an annual cash fee of $40,000.$58,000. During the first half of fiscal year
2002,
certain directors received per diem fees for extraordinary services not
exceeding $40,000 in the aggregate per person. Commencing October 1, 2002,2003, non-employee directors were to receive an annual cash fee of the Company will receive$40,000 and
an additional $16,000, $8,000, $8,000, $8,000 and $8,000 annual cash fee for
serving as the Chairman of the Audit, Compensation, Transaction, Executive and
Nominating Committees, respectively,respectively. Effective July 10, 2003, the Company
amended its director compensation policy to provide that the annual fee for
non-employee directors will be $58,000 and that there will be no supplemental
annual fees for serving as Chairman of thea Board of Directors. In addition, suchcommittee or for attending board
meetings. Non-employee directors also participate in the Eighteen Month Compensation ContinuationHanover Direct, Inc.
Change of Control Plan for Directors, the 1999 Stock Option Plan for Directors
and the 2002 Stock Option Plan for Directors. See "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements." The Company does
not compensate its employees, or employees of its subsidiaries, who serve as
directors. During fiscal 2002,2003, the Company provided $50,000 of term life
insurance for each director.
During 2002, a total of 50,0002003, no options to purchase shares of Common Stock were granted to
eligible directors all in accordance with the 1999 Stock Option Plan for Directors.
During 2002,2003, no options to purchase shares of Common Stock under the 1999 Stock
Option Plan for Directors were exercised. A total of
250,000During 2003, no 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 directorsa director from the
Company's Board of Directors. As of December 28, 2002,27, 2003, 420,000 options to
purchase Common Stock under the 1999 Stock Option Plan for Directors were
outstanding, of which 316,667366,667 options were exercisable.
During 2002,2003, a total of 100,000610,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the 2002 Stock Option
Plan for Directors. During 2002,2003, no options to purchase shares of Common Stock
under the 2002 Stock Option Plan for Directors were exercised. NoDuring 2003, 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 directorsa
director from the Company's Board of Directors. As of December 28,
2002, 100,00027, 2003, 710,000
options to purchase Common Stock under the 2002 Stock Option Plan for Directors
were outstanding, none471,666 of which were exercisable.
Effective January 1, 2003, the 2002 Stock Option Plan for Directors was
amended to increase the annual service award for directors who are not employees
of the Company from 25,000 to 35,000 options to purchase shares of Common Stock.
In November 2003, the 2002 Stock Option Plan for Directors was amended to
increase the maximum number of shares of Common Stock that may be delivered or
purchased under the plan from 500,000 to 900,000. See "PROPOSAL 6 -- Amendments
to 2002 Stock Option Plan for Directors."
Hanover Direct, Inc. Directors Change of Control Plan. Effective May 3,
2001, the Company's Board of Directors established the Hanover Direct, Inc.
Directors Change of Control Plan (the "Directors Plan") for all Directors of the
Company except for (i) any Director who is also an employee of the Company for
purposes of the Federal Insurance Contributions Act; or (ii) any persons (and
their successors from time to time) who are designated by a holder of
thirty-three percent (33%) or more of the Voting Shares to stand for election
and serve as a Director. For purposes of the Directors Plan, a "Change of
Control" will occur upon the occurrence of the first of any of the events
specified in item (i), (ii) or (iii) of the definition of "Change in Control"
under the Executive Plan, as discussed above.
A participant in the Directors Plan shall be entitled to receive a Change
of Control Payment under the Directors Plan if there occurs a Change of Control
and he/she is a Directordirector 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
38
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
The Recapitalization transaction was a "Change of Control" for purposes of
the Directors Plan. Under the Recapitalization Agreement, the Company was
permitted to make payments under the Directors Plan on or after the closing of
the Recapitalization. On December 18, 2003, each of the eight non-employee
directors (Messrs. Brown, James, Krushel, Sonnenfeld, Masson, Regan, Garten and
Edelman) received a payment in the amount of $87,000 under the terms of the
Directors Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:TRANSACTIONS
On July 8, 2004, the Company closed and funded a $20 million junior secured
term loan facility (the "Term Loan Facility") with Chelsey Finance, LLC
("Chelsey Finance"), an affiliate of its controlling shareholder, Chelsey
Direct. The Term Loan Facility is for a three-year term, subject to earlier
maturity upon the occurrence of a change in control or sale of the Company, and
carries an interest rate of 5% above the prime rate publicly announced by
Wachovia Bank, N.A., payable currently. The Term Loan Facility is secured by a
second priority lien on the assets of the Company. In connection therewith,
Chelsey Finance concurrently entered into an intercreditor and subordination
agreement with the Company's senior secured lender, Congress Financial
Corporation ("Congress").
In consideration for providing the Term Loan Facility to the Company,
Chelsey Finance received a closing fee of $200,000, which was paid in cash, and
will receive a warrant (the "Common Stock Warrant") to purchase 30% of the fully
diluted shares of Common Stock of the Company, which the Company believes would
be approximately 10,247,210 shares of Common Stock (adjusted for the one-for-ten
reverse split) at an exercise price of $.01 per share. Pending shareholder
approval of such issuance pursuant to Proposal 10, Chelsey Finance received a
warrant (the "Series D Preferred Warrant") to purchase a newly-issued series of
nonvoting preferred stock of the Company (the "Series D Preferred Stock") that
will be automatically exchanged for such Common Stock Warrant upon the receipt
of shareholder approval of the issuance thereof pursuant to Proposal 10. See
Proposal 10 for a description of the terms of the Series D Preferred Stock. In
connection with the closing of the Term Loan Facility, Chelsey Direct received a
waiver fee equal to 1% of the liquidation preference of the Company's
outstanding Series C Participating Preferred Stock, payable in Common Stock of
the Company, or 4,344,762 additional shares of Common Stock (calculated based
upon the fair market value thereof two business days prior to the closing date),
in consideration for the waiver by Chelsey Direct of its blockage rights over
the issuance of senior securities, as more fully described in Proposal 9.
The terms of the Term Loan Facility with Chelsey Finance were approved by
the Company's Audit Committee, all of whose members are independent, and the
Company's Board of Directors.
Concurrently with the closing of the Term Loan Facility with Chelsey
Finance, the Company amended its existing senior credit facility with Congress
(the "Congress Credit Facility"). Together, these two arrangements have
increased the Company's liquidity by approximately $25 million. Proceeds from
the Term Loan Facility with Chelsey Finance have been used to repay the Tranche
B Term Loan of approximately $4.9 million under the Congress Credit Facility and
to pay fees and expenses in connection with the two transactions and will
provide ongoing working capital for the Company.
The transactions contemplated by the Term Loan Facility would increase the
voting power of the Common Stock held by Chelsey and decrease the collective
voting power of the Common Stock held by other shareholders. After giving effect
to the payment of the Waiver Fee in shares of Common Stock, the one-for-ten
reverse split and the issuance of Common Stock under the Common Stock Warrants,
the Company
39
believes that Chelsey and Messrs. Wachtel and Feldman collectively would hold
approximately 66.8% of the issued and outstanding Common Stock and Chelsey would
hold 100% of the issued and outstanding Series C Participating Preferred Stock,
collectively representing approximately 87.8% of combined voting power of the
Voting Stock.
On November 10, 2003, the Company entered into a Memorandum of
Understanding (the "MOU") with Chelsey and Regan Partners. On November 18, 2003,
the Company and Chelsey entered into the Recapitalization Agreement. The
Recapitalization Agreement sets forth the terms and conditions of the
Recapitalization transaction, including the terms of the Series C Preferred
Stock and the reconstituted board of directors. The Recapitalization was a
"Change of Control" for purposes of all of the Company's existing Compensation
Continuation (Change of Control) Plans, the 2002 Employment Agreement, and the
Transaction Bonus Letters between the Company and its executive officers. Under
the Recapitalization Agreement, the Company was permitted to make any payments
required under the Transaction Bonus Letters on or after the Closing of the
Recapitalization. See the disclosure under the caption "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements." The Closing of
the Recapitalization occurred on November 30, 2003. In the MOU and the
Recapitalization Agreement, the Company acknowledged that Chelsey is the lawful
and bona fide owner of 29,446,888 shares of Common Stock and 1,622,111 shares of
Series B Preferred Stock. At the Closing of the Recapitalization, the Company
and Chelsey agreed to release each other from all claims, filed or that could
have been filed, as of the date of such release, and each of the Company and
Chelsey discontinued, with prejudice, all pending litigation between such
parties. In the MOU and the Recapitalization Agreement, the Company agreed that,
prior to the expiration of one hundred fifty (150) days from the execution of
the Recapitalization Agreement (or April 16, 2004), it would not (a) sell, other
than in the ordinary course of business, the inventory, trademarks or customer
lists associated with The Company Store division of the Company or (b) terminate
the employment of the Chief Executive Officer of the Company, unless, in either
case, such action has been approved by the Board of Directors pursuant to an
affirmative vote of at least six (6) members of the Board of Directors. The
Company agreed to pay (a) the reasonable legal fees and disbursements in
connection with the preparation and negotiation of the MOU, the Recapitalization
Agreement and all related documentation on behalf of Chelsey and (b) the
reasonable fees of any financial advisors engaged by Chelsey or Chelsey's legal
counsel not to exceed $20,000 in the aggregate relating to compliance with the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, including,
without limitation, a valuation by such financial advisors of the securities to
be received by Chelsey pursuant to the Recapitalization. Pursuant to the
Recapitalization Agreement, the following additional documents were executed:
(i) a certificate of designations setting forth the terms and conditions of the
Series C Preferred Stock which was filed with the Delaware Secretary of State,
(ii) a voting agreement setting forth certain voting arrangements among Chelsey,
Stuart Feldman, Regan Partners and Basil Regan, (iii) a registration rights
agreement providing for registration rights with respect to resales by Chelsey
and Stuart Feldman of all shares of Common Stock owned by Chelsey and Mr.
Feldman, and (iv) a corporate governance agreement between the Company, Chelsey,
Stuart Feldman, Regan Partners, Regan Fund and Basil Regan setting forth the
corporate governance provisions in the Recapitalization Agreement. For a further
discussion of the terms and conditions of the MOU, the Recapitalization
Agreement and the Recapitalization, see "DIRECTORS AND EXECUTIVE OFFICERS--The
Recapitalization" above.
At December 28, 2002, Richemont Finance S.A. ("Richemont"), a Luxembourg company
("Richemont"), owned approximately 21.3% of the Company's Common Stock
outstanding and 100% of the Company's Series B Preferred Stock through direct
and indirect ownership. At December 28, 2002, currentPursuant to the terms and former officersconditions of that certain
Purchase and executivesSale Agreement, dated as of May 19, 2003, between Richemont and
Chelsey, Chelsey
40
purchased all of Richemont's securities in 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.
During November 2002, the Company entered into Transaction Bonus Letters
with eachconsisting 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 600,00029,446,888
shares of the Company's common stock to an Executive Vice President atCommon Stock and 1,622,111 shares of Series B Preferred Stock, for a
purchase price of $0.27
per share under$40,000,000. The Company was not a party to such transaction.
As a result of this transaction, on such date, Chelsey became the Company's 2000 Management Stock Option Plan.
During September 2002, Charles F. Messina resigned as Executive Vice
President, Chief Administrative Officer and Secretarybeneficial
owner 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 shares21.3% 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 shares100% 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.Series B
Preferred Stock.
On December 19, 2001, the Company consummated a transaction with Richemont
(the "Richemont Transaction"). In the Richemont Transaction, the Company
repurchased from Richemont all of the outstanding shares of the Series A
Preferred Stock and 74,098,769 shares of the Common Stock of the
26
Company held by
Richemont in return for the issuance to Richemont of 1,622,111 shares of newly
created Series B Preferred Stock and the 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.
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 2000, Mr. Shull, Meridian and the Company entered into the
December 2000 Services Agreement.
John F. Shull, the brother of Thomas C. Shull, the former President and
Chief Executive Officer of the Company, acted as a consultant under the December
2001 Services Agreement, and received an option to purchase 100,000 shares of
the Company's Common Stock under the December 2001 Services Agreement and an
option to purchase 500,000 shares of the Company's Common Stock under the
December 2000 Services Agreement.
In January 1998, the Company made a $75,000 non-interest bearing loan to
Mr. Contino for the purchase by Mr. Contino of a new principal residence in the
State of New Jersey. The terms of the loan agreement included a provision for
the Company to forgive the original amount of the principal on the fifth
anniversary of the loan. The loan was secured by the residence which the
proceeds were used to purchase. The loan was forgiven in full in accordance with
its terms during January 2003. In addition to the loan forgiveness, the Company
paid all applicable withholding taxes totaling $64,063.
At December 27, 2003, current and former officers and executives of the
Company owed the Company approximately $0.3 million, excluding accrued interest,
under the 1993 Executive Equity Incentive Plan. These amounts due to the Company
bear interest at rates ranging from 5.54% to 7.75% and are due or will be due
during 2004.
41
Effective February 15, 2004, the Company and Brian C. Harriss entered into
a severance agreement. See "EXECUTIVE COMPENSATION AND OTHER
INFORMATION -- Employment Contracts, Termination of Employment and
Change-In-Control Arrangements -- Brian C. Harriss."
Effective November 4, 2003, the Company and Edward M. Lambert entered into
a severance agreement. See "EXECUTIVE COMPENSATION AND OTHER
INFORMATION -- Employment Contracts, Termination of Employment and
Change-In-Control Arrangements -- Chief Financial Officer."
Effective May 5, 2004, the Company and Thomas Shull entered into the Shull
Severance Agreement. See "EXECUTIVE COMPENSATION AND OTHER
INFORMATION -- Employment Contracts, Termination of Employment and
Change-In-Control Arrangements -- Shull Severance Agreement."
Effective May 5, 2004, the Company and Wayne P. Garten entered into the
Garten Employment Agreement. See "EXECUTIVE COMPENSATION AND OTHER
INFORMATION -- Employment Contracts, Termination of Employment and
Change-In-Control Arrangements -- Garten Employment Agreement."
See also "Stock Options and Stock Appreciation Rights" and "Employment
Contracts, Termination of Employment and Change-in-Control Arrangements" for
additional information on relationships and related-party transactions.
Either the Company's Board of Directors, a committee of the Company's Board
of Directors, or the stockholders have approved these relationships and
transactions and, to the extent that such arrangements are available from
non
affiliatednonaffiliated parties, all relationships and transactions are on terms no less
favorable to the Company than those available from non affiliated parties.
2742
PRINCIPAL HOLDERS OF VOTING SECURITIES OF THE COMPANY
CERTAIN BENEFICIAL OWNERS: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 BC Preferred
Stock as of April 2, 2003. InformationJuly 9, 2004 (without giving effect to the proposed reverse split of
the Company's Common Stock). The information is determined in accordance with
Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), based upon information furnished by the persons listed or
contained in filings made by them with the Commission. Except as noted below, to
the Company's knowledge, each person named in the table is based on information
furnishedwill have sole voting
and investment power with respect to the Companyall shares of Common Stock and Series C
Preferred Stock shown as beneficially owned by such persons or groups and statements filed with the
Securities and Exchange Commission (the "Commission").them.
PERCENTAGE
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS(1)
- -------------- ------------------- ----------------------- ----------
Series B Richemont Finance S.A. ......................... 1,622,111(2)C Chelsey Direct, LLC,........................... 564,819(2) 100%
Participating 35 Boulevard Prince HenriWilliam B. Wachtel and
Preferred Stock L 1724 LuxembourgStuart Feldman
c/o Wachtel & Masyr, LLP
110 East 59th Street
New York, New York 10022
Common Stock Richemont Finance S.A. ......................... 29,446,888(2) 21.3%
35 Boulevard Prince Henri
L 1724 LuxembourgChelsey Direct, LLC,........................... 115,810,383(2) 51.6%
William B. Wachtel and
Stuart Feldman
c/o Wachtel & Masyr, LLP
110 East 59th Street
New York, New York 10022
Common Stock Regan Partners, L.P. and Basil P. Regan......... 38,745,017(3) 28.0%Regan........ 38,821,683(3) 17.3%
32 East 57th Street
New York, New York 10022
Common Stock Theodore Kruttschnitt........................... 10,144,000(4) 7.3%
1730 South El Camino Real
Suite 400
San Mateo, California 94402
- ---------------
(1) In the case of Common Stock, includes shares of Common Stock issued upon
exercise of options or warrants exercisable within 60 days for the subject
individual only. Percentages of Common Stock are computed on the basis of
138,315,800224,518,395 shares of Common Stock and 564,819 shares of Series C Preferred
Stock outstanding as of AprilJuly 9, 2004. In the case of Common Stock, does not
give effect to the proposed reverse split of the Common Stock. See "PROPOSAL
4 -- Principal Effect of the Increase in Authorized Shares" and see
"PROPOSAL 2 2003.-- Effect of Reverse Split on Voting Power of Holders of Common
Stock."
(2) Information concerning the number of shares beneficially owned has been
taken from Amendment No. 511 to the Statement on Schedule 13D filed by
RichemontChelsey Direct, LLC on March 21,July 13, 2004 with the Commission. Chelsey is the
record holder of 115,810,383 shares of Common Stock and 564,819 shares of
43
Series C Preferred Stock. Chelsey Capital Profit Sharing Plan (the "Chelsey
Plan") is the sole member of Chelsey and Mr. Wachtel is the Manager of
Chelsey. The sponsor of the Chelsey Plan is DSJ International Resources Ltd.
("DSJI"). Mr. Feldman is the sole officer and director of DSJI and a
principal beneficiary of the Chelsey Plan. Mr. Feldman is also the owner of
160,900 shares of Common Stock. Mr. Wachtel, in his capacity as the Manager
of Chelsey, will have sole voting and dispositive power with respect to
115,649,483 shares of Common Stock and 564,819 shares of Series C Preferred
Stock owned by Chelsey, and Mr. Feldman will have sole voting and
dispositive power with respect to 160,900 shares of Common Stock owned by
him. Each of Messrs. Wachtel and Feldman have options to purchase 50,000
shares of Common Stock exercisable within 60 days. The shares of Common
Stock and Series C Preferred Stock which are owned by Chelsey and Messrs.
Wachtel and Feldman collectively represent approximately 61.3% of the
combined voting power of the Company's securities. See "PROPOSAL 2 -- Effect
of Reverse Split on Voting Power of Holders of Common Stock." After giving
effect to the one-for-ten reverse split and the issuance of Common Stock
under the Common Stock Warrant, the Company believes that Chelsey, Chelsey
Finance and Messrs. Wachtel and Feldman would hold approximately 66.8% of
the issued and outstanding Common Stock and Chelsey would own 100% of the
issued and outstanding Series C Participating Preferred Stock, collectively
representing approximately 87.8% of combined voting power of the Voting
Stock.
(3) Information concerning the number of shares beneficially owned has been
taken from Amendment No. 3 to the Statement on Schedule 13D filed by Regan
Partners L.P. on June 5, 2003 with the Commission. Mr. Regan and Regan
Partners L.P. have shared voting and dispositive power with respect to
37,773,450 shares of Common Stock and Mr. Regan has sole voting and
dispositive power with respect to 1,048,233 shares of Common Stock
(including options to purchase 93,333 shares exercisable within 60 days).
44
SECURITY OWNERSHIP OF MANAGEMENT OF THE COMPANY
MANAGEMENT OWNERSHIP
The following table lists share ownership of the Company's Common Stock and
Series C Preferred Stock as of July 9, 2004 (without giving effect to the
proposed reverse split of the Company's Common Stock). The information includes
beneficial ownership by (i) each of the Company's directors and nominees for
director and executive officers and (ii) all directors and executive officers as
a group. The information is determined in accordance with Rule 13d-3 promulgated
under the Exchange Act based upon information furnished by the persons listed or
contained in filings made by them with the Commission. Except as noted below, to
the Company's knowledge, each person named in the table will have sole voting
and investment power with respect to all shares of Common Stock and Series C
Preferred Stock shown as beneficially owned by them.
AMOUNT AND NATURE OF PERCENTAGE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS(1)
- ------------------------ ----------------------- -------------
Robert H. Masson.................................... 85,000(2) *
Basil P. Regan...................................... 38,821,683(3) 17.3%
Wayne P. Garten..................................... 718,571(4) *
A. David Brown...................................... 85,000(5) *
Michael D. Contino.................................. 1,452,400(6) *
Charles E. Blue..................................... 294,000(7) *
Steven Lipner....................................... 71,174(8) *
William B. Wachtel.................................. 115,699,483(9) 51.5%
564,819(9) 100%
Stuart Feldman...................................... 115,860,383(9) 51.6%
564,819(9) 100%
Donald Hecht........................................ 0(10) *
Paul S. Goodman..................................... 0(10) *
William C. Kingsford................................ 235,117(11) *
Directors and Executive Officers as a
Group (12 persons).................................. 157,683,328(12) 70.2%
564,819(13) 100%
- ---------------
* Less than one percent
(1) Includes in each case shares of Common Stock issuable upon exercise of
options or warrants exercisable within 60 days for the subject individual
only. Percentages are computed on the basis of 224,518,395 shares of Common
Stock and 564,819 shares of Series C Preferred Stock outstanding as of July
9, 2004. In the case of Common Stock, does not give effect to the proposed
reverse split of the Common Stock. See "PROPOSAL 2 -- Effect of Reverse
Split on Voting Power of Holders of Common Stock" and "PROPOSAL
4 -- Principal Effect of the Increase in Authorized Shares."
(2) Represents options to purchase 85,000 shares exercisable within 60 days.
(3) Mr. Regan and Regan Partners L.P. have shared voting and dispositive power
with respect to 37,773,450 shares of Common Stock and Mr. Regan has sole
voting and dispositive power with respect to 954,9001,048,233 shares of Common
Stock.
Also includesStock (including options to purchase 16,66793,333 shares exercisable within 60
days).
45
(4) Includes options to purchase 716,666 shares exercisable within 60 days.
(4) Information concerning the number of shares beneficially owned has been
taken from the Amendment No. 14 to Statement on Schedule 13D filed by Mr.
Kruttschnitt on May 28, 2002 with the Commission. The Schedule 13D indicates
that Mr. Kruttschnitt had sole voting and sole dispositive power with
respect to 10,074,000 shares of Common Stock. Also includes options held by
Mr. Kruttschnitt to purchase 70,000 shares 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 April 2,
2003. The information includes beneficial ownership by each of our current
directors and executive officers and by all directors and executive officers as
a group. Except as noted below, to our knowledge, each person named in the table
has sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
SHARES OF PERCENT OF
NAME OF BENEFICIAL OWNER COMMON STOCK(1) CLASS(1)
- ------------------------ --------------- ----------
Robert H. Masson.......................................... 0 *
Kenneth J. Krushel........................................ 60,000(2) *
E. Pendelton James........................................ 16,667(3) *
Basil P. Regan(4)......................................... 38,745,017(4) 28.0%
Thomas C. Shull........................................... 3,200,000(5) 2.3%
Michael D. Contino........................................ 389,900(6) *
Brian C. Harriss.......................................... 53,600 *
William C. Kingsford...................................... 99,867(7) *
Edward M. Lambert......................................... 300,000(8) *
Frank J. Lengers.......................................... 19,000(9) *
Steven Lipner............................................. 26,174(10) *
Directors and executive officers as a group (11
persons)................................................ 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 138,315,800 shares of Common
Stock outstanding as of April 2, 2003.
(2) RepresentsExcludes options to purchase 60,0001,333,334 shares exercisable within 60 days.
(3) Represents options to purchase 16,667 shares exercisable within 60 days.
(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 954,900 shares of Common
Stock. Also includes options to purchase 16,667 shareswhich are not exercisable
within 60 days.
(5) Represents options to purchase 3,200,00085,000 shares exercisable within 60 days.
(6) Includes options to purchase 387,5001,450,000 shares exercisable within 60 days.
(7) Represents options to purchase 99,867294,000 shares exercisable within 60 days.
(8) RepresentsIncludes options to purchase 300,00070,000 shares exercisable within 60 days.
(9) RepresentsChelsey is the record holder of 115,649,483 shares of Common Stock and
564,819 shares of Series C Preferred Stock. Chelsey Capital Profit Sharing
Plan (the "Chelsey Plan") is the sole member of Chelsey and Mr. Wachtel is
the Manager of Chelsey. The sponsor of the Chelsey Plan is DSJ
International Resources Ltd. ("DSJI"). Mr. Feldman is the sole officer and
director of DSJI and a principal beneficiary of the Chelsey Plan. Mr.
Feldman is also the owner of 160,900 shares of Common Stock. Mr. Wachtel,
in his capacity as the Manager of Chelsey, has sole voting and dispositive
power with respect to 115,649,483 shares of Common Stock and 564,819 shares
of Series C Preferred Stock owned by Chelsey, and Mr. Feldman has sole
voting and dispositive power with respect to 160,900 shares of Common Stock
owned by him. Each of Messrs. Wachtel and Feldman have options to purchase
19,00050,000 shares of Common Stock exercisable within 60 days. The shares of
Common Stock and Series C Preferred Stock owned by Chelsey and Messrs.
Wachtel and Feldman collectively represent approximately 61.3% of the
combined voting power of the Company's securities. See "PROPOSAL
2 -- Effect of Reverse Split on Voting Power of Holders of Common Stock."
After giving effect to the payment of the Waiver Fee on the closing of the
Chelsey Term Loan in shares of Common Stock, the one-for-ten reverse split
and the issuance of Common Stock under the Common Stock Warrant, the
Company believes that Chelsey, Chelsey Finance and Messrs. Wachtel and
Feldman would hold approximately 66.8% of the issued and outstanding Common
Stock and Chelsey would own 100% of the issued and outstanding Series C
Participating Preferred Stock, collectively representing approximately
87.8% of combined voting power of the Voting Stock.
(10) IncludesExcludes options to purchase 25,00050,000 shares which are not exercisable within
60 days.
(11) Includes options to purchase 4,124,701235,117 shares exercisable within 60 days.
29(12) Shares of Common Stock; includes options to purchase 3,129,116 shares
exercisable within 60 days.
(13) Shares of Series C Preferred Stock.
46
PROPOSAL I1
ELECTION OF DIRECTORS
GENERALLY:INTRODUCTION:
The Board of Directors currently consists of 5 members.the following (8) members: A.
David Brown; Stuart Feldman; Wayne P. Garten; Paul S. Goodman; Donald Hecht;
Robert H. Masson; Basil P. Regan; and William B. Wachtel. The Company has
elected controlled company status as defined in Rule Section 121(A) of the
American Stock Exchange's listing standards; as a result, a majority of the
Board of Directors amendedneed not be independent.
At the Company's Bylaws, effective on the date of the 20012003 Annual Meeting of Stockholders of the Company (May 31, 2001)held on May 15,
2003, the five (5) members of the Board of Directors in office at such time were
re-elected to reducethe Board of Directors. On July 17, 2003, the size of the Company's Board of
Directors was increased from five (5) to six Directors.seven (7) members and A. David Brown
and Jeffrey A. Sonnenfeld were elected as members of the newly-expanded Board of
Directors, subject to the fulfillment of certain conditions precedent which were
fulfilled on July 29, 2003. On January 10, 2002,September 29, 2003, Martin Edelman and Wayne
Garten were elected to the Board of Directors announced the reductionby Chelsey, as holder of the
number of DirectorsSeries B Preferred Stock, as the result of the CompanyCompany's failure to redeem any
shares of the Series B Preferred Stock on or prior to August 31, 2003, and the
Board expanded to nine (9) members. On November 18, 2003, the date of signing of
the Recapitalization Agreement, E. Pendleton James, Kenneth J. Krushel and
Jeffrey A. Sonnenfeld resigned from six to five. On January 10, 2002,the Board of Directors. Also on November 18,
2003, the date of signing of the Recapitalization Agreement, the size of the
Board of Directors announced the
appointment of Thomas C. Shullwas changed from nine (9) to eight (8) members and Stuart
Feldman and William B. Wachtel were elected as Chairmanmembers of the Company's Board of
DirectorsDirectors. Pursuant to the Recapitalization Agreement, upon completion of the
Recapitalization on November 30, 2003, the number of directors was fixed at nine
(9) and the election of E. Pendleton JamesDonald Hecht was elected as a member of the Company's Board of Directors, each filling the vacancies created by the resignation of Eloy
Michotte and Alan Grieve and each to serve until the Company's next annual
meeting of stockholders. On December 20, 2002,Directors. Martin
Edelman resigned from the Board of Directors announcedeffective February 15, 2004. On
March 23, 2004, Paul S. Goodman was designated by Chelsey to fill the election of Robert H. Masson as a member ofvacancy
created by Mr. Edelman's resignation effective April 12, 2004. On May 5, 2004,
Thomas Shull resigned from the Company's Board of Directors effective January 1, 2003, fillingimmediately. On May
5, 2004, Wayne Garten took the Chief Executive Officer's seat on the Board which
was vacated by Mr. Shull, and Mr. Garten's seat on the Board became vacant.
Chelsey has indicated that it does not presently intend to fill the vacancy on
the Board created by Mr. Garten taking the resignationChief Executive Officer's seat on the
Board.
Pursuant to the Corporate Governance Agreement, dated as of J.
David Hakman effective December 31, 2002.November 30,
2003, by and among the Company, Chelsey, Stuart Feldman, Regan Partners, L.P.,
Regan International Fund Limited and Basil P. Regan, the parties agreed that,
for a period of two years from the closing of the Recapitalization, five of the
nine directors of the Company will at all times be directors of the Company
designated by Chelsey (who initially were Martin L. Edelman, William Wachtel,
Stuart Feldman, Wayne Garten and Donald Hecht) and one of the nine directors of
the Company will at all times be a director of the Company designated by Regan
Partners (who initially was Basil Regan) and one of the directors of the Company
will at all times by the Chief Executive Officer of the Company. The right of
Regan Partners to designate a nominee to the Board of Directors shall terminate
if Regan Partners ceases to own at least 75% of the outstanding shares of Common
Stock (as adjusted for stock splits, reverse stock splits and the like) owned by
Regan Partners as of November 10, 2003. In connection with the closing of the
transactions contemplated by the Recapitalization Agreement, Chelsey, Stuart
Feldman, Regan Partners and Basil Regan entered into a Voting Agreement, dated
as of November 30, 2003, providing that each of them will vote any shares of the
Company beneficially owned by them or any entity affiliated with them to elect
the nominees to the Board of Directors of Chelsey
47
and Regan Partners designated pursuant to the Recapitalization Agreement for a
period of two years unless sooner terminated. All shares for which the Company's
management or Board of Directors hold proxies (including undesignated proxies)
will be voted in favor of the addition of such designees of Chelsey and Regan
Partners, except as may otherwise be provided by stockholders submitting such
proxies. In the event that any Chelsey or Regan Partners designee shall cease to
serve as a director of the Company for any reason, the Company will cause the
vacancy resulting thereby to be filled by a designee of Chelsey or Regan
Partners, as the case may be, reasonably acceptable to the Board of Directors as
promptly as practicable. Chelsey may nominate or propose for nomination or elect
any persons to the Board of Directors, without regard to the foregoing
limitations, after the Series C Preferred Stock is redeemed in full. The right
of Regan Partners to designate a nominee to the Board of Directors shall
terminate if Regan Partners ceases to own at least 75% of the outstanding shares
of Common Stock (as adjusted for stock splits, reverse stock splits and the
like) owned by Regan Partners as of November 10, 2003.
The Board has nominated 5eight (8) directors for election at the Annual
Meeting. Four of them have been designated by Chelsey and one of them has been
designated by Regan Partners pursuant to the Corporate Governance Agreement
discussed above. The Corporate Governance Agreement also requires that the Board
of Directors designate the Chief Executive Officer of the Company to serve as a
member of the Board of Directors. Mr. Garten, the current President and Chief
Executive Officer of the Company and a member of the Board of Directors, was
originally a Chelsey designee. Messrs. Brown and Masson were nominated by the
Nominating Committee. All of them are currently serving as directors. If you
elect the 5eight (8) 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 51 Thomas C. Shullbylaws. Since the Company has been Chairmanelected controlled company
status as defined in Rule Section 121(A) of the Company's
BoardAmerican Stock Exchange's
listing standards, a majority of Directors since January 10, 2002the directors nominated for election at the
Annual Meeting need not be independent.
NOMINEES:
A. DAVID BROWN............
AGE 61 Mr. Brown is the co-founder of Bridge Partners LLC, a
consumer financial services and diversity headhunting
firm. Prior to co-founding Bridge Partners, Mr. Brown
served as a Managing Director of Whitehead Mann after
having served as Vice President of the Worldwide
Retail/Fashion Specialty Practice at Korn/Ferry
International. Previously, Mr. Brown served for 12
years as Senior Vice President for Human Resources at
R.H. Macy & Co. He was responsible for human
resources and labor relations for 50,000 employees in
five U.S. divisions and 17 foreign buying offices
around the world. He serves on the Boards of Zale
Corporation and Selective Insurance Group, Inc. He is
a member of the Board of DirectorsTrustees of Morristown
Memorial Hospital, Drew University and the Jackie
Robinson Foundation. Mr. Brown was elected a director
of the Company andeffective July 29, 2003.
STUART FELDMAN............
AGE 44 Mr. Feldman has been a principal of Chelsey Capital,
LLC, a private hedge fund, for more than the past
five years. Mr. Feldman is the principal beneficiary
of the Chelsey Capital Profit Sharing Plan, which is
the sole member of Chelsey. Mr. Feldman was elected a
director of the Company effective November 18, 2003,
the date of signing of the Recapitalization
48
Agreement. Mr. Feldman was elected a director of the
Company on November 18, 2003, the date of the signing
of the Recapitalization Agreement.
WAYNE P. GARTEN...........
AGE 52 Mr. Garten has served as the President and Chief
Executive Officer of the Company since DecemberMay 5, 2000. In 1990,2004.
Mr. Shull co-founded
Meridian Ventures, a venture management and
turnaround firm presently based in Connecticut, and
hasGarten served as chief executive officer since its
inception.the President of Caswell-Massey
Ltd., Inc., a retailer and direct marketer of
fragrance and other personal care products, from
January 2004 to May 2004. Prior thereto, Mr. Garten
was a financial consultant specializing in the direct
marketing industry. He was Chief Executive Officer
and President of Popular Club, Inc., a direct
selling, catalog marketer of apparel and general
merchandise products, from 2001 to 2003. From 1997 to
1999,2000, he served as President
and CEO of Barneys New York, a leading luxury
retailer, where he led them out of bankruptcy. From
1992 to 1994, Mr. Shull was Executive Vice President and Chief
Financial Officer of R.H. Macy Company,Micro Warehouse, Inc., where he was responsible
for human resources, information technology, business
development, strategic planningan
international catalog reseller of computer products.
From 1983 to 1996, Mr. Garten held various financial
positions at Hanover Direct and merchandise
distribution and led the merger negotiations with
Federated Department Stores. Prior to that, he served
as a consultant with McKinseyits predecessor, The
Horn & Hardart Company, and in the
early 1980s as a member of the National Security
Council Staff in the Reagan White House.
E. PENDLETON JAMES........
AGE 73 E. Pendleton James has been a director of the Company
since January 2002. Mr. James has over thirty years
experience in executive search and recently merged
his firm, Pendleton James Associates, with Whitehead
Mann. He currently serves on the Board of the
Citizens for Democracy Corps and is a Trustee for the
Center for the Study of the Presidency. Mr. James
served as an assistant to Presidents Nixon and
Reagan. He is a former member of the Board of
Directors of Comsat Corporation, the Metropolitan
Life Series Fund, the White House Fellows Commission,
the Ronald Reagan Foundation and the USO World Board
of Governors.
30
KENNETH J. KRUSHEL........
AGE 51 Kenneth J. Krushel has been theincluding 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 ExecutiveFinancial Officer of College
Enterprises, Inc. From 1996from 1989 to
1999,1996. 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,Garten is a Certified Public Accountant.
Mr. Krushel was President and
Chief Operating Officer of Think Entertainment and
Vice-President of Programming and Marketing for
American Cablesystems. Mr. KrushelGarten was elected a director of the Company by
Chelsey effective September 29, 2003.
PAUL S. GOODMAN...........
AGE 50 Mr. Goodman is the Chief Executive Officer of Chelsey
Broadcasting Company, LLC, which position he has held
since January 2003. Chelsey Broadcasting is the owner
of middle market network-affiliated television
stations. Until October 2002, Mr. Goodman had served
as a director of Benedek Broadcasting Corporation
from November 1994 and as a director of Benedek
Communications Corporation from its inception. Until
October 2002, Mr. Goodman was also corporate counsel
to Benedek Broadcasting since 1983 and Benedek
Communications since its formation in May 1999.1996. From
April 1993 to December 2002, Mr. Goodman was a member
of the law firm of Shack Siegel Katz Flaherty &
Goodman, P.C. From January 1990 to April 1993, Mr.
Goodman was a member of the law firm of Whitman &
Ransom. Mr. Goodman became a director of the Company
effective April 12, 2004.
DONALD HECHT..............
AGE 70 Mr. Hecht has, since 1966, together with his brother,
Michael Hecht, managed Hecht & Company, an accounting
firm. Mr. Hecht was elected a director of the Company
effective November 30, 2003, the date of the closing
of the Recapitalization.
ROBERT H. MASSON..........
AGE 6768 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.
49
BASIL P. REGAN............
AGE 6263 Basil P. Regan has been the General Partner of Regan
Partners, L.P., a limited partnership that invests
primarily in turnaround companies and special
situations, since December 1989. He has been
President of Regan Fund Management Ltd. since October
1995, which manages Regan Partners, L.P., Regan Fund
International, L.P. and Super Hedge Fund, L.P. From
1986 to 1989, Mr. Regan was Vice President and
Director of Equity Research of Reliance Group
Holdings. Mr. Regan was elected a director of the
Company in August 2001.
BOARD MEETINGS:WILLIAM B. WACHTEL........
AGE 49 Mr. Wachtel has been a managing partner of Wachtel &
Masyr, LLP, or its predecessor law firm (Gold &
Wachtel, LLP), since its founding in August 1984. He
is the co-founder of the Drum Major Institute, a
not-for-profit organization carrying forth the legacy
of Dr. Martin Luther King, Jr. Mr. Wachtel is the
Manager of Chelsey. Mr. Wachtel was elected a
director of the Company effective November 18, 2003,
the date of signing of the Recapitalization
Agreement. Mr. Wachtel was elected a director of the
Company on November 18, 2003, the date of the signing
of the Recapitalization Agreement.
CORPORATE GOVERNANCE
Board of Directors Meetings
In 2002,2003, the Board of Directors held 9fifteen meetings in person or by
conference telephone and took action by written consent on 4three occasions. Each
incumbent director attended at least 75% of the aggregate number of the
Company's Board Meetingsof Directors meetings and his committee meetings.meetings except for Mr.
Garten. While the Company encourages all members of the Board of Directors to
attend the Annual Meeting, there is no formal policy as to their attendance at
each of the annual meetings of stockholders. All of the members of the Board of
Directors attended the 2003 annual meeting of stockholders. The Company holds
meetings of its Board of Directors on at least a quarterly basis.
Board of Director Independence
Each year, the Board of Directors reviews the relationships that each
director has with the Company and with other parties. Only those directors who
do not have any of the categorical relationships that preclude them from being
independent as defined in Rule Section 121(A) of the American Stock Exchange's
listing standards, and who the Board of Directors affirmatively determines have
no relationships that would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director, are considered to be
independent directors. The Board of Directors has reviewed a number of factors
to evaluate the independence of each of its members. These factors include its
members' current and historic relationships with the Company and its
competitors, suppliers and customers; their relationships with management and
other directors and shareholders; the relationships their current and former
employers have with the Company; and the relationships between the Company and
other companies of which the Company's board members are directors or executive
officers. The Company has elected controlled company status as defined in Rule
Section 121(A) of the American Stock Exchange listing standards. As a result, a
majority of the Board of Directors need not be independent.
50
Independent members of the Board of Directors of the Company meet in
executive session without management present, and are scheduled to do so at
least annually.
Stockholder Communications
The Company's stockholders may communicate directly with the members of the
Board of Directors or the individual chairman of standing Board of Directors
committees by writing directly to those individuals at the following address:
Hanover Direct, Inc., 115 River Road, Building 10, Edgewater, New Jersey 07020.
The Company's general policy is to forward, and not to intentionally screen, any
mail received at the Company's corporate office that is sent directly to an
individual unless the Company believes the communication may pose a security
risk.
Code of Ethics
The Company has adopted a code of ethics that applies to the Company's
principal executive officer, principal financial officer and principal
accounting officer and other persons performing similar functions. A copy of the
code of ethics has been filed with the Securities & Exchange Commission as an
exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 2002. The Company has also adopted a Code of Conduct that applies
to the Company's directors, officers and employees. A copy of the Code of
Conduct has been filed with the Securities & Exchange Commission as an Exhibit
to the Company's Annual Report on Form 10-K for the fiscal year ended December
27, 2003.
BOARD COMMITTEES:COMMITTEES
The Board of Directors has standing Executive, Audit, Stock Option and
Executive Compensation, Nominating, Transactions and TransactionsCorporate Governance
Committees.
The Executive CommitteeCommittee.
- During 2002,2003, Messrs. Kenneth J. Krushel (Chairman), Basil P. Regan,
Thomas C. Shull, Robert H. Masson and Kenneth J.
KrushelJeffrey A. Sonnenfeld were members
of the Executive Committee. Currently, Messrs. Basil
P. Regan (Chairman), Thomas C. Shull and Kenneth J. Krushel areUpon execution of the Recapitalization
Agreement, the members of the Executive Committee.Committee became Stuart Feldman
(Chairman), Martin Edelman and Basil Regan. The current members of the
Executive Committee are Stuart Feldman (Chairman), William B. Wachtel and
Basil Regan.
- The duties of the Executive Committee include:
- recommending actions to the Board;Board of Directors; and
31
- acting on behalf of the Board of Directors on certain operating matters
requiring Board of Director approval when the Board of Directors is not
in session.
- The Executive Committee held 5five meetings in person or by conference
call in 20022003 and took action by written consent on 1 occasiontwo occasions in 2002.2003.
The Audit Committee.
- At various times during 2002,2003, Messrs. J. David Hakman,Robert H. Masson (Chairman),
Kenneth J. Krushel and E. Pendleton James were members of the Audit
Committee. Currently,
Messrs. Robert H. Masson (Chairman), Kenneth J. Krushel and E. Pendleton
James areUpon execution of the Recapitalization Agreement, the members
of the Audit Committee.Committee became Robert Masson (Chairman), Wayne P.
51
Garten and A. David Brown. Donald Hecht was added to the Audit Committee
at the same time he was added to the Board of Directors. The current
members of the Audit Committee are Messrs. Masson (Chairman), Brown and
Hecht. Each of the members of the Audit Committee is independent, as
defined in Rule Section 121(A) of the American Stock Exchange's listing
standards.
- The duties of the Audit Committee include:
- monitoring the integrity of the Company's financial reporting process
and systems of internal controls regarding finance, accounting and legal
compliance;
- responsibility for the appointment, compensation and oversight of the
work of the independent auditor (including resolution of disagreements
between management and the independent auditor regarding financial
reporting) for the purpose of preparing its audit report or any related
work;
- determining the extent of funding necessary for payment of compensation
to the independent auditor for the purpose of rendering or issuing the
annual audit report and to any independent legal counsel or other
advisors retained under the preceding paragraph to advise the Audit
Committee;
- seeking to insure and monitor the independence and performance of the
Company's external auditors and internal auditing department and advise
the Board;Board of Directors;
- reviewing and approving all related-party transactions after such
transactions have been reviewed and approved by the Transactions
Committee of the Board;transactions;
- monitoring the independence and performance of the Company's independent
auditors and internal auditing department;
- ensuring that the independent auditor submits to the Audit Committee on
an annual basis a written statement consistent with Independent
Standards Board Standard No. 1, discussing with the independent auditor
any disclosed relationships or services that may impact the objectivity
and independence of the independent auditor, and satisfying itself as to
the independent auditor's independence;
- confirming that the independent auditor does not violate the audit
rotation requirements of Section 203 of the Sarbanes-Oxley Act of 2002,
which provides that the auditor may not perform audit services for the
Company if the lead audit partner or the audit partner responsible for
reviewing the audit has performed audit services for the Company for
each of the five (5) previous fiscal years;
- establishing procedures for the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
accounting controls or auditing matters and the confidential, anonymous
submission by employees of the Company of concerns regarding
questionable accounting or auditing matters;
- 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;
52
- reviewing with financial management and the independent auditors the
Company's quarterly financial results prior to the release of earnings
and/or the Company's quarterly financial statements prior to filing or
distribution;
- reviewing the performance, independence and compensation of the
independent auditors and approving, appointing and/or discharging
auditors on an annual basis. Reviewing the independent auditor's plan,
discussing yearly audit results with auditors prior to release, and
considering independent auditors' judgments with respect to the quality
and appropriateness of the Company's accounting methods;
- reviewing the internal organizational structure and qualifications, as
needed; reviewing the annual audit scope and plan; reviewing the
appointment, annual performance reviews and replacement of internal
audit executives; reviewing summary findings and management's response;
and reviewing annually, with the Company's counsel, any legal matters
that could have a significant impact on the Company's financial
statements;
- annually assessing its performance of the duties specified in the
charter of the Audit Committee and reporting its findings to the Board;Board
of Directors; and
- performing any other activities consistent with the charter of the Audit
Committee, the Company's By-Laws and governing law as the Audit
Committee or the Company's Board of Directors deems necessary or
appropriate.
- - The Company's Board of Directors has adopted a written charter for the Audit
Committee, aCommittee. A copy of whichthe Charter is filed as Appendix AC to this Proxy
Statement.
- - The Audit Committee held 6five meetings in person or by conference call in 20022003
and took action by written consent on 1 occasiontwo occasions in 2002.2003.
- - The Company's Board of Directors has determined that the Company has at least
one "audit committee financial expert" who is financially sophisticated
serving on the Audit Committee of the Board of Directors who is "independent"
of management within the definition of such term in the 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.
Pre-Approval Policy. The Audit Committee has policies and procedures that
require the pre-approval by the Audit Committee of all fees paid to, and all
services performed by, our independent auditors. Each year, the Audit Committee
approves the proposed services, including the nature, type and scope of services
contemplated and the related fees, to be rendered by our accountants during the
year. In addition, Audit Committee pre-approval is also required for those
engagements that may arise during the course of the year that are outside the
scope of the initial services and fees pre-approved by the Audit Committee.
The Stock Option and Executive Compensation Committee.
- At various times during 2002,2003, Messrs. E. Pendleton James, Kenneth J.
KrushelJeffrey A. Sonnenfeld (Chairman),
A. David Brown and Basil P. ReganRobert H. Masson were members of the Stock Option and
Executive Compensation Committee. Currently, Messrs. Kenneth J. Krushel (Chairman),
E. Pendleton James and Robert H. Masson areUpon execution of the Recapitalization
Agreement, the members of the Stock Option and Executive Compensation
Committee became A. David Brown (Chairman), Wayne Garten and Stuart
Feldman. A. David Brown (Chairman), Stuart Feldman and Donald Hecht are
the current members of the
53
Stock Option and Executive Compensation Committee. Each of the members of
the Stock Option and Executive Committee is independent, as defined in
Rule Section 121(A) of the American Stock Exchange's listing standards,
except for Mr. Feldman. The Amex rules provide that the Compensation
Committee be composed solely of independent directors unless the Company
has elected controlled company status or the Board of Directors, under
exceptional and limited circumstances, determines that membership on the
Compensation Committee of one director that is not independent is in the
best interests of the Company. The Company has elected controlled company
status and the Board has determined that Mr. Feldman's service on the
Compensation Committee was and is in the best interest of the Company due
to his business experience and his perspective as the beneficial owner of
61% of the combined voting power of the Company's Voting Stock as well as
the Company's contractual obligation under the Recapitalization Agreement
which was entered into prior to the effective date of the Amex rules to
include Mr. Feldman as a member of the Compensation Committee.
- The duties of the Stock Option and Executive Compensation Committee
include reviewing and making recommendations for approval by the Board of
Directors of remuneration arrangements for directors and members of
management.management including the chief executive officer and the other executive
officers.
- The Stock Option and Executive Compensation Committee held 1 meetingdid not hold
meetings in 20022003 in person or by conference call and took action by
written consent on 9six occasions in 2002.
33
2003.
The Nominating Committee.
- At various times during 2002,2003, Messrs. Thomas C. Shull, J. David Hakman
and E. Pendleton James (Chairman),
Jeffrey A. Sonnenfeld, A. David Brown, Robert H. Masson and Basil P.
Regan were members of the Nominating Committee. Currently, Messrs. E. Pendleton JamesUpon execution of the
Recapitalization Agreement, the members of the Nominating Committee
became William Wachtel (Chairman), Basil P. ReganWayne Garten and Thomas Shull. William
Wachtel (Chairman), Wayne Garten and Robert H. Masson are the current
members of the Nominating Committee. Of the members of the Nominating
Committee, only Mr. Masson is independent, as defined in Rule Section
121(A) of the American Stock Exchange's listing standards. The Amex rules
provide that the Nominating Committee be composed solely of independent
directors unless the Company has elected controlled company status or the
Board of Directors, under exceptional and limited circumstances,
determines that membership on the Nominating Committee of one director
that is not independent is in the best interests of the Company. The
Company has elected controlled company status and the Board has
determined that Mr. Wachtel's service on the Nominating Committee was and
is in the best interest of the Company due to his business experience and
his personal contacts and his perspective as an affiliate of the holder
of 61% of the combined voting power of the Company's Voting Stock as well
as the Company's contractual obligation under the Recapitalization
Agreement which was entered into prior to the effective date of the Amex
rules to include Mr. Wachtel as a member of the Nominating Committee.
- The duties of the Nominating Committee include:
-include evaluating and
recommending candidates for election or reelection to the Board.Board of
Directors and its committees, including those recommendations submitted
by stockholders.
- It is a policy of the Nominating Committee that candidates for director
are at least 18 years of age and possess the highest personal and
professional integrity, have demonstrated exceptional ability and
judgment, and have skills and expertise appropriate for the Company and
serving the long-term interest
54
of the Company's stockholders. The committee's process for identifying
and evaluating nominees is as follows: (1) in the case of incumbent
directors whose terms of office are set to expire, the committee reviews
such directors' overall service to the Company during their term,
including the number of meetings attended, level of participation,
quality of performance, and any related party transactions with the
Company during the applicable time period; and (2) in the case of new
director candidates, the committee first conducts any appropriate and
necessary inquiries into the backgrounds and qualifications of possible
candidates after considering the function and needs of the Board of
Directors. The committee meets to discuss and consider such candidates'
qualifications, including whether the nominee is independent for purposes
of the American Stock Exchange rules taking into account that the Company
has elected controlled company status as defined in the American Stock
Exchange listing standards, and then selects a candidate for
recommendation to the Board of Directors by majority vote. In seeking
potential nominees, the Nominating Committee uses its network of contacts
to compile a list of potential candidates, but may also engage, if it
deems appropriate, a professional search firm. To date, the Nominating
Committee has not paid a fee to any third party to assist in the process
of identifying or evaluating director candidates, nor has the committee
rejected a timely director nominee from a stockholder(s) holding more
than 5% of the Company's voting stock.
The Nominating Committee held no meetingsis mindful of the Company's contractual
obligations under the Corporate Governance Agreement to nominate five
persons designated by Chelsey, one person designated by Regan Partners and
the Chief Executive Officer of the Company for election to the Board of
Directors as discussed below.
The Nominating Committee will consider director candidates recommended by
stockholders provided the stockholders follow the procedures set forth
below. The committee does not intend to alter the manner in personwhich it
evaluates candidates, including the criteria set forth above, based on
whether the candidate was recommended by a stockholder or by conference
call in 2002 and took action by written consent on 1 occasion in 2002.otherwise.
- The Bylawsbylaws of the Company require advance notice of nominations for
election to the Board of Directors, other than those made by the Board.Board of
Directors. Unless waived by the Board of Directors, a notice of
nomination must be received by the Company at least 75 days before
initiation of solicitation to the stockholders for election in the event
of an election other than at an annual meeting of stockholders, and at
least 75 days before the date that corresponds to the record date of the
prior year's annual meeting of stockholders in the event of an election
at an annual meeting of stockholders, and in all events must include
certaininformation required information.pursuant to the Exchange Act and the rules and
regulations promulgated thereunder.
- The Company's Board of Directors has adopted a written charter for the
Nominating Committee, a copy of which is attached as Appendix D to this
Proxy Statement.
- The Nominating Committee held one meeting in person in 2003 and took
action by written consent on two occasions in 2003.
Upon completion of the Recapitalization, the Company entered into a
Corporate Governance Agreement dated as of November 30, 2003, with Chelsey,
Stuart Feldman, Regan Partners, Regan International Fund Limited and Basil Regan
(the "Corporate Governance Agreement"). Pursuant to the terms of the Corporate
Governance Agreement, for a period of two (2) years from the completion of the
Recapitalization, five (5) of the nine (9) directors of the Company will consider nominees recommendedat all
times be directors of the Company designated by Chelsey (which initially were
Martin Edelman, Stuart Feldman, Wayne Garten, Donald Hecht and William Wachtel),
one (1) of the nine (9) directors of the Company will at all times be a director
of the Company
55
designated by Regan Partners (which initially was Basil Regan) and one (1)
director will be the Chief Executive Officer of the Company. The right of Regan
Partners to designate a nominee to the Board of Directors shall terminate if
Regan Partners ceases to own at least 75% of the outstanding shares of Common
Stock (as adjusted for stock splits, reverse stock splits and the like) owned by
Regan Partners as of November 10, 2003. All shares for which the Company's
management or Board of Directors hold proxies (including undesignated proxies)
will be voted in favor of the election of such designees of Chelsey and Regan
Partners, except as may otherwise be provided by stockholders submitting such
proxies. In the event that any Chelsey or Regan Partners designee shall cease to
serve as a director of the Company for any reason, the Company will cause the
vacancy resulting thereby to be filled by a designee of Chelsey or Regan
Partners, as the case may be, reasonably acceptable to the Board of Directors as
promptly as practicable. Chelsey may nominate or propose for nomination or elect
any persons to the Board of Directors, without regard to the foregoing
limitations, after the Series C Preferred Stock is redeemed in accordance with the Company's Bylaws.full.
The Transactions Committee.
- At various times during 2002, Messrs. J. David Hakman, Kenneth J. Krushel
and E. Pendleton James were members of the Transactions Committee.
Currently,2003, Messrs. Kenneth J. Krushel (Chairman),
Robert H. Masson, and E. Pendleton James, areJeffrey A. Sonnenfeld and A. David
Brown were members of the Transactions Committee. Upon execution of the
Recapitalization Agreement, and until the earlier of (i) two (2) years
from the closing of the Recapitalization and (ii) the redemption in full
of the Series C Preferred Stock, the Transactions Committee will consist
of three (3) members: one (1) designated by Chelsey (initially Martin
Edelman), one (1) designated by Regan Partners (initially Basil Regan)
and an independent member to be unanimously designated by Chelsey and
Regan Partners (initially David Brown). The right of Regan Partners to
designate a member of the Transactions Committee will terminate if Regan
Partners ceases to own at least 75% of the outstanding shares of Common
Stock owned by Regan Partners as November 10, 2003. The current members
of the Transactions Committee are Basil Regan (Chairman), Wayne Garten
and David Brown. Other than Mr. Garten, each of the members of the
Transactions Committee is independent, as defined in Rule Section 121(A)
of the American Stock Exchange's listing standards and as determined by
the Board of Directors.
- TheUntil the closing of the Recapitalization on November 30, 2003, the
duties of the Transactions Committee include:included:
- Providing assistance to the directors in fulfilling their responsibility
to the stockholders by recommending appropriate actions to the Board of
Directors or acting on behalf of the Board of Directors on a matter
which requires Board of Directors approval involving any of the
following:
(a) A material transaction with: (1) a person who (or an entity which)
may possess control of the Company by virtue of contract, ownership
of securities or otherwise; (2) a director or stockholder owning
more than ten percent (10%) of the voting securities of the Company;
or (3) a person who is related by blood or marriage to a director or
stockholder owning more than ten percent (10%) of the voting
securities of the Company;
(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.
56
- Following the closing of the Recapitalization, the Audit Committee
assumed the responsibilities of the Transactions Committee described
above.
- Upon execution of the Recapitalization Agreement, and until the earlier
of (i) two (2) years from the closing of the Recapitalization and (ii)
the redemption in full of the Series C Preferred Stock, the duties of the
Transactions Committee include passing on redemptions of the Series C
Preferred Stock, including transactions that pursuant to the terms of the
Series C Preferred Stock would require the Company to redeem any shares
of the Series C Preferred Stock (consistent with applicable laws or
agreements). The Board of Directors, in the reasonable exercise of its
business judgment, will determine if any such transaction is reasonably
likely to require the Company to redeem any shares of the Series C
Preferred Stock, and, if the Board of Directors determines that a
redemption is reasonably likely, such matter shall then be submitted to
the Transactions Committee.
- A unanimous vote of the three-member Transactions Committee is required
for the above actions. A unanimous vote of the Transactions Committee
cannot be overturned by the Board of Directors. Prior to April 16, 2004
(five (5) months following the execution of the Recapitalization
Agreement), if the Transactions Committee had been unable to decide
unanimously on any matter before the Transactions Committee, such matter
would have been decided by a vote of at least five (5) members of the
Board of Directors while the Board of Directors has eight (8) members and
six (6) members of the Board of Directors while the Board of Directors
has nine (9) members. After April 16, 2004, such matters will be decided
by a majority of the Board of Directors.
- The Transactions Committee held 1 meetingfive meetings in person or by conference
call in 20022003 and took action by written consent on no occasions in 2003.
The Corporate Governance Committee.
- The Company established a Corporate Governance Committee in December
2003. Messrs. A. David Brown, William Wachtel, Robert H. Masson and
Martin Edelman (Chairman) were the initial members of the Corporate
Governance Committee. The current members of the Corporate Governance
Committee are Messrs. Brown, Goodman, Masson and Wachtel.
- The duties of the Corporate Governance Committee include: (i) developing
and recommending to the Board standards to be applied in making
determinations as to the absence of material relationships between the
Company and a director or a member of senior management; (ii)
establishing procedures for the committee to exercise oversight of the
evaluation of the Board and management including, reporting to the Board
following the end of each fiscal year with an assessment of the Board's
and management's performance of its duties and responsibilities during
the preceding fiscal year with the objective of improving the
effectiveness of the Board and management; (iii) making recommendations
to the Board with respect to potential successors to the Chief Executive
Officer and with the participation of the Chief Executive Officer
developing and recommending to the Board management succession and career
development plans with respect to the Company's senior management; (iv)
developing and recommending to the Board a set of corporate governance
principles applicable to the Company, and reviewing those principles at
least once a year; and (v) reviewing and publishing the Company's code of
conduct and ethics as required by the American Stock Exchange and
applicable securities laws.
- The Corporate Governance Committee held no meetings in 2003 in person or
by conference call and took no action by written consent in 2002.2003.
57
LEGAL PROCEEDINGS INVOLVING DIRECTORS AND EXECUTIVE OFFICERS
On July 17, 2003, the Company filed an action in the Supreme Court of the
State of New York, County of New York (Index No. 03/602269) against Richemont
Finance S.A., a societe anonyme organized under the laws of the Grand Duchy of
Luxembourg ("Richemont"), and Chelsey, seeking a declaratory judgment as to
whether Richemont improperly transferred all of Richemont's securities in the
Company consisting of 29,446,888 shares of Common Stock and 1,622,111 shares of
Series B Preferred Stock (collectively, the "Shares") to Chelsey on or about May
19, 2003 and whether the Company could properly recognize the transfer of those
Shares from Richemont to Chelsey under federal and/or state law. On July 29,
2003, Chelsey answered the Company's complaint, alleged certain affirmative
defenses and raised three counterclaims against the Company, including Delaware
law requiring the registration of the Shares, damages, including attorney's
fees, for the failure to register the Shares, and tortious interference with
contract. Chelsey also moved for a preliminary injunction directing the Company
to register the ownership of the Shares in Chelsey's name. Chelsey later moved
for summary judgment dismissing the Company's complaint. Subsequently, Chelsey
moved to compel production of certain documents and for sanctions and/or costs.
On August 28, 2003, Richemont moved to dismiss the Company's complaint. It
subsequently filed a motion seeking sanctions and/or costs against the Company.
On October 27, 2003, the Court granted Chelsey's motion for summary judgment and
Richemont's motion to dismiss and ordered that judgment be entered dismissing
the case in its entirety. The Court also denied Chelsey's and Richemont's
motions for sanctions and Chelsey's motion to compel production of certain
documents.
Pursuant to the terms and conditions of the MOU and the Recapitalization
Agreement, the Company acknowledged that Chelsey is the lawful and bona fide
owner of the Shares and the Company and Chelsey executed a Stipulation of
Discontinuance for filing with the Supreme Court of the State of New York in
connection with the litigation between the Company and Chelsey.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
AND DIRECTORS:
We indemnify ourThe Company indemnifies its directors and 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 aThe Company maintains directors and
officers liability insurance policies,
underwritten by Greenwich Insurance Company, Zurich American Insurance Company
and National Union Fire Insurance Company of Pittsburgh, PA, in the aggregate
amount of $25,000,000. 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, 2002 to June 1, 2003.coverage consistent with industry standards.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE: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 except for Messrs. Kingsford, Lengers and Lipner, who each failed
to file one report in a timely fashion.
VOTE REQUIRED:requirements.
VOTING REQUIRED
The affirmative vote of the holders of a plurality of the combined voting
power of all shares of Voting Stock voted at the Annual Meeting, whether in
person or by proxy, whether by mail, Internet or telephone, and voting together
as a single class, is required to elect directors. Each share of Common Stock
has one (1) vote and each share of Series BC Preferred Stock has ten (10)one hundred
(100) votes. The enclosed proxy allows you to vote for the election of all of
the nominees listed, to withhold authority to vote for one or more of such
nominees or to withhold authority to vote for all of such nominees. Pursuant to
the terms of the Voting Agreement described above under the caption "The
Recapitalization," the election of the director nominees is assured.
58
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"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.
3559
PROPOSAL 2
SELECTIONAMENDING CERTIFICATE OF INCORPORATION TO EFFECT
A ONE-FOR-TEN REVERSE SPLIT OF COMMON STOCK
GENERALLY
The Board is submitting to you an amendment to the Company's Certificate of
Incorporation to effect a one-for-ten reverse split of the Company's Common
Stock and, in conjunction with such reverse split, the reduction of the
authorized number of shares of Common Stock from 300,000,000 to 30,000,000.
The Board has adopted resolutions:
- declaring the advisability of a one-for-ten reverse split of the Common
Stock and, in conjunction with such reverse split, the reduction of the
authorized number of shares of Common Stock from 300,000,000 to
30,000,000, subject to stockholder approval;
- amending the Company's Certificate of Incorporation to effect the reverse
split and, in conjunction with such reverse split, the reduction of the
authorized number of shares of Common Stock from 300,000,000 to
30,000,000, subject to stockholder approval; and
- authorizing any other action it deems necessary to effect the reverse
split and, in conjunction with such reverse split, the reduction of the
authorized number of shares of Common Stock from 300,000,000 to
30,000,000.
If approved by the Company's stockholders, the reverse split would become
effective as soon as reasonably practicable after the Annual Meeting, but in no
event later than September 30, 2004, by filing a certificate of amendment to the
Company's Certificate of Incorporation with the Delaware Secretary of State. The
Company anticipates that the reverse split, if approved by the Company's
stockholders, would be implemented by the same charter amendment as the
reduction in par value contemplated by Proposal 3, the change in number of
authorized shares contemplated by Proposal 4 and the increase in the number of
shares of Common Stock which the Company would have authority to issue
contemplated by Proposal 9, if those proposals are approved by the Company's
stockholders. Once the reverse split is approved and implemented, Chelsey will
hold approximately 87.8% of the combined voting power of the Voting Stock. See
"Effect of Reverse Split on Voting Power of Holders of Common Stock" below.
REASONS FOR PROPOSAL
Pursuant to the terms and conditions of the Recapitalization Agreement, the
Company, acting through its Board of Directors and in accordance with its
charter and bylaws and applicable law, has agreed to present to the Company's
stockholders a proposal to amend its Certificate of Incorporation to effect a
one-for-ten reverse split of the Company's Common Stock.
The purpose of the reverse split is to more appropriately align the
Company's share base with the Company's current operations and financial
performance. The Company anticipates that, barring unforeseen circumstances, the
smaller share base resulting from the reverse split would serve to highlight the
Company's future financial results and would position the Common Stock in a
price range that is more attractive to a broader range of investors, consistent
with the Company's objective of enhancing long-term stockholder value.
The Board believes that the current market price of the Common Stock has
had a negative effect on the marketability of the Common Stock, the amount and
percentage of transaction costs paid by individual
60
stockholders, and the Company's potential ability to raise capital by issuing
additional shares of Common Stock. The Board believes that the internal policies
of some institutional investors prevent the purchase of low-priced stocks and
that a variety of policies and practices of broker-dealers discourage individual
brokers within those firms from dealing in low-priced stocks. In addition,
brokers' commissions on low-priced stocks generally represent a higher
percentage of the stock price than commissions on higher-priced stocks -- that
is, the current share price of the Common Stock results in individual
stockholders paying transaction costs (commissions, markups or markdowns) that
are a higher percentage of the total share value -- than would be the case if
the Company's share price were substantially higher. The Board believes these
higher commissions may discourage individuals and institutions from purchasing
Common Stock.
While the one-for-ten reverse split could have certain of the favorable
impacts on trading and liquidity of the Common Stock described above, there can
be no assurance that the Company's listing of its Common Stock on the Exchange
can be maintained. As previously reported in the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on May 25, 2004, the
Company received a letter dated May 21, 2004 (the "Letter") from the American
Stock Exchange (the "Exchange") advising that a review of the Company's Form
10-K for the period ended December 27, 2003 indicates that the Company does not
meet certain of the Exchange's continued listing standards as set forth in Part
10 of the Exchange's Company Guide (the "Company Guide"). Specifically, the
Company is not in compliance with Section 1003(a)(i) of the Company Guide with
shareholders' equity of less than $2,000,000 and losses from continuing
operations and/or net losses in two out of its three most recent fiscal years;
and Section 1003(a)(ii) of the Company Guide with shareholders' equity of less
than $4,000,000 and losses from continuing operations and/or net losses in three
out of its four most recent fiscal years; and Section 1003(a)(iii) of the
Company Guide with shareholders' equity of less than $6,000,000 and losses from
continuing operations and/or net losses in its five most recent fiscal years.
The Exchange has requested that the Company contact the Exchange by June 4,
2004 to confirm receipt of the Letter, discuss any possible financial data of
which the Exchange's staff may be unaware, and indicate whether or not the
Company intends to submit a plan of compliance. In order to maintain its listing
on the Exchange, the Company must submit a plan to the American Stock Exchange
by June 22, 2004, advising the Exchange of action it has taken, or will take,
that would bring it into compliance with the continued listing standards of the
Exchange by November 24, 2005 (18 months of receipt of the Letter). The Company
submitted a plan to the Exchange on June 22, 2004. The management of the
Exchange's Listings Qualifications Department will evaluate the plan, including
any supporting documentation, and make a determination as to whether the Company
has made a reasonable demonstration in the plan of an ability to regain
compliance with the continued listing standards within 18 months, in which case
the plan will be accepted by the Exchange. If the plan is accepted by the
Exchange, the Company may be able to continue its listing during the plan period
of 18 months, during which time it will be subject to periodic review to
determine whether it is making progress consistent with the plan. If the Company
is not in compliance with the continued listing standards at the conclusion of
the 18-month plan period, or does not make progress consistent with the plan
during the 18-month plan period, the Exchange's staff will initiate delisting
proceedings as appropriate. There can be no assurance that the Exchange will
accept the Company's plan, or that the Company will be able to maintain the
listing of the Company's Common Stock on the Exchange.
The Board believes that the decrease in the number of shares of Common
Stock outstanding as a consequence of the reverse split, and the anticipated
increase in the market price of the Common Stock, could encourage interest in
the Common Stock and could promote greater liquidity for the Company's
stockholders, although such liquidity could be adversely affected by the reduced
number of shares outstanding after the
61
reverse split and the voting power held by Chelsey after the reverse split. In
addition, although any increase in the market price of Common Stock resulting
from the reverse split may be proportionately less than the decrease in the
number of outstanding shares, the reverse split could result in a market price
for the shares that will be high enough to overcome the reluctance, policies and
practices of brokers and investors referred to above and to diminish the adverse
impact of trading commissions on the market for the shares.
The Company cannot assure you that the foregoing events will occur, that
the reverse split will serve to assist the Company in regaining its compliance
with the Exchange's continued listing standards or that the market price of
Common Stock immediately after the reverse split will be maintained for any
period of time. Moreover, the Company cannot assure you that the market price of
the Common Stock after the proposed reverse split will adjust to reflect the
conversion ratio. For example, if the market price is $0.14 before the reverse
split, there can be no assurance that the market price immediately after the
reverse split will be $1.40 (10 X $0.14). The Company also cannot assure you
that the market price following the reverse split will either exceed or remain
in excess of the current market price.
PRINCIPAL EFFECTS OF THE REVERSE SPLIT
If a reverse split is approved at the Annual Meeting, each ten shares of
the Company's outstanding Common Stock as of the effective date of the filing of
a Certificate of Amendment with the Delaware Secretary of State (the "Old
Shares") will automatically be converted into one share of the Company's Common
Stock (the "New Shares"). Accordingly, the number of shares owned by each holder
of Common Stock as of the record date for the reverse split will immediately and
automatically be reduced, as of the effective date of the filing of the
Certificate of Amendment, by a ratio of ten to one. If a reverse split is
effected, by approving this proposal you are also approving a proportional
downward adjustment in the number of shares of Common Stock authorized under
this proposal by the same ratio from 300,000,000 to 30,000,000.
Proportional adjustments will be made to the maximum number of shares
issuable under the Company's stock plans, as well as the number of shares
issuable upon exercise and the exercise price of the Company's outstanding
options. No fractional shares of Common Stock will be issued in connection with
the reverse split. Holders of Common Stock who would otherwise receive a
fractional share of Common Stock pursuant to the reverse split will receive cash
in lieu of the fractional share as explained more fully below. Because the
reverse split will apply to all issued and outstanding shares of Common Stock
and outstanding options exercisable for Common Stock, the proposed reverse split
will not alter the relative rights and preferences of existing common
stockholders. See "Effect of Reverse Split on Voting Power of Holders of Common
Stock," below.
If the reverse split is approved at the Annual Meeting, the Board will fix
a record date for determination of shares subject to the reverse split. As of
the date of mailing of this proxy statement, the Board had not fixed a record
date for the reverse split.
If the reverse split is approved at the Annual Meeting, some stockholders
may consequently own fewer than 100 shares of Common Stock. A purchase or sale
of fewer than 100 shares (an "odd lot" transaction) may result in incrementally
higher trading costs through certain brokers, particularly "full service"
brokers, depending on whether the shares are held in certificate or electronic
form. Therefore, those stockholders who own fewer than 100 shares following the
reverse split may, in some circumstances, be required to pay modestly higher
transaction costs should they then decide to sell their shares of Common Stock.
Stockholders have no right under the Delaware General Corporation law
("DGCL") or the Company's Certificate of Incorporation or bylaws to exercise
appraisal rights with regard to the reverse split or to dissent from the payment
of cash in lieu of issuing fractional shares once the reverse split has been
approved.
62
Our Common Stock is currently registered under Section 12(b) of the
Exchange Act and, as a result, we are subject to the periodic reporting and
other requirements of the Exchange Act. The reverse split is not the first step
in, and will not have the effect of, a "going private transaction" covered by
Rule 13e-3 under the Exchange Act. Additionally, the reverse split will not
affect the registration of our Common Stock under the Exchange Act as we will
continue to be subject to the Exchange Act's periodic reporting requirements.
CASH PAYMENT IN LIEU OF FRACTIONAL SHARES
In lieu of any fractional shares to which a holder of Common Stock would
otherwise be entitled as a result of the reverse split, the Company will pay
cash equal to such fraction multiplied by the average of the high and low
trading prices of Common Stock on the American Stock Exchange during regular
trading hours for the five trading days immediately preceding the effective date
of the reverse split, which amount has been determined by the Board to equal the
fair market value of Common Stock at the effective time of the reverse split.
63
EFFECT OF REVERSE SPLIT ON VOTING POWER OF HOLDERS OF COMMON STOCK
The proposed amendment to the Company's charter to effect the one-for-ten
reverse split would negatively affect the voting power of the holders of Common
Stock. The following table sets forth the effects of the reverse split on the
voting power of the outstanding shares of Common Stock and Series C Preferred
Stock:
PRIOR TO REVERSE SPLIT SUBSEQUENT TO REVERSE SPLIT
-------------------------------------- ------------------------------------------
NUMBER OF NUMBER OF PERCENTAGE NUMBER OF NUMBER OF PERCENTAGE
SHARES VOTES OF TOTAL SHARES VOTES OF TOTAL
OUTSTANDING REPRESENTED VOTES OUTSTANDING REPRESENTED VOTES
----------- ----------- ---------- ----------- ----------- ----------
COMMON STOCK......... 224,518,395 224,518,395 79.9% 22,451,840(1) 22,451,840(1) 28.4%
SERIES C PREFERRED
STOCK.............. 564,819 56,481,900 20.1% 564,819 56,481,900 71.6%
TOTAL................ 225,083,214 281,000,295 100.0% 23,016,659(1) 78,933,740(1) 100.0%
- ---------------
(1) Without giving effect to any reduction in the number of Common Shares as the
result of cash payments in lieu of fractional shares.
The Series C Preferred Stock is not subject to the reverse split. After the
reverse split, Chelsey will hold approximately 87.8% of the combined voting
power of the Voting Stock (assuming that none of the Series C Preferred Stock is
redeemed). Please see the discussion under "Proposal 4 -- Amending Certificate
of Incorporation to Increase the Number of Shares of Stock Which the Company
Would Have Authority to Issue" below for the effects of the reverse split on the
capitalization of the Company.
PROCEDURE FOR EFFECTING REVERSE SPLIT AND EXCHANGE OF STOCK CERTIFICATES
If the Proposal is approved by the Company's stockholders, the Company will
file a Certificate of Amendment of Certificate of Incorporation with the
Secretary of State of the State of Delaware. The reverse split and the reduction
of the authorized number of shares of Common Stock from 300,000,000 to
30,000,000 will become effective on the date of filing the amendment (the
"Effective Date"). Beginning on the Effective Date, each certificate
representing Old Shares will be deemed for all corporate purposes to evidence
ownership of New Shares.
Promptly after the Effective Date, stockholders will be notified that the
reverse split and the reduction of the authorized number of shares of Common
Stock from 300,000,000 to 30,000,000 has been effected. The Company's transfer
agent, American Stock Transfer and Trust Company, will act as exchange agent
(the "Exchange Agent") for purposes of implementing the exchange of stock
certificates. Holders of Old Shares will be asked to surrender to the Exchange
Agent certificates representing Old Shares in exchange for certificates
representing New Shares in accordance with the procedures to be set forth in a
letter of transmittal to be sent by the Company. No new certificates will be
issued to a stockholder until such stockholder has surrendered such
stockholder's outstanding certificate(s) together with the properly completed
and executed letter of transmittal to the Exchange Agent. STOCKHOLDERS SHOULD
NOT DESTROY ANY STOCK CERTIFICATE AND SHOULD NOT SUBMIT ANY CERTIFICATES UNTIL
REQUESTED TO DO SO.
64
FEDERAL INCOME TAX CONSEQUENCES
The following description of the material United States federal income tax
consequences of the reverse split is based on the Internal Revenue Code of 1986,
as amended (the "Code"), applicable Treasury Regulations promulgated thereunder,
judicial authority and current administrative rulings and practices as in effect
on the date of mailing of this proxy statement. Changes to the laws could alter
the tax consequences described below, possibly with retroactive effect. The
Company has not sought and will not seek an opinion of counsel or a ruling from
the Internal Revenue Service regarding the federal income tax consequences of
the reverse split. This discussion is for general information only and does not
discuss the tax consequences that may apply to special classes of taxpayers (for
example, non-resident aliens, foreign corporations, broker/dealers, insurance
companies and persons who received their shares of Common Stock as compensation
in connection with the performance of services or an exercise of options
received in connection with the performance of services). The discussion only
applies to stockholders whose shares of Common Stock are held as capital assets
within the meaning of Section 1221 of the Code. The state, foreign and local tax
consequences of the reverse split may vary significantly as to each stockholder,
depending upon the jurisdiction in which such stockholder resides. Stockholders
should consult their own tax advisors to determine the particular consequences
to them.
In general, the federal income tax consequences of the reverse split will
vary among stockholders depending upon whether they receive cash for fractional
shares or solely a reduced number of shares of Common Stock in exchange for
their existing shares of Common Stock. The Company believes that because the
reverse split is not part of a plan to increase periodically a stockholder's
proportionate interest in its assets or earnings and profits, the reverse split
will likely have the following federal income tax effects:
- A stockholder who receives solely a reduced number of shares of Common
Stock will not recognize gain or loss. In the aggregate, such a
stockholder's basis in the reduced number of shares of Common Stock will
equal the stockholder's basis in its existing shares of Common Stock. A
stockholder's holding period for the reduced number of shares will
include the period during which the stockholder held the shares
surrendered in the reverse split.
- A stockholder who receives cash in lieu of a fractional share as a result
of the reverse split will generally be treated as having received the
payment as a distribution in redemption of the fractional share, as
provided in Section 302(a) of the Code, which distribution will be taxed
as either a distribution under Section 301 of the Code or an exchange to
such stockholder, depending on that stockholder's particular facts and
circumstances. This generally should be taxed as an exchange and a
stockholder receiving such a payment taxable as an exchange should
recognize gain or loss equal to the difference, if any, between the
amount of cash received and the stockholder's basis in the fractional
share. In the aggregate, such a stockholder's basis in the reduced number
of shares of Common Stock will equal the stockholder's basis in its
existing shares of Common Stock decreased by the basis allocated to the
fractional share for which such stockholder is entitled to receive cash.
Such gain or loss will be capital gain or loss, and a long-term capital
gain or loss if the stockholder's holding period is more than one year.
- The Company will not recognize any gain or loss as a result of the
reverse split.
VOTE REQUIRED
The affirmative "FOR" vote of the holders of (a) at least two-thirds of the
outstanding shares of Series C Preferred Stock, voting separately as a class,
and (b) a majority of the outstanding shares of Common Stock and Series C
Preferred Stock, voting together as a class, are required for approval of
Proposal 1. Pursuant to
65
the terms of the Voting Agreement described above under the caption "The
Recapitalization," the approval of Proposal 2 is assured.
In addition, as of the record date, Chelsey beneficially owned 115,810,383
shares of Common Stock (approximately 51.6% of the outstanding Common Stock) and
564,819 shares of Series C Preferred Stock, collectively representing
approximately 61.3% of the combined voting power of the Voting Stock.
Accordingly, Chelsey alone will be able to control the outcome of all matters
upon which it votes.
However, Proposal 2 is contingent upon the Company satisfying certain
conditions precedent to effectuate the consent of Congress Financial Corporation
to effectuate the reverse split and the reduction of the authorized number of
shares of Common Stock from 300,000,000 to 30,000,000. Therefore,
notwithstanding approval of Proposal 2 at the Annual Meeting, the charter will
not be amended to effect the reverse split unless the conditions precedent to
the consent of Congress Financial Corporation are satisfied.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE
AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO EFFECT A
ONE-FOR-TEN REVERSE SPLIT OF THE COMPANY'S COMMON STOCK.
66
PROPOSAL 3
AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION THAT WOULD REDUCE THE
PAR VALUE OF EACH SHARE OF COMMON STOCK FROM $0.66 2/3 PER SHARE TO $0.01 PER
SHARE AND TO RECLASSIFY THE OUTSTANDING SHARES OF COMMON STOCK INTO SUCH LOWER
PAR VALUE SHARES
GENERALLY
The Board is submitting to you an amendment to the Company's Certificate of
Incorporation that would reduce the par value of the Common Stock from $.66 2/3
per share to $.01 per share and to reclassify the outstanding shares of Common
Stock into such lower par value shares. The Board has already adopted a
resolution declaring the advisability of the amendment.
REASONS FOR PROPOSAL
Pursuant to the terms and conditions of the Recapitalization Agreement, the
Company, acting through its Board of Directors and in accordance with its
charter and bylaws and applicable law, has agreed to present to the Company's
stockholders a proposal to reduce the par value of the Common Stock from
$.66 2/3 per share to $.01 per share and to reclassify the outstanding shares of
Common Stock into such lower par value shares. The Board recommends that the par
value per share of Common Stock be decreased to $.01 to allow the Board to
reduce the Company's capital in order to facilitate the redemption of the
Company's Series C Preferred Stock under the DGCL.
"Par value" is a dollar value assigned to shares of capital stock by the
corporation's incorporators. There is no minimum or maximum value requirement
for par value under the DGCL, and the Board believes the prevailing current
practice of public companies is to have shares with nominal par value (such as
$0.01 per share). However, under the current DGCL, and notwithstanding the fact
that par value has limited significance, once a par value is assigned to the
shares of capital stock of a Delaware corporation, such corporation cannot issue
shares of capital stock for a consideration having a value below par, except out
of treasury shares.
Since the average quoted price for the Company's common stock is
substantially below the current par value attributed to such stock on July 12,
2004, the closing sale price of the Company's common stock was $0.16 per share
and the par value of the Company's Common Stock is currently set forth at
$.66 2/3 per share), the Board has determined that such par value restricts the
Company's ability to (i) pursue its restructuring strategy, which may involve
the issuance by the Company of shares of Common Stock or options to purchase
such shares for nominal consideration (but not less than market), and (ii)
incentivize management, as the Company may not issue stock in respect of options
with an exercise price for the underlying shares of Common Stock below par,
including with respect to options previously granted to management, except out
of treasury shares. The Board recommends that the par value per share of Common
Stock be reduced to $.01 to allow the Board greater flexibility in setting the
consideration that may be paid for its issuance of shares of Common Stock or
securities exercisable for or convertible into shares of Common Stock.
In addition, reducing par value of the Company's Common Stock may decrease
the Company's franchise taxes depending on the method of calculating franchise
taxes used by the Company. A reduction in the par value of the Company's Common
Stock will not otherwise affect the rights of the Company's stockholders. There
are no arrears in dividends with respect to the Company's Common Stock.
67
INTERESTED PERSONS
A. David Brown, Stuart Feldman, Paul S. Goodman, Donald Hecht, Robert H.
Masson, Basil P. Regan and William B. Wachtel all have an interest in the
approval of the amendment of the Company's certificate of incorporation to
reduce the par value of each share of Common Stock by virtue of their holding
options to purchase Common Stock at exercise prices below the current par value
of the Common Stock as discussed above under "Security Ownership of Management
of the Company" and by virtue of their entitlement to option grants under the
2004 Plan as described below. Wayne P. Garten, Michael D. Contino, Charles E.
Blue, Steven Lipner and William C. Kingsford all have an interest in the
approval of such amendment by virtue of their holding options to purchase Common
Stock as discussed above under "Security Ownership of Management of the
Company." In addition, Messrs. Regan, Garten, Contino, Lipner, Wachtel and
Feldman all have an interest in the approval of such amendment by virtue of
their owning, directly or indirectly, shares of Common Stock as discussed above
under "Security Ownership of Management of the Company."
The issuance of the Common Stock Warrant to Chelsey is contingent upon the
approval of this Proposal 3. As a result, Chelsey and Messrs. Wachtel and
Feldman stand to benefit from the approval of this Proposal 10.
PRINCIPAL EFFECTS ON OUTSTANDING COMMON STOCK
If Proposal 3 is approved, the Board will be authorized to file a
certificate of amendment with the Delaware Secretary of State that will reset
the par value of the Common Stock to $.01 per share and reclassify the
outstanding shares of Common Stock into such lower par value shares. As a
result, the Company may make appropriate adjustment to its stockholders' equity
accounts on its balance sheet. For example, if the Company had effected the
reduction in par value on December 27, 2003, the amount of the Company's stated
capital could have been reduced to approximately $2,228,612 and its additional
paid-in capital account could have been increased by approximately $145,958,609.
If approved by the Company's stockholders, the reduction in par value and
the reclassification of the outstanding shares of Common Stock into such lower
par value shares would become effective as soon as reasonably practicable after
the Annual Meeting by the Company's filing of a Certificate of Amendment to its
Certificate of Incorporation with the Delaware Secretary of State. The Company
anticipates that the reduction in par value, if approved by its stockholders,
would be implemented by the same certificate of amendment as the one-for-ten
reverse split of the Company's Common Stock contemplated by Proposal 2, the
change in authorized shares contemplated by Proposal 4 and the increase in the
number of shares of Common Stock which the Company would have authority to issue
as contemplated by Proposal 9, to the extent those proposals are approved by the
Company's stockholders.
VOTE REQUIRED
The affirmative "FOR" votes of the holders of (a) a majority of the
outstanding shares of Common Stock, voting separately as a class, (b) at least
two-thirds of the outstanding shares of Series C Preferred Stock, voting
separately as a class, and (c) a majority of the outstanding shares of Common
Stock and Series C Preferred Stock, voting together as a class, are required for
approval of Proposal 3. Pursuant to the terms of the Voting Agreement described
above under the caption "The Recapitalization," the approval of Proposal 3 is
assured.
In addition, as of the record date, Chelsey beneficially owned 115,810,383
shares of Common Stock (approximately 51.6% of the outstanding Common Stock) and
564,819 shares of Series C Preferred Stock,
68
collectively representing approximately 61.3% of the combined voting power of
the Voting Stock. Accordingly, Chelsey alone will be able to control the outcome
of all matters upon which it votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF
THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO REDUCE THE
PAR VALUE OF THE COMPANY'S COMMON STOCK TO $.01 AND RECLASSIFY
THE OUTSTANDING SHARES OF COMMON STOCK INTO SUCH LOWER PAR VALUE
SHARES.
69
PROPOSAL 4
AMENDING CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF SHARES OF
ADDITIONAL PREFERRED STOCK WHICH THE COMPANY WOULD HAVE AUTHORITY TO ISSUE
GENERALLY
The Board is submitting to you an amendment to the Company's Certificate of
Incorporation that would increase the number of shares of Additional Preferred
Stock which the Company would have authority to issue from 5,000,000 shares to
15,000,000 shares and make a corresponding change in the aggregate number of
shares of all classes of stock which the Corporation has authority to issue. All
of the additional 10,000,000 shares would be allocated to the number of shares
of Additional Preferred Stock that the Company would have authority to issue. As
of July 9, 2004, 5,000,000 shares of Additional Preferred Stock were authorized,
of which 564,819 shares of the Company's Series C Participating Preferred Stock
were outstanding. The Board has no current plans for the issuance of such
additional shares of Additional Preferred Stock.
If approved by the Company's stockholders, the increase in authorized
additional shares would become effective as soon as reasonably practicable after
the Annual Meeting by filing a Certificate of Amendment to the Company's
Certificate of Incorporation with the Delaware Secretary of State. The Company
anticipates that the increase in authorized shares, if approved by its
stockholders, would be implemented by the same certificate of amendment as the
one-for-ten reverse split of the Company's Common Stock contemplated by Proposal
2, the reduction in par value contemplated by Proposal 3 and the increase in the
number of shares of Common Stock which the Company would have authority to issue
as contemplated by Proposal 9, to the extent those proposals are approved by the
Company's stockholders. The Board believes that the amendment will benefit the
Company and you and, thus, recommends approval of the amendment. The Board has
already adopted a resolution declaring the advisability of the amendment.
REASONS FOR PROPOSAL
Pursuant to the terms and conditions of the Recapitalization Agreement, the
Company, acting through its Board of Directors and in accordance with its
charter and bylaws and applicable law, has agreed to present to the Company's
stockholders a proposal to increase the number of shares of all classes of stock
which the Company would have authority to issue by 10,000,000 shares from
318,172,403 shares to 328,172,403, of which all 10,000,000 shares would be
allocated to the number of shares of Additional Preferred Stock which the
Company would have authority to issue. The Additional Preferred Stock may be
issued in classes and series with rights and preferences, including dividend,
conversion, voting and other rights, determined by the Company's Board of
Directors, without further action by Company's stockholders. One particular
benefit to the authorization of the Additional Preferred Stock is that the
Company's Board of Directors may issue the Additional Shares to protect the
Company against potential hostile takeovers.
Under the DGCL, the Company is required to obtain approval from its
stockholders to amend its charter to increase the number of shares of capital
stock authorized for issuance. After taking into consideration the Company's
current outstanding equity obligations, together with its obligations under the
Recapitalization Agreement and related documents in connection with the
Recapitalization described earlier in this Proxy Statement, the Board has
determined that it is desirable to increase the number of shares of Additional
Shares of Preferred Stock, and the aggregate number of shares of all classes of
stock, authorized for issuance by
70
10,000,000. The additional shares of Additional Preferred Stock will be
available for general corporate purposes, as determined by the Board, without
(except as otherwise provided by law) further authority from you. The Company
has no current plans for the issuance of such shares.
PRINCIPAL EFFECTS OF THE INCREASE IN AUTHORIZED SHARES OF PREFERRED STOCK
The following table illustrates the principal effects of the increase in
authorized shares of Preferred Stock discussed in this Proposal on the Company's
capitalization, assuming the transactions contemplated by the Chelsey Term Sheet
do not occur:
NUMBER OF SHARES
NUMBER OF SHARES SUBSEQUENT TO
NUMBER OF SHARES SUBSEQUENT TO INCREASE IN
PRIOR TO INCREASE INCREASE IN AUTHORIZED
IN AUTHORIZED AUTHORIZED SHARES OF
SHARES OF SHARES OF PREFERRED STOCK
CLASS OF SHARES PREFERRED STOCK(1) PREFERRED STOCK AND REVERSE SPLIT
- --------------- ------------------- ---------------- -----------------
Common Stock Authorized:..................... 300,000,000 300,000,000(2) 30,000,000(3)
Common Stock Outstanding (4):................ 224,518,395 224,518,395(2) 22,451,840(3)
Common Stock Reserved for Issuance Pursuant
to Options(5):............................. 40,621,251 40,621,251(2) 4,062,125(3)
Common Stock Available for Future
Issuance:.................................. 34,860,354 34,860,354(2) 3,486,035(3)
Additional Preferred Stock Authorized(6):.... 5,000,000 15,000,000 15,000,000
Additional Preferred Stock Outstanding(7):... 564,819 564,819 564,819
Class B 8% Cumulative Preferred Stock
Authorized:................................ 40,000 40,000 40,000
Class B 8% Cumulative Preferred Stock
Outstanding:............................... 0 0 0
7.5% Cumulative Convertible Preferred Stock
Authorized:................................ 861,900 861,900 861,900
7.5% Cumulative Convertible Preferred Stock
Outstanding:............................... 0 0 0
Class B Common Stock Authorized:............. 12,270,503 12,270,503 12,270,503
Class B Common Stock Outstanding:............ 0 0 0
Aggregate Number of Shares of All Classes of
the Company's Stock Authorized:............ 318,172,403 328,172,403(2) 58,172,403(3)
- ---------------
(1) At July 9, 2004.
(2) Without giving effect to the proposed reverse split of the Common Stock.
(3) After giving effect to the proposed reverse split of the Common Stock, but
without giving effect to any reduction in the number of Common Shares as the
result of cash payments in lieu of fractional shares.
(4) Excludes 2,120,929 shares of treasury stock.
(5) Includes 2,120,929 shares of treasury stock.
(6) Includes 564,819 shares of Series C Preferred Stock and 100 shares of Series
D Preferred Stock.
(7) Represents 564,819 shares of Series C Preferred Stock outstanding. There are
no shares of any other series of preferred stock outstanding.
71
VOTE REQUIRED
The affirmative "FOR" vote of the holders of (a) at least two-thirds of the
outstanding shares of Series C Preferred Stock, voting separately as a class,
and (b) a majority of the outstanding shares of Common Stock and Series C
Preferred Stock, voting together as a class, are required for approval of
Proposal 4. Pursuant to the terms of the Voting Agreement described above under
the caption "The Recapitalization," the approval of Proposal 4 is assured.
In addition, as of the record date, Chelsey, beneficially owned 115,810,383
shares of Common Stock (approximately 51.6% of the outstanding Common Stock) and
564,819 shares of Series C Preferred Stock, collectively representing
approximately 61.3% of the combined voting power of the Voting Stock.
Accordingly, Chelsey alone will be able to control the outcome of all matters
upon which it votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL
OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF SHARES OF ADDITIONAL PREFERRED
STOCK AND THE TOTAL NUMBER OF SHARES OF ALL CLASSES OF
STOCK WHICH THE COMPANY WOULD HAVE AUTHORITY TO ISSUE.
72
PROPOSAL 5
RATIFICATION AND APPROVAL OF THE ADOPTION OF THE
2004 STOCK OPTION PLAN FOR DIRECTORS
GENERALLY
The Company is asking you to ratify and approve the adoption of the
Company's 2004 Stock Option Plan for Directors (the "2004 Plan"). The purpose of
the 2004 Plan is to advance the interests of the Company, through the grant of
options to purchase shares of Common Stock, by providing non-employee directors
of the Company (other than directors who are non-resident United States aliens),
with a larger personal and financial interest in the success of the Company. The
following is a brief summary of the 2004 Plan. The complete text of the 2004
Plan, as in effect on the date hereof, is attached hereto as Appendix A. All
references to number of shares of Common Stock in this Proposal 5 are without
giving effect to the proposed reverse split of the Common Stock.
SUMMARY OF THE 2004 PLAN
Persons Eligible To Participate. Each director of the Company who is
neither an employee of the Company nor a United States non-resident alien (an
"Eligible Director") is eligible to participate in the 2004 Plan.
Effective Date and Duration of 2004 Plan. The 2004 Plan became effective
on the date of its adoption by the Compensation Committee, subject to the
ratification of the 2004 Plan by the affirmative vote or consent of holders of a
majority of the issued and outstanding shares of Common Stock, and will
terminate 10 years from the date of its adoption or such earlier date as the
Board may determine.
Administration of 2004 Plan. The 2004 Plan is administered by a committee
(the "Committee") consisting of at least two members of the Board. The Committee
shall have full power and authority to interpret the 2004 Plan, to establish
such rules and regulations as it deems appropriate for the administration of the
2004 Plan, and to take such other action as it deems necessary or desirable for
the administration of the 2004 Plan.
Status of Options. Options granted under the 2004 Plan are nonqualified
options not qualifying as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended.
Shares Subject to Options Granted Under 2004 Plan. The maximum number of
shares of Common Stock that may be delivered or purchased under the 2004 Plan is
currently 1,000,000, subject to adjustment to preserve the value of an option
grant in the event of any change in the outstanding Common Stock by reason of
any stock dividend, stock split, combination of shares, recapitalization or
other similar change in the capital stock of the Company, or in the event of the
merger or consolidation of the Company with or into any other corporation or the
reorganization of the Company. The shares of Common Stock to be issued in
connection with the exercise of stock options granted under the 2004 Plan may be
authorized but unissued shares of Common Stock that are not reserved for any
other purpose or previously issued shares acquired by the Company and held in
its treasury. If, as a result of the termination or expiration of an option
granted under the 2004 Plan, certain shares are no longer subject to an option
granted under the 2004 Plan, such shares will again be available for future
option grants under the 2004 Plan.
Amendment of 2004 Plan. The 2004 Plan may be amended by the Board or a
duly authorized committee thereof as the Board or such committee deems
advisable. However, no 2004 Plan amendment will
73
become effective unless approved by affirmative vote of the Company's
stockholders if such approval is necessary or desirable for the continued
validity of the 2004 Plan or if the failure to obtain such approval would
adversely affect the compliance of the 2004 Plan with Rule 16b-3 or any
successor rule under the Exchange Act or any other rule or regulation. No 2004
Plan amendment may impair the rights of any 2004 Plan participant under any
option previously granted under the 2004 Plan without a participant's consent.
The Board or a duly authorized committee thereof has the power, in the event of
any disposition of substantially all of the assets of the Company, its
dissolution, any merger or consolidation of the Company with or into any other
corporation, or the merger or consolidation of any other corporation into the
Company, to amend all outstanding options granted under the 2004 Plan so as to
terminate them upon such effectiveness. If the Board or such committee exercises
such power, all options then outstanding shall be deemed to terminate upon such
effectiveness.
Interested Persons. A. David Brown, Stuart Feldman, Paul S. Goodman,
Donald Hecht, Robert H. Masson, Basil P. Regan and William B. Wachtel all have
an interest in the approval of the amendment of the 2004 Plan by the Company's
stockholders by virtue, as described below, of their entitlement to option
grants under the 2004 Plan on August 3, 2004 (to the extent the aggregate number
of options granted on such date under the 2002 Stock Option Plan for Directors
exceeds the number of shares of Common Stock then available to be granted under
the 2002 Stock Option Plan for Directors ), August 3, 2005 and August 3, 2006,
provided that each such person continues to serve as a director of the Company
on each such date.
AWARDS AVAILABLE UNDER THE 2004 PLAN
Pursuant to the 2004 Plan, each Eligible Director is granted an option to
purchase 50,000 shares of Common Stock as of the effective date of his or her
initial appointment or election to the Board (or, if later, the effective date
of the 2004 Plan) (the "Initial Appointment Date"). In addition, on August 3,
2004 (to the extent the 2002 Stock Option Plan for Directors does not have
enough remaining shares), August 3, 2005 and August 3, 2006, provided that such
date occurs after the Initial Appointment Date, each Eligible Director whose
Initial Appointment Date preceded such date will be granted an option to
purchase an additional 35,000 shares of Common Stock provided that he or she is
a director of the Company on such date. In the event of any change in the
outstanding Common Stock by reason of any merger, share exchange,
reorganization, consolidation, recapitalization, stock dividend, stock split,
combination of shares, split-up, spin-off, or other similar transaction or
event, the Committee may, to the extent it deems appropriate, make substitutions
or adjustments in the aggregate number and kind of shares of Common Stock
reserved for issuance under the 2004 Plan, in the number, kind and price of
shares of Common Stock subject to outstanding options and in the option limits
under the 2004 Plan (or make provision for cash payments to the holders of
options granted under the 2004 Plan).
All options granted under the 2004 Plan will be evidenced by option
agreements. Each option shall be granted for a term of 10 years. Each option
will be exercisable in accordance with the terms and conditions set forth in the
option agreements evidencing the grant of such options. However, each option
granted under the 2004 Plan will become exercisable at a rate of no less than
33 1/3% per year from its date of grant, with the exception that all options
granted under the 2004 Plan will become immediately and fully exercisable upon
the occurrence of a "Change of Control", which is defined as the first to occur
of any of the events described in subsections (i) through (iii) below, following
May 3, 2001 (the "Effective Date"):
(i) When any Person becomes, through an acquisition, the beneficial
owner of shares of the Company having at least fifty percent (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
74
shall not constitute a Change of Control: (a) if a Person owns less than
fifty percent (50%) of the voting power of the Company and that Person's
ownership increases above fifty percent (50%) solely by virtue of an
acquisition of stock by the Company, then no Change of Control shall 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 Plan
owned at least thirty-three percent (33%) of the Voting Shares.
(ii)(a) Notwithstanding the foregoing, a Change of Control will occur
when the shareholders of the Company approve any of the following (each, a
"Transaction"): (I) any reorganization, merger, consolidation or other
business combination of the Company; (II) any sale or series of sales since
April 27, 2001 involving an aggregate of fifty percent (50%) or more of the
market value of the Company's assets (for this purpose, said 50% amount
shall be deemed to be $107.6 million); or (III) a complete liquidation or
dissolution of the Company. (b) Notwithstanding subsection (ii)(a) above,
shareholder approval of either of the following types of Transactions will
not give rise to a Change of Control: (I) a Transaction involving only the
Company and one or more of its subsidiaries; or (II) a Transaction (other
than as described in clause (ii)(A)(II) of this definition) immediately
following which the shareholders of the Company immediately prior to the
Transaction continue to have a majority of the voting power in the
resulting entity.
(iii) When, within any twenty-four (24) month period, persons who were
directors of the Company (each, a "Director") immediately before the
beginning of such period (the "Incumbent Directors") shall cease (for any
reason other than death or disability) to constitute at least a majority of
the Board of Directors or the board of directors of any successor to the
Company. For purposes of this subsection (iii), any Director who was not a
Director as of the Effective Date shall 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 this subsection (iii), and 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 Directors in lieu of other such designees serving as
Directors on the effective date of the 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.
Options granted under the 2004 Plan may not be exercised more than 3 months
after a participant ceases to be a director of the Company, except in the case
of the participant's death or disability, in which case options may be exercised
within 12 months after the date of such death or disability.
The price at which shares of Common Stock may be purchased upon the
exercise of an option granted under the 2004 Plan is the fair market value of
such shares on the date of grant of such option. For purposes of the 2004 Plan,
the fair market value of a share of Common Stock is deemed to be the average of
the closing price of the Common Stock on the date of grant, and the ten trading
days immediately preceding such date.
Full payment of the purchase price for shares of Common Stock purchased
upon the exercise, in whole or part, of an option granted under the 2004 Plan
must be made at the time of such exercise. The 2004 Plan provides that the
option exercise price may be paid in cash, in shares of Common Stock valued at
their fair market value on the date of exercise or by any other form of
compensation permissible for such purposes under Delaware law, as determined by
the Committee. Alternatively, an option granted under the 2004 Plan may be
75
exercised in whole or in part by delivering a properly executed exercise notice
together with irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds necessary to pay the option exercise
price, and such other documents as the Committee may determine.
During a participant's lifetime, options granted under the 2004 Plan may be
exercised only by such participant and may not be transferred, other than by
will or by the laws of descent and distribution, except that a participant may
transfer any option granted under the 2004 Plan to his or her spouse, children,
grandchildren, parents, and/or siblings or to one or more trusts for the benefit
of such family members, provided that the participant does not receive any
consideration for the transfer. Any option so transferred will be subject to the
same terms and conditions that applied to such option immediately prior to its
transfer, except that it will not be further transferable by the transferee
during such transferee's lifetime.
FEDERAL INCOME TAX CONSEQUENCES
For the federal income tax purposes, the grant of an option granted under
the 2004 Plan will have no immediate tax consequences to the participant. The
exercise of the option by the participant will result in taxable income to the
participant, as compensation, in an amount equal to the amount by which the fair
market value of the acquired shares on the exercise date exceeds the option
price. The participant will have a tax basis in the acquired shares in an amount
equal to the fair market value of the shares on the date of exercise. Upon a
subsequent sale or taxable exchange of such shares, such participant will
recognize long or short-term capital gain or loss equal to the difference
between the amount realized on the sale and the tax basis of such shares. The
Company will be entitled to a deduction in the amount of any compensation income
that a participant recognizes in connection with an option.
NEW PLAN BENEFITS
The following table summarizes the option grants that may be awarded under
the 2004 Stock Option Plan for Directors during the term thereof, assuming the
2004 Stock Option Plan for Directors is approved and adopted by the Company's
stockholders.
NUMBER OF SHARES
NAME AND POSITION DOLLAR VALUE($) SUBJECT TO OPTIONS
- ----------------- --------------- -------------------
Wayne P. Garten, Chief Executive Officer(1)................ 0 None
Michael D. Contino, Executive Vice President and Chief
Operating Officer(1)..................................... 0 None
Charles E. Blue, Senior Vice President and Chief Financial
Officer(1)............................................... 0 None
William C. Kingsford, Senior Vice President, Treasury and
Control (Corporate Controller)(1)........................ 0 None
Executive Group(1)......................................... 0 None
Non-Executive Director Group............................... Unknown(2) Up to 1,000,000
in the aggregate(3)
Non-Executive Officer Employee Group(1).................... 0 None
- ---------------
(1) Pursuant to terms of the 2004 Plan, only those directors of the Company who
are neither an employee of the Company nor a United States non-resident
alien are eligible to participate.
(2) The price at which shares of Common Stock may be purchased upon the exercise
of an option granted under the 2004 Plan is the fair market value of such
shares on the date of grant of such option. For
76
purposes of determining the price under the 2004 Plan, the fair market value of
a share of Common Stock is deemed to be the average of the closing price of the
Common Stock on the date of grant and the ten trading days immediately preceding
such date.
(3) If each existing non-executive Director were to remain on the Board of
Directors until August 3, 2006 and did not become an executive officer, he
would receive options under the 2004 Stock Option Plan for Directors to
purchase up to 105,000 Common Shares.
VOTE REQUIRED
The affirmative "FOR" vote of the holders of a majority of the outstanding
shares of Common Stock and Series C Preferred Stock present or represented by
proxy and entitled to vote at the Annual Meeting, voting together as a class, is
required for approval of Proposal 5.
As of the record date, Chelsey beneficially owned 115,810,383 shares of
Common Stock (approximately 51.6% of the outstanding Common Stock) and 564,819
shares of Series C Preferred Stock, collectively representing approximately
61.3% of the combined voting power of the Voting Stock. Accordingly, Chelsey
alone will be able to control the outcome of all matters upon which it votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE ADOPTION
OF THE 2004 STOCK OPTION PLAN FOR DIRECTORS.
77
PROPOSAL 6
AMENDMENTS TO THE 2002 STOCK OPTION PLAN FOR DIRECTORS
The Board of Directors is submitting two amendments to the 2002 Stock
Option Plan for Directors (the "2002 Plan") described herein to stockholders for
their approval. The purpose of the 2002 Plan is to advance the interests of the
Company, through the grant of options to purchase shares of Common Stock, by
providing non-employee directors of the Company (other than directors who are
non-resident United States aliens), with a larger personal and financial
interest in the success of the Company.
Up to nine (9) directors are eligible to participate in the 2002 Plan.
During 2003, options to purchase an aggregate of 610,000 shares of Common Stock
were granted under the 2002 Plan. During 2003, no options to purchase Common
Stock granted under the 2002 Plan expired unexercised.
The following is a brief summary of the 2002 Plan and the proposed
amendments to the 2002 Plan. All references to number of shares of Common Stock
in this Proposal 6 are without giving effect to the proposed reverse split of
the Common Stock.
SUMMARY OF THE 2002 PLAN
Persons Eligible To Participate. Each director of the Company who is
neither an employee of the Company nor a United States non-resident alien (an
"Eligible Director") is eligible to participate in the 2002 Plan.
Effective Date and Duration of 2002 Plan. The 2002 Plan became effective
on the date of its adoption by the Compensation Committee, was ratified by the
affirmative vote of holders of a majority of the issued and outstanding shares
of Common Stock at the 2002 Annual Meeting of Stockholders, and will terminate
10 years from the date of its adoption or such earlier date as the Board may
determine.
Administration of 2002 Plan. The 2002 Plan is administered by a committee
(the "Committee") consisting of at least two members of the Board. The Committee
has full power and authority to interpret the 2002 Plan, to establish such rules
and regulations as it deems appropriate for the administration of the 2002 Plan,
and to take such other action as it deems necessary or desirable for the
administration of the 2002 Plan.
Status of Options. Options granted under the 2002 Plan are nonqualified
options not qualifying as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended.
Shares Subject to Options Granted Under 2002 Plan. The maximum number of
shares of Common Stock that may be delivered or purchased under the 2002 Plan
was originally 500,000 and was increased by the Board of Directors in November
2003 to 900,000, subject to adjustment to preserve the value of an option grant
in the event of any change in the outstanding Common Stock by reason of any
stock dividend, stock split, combination of shares, recapitalization or other
similar change in the capital stock of the Company, or in the event of the
merger or consolidation of the Company with or into any other corporation or the
reorganization of the Company. See "Plan Amendments," below. The shares of
Common Stock to be issued in connection with the exercise of stock options
granted under the 2002 Plan may be authorized but unissued shares of Common
Stock that are not reserved for any other purpose or previously issued shares
acquired by the Company and held in its treasury. If, as a result of the
termination or expiration of an option granted under
78
the 2002 Plan, certain shares are no longer subject to an option granted under
the 2002 Plan, such shares will again be available for future option grants
under the 2002 Plan.
Amendment of 2002 Plan. The 2002 Plan may be amended by the Board or a
duly authorized committee thereof as the Board or such committee deems
advisable. However, no 2002 Plan amendment will become effective unless approved
by affirmative vote of the Company's stockholders if such approval is necessary
or desirable for the continued validity of the 2002 Plan or if the failure to
obtain such approval would adversely affect the compliance of the 2002 Plan with
Rule 16b-3 or any successor rule under the Exchange Act or any other rule or
regulation. No 2002 Plan amendment may impair the rights of any 2002 Plan
participant under any option previously granted under the 2002 Plan without a
participant's consent. The Board or a duly authorized committee thereof has the
power, in the event of any disposition of substantially all of the assets of the
Company, its dissolution, any merger or consolidation of the Company with or
into any other corporation, or the merger or consolidation of any other
corporation into the Company, to amend all outstanding options granted under the
2002 Plan so as to terminate them upon such effectiveness. If the Board or such
committee exercises such power, all options then outstanding shall be deemed to
terminate upon such effectiveness.
Interested Persons. A. David Brown, Stuart Feldman, Paul S. Goodman,
Donald Hecht, Robert H. Masson, Basil P. Regan and William B. Wachtel all have
an interest in the approval of the amendments of the 2002 Plan by the Company's
stockholders by virtue, as described below, of their entitlement to options
previously granted under the 2002 Plan and to be granted under the 2002 Plan on
August 3, 2004, provided that each such person continues to serve as a director
of the Company on such date.
AWARDS AVAILABLE UNDER THE 2002 PLAN
Pursuant to the 2002 Plan, each Eligible Director is granted an option to
purchase 50,000 shares of Common Stock as of the effective date of his or her
initial appointment or election to the Board (the "Initial Appointment Date").
In addition, on August 2, 2002, August 1, 2003 and August 3, 2004 (an "Award
Date"), provided that such date occurs after the Initial Appointment Date, each
Eligible Director whose Initial Appointment Date preceded such date will be
granted an option to purchase an additional 35,000 shares of Common Stock
(increased from 25,000 shares of Common Stock by an amendment of the 2002 Plan
in November 2002) provided that he or she is a director of the Company on such
date. See "Plan Amendments," below. In the event of any change in the
outstanding Common Stock by reason of any merger, share exchange,
reorganization, consolidation, recapitalization, stock dividend, stock split,
combination of shares, split-up, spin-off, or other similar transaction or
event, the Committee may, to the extent it deems appropriate, make substitutions
or adjustments in the aggregate number and kind of shares of Common Stock
reserved for issuance under the 2002 Plan, in the number, kind and price of
shares of Common Stock subject to outstanding options and in the option limits
under the 2002 Plan (or make provision for cash payments to the holders of
options granted under the 2002 Plan).
All options granted under the 2002 Plan will be evidenced by option
agreements. Each option shall be granted for a term of 10 years. Each option
will be exercisable in accordance with the terms and conditions set forth in the
option agreements evidencing the grant of such options. However, each option
granted under the 2002 Plan will become exercisable at a rate of no less than
33 1/3% per year from its date of grant, with the exception that all options
granted under the 2002 Plan will become immediately and fully exercisable upon
the occurrence of a "Change of Control" (as defined in the Hanover Direct, Inc.
Directors Change of Control Plan) which occurred for the current participants in
the 2002 Plan on November 30, 2003 on the closing of the
79
Recapitalization. Options granted under the 2002 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 2002 Plan is the fair market value of
such shares on the date of grant of such option. For purposes of the 2002 Plan,
the fair market value of a share of Common Stock is deemed to be the average of
the closing price of the Common Stock on the date of grant, the ten trading days
immediately preceding such date, and the ten trading days immediately following
such date.
Full payment of the purchase price for shares of Common Stock purchased
upon the exercise, in whole or part, of an option granted under the 2002 Plan
must be made at the time of such exercise. The 2002 Plan provides that the
option exercise price may be paid in cash or in shares of Common Stock valued at
their fair market value on the date of exercise. Alternatively, an option
granted under the 2002 Plan may be exercised in whole or in part by delivering a
properly executed exercise notice together with irrevocable instructions to a
broker to deliver promptly to the Company the amount of sale or loan proceeds
necessary to pay the option exercise price, and such other documents as the
Committee may determine.
During a participant's lifetime, options granted under the 2002 Plan may be
exercised only by such participant and may not be transferred, other than by
will or by the laws of descent and distribution, except that a participant may
transfer any option granted under the 2002 Plan to his or her spouse, children,
grandchildren, parents, and/or siblings or to one or more trusts for the benefit
of such family members, provided that the participant does not receive any
consideration for the transfer. Any option so transferred will be subject to the
same terms and conditions that applied to such option immediately prior to its
transfer, except that it will not be further transferable by the transferee
during such transferee's lifetime.
FEDERAL INCOME TAX CONSEQUENCES
For the federal income tax purposes, the grant of an option granted under
the 2002 Plan will have no immediate tax consequences to the participant. The
exercise of the option by the participant will result in taxable income to the
participant, as compensation, in an amount equal to the amount by which the fair
market value of the acquired shares on the exercise date exceeds the option
price. The participant will have a tax basis in the acquired shares in an amount
equal to the fair market value of the shares on the date of exercise. Upon a
subsequent sale or taxable exchange of such shares, such participant will
recognize long or short-term capital gain or loss equal to the difference
between the amount realized on the sale and the tax basis of such shares. The
Company will be entitled to a deduction in the amount of any compensation income
that a participant recognizes in connection with an option.
PLAN AMENDMENTS
The Board has amended the 2002 Plan (i) to increase the maximum number of
shares of Common Stock that may be delivered or purchased under the 2002 Plan
from 500,000 to 900,000 and (ii) to increase the number of shares of Common
Stock for which a Non-Employee Director will be granted an option on each annual
Award Date from 25,000 to 35,000. Such amendments are shown in bold-faced type
in the full text of the 2002 Plan attached hereto as Appendix B.
80
The following table summarizes the option grants that may be awarded under
the 2002 Plan during the term thereof, assuming the proposed amendments to the
2002 Plan are approved and adopted by the Company's stockholders.
DOLLAR NUMBER OF SHARES
NAME AND POSITION VALUE($) SUBJECT TO OPTIONS
- ----------------- ---------- ------------------
Wayne P. Garten, Chief Executive Officer(1)........... 0 None
Michael D. Contino, Executive Vice President and Chief
Operating Officer(1)................................ 0 None
Charles E. Blue, Senior Vice President and Chief
Financial Officer(1)................................ 0 None
William C. Kingsford, Senior Vice President, Treasury
and Control (Corporate Controller)(1)............... 0 None
Executive Group(1).................................... 0 None
Non-Executive Director Group.......................... Unknown(2) Up to 900,000 in
the aggregate
Non-Executive Officer Employee Group(1)............... 0 None
- ---------------
(1) Pursuant to the terms of the 2002 Plan, only those directors of the Company
who are neither an employee of the Company nor a United States non-resident
alien are eligible to participate.
(2) The price at which shares of Common Stock may be purchased upon the exercise
of an option granted under the 2002 Plan is the fair market value of such
shares on the date of grant of such option. For purposes of determining the
price under the 2002 Plan, the fair market value of a share of Common Stock
is deemed to be the average of the closing price of the Common Stock on the
date of the grant, the ten trading days immediately preceding such date, and
the ten trading days immediately following such date.
VOTE REQUIRED
The affirmative "FOR" vote of the holders of a majority of the outstanding
shares of Common Stock and Series C Preferred Stock present or represented by
proxy and entitled to vote at the Annual Meeting, voting together as a class, is
required for approval of Proposal 6.
As of the record date, Chelsey, beneficially owned 115,810,383 shares of
Common Stock (approximately 51.6% of the outstanding Common Stock) and 564,819
shares of Series C Preferred Stock, collectively representing approximately
61.3% of the combined voting power of the Voting Stock. Accordingly, Chelsey
alone will be able to control the outcome of all matters upon which it votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE AMENDMENTS
TO THE 2002 STOCK OPTION PLAN FOR DIRECTORS.
81
PROPOSAL 7
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
INDEPENDENT PUBLIC ACCOUNTANTS:GENERALLY
Ratification of the Company's selection of independent auditors by the
Company's stockholders is not required by the Company's by-laws or other
applicable legal requirements and no recommendation of independent auditors is
being made to stockholders at this time. Instead, we are asking you to delegate
to the Audit Committee of the Board of Directors authority to select the
Company's independent auditors for the fiscal year ending December 27, 200325, 2004 from
amongst established national audit firms.
Representatives of KPMG LLP ("KPMG"), which audited the Company's financial
statements for the fiscal year ended December 28, 2002, are expected to be
present atattend the Annual Meeting with theMeeting. They
will have an opportunity to make a statement if they desire to do so and will be
available to respond to appropriate stockholder questions.
If, before the Annual
Meeting, theCHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There were no disagreements with accountants on accounting and financial
disclosure.
The Board of Directors selects an independent auditor other than KPMG
for the fiscal year ending December 27, 2003, it is expected that
representatives of such audit firm will be present at the Annual Meeting with
the opportunity to make a statement if they desire to do so and to respond to
appropriate questions.
FEES AND INDEPENDENCE:
Audit Fees. KPMG billed the Company an aggregate of $613,501 for
professional services rendered for the audit of the Company's financial
statements for fiscal year ended December 28, 2002 and its reviews of the
Company's financial statements included in the Company's Forms 10-Q for the 2002
fiscal year. Arthur Andersen LLP billed the Company, an aggregate of $29,800 for
professional services rendered for its reviews of the Company's financial
statements included in the Company's Form 10-Q for the first quarter of the 2002
fiscal year.
Financial Information Systems Design and Implementation Fees. During the
fiscal year ended December 28, 2002, KPMG provided no services and therefore
billed no fees to the Company in connection with financial information systems
design and implementation.
All Other Fees. During the fiscal year ended December 28, 2002, KPMG
billed the Company an aggregate of $151,955 for services other than services
specified in the preceding paragraphs.
The Audit Committee of the Board of Directors has considered whether the
provision of services by KPMG described in the preceding two paragraphs are
compatible with maintaining KPMG's independence as the Company's principal
accountant.
CHANGES IN INDEPENDENT PUBLIC ACCOUNTANTS:
The Company's Board of Directors, upon recommendation of its Audit
Committee, ended the engagement of Arthur Andersen LLP ("Arthur Andersen") as the Company's
independent public accountants, effective on the filing on May 14,
2002after Arthur Andersen's review of the
Company's Form 10-Qfinancial results for the fiscal quarter ended March 30, 2002 and the
filing of this Quarterly Report on Form 10-Q for such quarter, and authorized
the engagement of KPMG LLP to serve as the Company's independent public
accountants for the fiscal year ending December 28, 2002. Arthur Andersen's
report on the Company's 2001 financial statements was issued on March 16, 2002,
in conjunction with the filing of the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 2001.
DuringFEES AND INDEPENDENCE
KPMG LLP provided audit services to the Company consisting of the annual
audit of the Company's fiscal years ended December 30, 20002003 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 contained
in the Company's Annual Report on Form 10-K for each year and reviews of the
financial statements contained in the Company's Quarterly Reports on Form 10-Q
for the 2003 fiscal year and the final three quarters of the 2002 fiscal year.
Arthur Anderson LLP billed the Company an aggregate of $29,800 for audit and
subsidiaries asaudit-related fees for its review of andthe financial statements contained in the
Company's Quarterly Report on Form 10-Q for the first quarter of the 2002 fiscal
year. The following table shows the fees that were billed to the Company by KPMG
LLP for professional services rendered for the fiscal years ended December 30, 200027,
2003 and December 29, 200128, 2002.
FEE CATEGORY FISCAL YEAR 2003 % OF TOTAL FISCAL YEAR 2002 % OF TOTAL
- ------------ ---------------- ---------- ---------------- ----------
Audit Fees(1).............................. $814,500 84.6% $632,801 77.9%
Audit-Related Fees(2)...................... 133,500 13.9% 49,619 13.2%
Tax Fees(3)................................ 14,500 1.5% 36,975 4.6%
All Other Fees(4).......................... -0- -0- 35,130 4.3%
Total Fees................................. $962,500 100.0% $754,525 100.0%
82
- ---------------
(1) Audit Fees are fees for professional services performed for the audit of the
Company's annual financial statements and review of financial statements
included in the Company's 10-Q filings, and services that are normally
provided in connection with statutory and regulatory filings or engagements.
(2) Audit-Related Fees are fees for assurance and related services that are
reasonably related to the performance of the audit or review of the
Company's financial statements. This includes: employee benefit and
compensation plan audits; due diligence related to mergers and acquisitions;
auditor attestations that are not required by statute or regulation; and
consulting on financial accounting/ reporting standards.
(3) Tax Fees are fees for professional services performed with respect to tax
compliance, tax advice and tax planning. For fiscal year 2003, tax fees of
$14,500 are related to tax compliance billings. For fiscal year 2002, tax
fees of $6,825 are related to tax compliance billings and $30,150 are
related to tax consultation and planning.
(4) All Other Fees are fees for other permissible work that does not meet the
above category descriptions, including consulting services regarding the
evaluation of stock option grants and employee agreements.
KPMG LLP did not containprovide any adverse opinionservices related to financial information
systems design and implementation during the 2003 and 2002 fiscal years.
The Audit Committee of the Board of Directors has considered whether the
provision of services by KPMG described above are compatible with maintaining
KPMG's independence as the Company's principal accountant.
PRE-APPROVAL POLICY
The Audit Committee has policies and procedures that require the
pre-approval by the Audit Committee of all fees paid to, and all services
performed by, our independent auditors. Each year, the Audit Committee approves
the proposed services, including the nature, type and scope of services
contemplated and the related fees, to be rendered by our accountants during the
year. In addition, Audit Committee pre-approval is also required for those
engagements that may arise during the course of the year that are outside the
scope of the initial services and fees pre-approved by the Audit Committee.
All of the fees and services provided as noted in the table above were
authorized and approved by the Audit Committee in compliance with the
pre-approval policies and procedures described herein.
VOTE REQUIRED
The affirmative "FOR" vote of the holders of a majority of the outstanding
shares of Common Stock and Series C Preferred Stock present or disclaimerrepresented by
proxy and entitled to vote at the Annual Meeting, voting together as a class, is
required for approval of opinion, nor were they qualified or modified asProposal 7.
As of the record date, Chelsey, beneficially owned 115,810,383 shares of
Common Stock (approximately 51.6% of the outstanding Common Stock) and 564,819
shares of Series C Preferred Stock, collectively representing approximately
61.3% of the combined voting power of the Voting Stock. Accordingly, Chelsey
alone will be able to uncertainty,
audit scope, or accounting principles.control the outcome of all matters upon which it votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" RATIFICATION OF
THE DELEGATION TO THE AUDIT COMMITTEE OF AUTHORITY TO SELECT
THE COMPANY'S AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 25, 2004.
83
PROPOSAL 8
RATIFICATION AND APPROVAL OF THE COMPANY'S STOCK OPTION
AGREEMENT WITH WAYNE P. GARTEN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER OF THE COMPANY
GENERAL
The Company has provided Arthur Andersen with a copyis asking you to ratify and approve the adoption of the
foregoing
disclosures.
NoneCompany's Stock Option Agreement with Wayne P. Garten, the President and Chief
Executive Officer of the reportable events described under Item 304(a)(1)(v)Company (the "Stock Option Agreement"). The following
is a brief summary of Regulation S-K occurred withinthe terms of the Stock Option Agreement. The complete text
of the Stock Option Agreement is attached hereto as Appendix E.
SUMMARY OF STOCK OPTION AGREEMENT
Number of Options Granted and Exercise Price. The Stock Option Agreement
grants Mr. Garten the option (the "Option") to purchase up to 1,000,000 shares
of the Company's fiscal years ended December 30,Common Stock as such Common Stock exists immediately prior to
the taking of effect of the one-for-ten reverse split contemplated by Proposal 2
(the "Shares"), for an exercise price of $0.195 per share or, after giving
effect to the one-for-ten reverse split contemplated by Proposal 2, 100,000
shares for an exercise price of $1.95 per share. The options granted to Mr.
Garten pursuant to the Stock Option Agreement are not issued pursuant to the
Company's 2000 and December 29, 2001Management Stock Option Plan or the Company's 2002 Stock Option
Plan for Directors.
Vesting Schedule. The Options will vest over a 2-year period. One-third of
the Options vested upon the execution of the Garten Employment Agreement,
one-third will vest on May 5, 2005 and the subsequent interim period throughfinal-one third will vest on May 14,
2002.
During5,
2006; provided, however, that all such options shall vest in their entirety and
become fully exercisable upon the earliest to occur of (i) Mr. Garten's
resignation "For Good Reason" (as defined in the Garten Employment Agreement),
(ii) a "Change of Control" (as defined in the Garten Employment Agreement) or
(iii) the Company's fiscaltermination of Mr. Garten's employment without being "For
Cause" (as defined in the Garten Employment Agreement).
Exercise Period. The Options are exercisable within 10 years ended December 29, 2001, andof their
respective vesting dates.
Interested Persons. Wayne P. Garten has an interest in the subsequent interim period through May 14, 2002, the Company did not consult with
KPMG regarding anyapproval of the
matters or events set forth in Item 304(a)(2)(i) and
(ii)Stock Option Agreement by the Company's stockholders by virtue of Regulation S-Khis
entitlement to option grants under the Securities Exchange Act of 1934, as amended.Stock Option Agreement.
VOTE REQUIRED:REQUIRED
The affirmative "FOR" 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 respectapprove
Proposal 8.
As of the record date, Chelsey beneficially owned 115,810,383 shares of
Common Stock (approximately 51.6% of the outstanding Common Stock) and 564,819
shares of Series C Preferred Stock, collectively representing approximately
61.3% of the combined voting power of the Voting Stock. Accordingly, Chelsey
alone will be able to control the outcome of all matters upon which it votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE ADOPTION OF THE COMPANY'S STOCK
OPTION AGREEMENT WITH WAYNE P. GARTEN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF
THE COMPANY.
84
PROPOSAL 9
AMENDING THE CERTIFICATE OF INCORPORATION TO INCREASE THE
NUMBER OF SHARES OF COMMON STOCK WHICH THE COMPANY WOULD
HAVE AUTHORITY TO ISSUE
GENERAL
The Board is submitting to you an amendment to the selectionCompany's Certificate of
auditors.Incorporation that would increase the number of shares of Common Stock which the
Company would have authority to issue, after giving effect to the one-for-ten
reverse split of the Company's Common Stock, from 30,000,000 shares to
50,000,000 shares and to make a corresponding change in the aggregate number of
shares of all classes of stock which the Company has authority to issue.
If approved by the Company's stockholders, the increase in authorized
Common Stock would become effective as soon as reasonably practicable after the
Annual Meeting by filing a Certificate of Amendment to the Company's Certificate
of Incorporation with the Delaware Secretary of State. The Company anticipates
that the increase in the authorized shares of Common Stock, if approved by its
stockholders, would be implemented by the same certificate of amendment as the
one-for-ten reverse split of the Company's Common Stock contemplated by Proposal
2, the reduction in par value contemplated by Proposal 3 and the increase in the
number of authorized shares of Additional Preferred Stock contemplated by
Proposal 4, to the extent those proposals are approved by the Company's
stockholders. The Board believes that the amendment will benefit the Company and
you, and thus, recommends the approval of the amendment. The Board has already
adopted a resolution declaring the advisability of the amendment.
REASONS FOR PROPOSAL
The Company will have approximately 22,451,800 shares of Common Stock
(excluding treasury stock) outstanding after the reverse split. In addition, the
Company has reserved approximately 4,062,125 shares of Common Stock (adjusted
for the one-for-ten reverse split) for the issuance additional shares of Common
Stock upon the exercise of outstanding stock options.
A waiver fee (the "Waiver Fee") was paid to Chelsey Direct at closing of
the Term Loan Facility equal to 1% of the accreted liquidation preference of the
Series C Preferred Stock, payable in Common Stock of the Company, calculated
based upon the fair market value thereof two business days prior to the closing
date, in consideration for the waiver by Chelsey Direct of its blockage rights
over issuances of senior securities. Chelsey received 4,344,762 shares of Common
Stock (adjusted for the one-for-ten reverse split, approximately 434,476 shares)
as payment of the Waiver Fee on July 8, 2004.
In consideration for providing the Term Loan Facility, Chelsey Finance will
receive warrants (the "Common Stock Warrants") to purchase 30% of the fully
diluted shares of Common Stock of the Company at an exercise price of $.01 per
share, which the Company believes would be approximately 10,247,210 shares of
Common Stock (adjusted for the one-for-ten reverse split). Pending shareholder
approval of Proposal 10, Chelsey Finance received a warrant (the "Series D
Preferred Warrant") to purchase a newly issued series of nonvoting preferred
stock (the "Series D Preferred Stock") that will be automatically exchanged for
the Common Stock Warrants upon receipt of shareholder approval. The terms of the
Series D Preferred Warrant and the Series D Preferred Stock are discussed in
Proposal 10.
85
The Company believes that the number of shares of issued and outstanding
Common Stock upon completion of the one-for-ten reverse split will be
approximately 22,451,800 shares (excluding treasury stock). The Company believes
that the number of shares of issued and outstanding Common Stock on the Split
Date together with the number of shares of Common Stock reserved for the
exercise of stock options and the Common Stock Warrants, would be approximately
34,157,366 (excluding treasury shares). This amount exceeds the number of shares
of Common Stock which the Company is authorized to issue which, after giving
effect to the one-for-ten reverse split, will be 30,000,000. As a result, the
approval of this Proposal 9 is required in order that the Company be able to
issue the Common Stock Warrant.
The increase of the number of shares of Common Stock which the Company
would have authority to issue after giving effect to the one-for-ten reverse
split, from 30,000,000 to 50,000,000 is intended to provide the Company with the
ability to issue the Common Stock Warrant and to provide the Company with
additional authorized Common Stock for issuance in future transactions. The
Company has no current plan for the issuance of such additional shares of Common
Stock. Under the DGCL, the Company is required to obtain approval from
stockholders to amend its charter to increase the number of shares of capital
stock authorized for issuance.
PRINCIPAL EFFECTS OF THE INCREASE IN AUTHORIZED SHARES OF COMMON STOCK
The following table illustrates the principal effects of the increase in
authorized shares of Common Stock discussed in this proposal on the Company's
capitalization table, after giving effect to the one-for-ten reverse stock
split:
NUMBER OF SHARES NUMBER OF SHARES
PRIOR TO SUBSEQUENT TO
INCREASE IN INCREASE IN
AUTHORIZED AUTHORIZED
SHARES OF SHARES OF
CLASS OF SHARES COMMON STOCK COMMON STOCK
- --------------- ---------------- ----------------
Common Stock Authorized:.................................... 30,000,000 50,000,000
Common Stock Outstanding(1):................................ 22,996,177 22,996,177
Common Stock Reserved for Issuance Pursuant to Options and
Common Stock Warrant(2):.................................. 4,062,125 4,062,125
Common Stock Available for Future Issuance:................. 2,941,698 22,941,698
Additional Preferred Stock Authorized(3):................... 15,000,000 15,000,000
Additional Preferred Stock Outstanding(4):.................. 564,819 564,819
Series B 8% Cumulative Preferred Stock Authorized:.......... 40,000 40,000
Series B 8% Cumulative Preferred Stock Outstanding:......... 0 0
7.5% Cumulative Convertible Preferred Stock Authorized:..... 861,900 861,900
7.5% Cumulative Convertible Preferred Stock Outstanding:.... 0
Class B Common Stock Authorized:............................ 12,270,503 12,270,503
Class B Common Stock Outstanding:........................... 0
Aggregate Number of Shares of All Classes of the Company's
Stock Authorized:......................................... 58,172,403(3) 78,172,403
86
- ---------------
(1) Includes 212,093 shares of treasury stock.
(2) Includes 212,093 shares of treasury stock.
(3) Includes 564,819 shares of Series C Preferred Stock and 100 Shares of Series
D Preferred Stock.
(4) Represents 564,819 shares of Series C Preferred Stock outstanding. There are
no shares of any other class of additional preferred stock outstanding.
VOTE REQUIRED
The affirmative vote of the holders of (a) a majority of the outstanding
shares of Common Stock, voting separately, as a single class, (b) at least
two-thirds of the outstanding shares of Series C Preferred Stock, voting
separately as a class, and (c) a majority of the combined voting power of all
shares of Voting Stock outstanding, voting together as a single class, whether
in person or by proxy, whether by mail, Internet or telephone, is required to
approve Proposal 9. So, if you abstain from voting, it has the same effect as if
you voted against the proposal. Each share of Common Stock has one (1) vote and
each share of Series BC Preferred Stock has ten (10)one hundred (100) votes.
As of the record date, Chelsey beneficially owned 115,810,383 shares of
Common Stock (approximately 51.6% of the outstanding Common Stock) and 564,819
shares of Series C Preferred Stock, collectively representing approximately
61.3% of the combined voting power of the Voting Stock. Accordingly, Chelsey
alone will be able to control the outcome of all matters upon which it votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" DELEGATIONTHE APPROVAL OF THE AMENDMENT TO THE
AUDIT
COMMITTEECERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK
AND THE TOTAL NUMBER OF SHARES OF ALL CLASSES OF STOCK WHICH THE COMPANY WOULD
HAVE AUTHORITY TO ISSUE.
87
PROPOSAL 10
APPROVE (I) THE ISSUANCE AND POTENTIAL ISSUANCE OF A COMMON STOCK PURCHASE
WARRANT BY THE COMPANY TO CHELSEY FINANCE, LLC, AND (II) THE ISSUANCE AND
POTENTIAL ISSUANCE UNDER THE COMMON STOCK PURCHASE WARRANT OF 30% OF THE
COMPANY'S ISSUED AND OUTSTANDING COMMON STOCK ON A FULLY DILUTED BASIS
BACKGROUND OF THE TRANSACTION
In consideration for providing the Term Loan Facility, Chelsey Finance will
receive the Common Stock Warrant, which will entitle Chelsey Direct to purchase
30% of the fully diluted shares of Common Stock of the Company at an exercise
price of $.01 per share, which the Company believes would be approximately
10,247,210 shares of Common Stock (adjusted for the one-for-ten reverse split).
Pending shareholder approval of this Proposal 10, Chelsey Finance received the
Series D Preferred Warrant, which entitles Chelsey Finance to purchase 100
shares of a newly issued series of preferred stock, the Series D Preferred
Stock, that will be automatically exchanged for the Common Stock Warrant upon
receipt of shareholder approval of this Proposal 10. The American Stock
Exchange's Company Guide requires shareholder approval of the issuance and
potential issuance of the Common Stock Warrant; see "Reasons for Proposal,"
below.
GENERALLY
The Company is asking you to approve (i) the issuance and potential
issuance of a Common Stock Purchase Warrant by the Company to Chelsey Finance,
LLC, and (ii) the issuance and potential issuance under the Common Stock
Purchase Warrant of 30% of the Company's issued and outstanding Common Stock on
a fully diluted basis. The following is a brief summary of the terms of the
Common Stock Warrant, the Series D Preferred Warrant and the Series D Preferred
Stock.
SUMMARY OF COMMON STOCK WARRANT, SERIES D PREFERRED WARRANT AND SERIES D
PREFERRED STOCK
On the closing of the Term Loan Facility, Chelsey Finance received the
Series D Preferred Warrant, which entitles Chelsey Finance to purchase 100
shares of a newly issued series of preferred stock, the Series D Preferred
Stock. The Series D Preferred Warrant will be automatically exchanged for the
Common Stock Warrant upon receipt of shareholder approval of this Proposal 10.
The Common Stock Warrant will entitle Chelsey Finance to purchase 30% of the
fully diluted shares of Common Stock of the Company at an exercise price of $.01
per share, which the Company believes would be approximately 10,247,210 shares
of Common Stock (adjusted for the one-for-ten reverse split). The Series D
Preferred Warrant may not be exercised prior to September 30, 2004.
DESCRIPTION OF SERIES D PREFERRED STOCK
The Series D Preferred Stock has a par value of $.01 per share. The holders
of the Series D Preferred Stock have no voting rights except the right to vote
as a class on certain matters that would adversely affect the rights of the
Series D Preferred Stock.
In the event of the liquidation, dissolution or winding up of the Company,
the holders of the Series D Preferred Stock are entitled to a liquidation
preference equal to the fair market value of the Common Stock Warrant on the
closing date (based upon a Black-Scholes valuation of such warrants), plus
declared but unpaid dividends thereon, or $81,868.40 per share.
88
At the election of the holders of a majority of the shares of Series D
Preferred Stock, in the event of the approval by the shareholders of the Company
of a sale of the Company or substantially all of its assets or certain mergers,
or upon the election of any holder following a Change of Control (as defined),
such transaction will be treated as a liquidation and entitle such holders to
have their shares redeemed for an amount equal to the liquidation preference
plus declared but unpaid dividends thereon.
The Series D Preferred Stock is entitled to participate with the Common
Stock in any dividends or distributions paid to or with respect to the Common
Stock based upon the liquidation preference per share of Series D Preferred
Stock times a fraction, the numerator of which is the dividend per share of
Common Stock and the denominator is the fair market value of the Common Stock
immediately prior to the record date for the dividend. The Company's credit
agreement with Congress currently prohibits the payment of dividends.
The Series D Preferred Stock may be redeemed in whole and not in part,
except as set forth below, at the option of the Company at any time for the
liquidation preference plus any declared but unpaid dividends (the "Redemption
Price"). The Series D Preferred Stock, if not redeemed earlier, must be redeemed
by the Company out of the proceeds of certain equity sales, and any remaining
outstanding shares shall be redeemed on January 1, 2009 (the "Mandatory
Redemption Date") for the Redemption Price.
Pursuant to the terms of the Certificate of Designations of the Series D
Preferred Stock, the Company's obligation to pay dividends on or redeem the
Series D Preferred Stock is subject to compliance with its credit agreement with
Congress.
REASONS FOR PROPOSAL
The American Stock Exchange's Company Guide requires shareholder approval
(pursuant to a proxy solicitation conforming to SEC proxy rules) as a
prerequisite to approval of applications to list additional shares to be issued
in connection with certain transactions. These include a transaction involving
the sale, issuance and potential issuance by the Company of Common Stock
pursuant to the Common Stock Warrant equal to 20% or more of presently
outstanding Common Stock at a price less than the greater of book or market
value.
The issuance and potential issuance of the Company's Series D Participating
Preferred Stock under the Series D Preferred Warrant, involves the issuance and
potential issuance of a security convertible into Common Stock in an amount
equal to more than 20% of the presently outstanding Common Stock. The issuance
and potential issuance of the Common Stock Warrant involves the issuance and
potential issuance of a security convertible into Common Stock in an amount
equal to more than 20% of the presently outstanding Common Stock. In addition,
the issuance and potential issuance of Common Stock under the Common Stock
Warrant involves the issuance and potential issuance by the Company of Common
Stock in an amount equal to more than 20% of the presently outstanding Common
Stock. The price payable for the Common Stock on exercise of the Common Stock
Warrant, $0.01 per share, will be less than the greater of the aggregate book or
market value of the shares of Common Stock issued on such exercise. As a result,
the Exchange's Company Guide requires shareholder approval of these
transactions.
PRINCIPAL EFFECTS OF THE APPROVAL OF THIS PROPOSAL 10
The approval of this Proposal 10, assuming the transactions contemplated by
the Chelsey Term Sheet occur, would increase the voting power of the Common
Stock held by Chelsey and decrease the collective voting power of the Common
Stock held by other shareholders. After giving effect to the one-for-ten reverse
split and the issuance of Common Stock under the Common Stock Warrant, the
Company believes that
89
Chelsey, Chelsey Finance and Messrs. Wachtel and Feldman collectively would hold
approximately 66.8% of the issued and outstanding Common Stock and Chelsey would
hold 100% of the issued and outstanding Series C Participating Preferred Stock,
collectively representing approximately 87.8% of combined voting power of the
Voting Stock.
VOTE REQUIRED
The affirmative vote of the holders of (a) a majority of the outstanding
shares of Common Stock, voting separately, as a single class, (b) at least
two-thirds of the outstanding shares of Series C Preferred Stock, voting
separately as a class, and (c) a majority of the combined voting power of all
shares of Voting Stock outstanding, voting together as a single class, whether
in person or by proxy, whether by mail, Internet or telephone, is required to
approve Proposal 10. So, if you abstain from voting, it has the same effect as
if you voted against the proposal. Each share of Common Stock has one (1) vote
and each share of Series C Preferred Stock has one hundred (100) votes.
As of the record date, Chelsey beneficially owned 115,810,383 shares of
Common Stock (approximately 51.6% of the outstanding Common Stock) and 564,819
shares of Series C Preferred Stock, collectively representing approximately
61.3% of the combined voting power of the Voting Stock. Accordingly, Chelsey
alone will be able to control the outcome of all matters upon which it votes.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF DIRECTORS AUTHORITY(I) THE ISSUANCE AND
POTENTIAL ISSUANCE OF A COMMON STOCK PURCHASE WARRANT BY THE COMPANY TO SELECTCHELSEY
FINANCE, LLC, AND (II) THE ISSUANCE AND POTENTIAL ISSUANCE UNDER THE COMMON
STOCK PURCHASE WARRANT OF 30% OF THE COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 27, 2003,
FROM AMONGST ESTABLISHED NATIONAL AUDIT FIRMS.
37ISSUED AND OUTSTANDING COMMON
STOCK ON A FULLY DILUTED BASIS.
90
STOCKHOLDER PROPOSALS FOR THE 20042005 ANNUAL MEETING
If you wish to submit proposals to be presented at the 20042005 Annual Meeting
of Stockholders of the Company, they must be received by the Company no later
than December 7, 200313, 2004 for them to be included in the Company's proxy material
for that meeting. In order for a proposal to be included in the proxy statement,
the stockholder submitting the proposal must meet certain eligibility standards
and must comply with certain procedures established by the Commission, and the
proposal must comply with the requirements as to form and substance established
by applicable laws and regulations.
DISCRETIONARY AUTHORITY
If the Company did not receive notice of any matter that is to come before
the stockholders at the 20032004 Annual Meeting of Stockholders on or before February 21, 2003,May 28,
2004, which corresponds to forty-five (45) days before the date on which the
Company first mailed this proxy statement, the proxy for the 20032004 Annual Meeting
of Stockholders may, pursuant to Rule 14a-4(c) of the Proxy Rulesproxy 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 AAN ADDITIONAL COPY OF THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002,27, 2003, AS AMENDED, FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION WITHOUT CHARGE (EXCEPT FOR EXHIBITS TO SUCH
ANNUAL REPORT, WHICH WILL BE FURNISHED UPON PAYMENT OF THE COMPANY'S REASONABLE
EXPENSES IN FURNISHING SUCH EXHIBITS) BY WRITING TO: INVESTOR RELATIONS, HANOVER
DIRECT, INC., 115 RIVER ROAD, EDGEWATER, NEW JERSEY 07020, OR FROM THE COMPANY'S
WEB SITEWEBSITE AT WWW.HANOVERDIRECT.COM.
By Order of the Board of Directors
LOGO
Brian C. Harriss-s- Charles E. Blue
Charles E. Blue
Secretary
Dated: April 7, 2003July 13, 2004
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY
AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE
OR VOTE BY THE INTERNET OR BY TELEPHONE.
PLEASE VOTE -- YOUR VOTE IS IMPORTANT
3891
APPENDIX A
HANOVER DIRECT, INC.
2004 STOCK OPTION PLAN FOR DIRECTORS
1. PURPOSE. The purpose of the Hanover Direct, Inc. 2004 Stock Option Plan
for Directors (the "Plan") is to advance the interests of Hanover Direct, Inc.
(the "Company") by providing non-employee directors of the Company, through the
grant of options to purchase shares of Common Stock (as hereinafter defined),
with a larger personal and financial interest in the Company's success.
2. ADMINISTRATION. The Plan shall be administered by a committee
(the"Committee") consisting of at least two members of the Board of Directors of
the Company (the "Board"). The Committee shall have full power and authority to
interpret the Plan, to establish such rules and regulations as it deems
appropriate for the administration of the Plan, and to take such other action as
it deems necessary or desirable for the administration of the Plan. The
Committee's interpretation and construction of any provision of the Plan or the
terms of any Option (as hereinafter defined) shall be conclusive and binding on
all parties.
3. PARTICIPANTS. Each director of the Company who is neither an employee
of the Company nor an Ineligible Director (as hereinafter defined) (a
"Non-Employee Director") shall be eligible to be granted Options to purchase
shares of Common Stock ("Options") under the Plan. An "Ineligible Director"
means any director of the Company who is a nonresident alien.
Nothing contained in the Plan, or in any Option granted pursuant to the
Plan, shall confer upon any Director any right to the continuation of his or her
directorship or limit in any way the right of the Company to terminate his or
her directorship at any time.
4. THE SHARES. Options may be granted from time to time under the Plan for
the purchase, in the aggregate, of not more than 1,000,000 shares of common
stock, par value $0.66 2/3 per share, of the Company ("Common Stock") (subject
to adjustment pursuant to Section 13). Such shares of Common Stock may be set
aside out of the authorized but unissued shares of Common Stock not reserved for
any other purpose or out of previously issued shares acquired by the Company and
held in its treasury. Any shares of Common Stock which, by reason of the
termination or expiration of an Option or otherwise, are no longer subject to
purchase pursuant to an Option granted under the Plan may again be subjected to
an Option under the Plan.
5. OPTION GRANTS. Options shall be evidenced by Option agreements which
shall be subject to the terms and conditions set forth in the Plan and such
other terms and conditions not inconsistent herewith as the Committee may
approve.
(a) INITIAL APPOINTMENT AWARDS. As of the effective date of his or
her initial appointment or election to the Board (or, if later, the
effective date of the Plan) (the "Initial Appointment Date"), a
Non-Employee Director shall receive a grant of an Option to purchase 50,000
shares of Common Stock (subject to adjustment pursuant to Section 13).
(b) ANNUAL SERVICE AWARDS. On each Award Date (as hereinafter
defined) occurring after a Non-Employee Director's Initial Appointment
Date, such Non-Employee Director shall be granted, provided he or she
continues to serve as a member of the Board on such date (to the extent the
2002 Stock Option Plan for Directors does not have enough remaining
shares), an Option to purchase 35,000 shares of Common Stock (subject to
adjustment pursuant to Section 13). An "Award Date" means August 3, 2004,
August 3, 2005 and August 3, 2006.
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
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of grant of such Option. Solely for purposes of this Section 6, the fair market
value of a share of Common Stock shall be deemed to be the average of the
closing prices of the Common Stock on the Award Date and the 10 trading days
immediately preceding the Award Date.
7. TERM AND EXERCISABILITY OF OPTIONS. Options shall be granted for a
maximum term of 10 years. Subject to the other provisions of the Plan relating
to exercisability of Options, or as otherwise provided by the Committee and
evidenced in an Option agreement, the participant shall have the cumulative
right as of the first, second, and third anniversaries of the date of grant, to
purchase up to one-third, two-thirds, and 100%, respectively, of the Option
Shares; provided, however, that in the event of a Change of Control (as such
term is defined in the Hanover Direct, Inc. Directors Change of Control Plan),
the participant shall have the cumulative right to purchase up to 100% of the
Option Shares.
8. TERMINATION OF DIRECTORSHIP. Except as otherwise provided in this
Section 8, or as otherwise provided by the Committee and evidenced in an Option
agreement, no person may exercise an Option more than three months after the
first date on which he or she ceases to be a director of the Company. If a
participant ceases to be a director of the Company by reason of death or
disability, any Options held by him or her may be exercised within 12 months
after the date he or she ceases to be a director of the Company. In no event may
an Option be exercised after the expiration of the term of such Option.
9. PAYMENT. Full payment of the purchase price for shares of Common Stock
purchased upon the exercise, in whole or in part, of an Option granted under the
Plan shall be made at the time of such exercise. The Option Price may be paid in
cash, in shares of Common Stock valued at their fair market value on the date of
exercise or with any other form of compensation permissible for such purposes
under Delaware law, as determined by the Committee in its judgment.
Alternatively, an Option may be exercised in whole or in part by delivering a
properly executed exercise notice together with irrevocable instructions to a
broker to deliver promptly to the Company the amount of sale or loan proceeds
necessary to pay the Option Price, and such other documents as the Committee may
determine.
No shares of Common Stock shall be issued or transferred to a participant
until full payment therefor has been made, and a participant shall have none of
the rights of a stockholder until shares are issued or transferred to him or
her.
10. NONTRANSFERABILITY. Options granted under the Plan shall not be
transferable other than by will or by the laws of descent and distribution, and,
during a participant's lifetime, shall be exercisable only by him or her.
Notwithstanding the foregoing, a participant may transfer any Option granted
under the Plan to the participant's spouse, children, grandchildren, parents,
and/or siblings or to one or more trusts for the benefit of such family members,
if the agreement evidencing such Option so provides and the participant does not
receive any consideration for the transfer. Any Option so transferred shall
continue to be subject to the same terms and conditions that applied to such
Option immediately prior to its transfer (except that such transferred Option
shall not be further transferable by the transferee during the transferee's
lifetime).
11. ISSUANCE OF SHARES. If a participant so requests, shares purchased
upon the exercise of an Option may be issued or transferred in the name of the
participant and another person jointly with the right of survivorship.
12. STATUS OF OPTIONS. Options granted under the Plan are nonqualified
options not qualifying as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended.
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
AA-2
authorized, to the extent it deems appropriate, to make substitutions or
adjustments in the aggregate number and kind of shares of Common Stock reserved
for issuance under the Plan, in the number, kind and price of shares of Common
Stock subject to outstanding awards, and in the award limits under the Plan (or
to make provision for cash payment to the holder of an Option). Outstanding
Options shall be appropriately amended as to price and other terms in a manner
consistent with the aforementioned adjustment to the shares of Common Stock
subject to the Plan. Fractional shares resulting from any adjustment in Options
pursuant to this Section 13 may be settled in cash or otherwise as the Committee
shall determine. Notice of any adjustment shall be given by the Company to each
holder of an Option which shall have been adjusted and such adjustment (whether
or not such notice is given) shall be effective and binding for all purposes of
this Plan.
14. EFFECTIVE DATE AND TERMINATION OF PLAN. The Plan shall become
effective on the date of its adoption by the Board or a duly authorized
committee thereof, subject to the ratification of the Plan by the affirmative
vote or consent of holders of a majority of the issued and outstanding shares of
Common Stock. The Plan shall terminate 10 years from the date of its adoption or
such earlier date as the Board or such committee may determine. Any Option
outstanding under the Plan at the time of its termination shall remain in effect
in accordance with its terms and conditions and those of the Plan.
15. AMENDMENT. The Board or a duly authorized committee thereof may amend
the Plan in any respect from time to time; provided, however, that no amendment
shall become effective unless approved by affirmative vote of the Company's
shareholders if such approval is necessary or desirable for the continued
validity of the Plan or if the failure to obtain such approval would adversely
affect the compliance of the Plan with Rule 16b-3 or any successor rule under
the Securities Exchange Act of 1934, as amended, or any other rule or
regulation. No amendment may, without the consent of a participant, impair his
or her rights under any Option previously granted under the Plan.
The Board or a duly authorized committee thereof shall have the power, in
the event of any disposition of substantially all of the assets of the Company,
its dissolution, any merger or consolidation of the Company with or into any
other corporation, or the merger or consolidation of any corporation into the
Company, to amend all outstanding Options to terminate such Options as of such
effectiveness. If the Board shall exercise such power, all Options then
outstanding shall be deemed to terminate upon such effectiveness.
16. LEGAL AND REGULATORY REQUIREMENTS. No Option shall be exercisable and
no shares will be delivered under the Plan except in compliance with all
applicable federal and state laws and regulations including, without limitation,
compliance with the rules of all domestic stock exchanges on which the Common
Stock may be listed. Any share certificate issued to evidence shares for which
an Option is exercised may bear such legends and statements as the Committee
shall deem advisable to assure compliance with federal and state laws and
regulations. No Option shall be exercisable, and no shares will be delivered
under the Plan, until the Company has obtained consent or approval from
regulatory bodies, federal or state, having jurisdiction over such matters as
the Committee may deem advisable.
In the case of the exercise of an Option by a person or estate acquiring
the right to exercise the Option by bequest or inheritance, the Committee may
require reasonable evidence as to the ownership of the Option and may require
consents and releases of taxing authorities that it may deem advisable.
AA-3
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APPENDIX B
HANOVER DIRECT, INC.
2002 STOCK OPTION PLAN FOR DIRECTORS
1. PURPOSE. The purpose of the Hanover Direct, Inc. 2002 Stock Option Plan
for Directors (the "Plan") is to advance the interests of Hanover Direct, Inc.
(the "Company") by providing non-employee directors of the Company, through the
grant of options to purchase shares of Common Stock (as hereinafter defined),
with a larger personal and financial interest in the Company's success.
2. ADMINISTRATION. The Plan shall be administered by a committee (the
"Committee") consisting of at least two members of the Board of Directors of the
Company (the "Board"). The Committee shall have full power and authority to
interpret the Plan, to establish such rules and regulations as it deems
appropriate for the administration of the Plan, and to take such other action as
it deems necessary or desirable for the administration of the Plan. The
Committee's interpretation and construction of any provision of the Plan or the
terms of any Option (as hereinafter defined) shall be conclusive and binding on
all parties.
3. PARTICIPANTS. Each director of the Company who is neither an employee
of the Company nor an Ineligible Director (as hereinafter defined) (a
"Non-Employee Director") shall be eligible to be granted Options to purchase
shares of Common Stock ("Options") under the Plan. An "Ineligible Director"
means any director of the Company who is a nonresident alien.
Nothing contained in the Plan, or in any Option granted pursuant to the
Plan, shall confer upon any Director any right to the continuation of his or her
directorship or limit in any way the right of the Company to terminate his or
her directorship at any time.
4. THE SHARES. Options may be granted from time to time under the Plan for
the purchase, in the aggregate, of not more than 1,00,000 shares of common
stock, par value $0.66 2/3 per share, of the Company ("Common Stock") (subject
to adjustment pursuant to Section 13). Such shares of Common Stock may be set
aside out of the authorized but unissued shares of Common Stock not reserved for
any other purpose or out of previously issued shares acquired by the Company and
held in its treasury. Any shares of Common Stock which, by reason of the
termination or expiration of an Option or otherwise, are no longer subject to
purchase pursuant to an Option granted under the Plan, may again be subjected to
an Option under the Plan.
5. OPTION GRANTS. Options shall be evidenced by Option agreements which
shall be subject to the terms and conditions set forth in the Plan and such
other terms and conditions not inconsistent herewith as the Committee may
approve.
(a) INITIAL APPOINTMENT AWARDS. As of the effective date of his or
her initial appointment or election to the Board (or, if later, the
effective date of the Plan) (the "Initial Appointment Date"), a
Non-Employee Director shall receive a grant of an Option to purchase 50,000
shares of Common Stock (subject to adjustment pursuant to Section 13).
(b) ANNUAL SERVICE AWARDS. On each Award Date (as hereinafter
defined) occurring after a Non-Employee Director's Initial Appointment
Date, such Non-Employee Director shall be granted, provided he or she
continues to serve as a member of the Board on such date, an Option to
purchase 25,000 shares of Common Stock (35,000 SHARES OF COMMON STOCK ON
AUGUST 1, 2003 AND AUGUST 3, 2004) (subject to adjustment pursuant to
Section 13). An "Award Date" means August 2, 2002, August 1, 2003 and
August 3, 2004.
BB-1
6. OPTION PRICE. The price (the "Option Price") at which shares of Common
Stock may be purchased upon the exercise of an Option granted under the Plan
shall be the fair market value of such shares on the date of grant of such
Option. Solely for purposes of this Section 6, the fair market value of a share
of Common Stock shall be deemed to be the average of the closing prices of the
Common Stock on the Award Date, the 10 trading days immediately preceding the
Award Date, and the 10 trading days immediately following the Award Date.
7. TERM AND EXERCISABILITY OF OPTIONS. Options shall be granted for a
maximum term of 10 years. Subject to the other provisions of the Plan relating
to exercisability of Options, or as otherwise provided by the Committee and
evidenced in an Option agreement, the participant shall have the cumulative
right as of the first, second, and third anniversaries of the date of grant, to
purchase up to one-third, two-thirds, and 100%, respectively, of the Option
Shares; provided, however, that in the event of a Change of Control (as such
term is defined in the Hanover Direct, Inc. Key Executive Twenty-Four Month
Compensation Continuation Plan), the participant shall have the cumulative right
to purchase up to 100% of the Option Shares.
8. TERMINATION OF DIRECTORSHIP. Except as otherwise provided in this
Section 8, or as otherwise provided by the Committee and evidenced in an Option
agreement, no person may exercise an Option more than three months after the
first date on which he or she ceases to be a director of the Company. If a
participant ceases to be a director of the Company by reason of death or
disability, any Options held by him or her may be exercised within 12 months
after the date he or she ceases to be a director of the Company. In no event may
an Option be exercised after the expiration of the term of such Option.
9. PAYMENT. Full payment of the purchase price for shares of Common Stock
purchased upon the exercise, in whole or in part, of an Option granted under the
Plan shall be made at the time of such exercise. The Option Price may be paid in
cash or in shares of Common Stock valued at their fair market value on the date
of exercise. Alternatively, an Option may be exercised in whole or in part by
delivering a properly executed exercise notice together with irrevocable
instructions to a broker to deliver promptly to the Company the amount of sale
or loan proceeds necessary to pay the Option Price, and such other documents as
the Committee may determine.
No shares of Common Stock shall be issued or transferred to a participant
until full payment therefor has been made, and a participant shall have none of
the rights of a stockholder until shares are issued or transferred to him or
her.
10. NONTRANSFERABILITY. Options granted under the Plan shall not be
transferable other than by will or by the laws of descent and distribution, and,
during a participant's lifetime, shall be exercisable only by him or her.
Notwithstanding the foregoing, a participant may transfer any Option granted
under the Plan to the participant's spouse, children, grandchildren, parents,
and/or siblings or to one or more trusts for the benefit of such family members,
if the agreement evidencing such Option so provides and the participant does not
receive any consideration for the transfer. Any Option so transferred shall
continue to be subject to the same terms and conditions that applied to such
Option immediately prior to its transfer (except that such transferred Option
shall not be further transferable by the transferee during the transferee's
lifetime).
11. ISSUANCE OF SHARES. If a participant so requests, shares purchased
upon the exercise of an Option may be issued or transferred in the name of the
participant and another person jointly with the right of survivorship.
12. STATUS OF OPTIONS. Options granted under the Plan are nonqualified
options not qualifying as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended.
BB-2
13. CHANGES IN CAPITAL STRUCTURE, ETC. In the event of any merger, share
exchange, reorganization, consolidation, recapitalization, reclassification,
distribution, stock dividend, stock split, reverse stock split, split-up,
spin-off, or other similar transaction or event affecting the Common Stock, the
Committee is authorized, to the extent it deems appropriate, to make
substitutions or adjustments in the aggregate number and kind of shares of
Common Stock reserved for issuance under the Plan, in the number, kind and price
of shares of Common Stock subject to outstanding awards, and in the award limits
under the Plan (or to make provision for cash payment to the holder of an
Option). Outstanding Options shall be appropriately amended as to price and
other terms in a manner consistent with the aforementioned adjustment to the
shares of Common Stock subject to the Plan. Fractional shares resulting from any
adjustment in Options pursuant to this Section 13 may be settled in cash or
otherwise as the Committee shall determine. Notice of any adjustment shall be
given by the Company to each holder of an Option which shall have been adjusted
and such adjustment (whether or not such notice is given) shall be effective and
binding for all purposes of this Plan.
14. EFFECTIVE DATE AND TERMINATION OF PLAN. The Plan shall become
effective on the date of its adoption by the Board or a duly authorized
committee thereof, subject to the ratification of the Plan by the affirmative
vote or consent of holders of a majority of the issued and outstanding shares of
Common Stock. The Plan shall terminate 10 years from the date of its adoption or
such earlier date as the Board or such committee may determine. Any Option
outstanding under the Plan at the time of its termination shall remain in effect
in accordance with its terms and conditions and those of the Plan.
15. AMENDMENT. The Board or a duly authorized committee thereof may amend
the Plan in any respect from time to time; provided, however, that no amendment
shall become effective unless approved by affirmative vote of the Company's
shareholders if such approval is necessary or desirable for the continued
validity of the Plan or if the failure to obtain such approval would adversely
affect the compliance of the Plan with Rule 16b-3 or any successor rule under
the Securities Exchange Act of 1934 or any other rule or regulation. No
amendment may, without the consent of a participant, impair his or her rights
under any Option previously granted under the Plan.
The Board or a duly authorized committee thereof shall have the power, in
the event of any disposition of substantially all of the assets of the Company,
its dissolution, any merger or consolidation of the Company with or into any
other corporation, or the merger or consolidation of any corporation into the
Company, to amend all outstanding Options to terminate such Options as of such
effectiveness. If the Board shall exercise such power, all Options then
outstanding shall be deemed to terminate upon such effectiveness.
16. LEGAL AND REGULATORY REQUIREMENTS. No Option shall be exercisable and
no shares will be delivered under the Plan except in compliance with all
applicable federal and state laws and regulations including, without limitation,
compliance with the rules of all domestic stock exchanges on which the Common
Stock may be listed. Any share certificate issued to evidence shares for which
an Option is exercised may bear such legends and statements as the Committee
shall deem advisable to assure compliance with federal and state laws and
regulations. No Option shall be exercisable, and no shares will be delivered
under the Plan, until the Company has obtained consent or approval from
regulatory bodies, federal or state, having jurisdiction over such matters as
the Committee may deem advisable.
In the case of the exercise of an Option by a person or estate acquiring
the right to exercise the Option by bequest or inheritance, the Committee may
require reasonable evidence as to the ownership of the Option and may require
consents and releases of taxing authorities that it may deem advisable.
BB-3
APPENDIX C
HANOVER DIRECT, INC.
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
ORGANIZATION:
There shall be a committee of the Board of Directors to be known as the
Audit Committee. The Audit Committee shall consist of at least three (3) members
of the Board of Directors and shall have a Chairman, who shall be elected by a
majority of the members of the Board of Directors. The members of the Audit
Committee shall be appointed by the Board of Directors. The members of the Audit
Committee may be removed for cause by a majority of the Board of Directors.
The members of the Audit Committee shall meet the independence, financial
sophistication and literacy, experience and other requirements of the American
Stock Exchange, the Securities and Exchange Commission and any other applicable
requirements. The Chairman of the Audit Committee shall meet the requirements of
the American Stock Exchange, the Securities and Exchange Commission and any
other applicable requirements.
The Audit Committee may form and delegate authority to subcommittees, when
appropriate.
STATEMENT OF POLICY:
The Audit Committee shall provide assistance to the Company's directors in
fulfilling their responsibility to shareholders and the investment community
relating to (1) the corporate accounting and reporting practices of the Company,
(2) the quality and integrity of the financial reports of the Company, (3) the
independent auditor's qualifications, independence and performance, (4) the
performance of the Company's internal audit function and (5) the compliance by
the Company with legal and regulatory requirements. In so doing, it is the
responsibility of the Audit Committee to maintain free and open means of
communication among the directors, the independent auditor, the internal
auditors, and the financial management of the Company. Notwithstanding the
foregoing, the independent auditor of the Company shall be ultimately
accountable and shall report directly to the Audit Committee.
MEETINGS:
The Audit Committee shall meet at least four times a year on a quarterly
basis, or more frequently as circumstances require. The Chairman of the Audit
Committee will preside at each meeting of the Audit Committee and, in
consultation with the other members of the Audit Committee, shall set the
frequency and length of each meeting. The Chairman of the Audit committee shall
set the agenda of items to be addressed at each upcoming meeting after
consultation with the chief financial officer, the head of internal audit, the
independent auditor and the Company's inside and outside counsel. The Chairman
of the Audit Committee shall ensure that the agenda for each upcoming meeting of
the Audit Committee is circulated to each member of the Audit Committee.
RESPONSIBILITIES AND RESOURCES:
As the independent auditor is ultimately accountable to the Audit
Committee, the Audit Committee shall be directly responsible for the
appointment, compensation, retention, termination and oversight of the work of
the independent auditor employed by the Company for the purpose of preparing or
issuing an audit
CC-1
report or related work on
A-1
behalf of the Company. The Audit Committee must meet
privately with the independent auditor from time to time. The Audit Committee
shall consult with management but shall not delegate these responsibilities.
The Audit Committee has the authority to conduct any investigation
appropriate to fulfilling its responsibilities.
The Audit Committee may request any officer or employee of the Company or
the Company's outside counsel or independent auditor to attend a meeting of the
Audit Committee, or to meet with any members of, or consultants to, the Audit
Committee. The Audit Committee may also meet with the Company's investment
bankers or financial analysts who follow the Company.
The Audit Committee has the authority to retain, at the Company's expense,
independent legal counsel and other advisors as it determines necessary to carry
out its duties.
The Audit Committee shall determine the extent of funding necessary for
payment of compensation (a) to (a) the independent auditor for the purpose of
rendering or issuing the annual audit report andor to perform other audit, review
or attest services for the Company, (b) to any independent legal counsel or
other advisors retained under the preceding paragraph to advise the Audit
Committee and (c) for ordinary administrative expenses of the Audit Committee.
In carrying out its responsibilities, the Audit Committee shall establish
and maintain flexible policies and procedures, in order to best react to
changing conditions and to ensure to the directors and shareholders of the
Company that the corporate accounting and reporting practices of the Company are
in accordance with all requirements and are of the highest quality.
In carrying out these responsibilities, the Audit Committee will:
GENERAL:
1. Monitor the Company's financial reporting process and systems of
internal controls regarding finance, accounting, and legal compliance.
2. Seek to insure and monitor the independence and performance of the
Company's external auditor and internal auditing department and advise the Board
of Directors.
3. Review and approve all related-party transactions after such
transactions have been reviewed and approved by the Transactions Committee of
the Board of Directors.transactions.
INDEPENDENT AUDITOR:
4. Be directly responsible for the appointment, compensation, retention,
termination and oversight of the work of the independent auditor (including
resolution of disagreements between management and the independent auditor
regarding financial reporting) for the purpose of preparing its audit report or
any related work.
5. Have the authority to review in advance, and grant any appropriate
pre-approvals, of (a) all audit services to be provided by the independent
auditor and (b) all permitted non-audit services to be provided by the
independent auditor, and in connection therewith to approve all fees and other
terms of engagement. The authority to grant pre-approvals may be delegated by
the Audit Committee to one or more of its members. However, any decision made by
these members must be presented to the full Audit Committee at Audit Committee
meetings.
CC-2
6. Review and approve disclosures required regarding non-audit services to
be included in Securities and Exchange Commission periodic reports filed under
Section 13(a) of the Securities Exchange Act of 1934, as amended.
7. Review the performance of the independent auditor annually.
A-2
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.
CC-3
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.
A-3
20. Prepare the report to shareholders required by the Securities and
Exchange Commission to be included in the Company's annual proxy statement and
any other reports of the Audit Committee required by applicable securities laws
or stock exchange listing requirements or rules.
21. Review with management and the independent auditor the certification by
the Chief Executive Officer and the Chief Financial Officer of the Company's
annual financial statements and the management's discussion and analysis section
in the Company's Annual Report on Form 10-K.
WITH RESPECT TO THE QUARTERLY FINANCIAL STATEMENTS:
22. Review and discuss with management, the internal audit department and
the independent auditor the Company's quarterly financial statements prior to
submission to stockholders, any governmental body, any stock exchange or the
public.
23. Review with management and the independent auditor the certification by
the Chief Executive Officer and the Chief Financial Officer of the Company's
quarterly financial statements and the management's discussion and analysis
section in the Company's Quarterly Reports on Form 10-Q.
PERIODIC REVIEWS:
24. Discuss at least quarterly with the independent auditor, without
management being present, (a) its judgments about the quality and
appropriateness of the Company's accounting principles and financial disclosure
practices as applied in its financial reporting and (b) the completeness and
accuracy of the Company's financial statements.
25. Consider and approve, as appropriate, significant changes to the
Company's accounting principles and financial disclosure practices as suggested
by the independent auditor, management or the internal audit department and any
items required to be communicated by the independent auditor in accordance with
AICPA SAS No. 61 (see item 18 above). Review with the independent auditor,
management and the internal audit department, at appropriate intervals, the
extent to which any changes or improvements in accounting or financial
practices, as approved by the Audit Committee, have been implemented.
26. Periodically review and discuss with management, the internal audit
department and the independent auditor, as appropriate, any legal, regulatory or
compliance matters that could have a significant impact on the Company's
financial statements, including applicable changes in accounting standards or
rules.
27. Review and reassess the Company's directors' and officers' liability
insurance.
28. Review and discuss with management the Company's major risk exposures
and the steps management has taken to monitor, control and manage such
exposures, including the Company's risk assessment and risk management
guidelines and policies.
CC-4
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 subsidiaries are in
conformity with applicable legal requirements and the Company's Corporate Code
of Conduct, including disclosures of insider and affiliated party transactions.
39. Advise the Board of Directors with respect to the Company's policies
and procedures regarding compliance with applicable laws and regulations and
with the Company's Corporate Code of Conduct.
40. Review and approve the Company's Corporate Code of Conduct, as it may
be amended and updated from time to time, and ensure that management has
implemented a compliance program to enforce such Code. Ensure that such
compliance program includes reporting violations of such Code of Conduct to the
Audit Committee.
41. Review reported violations of the Company's Corporate Code of Conduct.
CC-5
42. Review and approve (a) any change or waiver in the Company's Corporate
Code of Conduct for principal executives and senior financial officers and (b)
any disclosures made on Form 8-K regarding such change or waiver.
OTHER AUDIT COMMITTEE RESPONSIBILITIES:
43. Maintain minutes of meetings and regularly report to the Board of
Directors on the Committee's activities after each Audit Committee meeting.
44. Review and reassess the adequacy of this Charter at least annually and
recommend any proposed changes to the Board of Directors for approval. Submit
the Charter to the Board of Directors for approval, and have the document
published, at least every three years, in the Company's proxy statement in
accordance with regulations of the Securities and Exchange Commission.
45. Annually assess its performance of the duties specified in this Charter
and report its findings to the Board of Directors.
A-5
46. Perform any other activities consistent with this Charter, the
Company's by-laws and governing law, as the Audit Committee or the Board of
Directors deems necessary or appropriate.
* * *
While the Audit Committee has the responsibilities and powers set forth in
this Charter, the role of the Audit Committee is oversight. The members of the
Audit Committee are not full-time employees of the Company and may or may not be
accountants or auditors by profession or experts in the fields of accounting or
auditing and, in any event, do not serve in such capacity. Consequently, it is
not the duty of the Audit Committee to conduct audits or to determine that the
Company's financial statements and disclosures are complete and accurate and are
in accordance with generally accepted accounting principles and applicable rules
and regulations. These are the responsibility of management and the independent
auditor. Nor is it the duty of the Audit Committee to conduct investigations, to
resolve disagreements, if any, between management and the independent auditor or
to assure compliance with laws and regulations and the Company's Corporate Code
of Conduct.
A-6CC-6
APPENDIX BD
HANOVER DIRECT, INC.
NOMINATING COMMITTEE CHARTER
I. PURPOSES OF COMMITTEE
The purposes of the Nominating Committee (the "Committee") of the Board of
Directors (the "Board") of Hanover Direct, Inc. (the "Company") are to (i)
identify and recommend individuals to the Board for nomination as members of the
Board and its committees (including this Committee), and (ii) oversee the
evaluation of the Board and management.
II. COMMITTEE MEMBERSHIP AND REMOVAL
The Committee shall consist solely of three or more members of the Board,
each of whom the Board has determined has no material relationship with the
Company that would interfere with the exercise of independent judgment and each
of whom is otherwise "independent" under the rules of the American Stock
Exchange ("Amex") unless the Board of Directors, under exceptional and limited
circumstances, determines that membership on the Nominating Committee of one
director that is not independent is in the best interests of the Company.
The initial members of the Committee shall be appointed by the Board.
Candidates to fill subsequent vacancies in the Committee shall be nominated by
the Committee as set forth below and appointed by the Board. Members shall serve
at the pleasure of the Board and for such term or terms as the Board may
determine.
III. COMMITTEE STRUCTURE AND OPERATIONS
The Committee shall designate one member of the Committee as its
chairperson by a majority vote of the full Committee membership. The Committee
shall meet in person or telephonically at least once a year at a time and place
determined by the Committee chairperson, with further meetings to occur, or
actions to be taken by unanimous written consent, when deemed necessary or
desirable by the Committee or its chairperson.
IV. COMMITTEE DUTIES AND RESPONSIBILITIES
The following are the duties and responsibilities of the Committee:
1. To make recommendations to the Board from time to time as to
changes that the Committee believes to be desirable to the size of the
Board or any committee thereof.
2. To identify individuals believed to be qualified to become Board
members (including conducting the appropriate and necessary inquiries into
the backgrounds and qualifications of possible candidates), to recommend to
the Board the nominees to stand for election as directors at the annual
meeting of stockholders or, if applicable, at a special meeting of
stockholders, and in each case to provide to the Board the Committee's
assessment whether such individual would be considered independent. In the
case
DD-1
of a vacancy in the office of a director (including a vacancy created by an
increase in the size of the Board), the Committee shall recommend to the
Board an individual to fill such vacancy. In nominating candidates, the
Committee shall take into consideration the criteria set forth in the
Company's Corporate Governance Guidelines adopted by the Corporate
Governance Committee, which include judgment, skill, diversity, experience
with businesses and other organizations of comparable size, the interplay
of the candidate's experience with the experience of other Board members,
and the extent to which the candidate would be a desirable addition to the
Board and any committees of the Board. The Corporate Governance Guidelines
shall set forth the Company's nomination process. The Committee will
consider nominations submitted by stockholders so long as such nominations
are made in accordance with the procedures set forth in the Company's
by-laws and the Corporate Governance Guidelines. The Committee may also
consider candidates proposed by management.
3. To develop and recommend to the Board standards to be applied in
making the initial assessment as to whether a director is otherwise
independent under the rules of the Amex. The Committee will also recommend
to the Board any modifications to these standards that the Committee deems
desirable, and provide to the Board the Committee's assessment of which
directors should be deemed independent under any recommended modifications
of the standards.
4. To identify Board members qualified to fill vacancies on any
committee of the Board (including the Committee) and to recommend that the
Board appoint the identified member or members to the respective committee.
In nominating a candidate for committee membership, the Committee shall
take into consideration the factors set forth in the charter of that
committee, if any, as well as any other factors it deems appropriate,
including, without limitation, the consistency of the candidate's
experience with the goals of the committee and the interplay of the
candidate's experience with the experience of other committee members.
5. Review a director's continuation on the Board in the event that
(i) a director's principal occupation or business association changes
substantially from the position he or she held when originally invited to
join the Board, (ii) a director becomes involved in a current or potential
conflict of interest or (iii) a director becomes unable to spend the time
required to carry out his or her responsibilities as a director or becomes
disabled and recommend to the Board whether, under the circumstances, such
director should continue to serve on the Board.
6. Prepare and issue the evaluation required under "Performance
Evaluation" below.
7. Review and reassess the adequacy of this charter annually and
recommend to the Board any changes deemed appropriate by the Committee.
8. Any other duties or responsibilities expressly delegated to the
Committee by the Board from time to time.
Since the Company is required by contract to provide third parties with the
ability to nominate directors and such obligation pre-dates December 1, 2003,
then the selection and nomination of such directors need not be subject to the
nomination process described in this Charter.
DD-2
V. DELEGATION TO SUBCOMMITTEE
The Committee may, in its discretion, delegate all or a portion of its
duties and responsibilities to a subcommittee of the Committee.
VI. PERFORMANCE EVALUATION
The Committee shall produce and provide to the Board an annual performance
evaluation of the Committee, which evaluation shall compare the performance of
the Committee with the requirements of this charter. The performance evaluation
shall also recommend to the Board any improvements to the Committee's charter
deemed necessary or desirable by the Committee. The performance evaluation by
the Committee shall be conducted in such manner as the Committee deems
appropriate. The report to the Board may take the form of an oral report by the
chairperson of the Committee or any other member of the Committee designated by
the Committee to make this report.
VII. RESOURCES AND AUTHORITY OF THE COMMITTEE
The Committee shall have the resources and authority appropriate to
discharge its duties and responsibilities, including the authority to select,
retain, terminate and approve the fees and other retention terms of special
counsel or other experts or consultants, as it deems appropriate, without
seeking approval of the Board or management. With respect to consultants or
search firms used to identify director candidates, this authority shall be
vested solely in the Committee.
DD-3
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APPENDIX E
STOCK OPTION AGREEMENT
As of May 5, 2004, Hanover Direct, Inc. (the "Company") hereby grants to
Wayne P. Garten (the "Optionee") an option (this "Option") to purchase as many
as 1,000,000 prereverse split shares ("Shares") of the Company's common stock
("Common Stock"), for an exercise price of $0.195 per Share (the "Exercise
Price"), pursuant to the terms and conditions set forth below.
1. This Option shall become vested and exercisable as to (a) one-third of
the Shares subject hereto on the date hereof, and (b) the remaining two-thirds
of such Shares at the rate of 50% per completed year of service by the Optionee
for the Company on and after the date hereof. Notwithstanding the foregoing,
this Option shall become vested and exercisable as to 100% of the Shares subject
hereto upon the earliest to occur of (i) a "Change of Control" (as defined in
the employment agreement between the Optionee and the Company (the "Employment
Agreement")), (ii) the Optionee's resignation of his employment with the Company
under the Employment Agreement "For Good Reason" (as defined in the Employment
Agreement), or (iii) the Company's termination of the Optionee's employment
under the Employment Agreement without being "For Cause" (as defined in the
Employment Agreement).
2. In order to exercise this Option, in whole or in part, the Optionee (or
his legal representative or beneficiary in the case of the Optionee's death or
disability) shall give written notice to the Company, specifying the number of
Shares to be purchased and the aggregate purchase price to be paid, accompanied
by the payment of the purchase price. The purchase price may be paid in cash, by
certified check, in whole shares of Common Stock held by the Optionee for at
least 6 months evidenced by negotiable certificates, valued at their fair market
value on the date of exercise, or in a combination of the foregoing.
Alternatively, if applicable, payment may be made by the Optionee by delivering
a properly executed exercise notice together with irrevocable instructions to a
broker to deliver promptly to the Company the amount of sale or loan proceeds
necessary to pay the purchase price in full, and such other documents as the
Company may determine. Upon receipt of payment, the Company shall deliver to the
Optionee (or his legal representative or beneficiary in the case of the
Optionee's death or disability) a certificate or certificates for such Shares.
If certificates representing shares of Common Stock are used to pay all or part
of the purchase price under this Option, separate certificates shall be
delivered by the Company representing the same number of shares as each
certificate so used and an additional certificate shall be delivered
representing the additional shares to which the Optionee is entitled as a result
of exercise of this Option.
3. This Option, to the extent vested, shall be exercisable solely (a)
during the period of the Optionee's employment with the Company, and (b) for the
180-day period immediately following the termination of the Optionee's
employment with the Company (unless such termination is by reason of the
Optionee's death, permanent disability (within the meaning of Section 22(e)(3)
of the Internal Revenue Code of 1986, as amended) or retirement at or after age
65, in which case the 180-day post-termination exercise period shall be extended
to one year).
4. This Option is not transferable by the Optionee other than by will or
the laws of descent and distribution and is exercisable, during the Optionee's
lifetime, only by the Optionee, except that the Optionee may transfer this
Option or any part hereof (but in no event with respect to less than 500 Option
Shares) to the Optionee's spouse, children, parents, and/or siblings or to one
or more trusts for the benefit of such family members if the Optionee does not
receive any consideration for the transfer; provided that this Option shall
continue to be subject to the same terms and conditions that were applicable to
this Option immediately prior
E-1
to its transfer (except that this Option shall not be further transferred by the
transferee during the transferee's lifetime), and further, should the Optionee
become disabled, his legal representative shall be entitled to exercise this
Option on the Optionee's behalf.
5. This Option shall be exercised only with respect to full Shares of
Common Stock; no fractional Shares shall be issued.
6. This Option is not intended to qualify as an incentive stock option
under Section 422 of the Internal Revenue Code.
7. This Option shall be binding upon and shall inure to the benefit of any
successor or assignee of the Company and to any executor, administrator, legal
representative, legatee or distributee entitled by law to the Optionee's rights
hereunder.
8. This Option shall be construed and enforced in accordance with the laws
of the State of New York.
9. This Option shall expire on May 4, 2014.
HANOVER DIRECT, INC.
By: /s/ MICHAEL D. CONTINO
--------------------------------------
Michael D. Contino
Executive Vice President
/s/ WAYNE P. GARTEN
--------------------------------------
Wayne P. Garten
E-2
HANOVER DIRECT, INC.
PROXY FOR COMMON STOCKHOLDERS FOR
THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON THURSDAY, MAY 15, 2003AUGUST 12, 2004
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned common stockholder of Hanover Direct, Inc. (the "Company")
hereby appoints each of Edward M. LambertCharles E. Blue and BrianWilliam C. Harriss,Kingsford, attorneys and
proxies, each with full power of substitution, to represent the undersigned and
vote all shares of the common stock of the Company which the undersigned is
entitled to vote, with all powers the undersigned would possess if personally
present, at the Annual Meeting of Stockholders of the Company to be held at the
Sheraton Suites on the Hudson, 500 Harbor Boulevard, Weehawken,Meadowlands Hotel and Conference Center, 2 Meadowlands Plaza, East
Rutherford, New Jersey, 0708707073 on Thursday, May 15, 2003August 12, 2004 at 9:30 a.m., local
time, and at any adjournments thereof, with respect to the proposals hereinafter
set forth and upon such other matters as may properly come before the Annual
Meeting and any adjournments thereof.
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned common stockholder.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 DIRECTORSAPPROVAL OF THE COMPANY, "FOR" THE DELEGATION TO THE AUDIT
COMMITTEE OF THE BOARD OF DIRECTORS OF AUTHORITY TO SELECT AUDITORS OF THE
COMPANY ANDTEN PROPOSALS SET FORTH 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 ON REVERSE SIDE
B-1
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.[X] PLEASE MARK YOUR VOTEVOTES AS IN BLUE OR BLACK INK AS SHOWN HERE [X]THIS EXAMPLE.
1. ELECTION OF DIRECTORS
[ ] FOR ALL NOMINEESall nominees listed at the right (except as marked to the contrary)
[ ] WITHHOLD AUTHORITY FOR ALL NOMINEES
[ ] FOR ALL EXCEPT (See instructions below)to vote for all nominees listed at right
NOMINEES: o Thomas C. Shull
o E. Pendleton James
o Kenneth J. Krushel
oA. David Brown, Stuart Feldman, Wayne P. Garten, Paul S. Goodman,
Donald Hecht, Robert H. Masson, o Basil P. Regan INSTRUCTION:and William B. Wachtel.
(INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark
"FOR ALL EXCEPT" and fillnominee, write
that nominee's name in the circle next to each nominee you wish to
withhold, as shown here: -space provided below.)
2. DELEGATEAMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO EFFECT A
ONE-FOR-TEN REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK, PAR VALUE
$0.66 2/3 PER SHARE
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION THAT WOULD REDUCE
THE PAR VALUE OF EACH SHARE OF COMMON STOCK FROM $0.66 2/3 PER SHARE TO
$0.01 PER SHARE AND TO RECLASSIFY THE OUTSTANDING SHARES OF COMMON STOCK
INTO SUCH LOWER PAR VALUE SHARES
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION THAT WOULD INCREASE
THE NUMBER OF SHARES OF ADDITIONAL PREFERRED STOCK WHICH THE COMPANY WOULD
HAVE AUTHORITY TO ISSUE FROM 5,000,000 SHARES TO 15,000,000 SHARES AND MAKE
A CORRESPONDING CHANGE TO THE AGGREGATE NUMBER OF SHARES OF ALL CLASSES OF
STOCK IN THE AGGREGATE WHICH THE CORPORATION WOULD HAVE AUTHORITY TO ISSUE
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. RATIFICATION AND ADOPTION OF THE 2004 STOCK OPTION PLAN FOR DIRECTORS
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. RATIFICATION AND ADOPTION OF CERTAIN AMENDMENTS TO 2002 STOCK OPTION PLAN
FOR DIRECTORS DESCRIBED IN THE PROXY STATEMENT
[ ] FOR [ ] AGAINST [ ] ABSTAIN
7. RATIFICATION OF THE DELEGATION OF AUTHORITY TO THE AUDIT COMMITTEE OF THE
COMPANY'S BOARD OF DIRECTORS AUTHORITY TO SELECT THE COMPANY'S INDEPENDENT AUDITORS
FOR THE FISCAL YEAR ENDING DECEMBER 27, 2003 FROM AMONGST ESTABLISHED NATIONAL AUDIT FIRMS.25, 2004
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3.8. RATIFICATION AND ADOPTION OF THE COMPANY'S STOCK OPTION AGREEMENT WITH WAYNE
GARTEN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE COMPANY.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
9. APPROVE AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION, AFTER
GIVING EFFECT TO THE ONE-FOR-TEN REVERSE SPLIT OF THE COMPANY'S COMMON
STOCK, TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK WHICH THE COMPANY
WOULD HAVE AUTHORITY TO ISSUE FROM 30,000,000 SHARES TO 50,000,000 SHARES
AND MAKE A CORRESPONDING CHANGE TO THE AGGREGATE NUMBER OF SHARES OF ALL
CLASSES OF STOCK IN THE AGGREGATE WHICH THE COMPANY WOULD HAVE AUTHORITY TO
ISSUE.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
10. APPROVE (I) THE ISSUANCE AND POTENTIAL ISSUANCE OF A COMMON STOCK PURCHASE
WARRANT BY THE COMPANY TO CHELSEY FINANCE, LLC, AND (II) THE ISSUANCE AND
POTENTIAL ISSUANCE UNDER THE COMMON STOCK PURCHASE WARRANT OF 30% OF THE
COMPANY'S ISSUED AND OUTSTANDING COMMON STOCK ON A FULLY DILUTED BASIS.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
11. 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 herbyhereby acknowledges receipt of a copy of the accompanying Notice
of Annual Meeting of Stockholders and Proxy Statement and hereby revokes any
Proxyproxy or Proxiesproxies heretofore given. You may strike out the persons named as
proxies and designate a person of your choice, and may send this Proxyproxy directly
to such person.
To changeYOUR VOTE IS IMPORTANT
VOTE BY MAIL, INTERNET OR TELEPHONE
MAIL -- Please complete, date, sign and mail this proxy form
promptly using the address onenclosed envelope
COMPANY NUMBER:
TELEPHONE -- Call toll-free 1-800-PROXIES from any
touch-tone telephone and follow the instructions. Have your
account, please checkproxy card available when you call
ACCOUNT NUMBER:
INTERNET -- Access "www.Vote proxy.com" and follow the
box at right and
indicateon-screen instructions. Have your new address inproxy card available when you
access the address space above. Please note that changes
to the registered name(s) on the account may not be submitted via this
method. [ ]
--------------------------------------web page
------------------------------------
Signature of ShareholderCommon Stockholders(s)
------------------------------------
Name of Common Stockholder(s)
Date: ---------- --------------------------------------
Signature of Shareholder
Date: ----------
B-2
, 2004
NOTE: Please complete, date and sign exactly as name appears hereon. When
signing as attorney, administrator, executor, guardian, trustee or corporate
official, please add your title. If a corporation, please sign full corporate
name or names appear on this Proxy. Whenby authorized officer. 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.
B-3