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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14F-1
INFORMATION STATEMENT
PURSUANT TO SECTION 14(f) OF THE
SECURITIES EXCHANGE ACT OF 1934
AND RULE 14f-1 THEREUNDER
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HANOVER DIRECT, INC.
(Exact Name of Registrant as Specified in its Charter)
1-12082
(Commission File Number)
<Table>
DELAWARE 13-0853260
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer Identification Number)
</Table>
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115 RIVER ROAD
EDGEWATER, NEW JERSEY 07020
(Address of Principal Executive Offices)
(201) 863-7300
(Registrant's Telephone Number)
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HANOVER DIRECT, INC.
115 RIVER ROAD
EDGEWATER, NEW JERSEY 07020
INFORMATION STATEMENT
PURSUANT TO SECTION 14(F) OF THE SECURITIES EXCHANGE ACT OF 1934
AND RULE 14F-1 THEREUNDER
NOVEMBER 19, 2003
This Information Statement is being furnished on or about November 19, 2003
to all of the stockholders of record at the close of business on November 13,
2003 of the common stock, par value $0.66 2/3 per share, and the Series B
Participating Preferred Stock, par value $0.01 per share, of Hanover Direct,
Inc. (the "Company").
This Information Statement is required by Section 14(f) of the Securities
Exchange Act of 1934 and Rule 14f-1 promulgated thereunder. You are urged to
read this Information Statement carefully.
NO VOTE OR OTHER ACTION OF THE COMPANY'S STOCKHOLDERS IS REQUIRED IN CONNECTION
WITH THIS INFORMATION STATEMENT. NO PROXIES ARE BEING
SOLICITED AND YOU ARE REQUESTED NOT TO SEND THE COMPANY A PROXY.
INTRODUCTION
Hanover Direct, Inc., a Delaware corporation (the "Company"), has entered
into a Memorandum of Understanding (the "MOU"), dated as of November 10, 2003,
with Chelsey Direct, LLC, a Delaware limited liability company ("Chelsey"), and
Regan Partners, L.P., a New Jersey limited partnership ("Regan Partners").
Chelsey is the owner of 29,446,888 shares of common stock, par value $0.66 2/3
per share ("Common Stock"), or approximately 21.3% of the Common Stock, and
1,622,111 shares Series B Participating Preferred Stock, par value $0.01 per
share ("Series B Preferred Stock"), consisting of all of the issued and
outstanding shares of preferred stock, of the Company, and collectively
representing approximately 29.6% of the combined voting power of the Company's
securities. Regan Partners is the owner of 38,795,017 shares of Common Stock, or
approximately 28.0% of the outstanding Common Stock.
As contemplated by the MOU, the Company subsequently entered into a binding
agreement, dated November 18, 2003, with Chelsey which embodies the
recapitalization plan set forth in the MOU (the "Recapitalization") and all of
the other provisions of the MOU (the "Recapitalization Agreement"). Pursuant to
the Recapitalization Agreement, Chelsey will transfer 1,622,111 shares of Series
B Preferred Stock (including accrued dividends) to the Company in exchange for
564,819 shares of Series C Preferred Stock and 81,857,833 shares of Common Stock
in accordance with the terms and conditions of the Recapitalization Agreement as
described below under the caption "Recapitalization." Each share of Series C
Preferred Stock will be entitled to one hundred (100) votes per share. Upon the
issuance of the additional Common Shares and the Series C Preferred Stock to
Chelsey pursuant to the Recapitalization Agreement, Chelsey will own 111,304,721
shares of Common Stock constituting approximately 50.5% of the outstanding
Common Stock, and 564,819 shares of Series C Preferred Stock, constituting all
of the outstanding shares of preferred stock and collectively representing
approximately 60.7% of the combined voting power of the Company. The closing of
the transactions contemplated by the Recapitalization Agreement (the "Closing")
will occur as promptly as practicable following the execution of the
Recapitalization Agreement. If the Closing has not occurred by the close of
business on November 30, 2003, then, no later than December 3, 2003, the Company
will pay Chelsey $1,000,000. If the Closing has not occurred by the close of
business on December 17, 2003, then the Recapitalization Agreement will cease to
be effective unless either the Company or Chelsey elects to extend the Closing
past such date. In the event of such election made by the Company, the number of
shares of Common Stock and Series C Preferred Stock issued to Chelsey in the
Recapitalizaton will be adjusted in accordance with the terms of the
Recapitalization Agreement described below under the caption "Recapitalization."
If such election is made by Chelsey, no adjustment in the number of shares of
Common Stock and Series C Preferred Stock to be issued to Chelsey will be made.
If the Closing is extended past December 17, 2003, such Closing will occur not
later than February 29, 2004.
Under the Recapitalization Agreement, in connection with the
Recapitalization, the Board of Directors of the Company was reconstituted,
simultaneously with the execution of the Recapitalization Agreement on November
18, 2003, so that:
(a) the number of directors comprising the Board of Directors of the
Company was fixed at eight (8), four (4) of whom are designated by Chelsey,
and
(b) the Board of Directors of the Company consists of the following
individuals: Martin Edelman, William Wachtel, Stuart Feldman, Wayne Garten,
Thomas Shull, Basil Regan, David Brown and Robert Masson.
Following the execution of the Recapitalization Agreement and the
expiration of the tenth (10th) day following the filing of this Information
Statement by the Company with the Securities and Exchange Commission (the
"Commission") and the transmission to all equity holders of the Company:
(a) the number of directors comprising the Board of Directors of the
Company will be fixed at nine (9), five (5) of whom are designated by
Chelsey, and
(b) the Board of Directors of the Company will consist of the eight
(8) individuals named above plus Donald Hecht (the Board of Directors, as
reconstituted pursuant to the above, is referred to herein as the
"Reconstituted Board").
2
Following the execution of the Recapitalization Agreement and prior to Mr.
Hecht being added to the Board of Directors as set forth above, if the Board of
Directors becomes deadlocked on any matter, such matter will be decided by the
Executive Committee of the Board of Directors.
The Committees of the Board of Directors were also reconstituted,
simultaneously with the execution of the Recapitalization Agreement on November
18, 2003, as follows:
(a) the members of the Executive Committee are: Stuart Feldman
(Chairman), Martin Edelman and Basil Regan;
(b) the members of the Audit Committee are: Robert Masson (Chairman),
Wayne Garten and David Brown (Donald Hecht will be added to the Audit
Committee at the same time he is added to the Board of Directors);
(c) the members of the Stock Option and Executive Compensation
Committee are: David Brown (Chairman), Wayne Garten and Stuart Feldman;
(d) the members of the Nominating Committee are: William Wachtel
(Chairman), Wayne Garten and Thomas Shull; and
(e) the members of the Transactions Committee are: Martin Edelman
(Chairman), David Brown and Basil Regan.
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. In the event Mr. Regan or his
successor is unable or unwilling to serve as a director or committee member for
any reason, Regan Partners will designate a director or committee member, as
applicable, in place of such person. In the event that Mr. Shull or his
successor is unable or unwilling to serve as a director for any reason, the
Board of Directors will designate the Chief Executive Officer of the Company to
serve on the Board of Directors in place of such person. In the event that
Messrs. Brown or Masson or their respective successors are unable or unwilling
to serve as a director or committee member for any reason, the Board of
Directors (acting without the participation of Messrs. Wachtel and Feldman) will
designate a director or committee member, as applicable, in place of such
person. Notwithstanding the foregoing, any such substitute person not designated
by the Board of Directors must be reasonably acceptable to the Board of
Directors.
Pursuant to the Recapitalization Agreement, upon completion of the
Recapitalization, there will be a "change in control" of the Company.
Pursuant to the Recapitalization Agreement, the following additional
documents will be executed at the Closing: (i) a certificate of designations
setting forth the terms and conditions of the Series C Preferred Stock, (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, (iv)
mutual general releases from claims made by the Company and Chelsey, (v) a
stipulation of discontinuance in connection with pending litigation between the
Company and Chelsey, and (vi) a corporate governance agreement setting forth the
corporate governance provisions in the Recapitalization Agreement.
The closing of the Recapitalization is subject to a number of conditions,
including obtaining the consent of Congress Financial Corporation and the
American Stock Exchange.
As of November 13, 2003, the Company had 138,315,800 shares of its Common
Stock issued and outstanding and 1,622,111 shares of its Series B Preferred
Stock issued and outstanding. The Common Stock and Series B Preferred Stock are
the Company's only outstanding classes of voting securities that would be
entitled to vote for directors at a stockholders meeting if one were to be held,
each share of Common Stock being entitled to one (1) vote per share and each
share of Series B Preferred Stock being entitled to ten (10) votes per share.
Each share of Series C Preferred Stock will be entitled to one hundred (100)
votes per share.
3
Please read this Information Statement carefully. It describes the terms of
the Recapitalization and its effect on the Company and contains biographical and
other information concerning the executive officers and directors, including the
directors after the Recapitalization. Additional information about the
Recapitalization is contained in the Company's Current Reports on Form 8-K,
dated November 10, 2003 and November 18, 2003, which were filed with the
Commission on November 10, 2003 and November 19, 2003, respectively. 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.
RECAPITALIZATION
On November 18, 2003, the Company entered into the Recapitalization
Agreement, which sets forth the terms and conditions of the Recapitalization.
Pursuant to the terms and conditions of the Recapitalization Agreement, Chelsey
will exchange 1,622,111 shares of Series B Preferred Stock (including accrued
dividends) with the Company. In return, if the Closing has occurred on or prior
to December 17, 2003, or if Chelsey elects to extend the Closing past December
17, 2003, the Company will issue to Chelsey: (a) 564,819 shares of Series C
Preferred Stock, par value $0.01 per share (the "Series C Preferred Stock"), and
(b) 81,857,833 newly issued shares of Common Stock. If the Company elects to
extend the Closing past December 17, 2003, the Company will issue to Chelsey:
(a) shares of Series C Preferred Stock with an aggregate liquidation preference
equal to one-half ( 1/2) of the accreted liquidation preference (less $500,000)
of the Series B Preferred Stock on the date of the Closing of the
Recapitalization and (b) newly issued shares of Common Stock, at the rate of
$0.69 per share (300% of the market value at the close of business on August 6,
2003), rounded up to the next full share, for the balance of the accreted
liquidation preference (less $500,000) of the Series B Preferred Stock on the
date of the Closing. The aggregate liquidation preference of the Series B
Preferred Stock is currently $112,963,810 and will increase to $117,197,520 on
December 1, 2003.
The Closing of the transactions contemplated by the Recapitalization
Agreement will occur as promptly as practicable following the execution of the
Recapitalization Agreement, subject to the satisfaction of certain conditions,
including obtaining the consent of Congress Financial Corporation and the
American Stock Exchange. If the Closing has not occurred by the close of
business on November 30, 2003, then, no later than December 3, 2003, the Company
will pay Chelsey $1,000,000. If the Closing has not occurred by the close of
business on December 17, 2003, then the Recapitalization Agreement will cease to
be effective unless either the Company or Chelsey elects to extend the Closing
past such date. In the event of such election made by the Company, the number of
shares of Common Stock and Series C Preferred Stock issued to Chelsey in the
Recapitalization will be adjusted in accordance with the terms of the
Recapitalization Agreement. If such election is made by Chelsey, no adjustment
in the number of shares of Common Stock and Series C Preferred Stock to be
issued to Chelsey will be made. If the Closing is extended past December 17,
2003, such Closing will occur not later than February 29, 2004.
The key terms of the Series C Preferred Stock are as follows:
- Amount of Issue. (a) If the Closing occurs on or prior to December 17,
2003 or if Chelsey elects to extend the Closing past December 17, 2003,
564,819 shares of Series C Preferred Stock and (b) if the Company elects
to extend the Closing past December 17, 2003, shares of Series C
Preferred Stock with an aggregate liquidation preference equal to
one-half ( 1/2) of the accreted liquidation preference (less $500,000) of
the Series B Preferred Stock on the date of the Closing. The aggregate
liquidation preference of the Series B Preferred Stock is currently
$112,963,810 and will increase to $117,197,520 on December 1, 2003.
- Liquidation Preference. $100.00 per share, or an aggregate amount of
$56,481,900 if the Closing occurs on or before December 17, 2003 or if
Chelsey elects to extend the Closing past December 17, 2003, or
$58,098,759 if the Closing occurs after December 17, 2003 and the Company
elects to extend the Closing past December 17, 2003.
4
- Dividends. Commencing January 1, 2006, dividends will be payable
quarterly at the rate of 6% per annum, with the preferred dividend rate
increasing by 1 1/2% per annum on each anniversary of the dividend
commencement date until redeemed. At the Company's option, in lieu of
cash dividends, the Company may instead elect to cause accrued and unpaid
dividends to compound at a rate equal to 1% higher than the applicable
cash dividend rate. The Series C Preferred Stock will be entitled to
participate ratably with the Common Stock on a share for share basis in
any dividends or distributions paid to or with respect to the Common
Stock. The right to participate will have anti-dilution protection. The
Company's credit agreement with Congress Financial Corporation currently
prohibits the payment of dividends.
- Redemption. The Series C 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 and any accrued and unpaid
dividends (the "Redemption Price"). The Series C Preferred Stock will be
redeemed by the Company on January 1, 2009 (the "Mandatory Redemption
Date") for the Redemption Price. If the Series C Preferred Stock is not
redeemed on or before the Mandatory Redemption Date, or if other
mandatory redemptions are not made, the Series C Preferred Stock will be
entitled to elect one-half ( 1/2) of the Company's Board of Directors.
Notwithstanding the foregoing, the Company will redeem the maximum number
of shares of Series C Preferred Stock as possible with the net proceeds
of certain asset and equity sales not required to be used to repay
Congress Financial Corporation pursuant to the terms of the 19th
Amendment to the Loan and Security Agreement with Congress Financial
Corporation (as modified by a subsequent amendment to the Loan and
Security Agreement to be negotiated), and Chelsey will be required to
accept such redemptions.
- Voting. Each share of Series C Preferred Stock will be 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 share, and will vote as a class with the Common Stock on
any matter submitted to a vote of the holders of Common Stock. The Series
C Preferred Stock will be entitled to vote as a class on any matter that
would adversely affect such Series C Preferred Stock.
- Closing Conditions. The obligations of the parties to proceed with the
Recapitalization is subject to a number of conditions (certain of which
may be waived by a non-breaching party), including the truth of the other
party's representations and warranties on the closing date, the
compliance by the other party with all agreements, covenants and
conditions, the giving of notices and receipt of all consents,
authorizations, waivers and approvals, including those of Congress
Financial Corporation and the American Stock Exchange, the mailing of
this Information Statement 10 days prior to the closing, and no
litigation or proceedings brought by any governmental entity.
In connection with the closing of the Recapitalization, the Company will
file with the Secretary of State of Delaware a Certificate of Designations,
Powers, Preferences and Rights setting forth the terms and conditions of the
Series C Preferred Stock and a Certificate of Elimination of the Series B
Preferred Stock and will file a Stipulation of Discontinuance with the Supreme
Court of the State of New York in connection with pending litigation between the
Company and Chelsey. The Company must use its best efforts to obtain the consent
of Congress Financial Corporation and the American Stock Exchange prior to the
closing of the Recapitalization.
The Recapitalization has been approved by a committee of independent
directors of the Board of Directors of the Company, which has received a
fairness opinion from independent financial advisors stating that the terms of
the Recapitalization are fair to the holders of Common Stock of the Company
(other than Chelsey and Stuart Feldman) from a financial point of view. The
Company has obtained and furnished to Chelsey written confirmation of the
fairness opinion.
Prior to the closing of the Recapitalization, the Company will enter into a
registration rights agreement whereby the Company agrees to provide, at its sole
expense, two (2) demand and unlimited piggyback registration rights with respect
to resales by Chelsey and Stuart Feldman of all shares of Common Stock owned by
Chelsey.
5
Pursuant to the Recapitalization Agreement, the Company, acting through its
Board of Directors and in accordance with its charter and bylaws and applicable
law, will recommend in the proxy statement for the first stockholders meeting
following the Recapitalization, amendments to its Certificate of Incorporation
(the "Charter Amendment") to effectuate the following: (i) a reduction in the
par value per share of Common Stock from $0.66 2/3 per share to $0.01 per share,
(ii) a reverse split of the Common Stock in a ratio of 10 for 1 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.
Simultaneously with the execution of the Recapitalization Agreement,
Chelsey, Stuart Feldman, Regan Partners and Basil Regan will enter 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 to effectuate the
Recapitalization and the Charter Amendment and to elect the nominees to the
Board of Directors of Chelsey and Regan Partners designated pursuant to the
Recapitalization Agreement. In accordance with the terms of the Voting
Agreement, so long as Regan Partners has a designee on the Board of Directors,
Regan Partners and certain of its affiliates will agree to (i) notify Chelsey at
least twenty-four (24) hours prior to any sale, transfer or other disposition
(or the execution of any agreement with respect thereto), other than fund
balancing transactions entered into among Regan Partners and/or any affiliates
of Regan Partners, of any shares of Common Stock of the Company owned by Regan
Partners and (ii) provide Chelsey an opportunity to purchase such shares prior
to such sale, transfer or other disposition on terms no less favorable to Regan
Partners than otherwise available to it from such third party.
Pursuant to the Recapitalization Agreement, upon completion of the
Recapitalization, the number of directors will be fixed at nine (9) and will
initially be as follows: Martin Edelman, William Wachtel, Stuart Feldman, Wayne
Garten, Thomas Shull, Basil Regan, David Brown, Robert Masson and Donald Hecht.
For a period of two (2) years from the closing of the Recapitalization, five (5)
of the nine (9) directors of the Company will at all times be directors of the
Company designated by Chelsey (which initially shall be Martin Edelman, William
Wachtel, Stuart Feldman, Wayne Garten and Donald Hecht) and one (1) of the nine
(9) directors of the Company will at all times be a director of the Company
designated by Regan Partners (which initially shall be Basil Regan). 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 the date of the MOU. All shares for which
the Company's management or Board of Directors hold proxies (including
undesignated proxies) will be voted in favor of the election of such designees
of Chelsey and Regan Partners, except as may otherwise be provided by
stockholders submitting such proxies. In the event that any Chelsey or Regan
Partners designee shall cease to serve as a director of the Company for any
reason, the Company will cause the vacancy resulting thereby to be filled by a
designee of Chelsey or Regan Partners, as the case may be, reasonably acceptable
to the Board of Directors as promptly as practicable. Chelsey may nominate or
propose for nomination or elect any persons to the Board of Directors, without
regard to the foregoing limitations, after the Series C Preferred Stock is
redeemed in full.
Pursuant to the Recapitalization Agreement, upon its execution on November
18, 2003, the Committees of the Board of Directors were reconstituted as
follows:
(a) the members of the Executive Committee are: Stuart Feldman
(Chairman), Martin Edelman and Basil Regan;
(b) the members of the Audit Committee are: Robert Masson (Chairman),
Wayne Garten and David Brown (Donald Hecht will be added to the Audit
Committee at the same time he is added to the Board of Directors);
(c) the members of the Stock Option and Executive Compensation
Committee are David Brown (Chairman), Wayne Garten and Stuart Feldman;
(d) the members of the Nominating Committee are William Wachtel
(Chairman), Wayne Garten and Thomas Shull; and
6
(e) the members of the Transactions Committee are Martin Edelman
(Chairman), David Brown and Basil Regan.
CHANGE IN CONTROL
Pursuant to the Recapitalization Agreement, upon completion of the
Recapitalization, there will be 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. The
Company will be permitted to make any payments required thereunder on or after
the closing of the Recapitalization. Mr. Shull will be entitled to receive
$1,575,000 on the closing date of the Recapitalization under the terms of the
2002 Employment Agreement. See "EXECUTIVE COMPENSATION AND OTHER
INFORMATION -- Employment Contracts, Termination of Employment and
Change-in-Control Arrangements -- 2002 Employment Agreement." Messrs. Shull,
Harriss and Contino will be entitled to receive $450,000, $168,500 and $193,500,
respectively, on the closing date of the Recapitalization under the terms of the
Transaction Bonus Letters to which they are a party. See "EXECUTIVE COMPENSATION
AND OTHER INFORMATION -- Employment Contracts, Termination of Employment and
Change-in-Control Arrangements -- Transaction Bonus Letters." Each of the eight
non-employee directors (Messrs. Brown, James, Krushel, Sonnenfeld, Masson,
Regan, Garten and Edelman) will be entitled to receive $87,000 on the closing
date of the Recapitalization under the terms of the Hanover Direct, Inc.
Directors Change of Control Plan. See "EXECUTIVE COMPENSATION AND OTHER
INFORMATION -- Employment Contracts, Termination of Employment and
Change-in-Control Arrangements -- Hanover Direct, Inc. Directors Change of
Control Plan."
Section 14(f) of the Exchange Act requires the mailing of this Information
Statement to the Company's stockholders not less than ten (10) days prior to the
change in a majority of the Company's directors otherwise than at a meeting of
the Company's stockholders. No action is required by the stockholders of the
Company in connection with the election or appointment of the members of the
Reconstituted Board.
DIRECTORS AND EXECUTIVE OFFICERS
We expect that on or about November 30, 2003, the Recapitalization will be
completed and Mr. Hecht will join the Reconstituted Board. The following sets
forth information regarding the Company's current directors and executive
officers and the Company's Reconstituted Board after the Recapitalization is
completed.
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors currently consists of eight (8) members. The Board
of Directors amended the Company's Bylaws, effective on the date of the 2001
Annual Meeting of Stockholders of the Company (May 31, 2001) to reduce the size
of the Company's Board of Directors to six (6) directors. On January 10, 2002,
the Board of Directors announced the reduction of the number of directors of the
Company from six (6) to five (5). On January 10, 2002, the Board of Directors
announced the appointment of Thomas C. Shull as Chairman of the Company's Board
of Directors and the election of E. Pendleton James as a member of the Company's
Board of Directors, each filling the vacancies created by the resignation of
Eloy Michotte and Alan Grieve and each to serve until the Company's next annual
meeting of stockholders. On December 20, 2002, the Board of Directors announced
the election of Robert H. Masson as a member of the Company's Board of Directors
effective January 1, 2003, filling the vacancy created by the resignation of J.
David Hakman effective December 31, 2002. At the 2003 Annual Meeting of
Stockholders of the Company held on May 15, 2003, the five (5) members of the
Board of Directors in office at such time were re-elected to the Board of
Directors. On July 17, 2003, the size of the Board of Directors was increased
from five (5) to seven (7) members and Jeffrey A. Sonnenfeld and A. David Brown
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,
7
2003. On September 29, 2003, Martin Edelman and Wayne Garten were elected to the
Board of Directors by Chelsey, as holder of the Series B Preferred Stock, as the
result of the Company's failure to redeem any shares of the Series B Preferred
Stock on or prior to August 31, 2003, and the Board expanded to nine (9)
members. On November 18, 2003, the date of signing of the Recapitalization
Agreement, Jeffrey A. Sonnenfeld, E. Pendleton James and Kenneth J. Krushel
resigned from the Board of Directors. Also on November 18, 2003, the date of
signing of the Recapitalization Agreement, the size of the Board of Directors
was changed from nine (9) to eight (8) members and Stuart Feldman and William B.
Wachtel were elected as members of the newly-expanded Board of Directors.
Pursuant to the Recapitalization Agreement, upon completion of the
Recapitalization, the number of directors will be fixed at nine (9) and Donald
Hecht, a nominee of Chelsey, will join the Board. For a period of two (2) years
from the closing of the Recapitalization, five (5) of the nine (9) directors of
the Company will at all times be directors of the Company designated by Chelsey
and one (1) of the nine (9) directors of the Company will at all times be a
director of the Company designated by Regan Partners. 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 the date of the MOU. All shares for which the Company's
management or Board of Directors hold proxies (including undesignated proxies)
will be voted in favor of the election of such designees of Chelsey and Regan
Partners, except as may otherwise be provided by stockholders submitting such
proxies. In the event that any Chelsey or Regan Partners designee shall cease to
serve as a director of the Company for any reason, the Company will cause the
vacancy resulting thereby to be filled by a designee of Chelsey or Regan
Partners, as the case may be, reasonably acceptable to the Board of Directors as
promptly as practicable. Chelsey may nominate or propose for nomination or elect
any persons to the Board of Directors, without regard to the foregoing
limitations, after the Series C Preferred Stock is redeemed in full.
Pursuant to the Company's Bylaws, its officers are chosen annually by the
Board of Directors and hold office until their respective successors are chosen
and qualified. Effective January 28, 2002, Edward M. Lambert was appointed to
succeed Brian C. Harriss as Executive Vice President and Chief Financial Officer
of the Company and Mr. Harriss was appointed as Executive Advisor to the
Chairman of the Company coincident with his resignation as Executive Vice
President and Chief Financial Officer of the Company. During September 2002,
Charles F. Messina resigned as Executive Vice President, Chief Administrative
Officer and Secretary of the Company. Effective December 2, 2002, Brian C.
Harriss was appointed Executive Vice President, Human Resources and Legal and
Secretary of the Company. Effective November 11, 2003, Edward M. Lambert
resigned as Chief Financial Officer of the Company and Charles E. Blue, Senior
Vice President, Finance of the Company, was appointed to succeed Mr. Lambert as
Senior Vice President and Chief Financial Officer. Mr. Lambert will continue 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.
Set forth below is certain information regarding the current directors and
executive officers of the Company:
<Table>
Thomas C. Shull........................... President and Chief Executive Officer and a member of
Age 52 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
</Table>
8
<Table>
with McKinsey & Company and in the early 1980s as a
member of the National Security Council Staff in the
Reagan White House.
Robert H. Masson.......................... Robert H. Masson served as Senior Vice President,
Age 68 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 Com-
pany, Ellerbe, PepsiCo, Inc. and Combustion Engineering
(now part of the ABB Group). Mr. Masson currently serves
as a Trustee and as the Chairman of the Finance
Committee of The Naval Aviation Museum Foundation, Inc.
in Pensacola, Florida. Mr. Masson was elected a director
of the Company effective January 1, 2003.
Basil P. Regan............................ Basil P. Regan has been the General Partner of Regan
Age 63 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 Interna-
tional, 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.
A. David Brown............................ Mr. Brown is the co-founder of Bridge Partners LLC, a
Age 61 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. Mr. Brown received a B.S. degree from Monmouth
College. He serves on the Boards of Zale Corporation and
Selective Insurance Group, Inc. He is an active member
of community and scholastic boards, including the Board
of Trustees of Morristown Memorial Hospital, Drew
University and the Jackie Robinson Foundation. Mr. Brown
was elected a director of the Company effective July 17,
2003.
Martin L. Edelman......................... Mr. Edelman is of counsel to the law firm Paul,
Age 58 Hastings, Janofsky & Walker LLP. Prior to joining Paul
Hastings in 2000, Mr. Edelman was a partner with the law
firm of Battle Fowler LLP from 1972 through 1993 and as
of January 1, 1994 was of counsel to that firm. He
specializes primarily in real estate and corporate
transactions. He is a director of Cendant Incorporated,
Acadia Realty and Capital Trust. Mr. Edelman was elected
a director of the Company by Chelsey effective September
29, 2003.
Wayne P. Garten........................... Mr. Garten is a financial consultant specializing in the
Age 51 direct marketing industry. He was Chief Executive
Officer and President of Popular Club, Inc., a direct
selling, catalog marketer of apparel
</Table>
9
<Table>
and general merchandise products, from 2001 to 2003.
From 1997 to 2000, he was Executive Vice President and
Chief Financial Officer of Micro Warehouse, Inc., an
international catalog reseller of computer products.
From 1983 to 1996, Mr. Garten held various financial
positions at Hanover Direct and its predecessor, The
Horn & Hardart Company, including Executive Vice
President and Chief Financial Officer from 1989 to 1996.
Mr. Garten is a Certified Public Accountant. Mr. Garten
was elected a director of the Company by Chelsey
effective September 29, 2003.
William B. Wachtel........................ Mr. Wachtel has been a managing partner of Wachtel &
Age 49 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.
Stuart Feldman............................ Mr. Feldman has been a principal of Chelsey Capital,
Age 43 LLC, a private hedge fund, for more than the past five
years. Mr. Feldman is the principal beneficiary of
Chelsey Capital Profit Sharing Plan, which is the sole
member of Chelsey. Mr. Feldman was elected a director of
the Company effective November 18, 2003, the date of
signing of the Recapitalization Agreement.
Edward M. Lambert......................... Executive Vice President and Chief Financial Officer
Age 43 from January 28, 2002 to November 11, 2003. Mr. Lambert
will continue to serve as Executive Vice President of
the Company until January 2, 2004. From July 2001 until
January 28, 2002, Mr. Lambert served as an advisor to
the Company. In 1990, Mr. Lambert co-founded Meridian
Ventures, a venture management and turnaround firm
presently based in Connecticut, and served as a Managing
Director until December 2000. From 1998 to 1999, he
served as Chief Financial Officer of Barneys New York, a
leading luxury retailer, and from 1993 to 1994, he
served as Executive Vice President of Applied Solar
Energy Corporation, a space systems manufacturer.
Michael D. Contino........................ Executive Vice President and Chief Operating Officer
Age 42 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.......................... Executive Vice President, Finance and Administration
Age 54 since November 11, 2003 and Secretary. Mr. Harriss has
also served as Executive Vice President, Human Resources
and Legal and Secretary since December 2002. Executive
Advisor to the Chairman of the Company from January 28,
2002 to December 2002, and Executive Vice President and
Chief Financial Officer from June 1999 to January 28,
2002. From 1998 to 1999, Mr. Harriss was a Managing
Director of Dailey Capital Management, LP, a venture
</Table>
10
<Table>
capital fund, and Chief Operating Officer of E-Bidding
Inc., an Internet e-commerce freight Website. From 1997
to 1998, Mr. Harriss served as the Vice President of
Corporate Development at the Reader's Digest
Association, Inc. From 1994 to 1996, Mr. Harriss was the
Chief Financial Officer of the Thompson Minwax Company.
Prior thereto, Mr. Harriss held various financial
positions with Cadbury Schweppes PLC, Tambrands, Inc.
and PepsiCo, Inc.
William C. Kingsford...................... Senior Vice President, Treasury and Control (Corporate
Age 57 Controller) since May 2003. Vice President and Corporate
Controller from May 1997 to May 2003. Prior to May 1997,
Mr. Kingsford was Vice President and Chief Internal
Auditor at Melville Corporation. Mr. Kingsford filed a
petition under Chapter 13 of the United States
Bankruptcy Code during March 2001.
Charles E. Blue........................... Senior Vice President and Chief Financial Officer
Age 43 effective November 11, 2003. Mr. Blue joined the Company
in 1999 and had most recently served as the Company's
Senior Vice President, Finance. Before joining the
Company, he held the positions of Director of Planning
and Treasury for Genesis Direct, Inc. and Director of
Strategic Planning for The Copeland Companies.
Steven Lipner............................. Vice President, Taxation since October 2000. Mr. Lipner
Age 55 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.
</Table>
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.
RECONSTITUTED BOARD AFTER THE RECAPITALIZATION:
Set forth below is certain information regarding the members of the
Reconstituted Board after the Recapitalization is completed:
Thomas C. Shull............... See description above under "Current Directors
and Executive Officers."
Robert H. Masson.............. See description above under "Current Directors
and Executive Officers."
Basil P. Regan................ See description above under "Current Directors
and Executive Officers."
Martin L. Edelman............. See description above under "Current Directors
and Executive Officers."
Wayne P. Garten............... See description above under "Current Directors
and Executive Officers."
A. David Brown................ See description above under "Current Directors
and Executive Officers."
11
William B. Wachtel............ See description above under "Current Directors
and Executive Officers."
Stuart Feldman................ See description above under "Current Directors
and Executive Officers."
<Table>
Donald Hecht.............................. Mr. Hecht has, since 1966, together with his brother
Age 70 Michael Hecht, managed Hecht & Company, an accounting
firm.
</Table>
BOARD OF DIRECTORS MEETINGS:
In 2002, the Board of Directors held nine (9) meetings in person or by
conference telephone and took action by written consent on four (4) occasions.
Each incumbent director attended at least 75% of the aggregate number of the
Company's Board of Directors Meetings and his committee meetings.
BOARD OF DIRECTORS COMMITTEES:
The Board of Directors has standing Executive, Audit, Stock Option and
Executive Compensation, Nominating, and Transactions Committees.
THE EXECUTIVE COMMITTEE.
- During 2002, Messrs. Basil P. Regan, Thomas C. Shull and Kenneth J.
Krushel were members of the Executive Committee. Prior to the execution
of the Recapitalization Agreed, Messrs. Kenneth J. Krushel (Chairman),
Basil P. Regan, Thomas C. Shull, Robert H. Masson and Jeffrey A.
Sonnenfeld were members of the Executive Committee. Upon execution of the
Recapitalization Agreement, the members of the Executive Committee became
Stuart Feldman (Chairman), Martin Edelman and Basil Regan.
- The duties of the Executive Committee include:
- recommending actions to the Board of Directors and
- acting on behalf of the Board of Directors on certain operating matters
requiring Board of Director approval when the Board of Directors is not
in session.
- Following the execution of the Recapitalization Agreement and prior to
Mr. Hecht being added to the Board of Directors, if the Board of
Directors becomes deadlocked on any matter, such matter will be decided
by the Executive Committee.
- The Executive Committee held five (5) meetings in person or by conference
call in 2002 and took action by written consent on one (1) occasion in
2002.
THE AUDIT COMMITTEE.
- At various times during 2002, Messrs. J. David Hakman, Kenneth J. Krushel
and E. Pendleton James were members of the Audit Committee. Prior to the
execution of the Recapitalization Agreement, Messrs. Robert H. Masson
(Chairman), Kenneth J. Krushel and E. Pendleton James were members of the
Audit Committee. Each of the members of the Audit Committee is
independent, as defined in Rule Section 121(A) of the American Stock
Exchange's listing standards. Upon execution of the Recapitalization
Agreement, the members of the Audit Committee became Robert Masson
(Chairman), Wayne P. Garten and A. David Brown (Donald Hecht will be
added to the Audit Committee at the same time he is added to the Board of
Directors).
- 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;
12
- responsibility for the appointment, compensation and oversight of the
work of the independent auditor (including resolution of disagreements
between management and the independent auditor regarding financial
reporting) for the purpose of preparing its audit report or any related
work;
- determining the extent of funding necessary for payment of compensation
to the independent auditor for the purpose of rendering or issuing the
annual audit report and to any independent legal counsel or other
advisors retained under the preceding paragraph to advise the Audit
Committee;
- seeking to insure and monitor the independence and performance of the
Company's external auditors and internal auditing department and advise
the Board of Directors;
- reviewing and approving all related-party transactions after such
transactions have been reviewed and approved by the Transactions
Committee of the Board of Directors;
- 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;
- in consultation with the management, the independent auditors and the
internal auditors, considering the integrity of the Company's financial
reporting processes and controls and significant risk exposures;
- reviewing with financial management and the independent auditors the
Company's quarterly financial results prior to the release of earnings
and/or the Company's quarterly financial statements prior to filing or
distribution;
- reviewing the performance, independence and compensation of the
independent auditors and approving, appointing and/or discharging
auditors on an annual basis. Reviewing the independent auditor's plan,
discussing yearly audit results with auditors prior to release, and
considering independent auditors' judgments with respect to the quality
and appropriateness of the Company's accounting methods;
- 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;
13
- annually assessing its performance of the duties specified in the
charter of the Audit Committee and reporting its findings to the Board
of Directors; and
- performing any other activities consistent with the charter of the Audit
Committee, the Company's By-Laws and governing law as the Audit
Committee or the Company's Board of Directors deems necessary or
appropriate.
- The Company's Board of Directors has adopted a written charter for the
Audit Committee.
- The Audit Committee held six (6) meetings in person or by conference call
in 2002 and took action by written consent on one (1) occasion in 2002.
- The Company's Board of Directors has determined that the Company has at
least one "audit committee financial expert" serving on the Audit
Committee of the Board of Directors who is "independent" of management
within the definition of such term in the Exchange Act and the listing
requirements of the American Stock Exchange. Robert H. Masson, a member
of the Board of Directors and the Chairman of its Audit Committee, is the
"audit committee financial expert" serving on the Company's Audit
Committee.
- It is anticipated that, following the closing of the Recapitalization,
the Audit Committee will assume the current responsibilities of the
Transactions Committee.
THE STOCK OPTION AND EXECUTIVE COMPENSATION COMMITTEE.
- At various times during 2002, Messrs. E. Pendleton James, Kenneth J.
Krushel and Basil P. Regan were members of the Stock Option and Executive
Compensation Committee. Prior to the execution of the Recapitalization
Agreement, 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 David Brown (Chairman), Wayne Garten and Stuart Feldman.
- 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.
- The Stock Option and Executive Compensation Committee held one (1)
meeting in 2002 in person or by conference call and took action by
written consent on nine (9) occasions in 2002.
THE NOMINATING COMMITTEE.
- At various times during 2002, Messrs. Thomas C. Shull, J. David Hakman
and E. Pendleton James were members of the Nominating Committee. Prior to
the execution of the Recapitalization Agreement, Messrs. E. Pendleton
James (Chairman), Jeffrey A. Sonnenfeld and A. David Brown were members
of the Nominating Committee. Upon execution of the Recapitalization
Agreement, the members of the Nominating Committee became William Wachtel
(Chairman), Wayne Garten and Thomas Shull.
- The duties of the Nominating Committee include:
- evaluating and recommending candidates for election to the Board of
Directors.
- The Nominating Committee held no meetings in person or by conference call
in 2002 and took action by written consent on one (1) occasion in 2002.
- The Bylaws of the Company require advance notice of nominations for
election to the Board of Directors, other than those made by the Board of
Directors. Unless waived by the Board of Directors, a notice of
nomination must be received by the Company at least 75 days before
initiation of solicitation to the stockholders for election in the event
of an election other than at an annual meeting of stockholders, and at
least 75 days before the date that corresponds to the record date of the
prior year's
14
annual meeting of stockholders in the event of an election at an annual
meeting of stockholders, and in all events must include certain required
information. The Nominating Committee will consider nominees recommended
by stockholders in accordance with the Company's Bylaws.
THE TRANSACTIONS COMMITTEE.
- At various times during 2002, Messrs. J. David Hakman, Kenneth J. Krushel
and E. Pendleton James were members of the Transactions Committee. Prior
to the execution of the Recapitalization Agreement, Messrs. Kenneth J.
Krushel (Chairman), Robert H. Masson, E. Pendleton James, Jeffrey A.
Sonnenfeld and A. David Brown were members of the Transactions Committee.
Upon execution of the Recapitalization Agreement, and until the earlier
of (i) two (2) years from the closing of the Recapitalization and (ii)
the redemption in full of the Series C Preferred Stock, the Transactions
Committee will consist of three (3) members: one (1) designated by
Chelsey (Martin Edelman), one (1) designated by Regan Partners (Basil
Regan) and an independent member to be unanimously designated by Chelsey
and Regan Partners (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 of the date of the MOU.
- The duties of the Transactions Committee currently include:
- Providing assistance to the directors in fulfilling their responsibility
to the stockholders by recommending appropriate actions to the Board of
Directors or acting on behalf of the Board of Directors on a matter
which requires Board 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.
- It is anticipated that, following the closing of the Recapitalization,
the Audit Committee will assume the current responsibilities 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 have the following duties:
- Passing on redemptions of the Series C Preferred Stock, including
transactions that pursuant to the terms of the Series C Preferred Stock
would require the Company to redeem any shares of the Series C Preferred
Stock (consistent with applicable laws or agreements). The Board of
Directors, in the reasonable exercise of its business judgment, will
determine if any such transaction is reasonably likely to require the
Company to redeem any shares of the Series C Preferred Stock, and, if
the Board of Directors determines that a redemption is reasonably
likely, such matter shall then be submitted to the Transactions
Committee.
- A unanimous vote of the three-member Transactions Committee is required
for the above actions. A unanimous vote of the Transactions Committee
cannot be overturned by the Board of Directors. If the Transactions
Committee is unable to decide unanimously on any matter before the
Transactions
15
Committee during the first five (5) months following the execution of
the Recapitalization Agreement, such matter will be decided by a vote of
at least five (5) members of the Board of Directors while the Board of
Directors has eight (8) members and six (6) members of the Board of
Directors while the Board of Directors has nine (9) members, and
thereafter such matter will be decided by a majority of the Board of
Directors.
- The Transactions Committee held one (1) meeting in person or by
conference call in 2002 and took no action by written consent in 2002.
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 acknowledges that Chelsey is the lawful and bona fide
owner of the Shares and the Company and Chelsey agree to file a Stipulation of
Discontinuance with the Supreme Court of the State of New York in connection
with the litigation between the Company and Chelsey, upon the closing of the
Recapitalization.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS:
We indemnify our directors and executive officers to the fullest extent
permitted by applicable law against liabilities incurred as a result of their
service to the Company and directors, in particular, against liabilities
incurred as a result of their service as directors of other corporations when
serving at the request of the Company. We have a 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,
2003 to June 1, 2004. The Company also purchased a supplemental policy issued by
the National Union Fire Insurance Company (AIG) to cover independent directors
in the amount of $15,000,000, which will expire on July 25, 2004. Such policies
will be replaced on the closing of the Recapitalization.
16
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE COMPENSATION:
The following table shows salaries, bonuses, and long-term compensation
paid during the last three years for the Chief Executive Officer and our four
(4) next most highly compensated executive officers who were serving as
executive officers at the end of the Company's 2002 fiscal year.
<Table>
<Caption>
LONG TERM COMPENSATION
-----------------------------------
AWARDS
-----------------------
SECURITIES PAYOUTS
ANNUAL COMPENSATION RESTRICTED UNDERLYING -------
---------------------- OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND 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 $ 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 2000 $296,154 $ 129,500(5) $ 12,000(9) -- 100,000(13) None $ 3,421(19)
Legal, 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 Operating Officer 2000 $243,269 $ 182,718(6) $ 12,000(10) -- 150,000(13) None $ 3,253(22)
William C. Kingsford(1)... 2002 $169,390 $ 81,452(7) -- -- 125,000(13) None $ 7,285(23)
Senior Vice President, 2001 $168,000 $ 21,156(7) -- -- -- None $ 1,340(24)
Treasury and Control 2000 $166,260 $ 34,273(7) -- -- 41,000(13) None $ 1,040(25)
(Corporate Controller)
</Table>
- ---------------
(1) Thomas C. Shull was named President and Chief Executive Officer and was
elected to the Company's Board of Directors on December 5, 2000. On April
25, 2001, Brian C. Harriss became Executive Vice President and Chief
Financial Officer of the Company and Michael D. Contino became Executive
Vice President and Chief Operating Officer of the Company. Effective
January 28, 2002, Mr. Harriss resigned as Executive Vice President and
Chief Financial Officer of the Company. Effective January 28, 2002, Edward
M. Lambert was appointed to succeed Brian C. Harriss as Executive Vice
President and Chief Financial Officer of the Company and Mr. Harriss was
appointed as Executive Advisor to the Chairman of the Company coincident
with his resignation as Executive Vice President and Chief Financial
Officer of the Company. Effective December 2, 2002, Mr. Harriss was
appointed Executive Vice President, Human Resources and Legal and Secretary
of the Company. Effective November 11, 2003, Edward M. Lambert resigned as
Chief Financial Officer of the Company. Mr. Lambert will continue 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. During 2002 Mr. Kingsford was Vice
President and Controller and during May 2003 was appointed Senior Vice
President, Treasury and Control (Corporate Controller).
(2) $276,923 of salary and a $450,000 stay bonus was paid to Mr. Shull under an
Employment Agreement between Mr. Shull and the Company, dated as of
September 1, 2002, as amended by Amendment No. 1 thereto dated as of
September 1, 2002, Amended No. 2 thereto dated as of June 23, 2003, and
Amendment No. 3 thereto dated as of August 3, 2003 (as amended, the "2002
Employment Agreement"), pursuant to which Mr. Shull is employed by the
Company as its President and Chief Executive Officer. 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
17
amended effective April 2, 2002 (the "December 2001 Services Agreement"
and, together with the December 2000 Services Agreement and the August 2001
Services Agreement, the "Services Agreements"), each among Meridian, the
Company and Mr. Shull. See "Employment Contracts, Termination of Employment
and Change-in-Control Arrangements."
(3) Paid to Meridian Ventures, LLC under the Services Agreements.
(4) Includes the following payments made by the Company on behalf of Mr.
Lambert: for fiscal 2002, a $200,000 performance bonus and a $100,000 stay
bonus paid in 2002 and a $385,000 performance bonus paid in 2003.
(5) Includes the following payments made by the Company on behalf of Mr.
Harriss: for 2002, a $287,503 performance bonus paid in 2003; for fiscal
2001, a $375,000 2001 performance bonus paid in 2002; and for fiscal 2000,
a $129,500 2000 performance bonus paid in 2001.
(6) Includes the following payments made by the Company on behalf of Mr.
Contino: for fiscal 2002, a $565,988 2002 performance bonus paid in 2003;
for fiscal year 2001, a $350,000 2001 performance bonus paid in 2002; and
for fiscal 2000, a $182,718 2000 performance bonus paid in 2001.
(7) Includes the following payments made by the Company on behalf of Mr.
Kingsford: for fiscal 2002, a $81,452 2002 performance bonus paid in 2003;
for fiscal year 2001, a $21,156 2001 performance bonus paid in 2002; and
for fiscal 2000, a $34,273 2000 performance bonus paid in 2001.
(8) Paid to Meridian pursuant to the Services Agreements, and is deemed to
cover Meridian's over-head (including legal and accounting), health care
costs, payroll costs, and other expenses relating to Mr. Shull. See
"Employment Contracts, Termination of Employment and Change in Control
Arrangements."
(9) Includes the following payments made by the Company on behalf of Mr.
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) 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) Granted pursuant to the December 2001 Services Agreement and allocated to
Mr. Shull. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements."
(12) Granted pursuant to the December 2000 Services Agreement and allocated to
Mr. Shull. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements."
(13) Issued by the Company pursuant to the Company's 2000 Management Stock
Option Plan. See "Report of the Stock Option and Executive Compensation
Committee on Executive Compensation -- 2000 Management Stock Option Plan."
Options to purchase 100,000 shares issued to Mr. Harriss during 2000 were
forfeited during 2002 following his resignation as Executive Vice President
and Chief Financial Officer of the Company effective January 28, 2002.
(14) Granted pursuant to the December 2001 Services Agreement under the
Company's 2000 Management Stock Option Plan and allocated to Mr. Lambert.
See "Report of the Stock Option and Executive Compensation Committee on
Executive Compensation -- 2000 Management Stock Option Plan."
(15) Includes the following payments made by the Company on behalf of Mr. Shull
in 2002: $85 in group term life insurance premiums; $12 in accidental death
and disability insurance premiums; $50 in core life insurance premiums; $44
in dental insurance premiums; $49 in long-term disability premiums; and
$1,876 in health care insurance premiums.
(16) Includes the following payments made by the Company on behalf of Mr.
Lambert in 2002: $79 in group term life insurance premiums; $26 in
accidental death and disability insurance premiums; $106 in core life
insurance premiums; $44 in dental insurance premiums; $191 in long-term
disability premiums; $1,876 in health care insurance premiums; $3,333 in
matching contributions under the Company's 401(k) Savings Plan; and
$136,915 in a gross-up for income tax purposes of travel expenses.
18
(17) Includes the following payments made by the Company on behalf of Mr.
Harriss in 2002: $276 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $38 in dental insurance premiums; $561 in long-term
disability premiums; $5,589 in health care insurance premiums; $3,333 in
matching contributions under the Company's 401(k) Savings Plan; and $2 in
vision plan premiums.
(18) Includes the following payments made by the Company on behalf of Mr.
Harriss in 2001: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $770 in long-term disability premiums; $439 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(19) Includes the following payments made by the Company on behalf of Mr.
Harriss in 2000: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $110 in long-term disability premiums; $438 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(20) 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) 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) Includes the following payments made by the Company on behalf of Mr.
Contino in 2000: $2,833 in matching contributions under the Company's
401(k) Savings Plan; $110 in long-term disability premiums; $270 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(23) Includes the following payments made by the Company on behalf of Mr.
Kingsford in 2002: $516 in group term life insurance premiums; $40 in
accidental death and disability insurance premiums; $162 in core life
insurance premiums; $105 in dental insurance premiums; $265 in long-term
disability premiums; $6,195 in health care insurance premiums; and $2 in
vision plan premiums.
(24) Includes the following payments made by the Company on behalf of Mr.
Kingsford in 2001: $237 in matching contributions under the Company's
401(k) Savings Plan; $386 in long-term disability premiums; $677 in term
life insurance premiums; and $40 of accidental death insurance premiums.
(25) Includes the following payments made by the Company on behalf of Mr.
Kingsford in 2000: $764 in matching contributions under the Company's
401(k) Savings Plan; and $276 in term life insurance premiums.
19
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS:
The following table contains information concerning options and stock
appreciation rights ("SARs") granted to the Chief Executive Officer and our four
(4) next most highly compensated executive officers who were serving as
executive officers at the end of the Company's 2002 fiscal year. There were no
SARs granted during fiscal 2002 to the Chief Executive Officer or our four (4)
next most highly compensated executive officers who were serving as executive
officers at the end of the Company's 2002 fiscal year.
OPTION/SAR GRANTS IN FISCAL 2002
<Table>
<Caption>
INDIVIDUAL GRANTS
----------------------------------------------------------------------
PERCENTAGE
OF TOTAL
NUMBER OF OPTIONS/ GRANT DATE
SECURITIES SARS VALUE
UNDERLYING GRANTED TO ----------
OPTIONS/ EMPLOYEES EXERCISE MARKET PRICE GRANT DATE
SARS IN FISCAL OR BASE ON DATE OF PRESENT
NAME GRANTED YEAR 2002 PRICE GRANT EXPIRATION DATE VALUE ($)
- ---- ---------- ---------- -------- ------------ --------------- ----------
Thomas C. Shull.......... 0 0% -- -- -- $ 0
Edward M. Lambert(1)..... 1,000,000 14.79% $0.24 $0.24 August 8, 2012(2) $181,600(3)
Brian C. Harriss(1)...... 600,000 8.88% $0.27 $0.27 October 2, 2012(2) $123,660(4)
Michael D. Contino(1).... 1,000,000 14.79% $0.24 $0.24 August 8, 2012(2) $181,600(3)
William C.
Kingsford(1)........... 125,000 1.85% $0.24 $0.24 August 8, 2012(2) $ 22,700(3)
</Table>
- ---------------
(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.
20
The following table contains information concerning the fiscal 2002
year-end values of all options and SARs granted to the Chief Executive Officer
and our four (4) next most highly compensated executive officers who were
serving as executive officers at the end of the Company's 2002 fiscal year. No
SARs have been granted to the Chief Executive Officer or our four (4) next most
highly compensated executive officers who were serving as executive officers at
the end of the Company's 2002 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN 2002 FISCAL YEAR
AND DECEMBER 28, 2002 OPTION/SAR VALUES
<Table>
<Caption>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
DECEMBER 28, 2002 DECEMBER 28, 2002
SHARES ACQUIRED ----------------------- -----------------
ON EXERCISE VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ---- --------------- -------------- ----------------------- -----------------
Thomas C. Shull.......... None None 3,200,000 options(1) $0/$0
84.38% exercisable
15.62% unexercisable
Edward M. Lambert........ None None 1,300,000 options(1)(2) $0/$0
none exercisable 100%
unexercisable
Brian C. Harriss......... None None 600,000 options(2) none $0/$0
exercisable 100%
unexercisable
Michael D. Contino....... None None 1,450,000 options(2) $0/$0
24.14% exercisable
75.86% unexercisable
William C. Kingsford..... None None 235,117 options(2) $0/$0
38.12% exercisable
61.88% unexercisable
</Table>
- ---------------
(1) 2,700,000 options were awarded to Mr. Shull under the December 2000 Services
Agreement. All of such options were exercisable on December 28, 2002 and
expire on March 31, 2006. 500,000 options were awarded to Mr. Shull, and
300,000 options were awarded to Mr. Lambert, under the December 2001
Services Agreement. These options were not exercisable on December 28, 2002;
Mr. Lambert's options are exercisable on March 31, 2003 and expire on March
31, 2006, while Mr. Shull's options are exercisable on March 31, 2003, are
not saleable until September 30, 2004, and expire on March 31, 2006.
(2) 200,000 options for Mr. Contino 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 166,000 options for Mr. Kingsford represent options granted
pursuant to the 2000 Management Stock Option Plan. Under this plan, Mr.
Harriss', Mr. Kingsford's and Mr. Contino's options become exercisable after
four years and expire after ten years from the date of grant; Mr. Lambert's
options will become fully vested on January 2, 2004. An additional 100,000
options for Mr. Contino represents options granted effective November 3,
1999. These options become fully exercisable after four years.
LONG-TERM INCENTIVE PLANS:
No awards under long-term incentive plans were granted in fiscal 2002 to
the Chief Executive Officer or our four (4) next most highly compensated
executive officers who were serving as executive officers at the end of the
Company's 2002 fiscal year.
21
DEFINED BENEFIT OR ACTUARIAL PLANS:
The Company has no defined benefit or actuarial plans under which benefits
are determined primarily by final compensation (or average final compensation)
and years of service.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS:
2002 Employment Agreement. Effective December 5, 2000, Thomas C. Shull,
Meridian Ventures, LLC, a limited liability company controlled by Mr. Shull
("Meridian"), and the Company entered into a Services Agreement (the "December
2000 Services Agreement"). The December 2000 Services Agreement was replaced by
a subsequent services agreement, dated as of August 1, 2001 (the "August 2001
Services Agreement"), among Mr. Shull, Meridian and the Company, and a Services
Agreement, dated as of December 14, 2001 (the "2001 Services Agreement"), among
Mr. Shull, Meridian, and the Company. The 2001 Services Agreement was replaced
effective September 1, 2002 by an Employment Agreement between Mr. Shull and the
Company, dated as of September 1, 2002, as amended by Amendment No. 1 thereto,
dated as of September 1, 2002, Amendment No. 2 thereto, dated as of June 23,
2003, and Amendment No. 3 thereto, dated as of August 3, 2003 (as amended, the
"2002 Employment Agreement"), pursuant to which Mr. Shull is employed by the
Company as its President and Chief Executive Officer, as described below. The
term of the 2002 Employment Agreement began on September 1, 2002 and will
terminate on March 31, 2006 (the "2002 Employment Agreement Term").
Under the 2002 Employment Agreement, Mr. Shull is to receive from the
Company base compensation equal to $855,000 per annum, payable at the rate of
$71,250 per month ("Base Compensation"). Mr. Shull is to be provided with
participation in the Company's employee benefit plans, including but not limited
to the Company's Key Executive Eighteen Month Compensation Continuation Plan
(the "Change of Control Plan") and its transaction bonus program. The Company is
also to reimburse Mr. Shull for his reasonable out-of-pocket expenses incurred
in connection with his employment by the Company.
Under the 2002 Employment Agreement, the Company paid the remaining unpaid
$300,000 of Mr. Shull's fiscal 2001 bonus under the Company's 2001 Management
Incentive Plan in December 2002. Mr. Shull also received the same bonus amount
for fiscal 2002 under the Company's 2002 Management Incentive Plan as all other
Level 8 participants (as defined in such plan) received under such plan for such
period, subject to all of the terms and conditions applicable generally to Level
8 participants thereunder. Mr. Shull shall earn annual bonuses for fiscal 2003
and 2004 under such plans as the Company's Compensation Committee may approve in
a manner consistent with bonuses awarded to other senior executives under such
plans.
Under the 2002 Employment Agreement, the Company made two installment
payments in September and November 2002 to satisfy the obligation of $450,000 to
Mr. Shull previously due to be paid to Meridian on June 30, 2002. In addition,
the Company agreed to make two equal lump sum cash payments of $225,000 each to
Mr. Shull on March 31, 2003 and September 30, 2004, provided the 2002 Employment
Agreement has not terminated due to Willful Misconduct (as defined in the 2002
Employment Agreement) or material breach thereof by Mr. Shull, or Mr. Shull's
death or permanent disability. Such payments shall be made notwithstanding any
other termination of the Employment Agreement on or prior to such date or as a
result of another event constituting a Change of Control. The March 31, 2003
payment was made on or prior to such date. The Recapitalization constitutes a
"change of control" under the 2002 Employment Agreement and Mr. Shull will be
entitled to $225,000 on the closing date of the Recapitalization under the terms
of the 2002 Employment Agreement, representing an acceleration of the cash
payment due in September 2004.
Under the 2002 Employment Agreement, upon the closing of any transaction
which constitutes a "change of control" thereunder, provided that Mr. Shull is
then employed by the Company, the Company will be required to make a lump sum
cash payment to Mr. Shull on the date of such closing pursuant to the Change of
Control Plan, the Company's transaction bonus program and the Company's
Management Incentive Plan for the applicable fiscal year. Any such lump sum
payment would be in lieu of (i) any cash payment under the 2002 Employment
Agreement as a result of a termination thereof upon the first day after the
acquisition of the Company (whether by merger or the acquisition of all of its
outstanding capital stock) or
22
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 constitutes a
"change of control" under the 2002 Employment Agreement and Mr. Shull will be
entitled to $1,575,000 on the closing date of the Recapitalization 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.
Under the 2002 Employment Agreement, additional amounts are payable to Mr.
Shull by the Company under certain circumstances upon the termination of the
2002 Employment Agreement. If the termination is on account of the expiration of
the 2002 Employment Agreement Term, Mr. Shull shall be entitled to receive such
amount of bonus as may be payable pursuant to the Company's applicable bonus
plan as well as employee benefits such as accrued vacation and insurance in
accordance with the Company's customary practice. If the termination is on
account of the Company's material breach of the 2002 Employment Agreement or the
Company's termination of the 2002 Employment Agreement where there has been no
Willful Misconduct (as defined in the 2002 Employment Agreement) or material
breach thereof by Mr. Shull, Mr. Shull shall be entitled to receive (i) a lump
sum payment equal to the aggregate amount of Base Compensation to which he would
have otherwise been entitled through the end of the 2002 Employment Agreement
Term (not to exceed 18 months of such Base Compensation), plus (ii) such
additional amount, if any, in severance pay which, when combined with the amount
payable pursuant to clause (i) equals 18 months of Base Compensation and such
amount of bonus as may be payable pursuant to the Company's 2002 Management
Incentive Plan or other bonus plan, as applicable (based upon the termination
date and the terms and conditions of the applicable bonus plan), as described in
paragraph 4(b), as well as employee benefits such as accrued vacation and
insurance in accordance with the Company's customary practice. If the
termination is on account of the acquisition of the Company (whether by merger
or the acquisition of all of its outstanding capital stock) or the sale or any
series of sales since April 27, 2001 involving an aggregate of 50% or more of
the market value of the Company's assets (for this purpose under the 2002
Employment Agreement, such 50% amount shall be deemed to be $107.6 million) and
the amount realized in the transaction is less than $0.50 per common share (or
the equivalent of $0.50 per common share), and if and only if the Change of
Control Plan shall not then be in effect, Mr. Shull shall be entitled to receive
a lump sum payment equal to the aggregate amount of Base Compensation to which
he would have otherwise been entitled through the end of the 2002 Employment
Agreement Term. If the termination is on account of the acquisition of the
Company (whether by merger or the acquisition of all of its outstanding capital
stock) or the sale or any series of sales since April 27, 2001 involving an
aggregate of 50% or more of the market value of the Company's assets (for this
purpose under the 2002 Employment Agreement, such 50% amount shall be deemed to
be $107.6 million) and the amount realized in the transaction equals or exceeds
$0.50 per common share (or the equivalent of $0.50 per common share), and if and
only if the Change of Control Plan shall not then be in effect, Mr. Shull shall
be entitled to receive a lump sum payment equal to the greater of the Base
Compensation to which he would have otherwise been entitled through the end of
the 2002 Employment Agreement Term or $1,000,000. If the termination is on
account of an acquisition or sale of the Company (whether by merger or the
acquisition of all of its outstanding capital stock) or the sale or any series
of sales since April 27, 2001 involving an aggregate of 50% or more of the
market value of the Company's assets (for this purpose under the 2002 Employment
Agreement, such 50% amount shall be deemed to be $107.6 million) and the Change
of Control Plan shall then be in effect, Mr. Shull shall only be entitled to
receive his benefit under the Change of Control Plan. The Recapitalization
transaction will be deemed a "change of control" for purposes of the 2002
Employment Agreement and the Change of Control Plan. The Company will be
permitted to make any payments thereunder on the closing of the
Recapitalization. Mr. Shull will be entitled to $1,575,000 on the closing date
of the Recapitalization 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.
23
Under the 2002 Employment Agreement, the Company is required to maintain
directors' and officers' liability insurance for Mr. Shull during the 2002
Employment Agreement Term. The Company is also required to indemnify Mr. Shull
in certain circumstances.
Amended Thomas C. Shull Stock Option Award Agreements. During December
2000, the Company entered into a stock option agreement with Thomas C. Shull to
evidence the grant to Mr. Shull of an option to purchase 2.7 million shares of
the Company's common stock (the "Shull 2000 Stock Option Agreement"). Effective
as of September 1, 2002, the Company amended the Shull 2000 Stock Option
Agreement to (i) extend the final expiration date for the stock option under the
Shull 2000 Stock Option Agreement to June 30, 2005, and (ii) replace all
references therein to the December 2000 Services Agreement with references to
the 2002 Employment Agreement. Effective as of August 3, 2003, the 2002
Employment Agreement was amended to extend the final expiration date for the
stock option under the Shull 2000 Stock Option Agreement to March 31, 2006.
During December 2001, the Company entered into a stock option agreement
with Mr. Shull to evidence the grant to Mr. Shull of an option to purchase
500,000 shares of the Company's Common Stock under the Company's 2000 Management
Stock Option Plan (the "Shull 2001 Stock Option Agreement"). Effective as of
September 1, 2002, the Company has amended the Shull 2001 Stock Option Agreement
to (i) provide that any shares purchased by Mr. Shull under the Shull 2001 Stock
Option Agreement would not be saleable until September 30, 2004, and (ii)
replace all references therein to the 2001 Services Agreement with references to
the 2002 Employment Agreement.
Amended Thomas C. Shull Transaction Bonus Letter. During May 2001, Thomas
C. Shull entered into a letter agreement with the Company (the "Shull
Transaction Bonus Letter") under which he would be paid a bonus on the
occurrence of certain transactions involving the sale of certain of the
Company's businesses. Effective as of September 1, 2002, the Company has amended
the Shull Transaction Bonus Letter to (i) increase the amount of Mr. Shull's
agreed to base salary for purposes of the transaction bonus payable thereunder
from $600,000 to $900,000, and (ii) replace all references therein to the
December 2000 Services Agreement with references to the 2002 Employment
Agreement.
The Recapitalization transaction will be deemed a "change of control" for
purposes of the Shull Transaction Bonus Letter. The Company will be permitted to
make any payments thereunder on or after the closing of the Recapitalization.
Mr. Shull will be entitled to an additional $450,000 on the closing date of the
Recapitalization 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 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 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 under the Company's 2000 Management Stock Option Plan.
Charles F. Messina. During September 2002, Charles F. Messina resigned as
Executive Vice President, Chief Administrative Officer and Secretary of the
Company. In connection with such resignation, the Company and Mr. Messina
entered into a severance agreement dated September 30, 2002 providing for cash
payments of $884,500 and other benefits which were accrued in the fourth quarter
of 2002.
Brian C. Harriss. Brian C. Harriss was appointed as Executive Vice
President, Human Resources and Legal and Secretary of the Company effective
December 2, 2002 and as Executive Vice President, Finance and Administration
effective November 11, 2003. Prior to January 2002, Mr. Harriss had served the
Company as Executive Vice President and Chief Financial Officer. In connection
with the December 2002 appointment, Mr. Harriss and the Company terminated a
severance agreement entered into during January 2002 at the time
24
of Mr. Harriss' resignation from the Company during January 2002, and Mr.
Harriss waived his rights to certain payments under such severance agreement.
Edward M. Lambert. Edward M. Lambert served as Executive Vice President
and Chief Financial Officer from January 28, 2002 to November 11, 2003. Mr.
Lambert resigned as Chief Financial Officer effective November 11, 2003. Mr.
Lambert will continue to serve as Executive Vice President of the Company until
January 2, 2004. Charles E. Blue, the Company's Senior Vice President, Finance,
commenced serving as Chief Financial Officer effective November 11, 2003. In
connection with his resignation, Mr. Lambert and the Company entered into a
severance agreement dated November 4, 2003 providing a minimum of $600,000 and a
maximum of $640,000 of cash payments, as well as other benefits that will be
accrued and paid in the fourth quarter of 2003. Mr. Lambert is also entitled to
receive a payment under the Company's 2003 Management Incentive Plan, although
at this time the Company does not forecast that any payments under the Company's
2003 Management Incentive Plan will be earned by senior executives.
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).
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 stock by the
Company, then no Change of Control will have occurred, unless and until that
person subsequently acquires one or more additional shares representing voting
power of the Company; or (b) any acquisition by a person who as of the date of
the establishment of the Executive Plan owned at least 33% of the Voting Shares;
(ii)(a) notwithstanding the foregoing, a Change of Control will occur when the
stockholders of the Company approve any of the following (each, a
"Transaction"): (I) any reorganization, merger, consolidation or other business
combination of the Company; (II) any sale of 50% or more of the market value of
the Company's assets (for this purpose, 50% is deemed to be $107.6 million; or
(III) a complete liquidation or dissolution of the Company; (b) notwithstanding
(ii)(a), stockholder approval of either of the following types of Transactions
will not give rise to a Change of Control: (I) a Transaction involving only the
Company and one or more of its subsidiaries; or (II) a Transaction immediately
following which the stockholders of the Company immediately prior to the
Transaction continue to have a majority of the voting power in the resulting
entity; (iii) when, within any 24 month period, persons who were directors of
the Company (each, a "Director") immediately before the beginning of such period
(the "Incumbent Directors") cease (for any reason other than death or
disability) to constitute at least a majority of the Board of Directors or the
board of directors of any successor to the Company (for purposes of (iii), any
Director who was not a Director as of the effective date of the Executive Plan
will be deemed to be an Incumbent Director if such Director was elected to the
Board of Directors by, or on the recommendation of, or with the approval of, at
least a majority of the members of the Board of Directors or the nominating
committee who, at the time of the vote, qualified as Incumbent Directors either
actually or by prior operation of (iii), and any persons (and their successors
from time to time) who are designated by a holder of 33% or more of the Voting
Shares to stand for election and serve as Directors in lieu of other such
designees serving as Directors on the effective
25
date of the Executive Plan shall be considered Incumbent Directors.
Notwithstanding the foregoing, any director elected to the Board of Directors to
avoid or settle a threatened or actual proxy contest shall not, under any
circumstances, be deemed to be an Incumbent Director); or (iv) when the Company
sells, assigns or transfers more than 50% of its interest in, or the assets of,
one or more of its subsidiaries (each, a "Sold Subsidiary" and, collectively,
the "Sold Subsidiaries"); provided, however, that such a sale, assignment or
transfer will constitute a Change of Control only for: (a) the Executive Plan
participants who are employees of that Sold Subsidiary; and (b) the Executive
Plan participants who are employees of a direct or indirect parent company of
one or more Sold Subsidiaries, and then only if: (I) the gross assets of such
parent company's Sold Subsidiaries constitute more than 50% of the gross assets
of such parent company (calculated on a consolidated basis with the direct and
indirect subsidiaries of such parent company and with reference to the most
recent balance sheets of the Sold Subsidiaries and the parent company); (II) the
property, plant and equipment of such parent company's Sold Subsidiaries
constitute more than 50% of the property, plant and equipment of such parent
company (calculated on a consolidated basis with the direct and indirect
subsidiaries of such parent company and with reference to the most recent
balance sheets of the Sold Subsidiaries and the parent company); or (III) in the
case of a publicly-traded parent company, the ratio (as of the date a binding
agreement for the sale is entered) of (x) the capitalization (based on the sale
price) of such parent company's Sold Subsidiaries, to (y) the market
capitalization of such parent company, is greater than 0.50. (For purposes of
(iv), a Transaction shall be deemed to involve the sale of more than 50% of a
company's assets if: (a) the gross assets being sold constitute more than 50% of
the gross assets of the Company as stated on the most recent balance sheet of
the Company; (b) the property, plant and equipment being sold constitute more
than 50% of the property, plant and equipment of the Company as stated on the
most recent balance sheet of the Company; or (c) in the case of a
publicly-traded company, the ratio (as of the date a binding agreement for the
sale is entered) of (x) the capitalization (based on the sale price) of the
division, subsidiary or business unit being sold, to (y) the market
capitalization of the Company, is greater than 0.50. For purposes of this (iv),
no Change of Control will be deemed to have occurred if, immediately following a
sale, assignment or transfer by the Company of more than 50% of its interest in,
or the assets of, a Sold Subsidiary, any stockholder of the Company owning 33%
or more of the voting power of the Company immediately prior to such
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 will occur on the closing of the Recapitalization) and
thereafter the Company terminates his/her employment other than For Cause (as
defined in the Executive Plan) or the participant voluntarily terminates his/her
employment with the Company For Good Reason (as defined in the Executive Plan),
in either case, solely during the 2-year period immediately following the Change
of Control. A participant will not be entitled to Change of Control Benefits
under the Executive Plan if: (i) he/she voluntarily terminates his/her
employment with the Company or has his/her employment with the Company
terminated by the Company, in either case, prior to a Change of Control, (ii)
he/she voluntarily terminates employment with the Company following a Change of
Control but other than For Good Reason, (iii) he/she is terminated by the
Company following a Change of Control For Cause, (iv) has his/her employment
with the Company terminated solely on account of his/her death, (v) he/she
voluntarily or involuntarily terminates his/her employment with the Company
following a Change of Control as a result of his/her Disability (as defined in
the Executive Plan), or (vi) his/her employment with the Company is terminated
by the Company upon or following a Change of Control but where he/she receives
an offer of comparable employment, regardless of whether the participant accepts
the offer of comparable employment.
The Change of Control Benefits under the Executive Plan are as follows: (i)
an amount equal to 18 months of the participant's annualized base salary; (ii)
an amount equal to the product of 18 multiplied by the applicable monthly
premium that would be charged by the Company for COBRA continuation coverage for
the participant, the participant's spouse and the dependents of the participant
under the Company's group health plan in which the participant was participating
and with the coverage elected by the participant, in each case immediately prior
to the time of the participant's termination of employment with the Company;
(iii) an amount equal to 18 months of the participant's car allowance then in
effect as of the date of the termination of
26
the participant's employment with the Company; and (iv) an amount equal to the
cost of 12 months of executive-level outplacement services at a major
outplacement services firm.
The Recapitalization transaction is a "Change of Control" for purposes of
the Executive Plan.
Transaction Bonus Letters. During May 2001, each of Thomas C. Shull,
Jeffrey Potts, Brian C. Harriss and Michael D. Contino and, during November
2002, each of Edward M. Lambert and Brian C. Harriss (each, a "Participant")
entered into a letter agreement with the Company (a "Transaction Bonus Letter")
under which the Participant would be paid a bonus on the occurrence of certain
transactions involving the sale of certain of the Company's businesses. In
addition, Mr. Shull is a party to a "Letter Agreement" with the Company, dated
April 30, 2001, pursuant to which, following the termination of the December
2000 Services Agreement, in the event he is terminated without cause during any
period of his continued employment as the Chief Executive Officer of the
Company, he shall be paid one year of his annual base salary (the "Shull
Termination Payment"). Effective June 1, 2001, the Company amended the Executive
Plan to provide that, notwithstanding anything to the contrary contained in the
Executive Plan, Section 10.2 of the Executive Plan shall not be effective with
respect to the payment of (i) a Participant's "Transaction Bonuses," and/or (ii)
the Shull Termination Payment. The payment of any such "Transaction Bonus" to
any of the Participants, and/or the payment of the Shull Termination Payment,
shall be paid in addition to, and not in lieu of, any Change of Control Benefit
payable to any Participant or Mr. Shull pursuant to the terms of the Executive
Plan. In conjunction with his resignation as Executive Vice President and Chief
Financial Officer, Mr. Harriss released any claims that he may have against the
Company under his May 2001 Transaction Bonus Letter, although he entered into a
new Transaction Bonus Letter in November 2002. The remaining Transaction Bonus
Letters (with Messrs. Shull, Harriss and Contino), other than the Transaction
Bonus Letter with Mr. Potts, Mr. Messina and Mr. Lambert, remain in effect.
The Recapitalization transaction will be deemed a "change of control" for
purposes of the Transaction Bonus Letters. The Company will be permitted to make
any payments thereunder on the closing of the Recapitalization. Messrs. Shull,
Harriss and Contino will receive $450,000, $168,500 and $193,500, respectively,
on the closing date of the Recapitalization under the terms of the Transaction
Bonus Letters to which they are a party. Mr. Lambert will not receive any bonus
payment on the closing date of the Recapitalization under the terms of the
Transaction Bonus Letter to which he is a party because he has waived his rights
thereunder.
Letter Agreement with Mr. Shull and Meridian. On April 30, 2001, Mr.
Shull, Meridian and the Company entered into a letter agreement (the "Letter
Agreement") specifying Mr. Shull's rights under the Executive Plan, which is
discussed above. Under the Letter Agreement, Mr. Shull and Meridian agreed that,
so long as the Executive Plan is in effect and Mr. Shull is a Participant
thereunder, Meridian and Mr. Shull will accept the Change in Control Benefits
provided for in the Executive Plan in lieu of the compensation contemplated by
the December 2000 Services Agreement between them (which benefits amounts will
not be offset against the December 2000 flat fee provided for in the December
2000 Services Agreement and shall be payable at such times and in such amounts
as provided in the Executive Plan rather than in a lump sum payable within five
business days after the termination date of the December 2000 Services Agreement
as contemplated by the December 2000 Services Agreement). For purposes of the
change in control benefits under the Executive Plan and the Letter Agreement,
Mr. Shull's annualized base salary is $600,000. In addition to the benefits
provided by the December 2000 Services Agreement, Mr. Shull and those persons
named in the December 2000 Services Agreement shall also be entitled to the
optional cash out of stock options as provided in the Executive Plan. Under the
Letter Agreement, Mr. Shull is also entitled to payment of one year annual base
salary in the event he is terminated without cause during any period of his
continued employment as the Chief Executive Officer of the Company following the
termination of the December 2000 Services Agreement. The participation and
benefits to which Mr. Shull is entitled under the Executive Plan shall also
survive the termination of the December 2000 Services Agreement pursuant to the
terms thereof in the event that Mr. Shull is still employed as the Chief
Executive Officer of the Company and is a Participant under the Executive Plan.
Should the Executive Plan no longer be in effect or Mr. Shull no longer be a
Participant thereunder, Meridian and Mr. Shull shall continue to be entitled to
the compensation contem-
27
plated by the December 2000 Services Agreement. The Letter Agreement was
superseded by the 2002 Employment Agreement.
Hanover Direct, Inc. Directors Change of Control Plan. Effective May 3,
2001, the Company's Board of Directors established the Hanover Direct, Inc.
Directors Change of Control Plan (the "Directors Plan") for all Directors of the
Company except for (i) any Director who is also an employee of the Company for
purposes of the Federal Insurance Contributions Act; or (ii) any persons (and
their successors from time to time) who are designated by a holder of
thirty-three percent (33%) or more of the Voting Shares to stand for election
and serve as a Director. For purposes of the Directors Plan, a "Change of
Control" will occur upon the occurrence of any of the events specified in item
(i), (ii) or (iii) of the definition of "Change in Control" under the Executive
Plan, as discussed above.
A participant in the Directors Plan shall be entitled to receive a Change
of Control Payment under the Directors Plan if there occurs a Change of Control
and he/she is a Director on the effective date of such Change of Control. A
Change of Control Payment under the Directors Plan shall be an amount equal to
the greater of (i) $40,000 or (ii) 150% of the sum of the annual retainer fee,
meeting fees and per diem fees paid to a Director for his/her service on the
Board of Directors of the Company during the 12-month period immediately
preceding the effective date of the Change of Control.
The Recapitalization transaction will be a "Change of Control" for purposes
of the Directors Plan. The Company will be permitted to make any payments
thereunder on or after the closing of the Recapitalization. Each of the eight
non-employee directors (Messrs. Brown, James, Krushel, Sonnenfeld, Masson,
Regan, Garten and Edelman) will receive $87,000 on the closing date of the
Recapitalization under the terms of the Directors Plan.
2002 Directors' Option Plan. Effective January 1, 2002, 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.
Stock Option Plans. Pursuant to the Company's Compensation Continuation
(Change of Control) Plans, upon the closing of the Recapitalization, all stock
options previously granted pursuant to the Company's stock option plans to the
Participants under such Change of Control Plans by the Company will become fully
exercisable as of the closing date, whether or not otherwise exercisable and
vested as of that date.
REPRICING OF OPTIONS/SARS:
During fiscal 2002, the Company did not adjust or amend the exercise price
of stock options or SARs previously awarded to the Chief Executive Officer or
our four (4) next most highly compensated executive officers who were serving as
executive officers at the end of the Company's 2002 fiscal year.
STOCK OPTION AND EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION:
During the fiscal year ended December 28, 2002, the Stock Option and
Executive Compensation Committee of the Board of Directors of the Company
consisted of E. Pendleton James, Kenneth J. Krushel and Basil P. Regan. None of
such persons was, during such fiscal year or formerly, an officer or employee of
the Company or any of its subsidiaries or had any relationship with the Company
other than serving as a Director of the Company. During the 2002 fiscal year, no
executive officer of the Company served as a member of the compensation
committee (or other board committee performing equivalent functions or, in the
absence of such committee, the entire board of directors) of another entity, one
of whose executive officers served as a member of the Stock Option and Executive
Compensation Committee. During the 2002 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 2002 fiscal year, no executive officer of the Company served as a
member of the compensation committee (or other board committee performing
equivalent functions or, in the absence of such committee, the entire board of
directors) of another entity, one of whose executive officers served as a
Director of the Company.
28
REPORT OF THE STOCK OPTION AND EXECUTIVE COMPENSATION COMMITTEE ON EXECUTIVE
COMPENSATION:
The report of the Stock Option and Executive Compensation Committee (the
"Compensation Committee") for the fiscal year ended December 28, 2002, is as
follows:
The Compensation Committee consisting as of the date of this report for the
fiscal year ended December 28, 2002 of Kenneth J. Krushel (Chairman), E.
Pendleton James and Robert H. Masson, each an outside director, has the
responsibility, under delegated authority from the Company's Board of Directors,
for developing, administering and monitoring the executive compensation policies
of the Company and making recommendations to the Company's Board of Directors
with respect to these policies. The Board of Directors has accepted the
Compensation Committee's recommendations for 2002 compensation.
EXECUTIVE COMPENSATION PHILOSOPHY
The Compensation Committee's executive compensation philosophy supports the
Company's overall business strategy and has at its core a strong link between
pay, performance and retention. The philosophy emphasizes recognition of
achievement at both the Company and individual level. A significant portion of
compensation delivered to executives to reflect such achievement is intended to
be in the form of long-term incentives. This long-term focus emphasizes
sustained performance and encourages retention of executive talent. In addition,
executives are encouraged to hold a significant ownership stake in the Company
so that their interests are closely aligned with those of the stockholders in
terms of both risk and reward.
The specific executive compensation plans are designed to support the
executive compensation philosophy. Compensation of the Company's executives
consists of three components, which are discussed below: salary, annual
incentive awards and long-term incentive awards. Base salary levels have been
established in order to attract and retain key executives, commensurate with
their level of responsibility within the organization. Annual incentives closely
link executive pay with performance in areas that are critical to the Company's
short-term operating success. Long-term incentives motivate executives to make
decisions that are in the best interests of the Company's owners and reward them
for the creation of stockholder value. It is the intent of both the Company and
the Compensation Committee that the components of the executive compensation
program will support the Company's compensation philosophy, reinforce the
Company's overall business strategy, and ultimately drive stockholder value
creation.
BASE SALARIES
Individual salaries for executives of the Company, other than Mr. Shull,
are generally influenced by several equally weighted factors: the qualifications
and experience of the executive, the executive's level of responsibility within
the organization, pay levels at firms which compete with the Company for
executive talent, individual performance, and performance-related factors used
by the Company to determine annual incentive awards. Mr. Shull's compensation
and other benefits are specified in the 2002 Employment Agreement. See
"Employment Contracts, Termination of Employment and Change-in-Control
Arrangements."
The base salaries of the Company's executives are subject to periodic
review and adjustment. Annual salary adjustments are made based on the factors
described above.
ANNUAL INCENTIVE AWARDS
In addition to base salaries, each of the Company's executives and selected
key managers participate in the Company's Management Incentive Plan. As of the
date of this report (April 2003), approximately 217 executives and key managers
are eligible to participate in the annual Management Incentive Plan. Under this
plan, each participant is assigned a target bonus, expressed as a percentage of
his/her base salary, which is paid if all performance targets are fully met. It
is the policy of the Compensation Committee to position target bonuses at
competitive levels. Individual target bonuses are based on the person's
responsibility level in the organization and the bonus award opportunity at the
other organizations included in the performance chart. Target bonus levels range
from 5% to 100% of salary. Target bonus opportunities for Messrs. Contino,
Harriss,
29
Lambert and Shull for fiscal year 2002 were 100% of salary while maximum bonuses
were 150% of salary. For purposes of the 2002 Management Incentive Plan, Mr.
Shull's base salary was deemed to be $600,000. Mr. Kingsford's target bonus for
fiscal year 2002 was 25% of salary while his maximum bonus was 50% of salary.
Participants are eligible to receive an annual bonus depending upon the
extent to which certain goals are achieved. As in past years, performance goals
for 2002 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. Payments to the Chief Executive Officer and the four (4)
next most highly compensated executive officers under the 2002 Management
Incentive Plan for the fiscal year 2002 aggregated $2,197,433. One hundred
percent of awards made under the bonus plan are currently paid in cash, in some
cases on a deferred basis.
LONG-TERM INCENTIVE AWARDS
1993 EXECUTIVE EQUITY INCENTIVE PLAN
The 1993 Executive Equity Incentive Plan terminated in accordance with its
terms on December 31, 1996. Such plan provided executives and other key
employees with incentives to maximize the long-term creation of stockholder
value. The long-term incentive plan encouraged executives to acquire and retain
a significant ownership stake in the Company. Under the plan, executives were
given an opportunity to purchase shares of Common Stock with up to 80% of the
purchase price financed with a full recourse Company loan. For each share of
stock an employee purchased, he/she received an option to acquire two additional
shares of Common Stock, to a maximum of 250,000 shares in the aggregate, which
vest after three (3) years and expire after six (6) years. By creating this
opportunity, the Company encouraged executives to own Common Stock thereby
aligning executives' interests with those of the stockholders. The number of
shares offered for purchase to each executive and the corresponding number of
tandem options increased with the executive's level of responsibility within the
organization.
In December 1999, the rights of certain participants in this plan expired.
These participants had cumulative promissory notes of approximately $1.0 million
payable to the Company, comprised of $0.8 million of principal and $0.2 million
of interest, on the expiration date. Accordingly, collateral encompassing 20,000
shares, 20,000 shares and 80,000 shares of the Company's Common Stock in fiscal
years 2002, 2001, and 2000 respectively, held in escrow on behalf of each
participant, was transferred to and retained by the Company in satisfaction of
the aforementioned promissory notes, which were no longer required to be
settled. The Company recorded these shares as treasury stock. Furthermore, these
participants forfeited their initial 20% cash down payment, which was required
for entry into the 1993 Executive Equity Incentive Plan.
At December 28, 2002, current and former officers and executives of the
Company owed the Company approximately $0.3 million, excluding accrued interest,
under the 1993 Executive Equity Incentive Plan. These amounts due to the Company
bear interest at rates ranging from 5.54% to 7.75% and are due or will be due
during 2003.
As of December 28, 2002, no stock options remained outstanding or
exercisable under the 1993 Executive Entity Incentive Plan.
1996 STOCK OPTION PLAN
The purpose of the 1996 Stock Option Plan is to provide employees of the
Company and its subsidiaries with a larger personal and financial interest in
the success of the Company through the grant of stock-based incentive
compensation. Under the plan, employees may be granted options to purchase
shares of Common Stock at the fair market value on the date of grant. The total
options granted to an employee is one-half
30
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, no options to purchase shares of Common Stock were granted
pursuant to the 1996 Stock Option Plan.
However, as of December 28, 2002, options to purchase 1,337,270 shares of
Common Stock remained outstanding under the 1996 Stock Option Plan.
2000 MANAGEMENT STOCK OPTION PLAN
The purpose of the 2000 Management Stock Option Plan is to advance the
interests of the Company and its stockholders by providing employees of the
Company, through the grant of options to purchase shares of Common Stock, with a
larger personal and financial interest in the success of the Company. Under the
terms of the plan, officers, directors, agents, and employees of the Company and
consultants to the Company or of any subsidiary of the Company may be granted
options to purchase shares of Common Stock at their fair market value on the
date of grant. The plan provides that options may be granted for terms of not
more than 10 years and shall vest according to the terms of the grant of the
options. In addition, options may not be exercised more than 30 days after a
participant ceases to be an employee of the Company, except in the case of
death, disability or retirement, in which cases options may be exercised within
90 days after the date of death, disability or retirement.
During 2002, 6,761,000 options to purchase shares of Common Stock were
granted to employees (including the executives named in the executive
compensation table) in accordance with the 2000 Management Stock Option Plan.
1999 STOCK OPTION PLAN FOR DIRECTORS
The purpose of the 1999 Stock Option Plan for Directors is to advance the
interests of the Company by providing non-employee directors of the Company,
through the grant of options to purchase shares of Common Stock, with a larger
personal and financial interest in the success of the Company. Under the terms
of the plan, directors who are neither employees of the Company nor nonresident
aliens shall be granted an option to purchase 50,000 shares of Common Stock as
of the effective date of his or her initial appointment or election to the Board
of Directors or, if later, the effective date of the plan, and shall be granted
an option to purchase 10,000 shares of Common Stock on August 4, 2000 and August
3, 2001, provided that such directors continue to serve as directors on such
dates. The price at which shares of Common Stock may be purchased upon the
exercise of the options granted under the plan shall be the fair market value of
such shares on the date of grant of the options. The plan provides that options
shall be granted for terms of 10 years and shall vest one-third, one-third and
one-third on the first, second and third anniversaries of the date of grant. In
addition, options may not be exercised more than 3 months after a participant
ceases to be a director of the Company, except in the case of death or
disability, in which cases options may be exercised within 12 months after the
date of such death or disability.
During 2002, a total of 50,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the 1999 Stock Option
Plan for Directors. During 2002, no options to purchase shares of Common Stock
under the 1999 Stock Option Plan for Directors were exercised. A total of
250,000 options to purchase shares of Common Stock which were granted to
eligible directors under the 1999 Stock Option Plan for Directors have expired
following the resignation of such directors from the Company's Board of
Directors. As of December 28, 2002, 420,000 options to purchase Common Stock
under the 1999 Stock Option Plan for Directors were outstanding, of which
316,667 options were exercisable.
No additional options to purchase shares of Common Stock will be granted
under the 1999 Stock Option Plan for Directors.
31
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.
During 2002, a total of 100,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the 2002 Stock Option
Plan for Directors. During 2002, no options to purchase shares of Common Stock
under the 2002 Stock Option Plan for Directors were exercised. No options to
purchase shares of Common Stock which were granted to eligible directors under
the 2002 Stock Option Plan for Directors have expired following the resignation
of such directors from the Company's Board of Directors. As of December 28,
2002, 100,000 options to purchase Common Stock under the 2002 Stock Option Plan
for Directors were outstanding, none of which were exercisable.
CHIEF EXECUTIVE OFFICER COMPENSATION
On December 5, 2000, Thomas C. Shull was named President and Chief
Executive Officer and was elected to the Board of Directors of the Company.
Effective on that date, Mr. Shull, Meridian and the Company entered into the
December 2000 Services Agreement. Under the December 2000 Services Agreement,
Meridian provided for the benefit of the Company the services of Mr. Shull and
certain persons providing consulting services to the Company thereunder (the
"Consultants"). The term of the December 2000 Services Agreement, and the term
for the services of Mr. Shull, began on December 5, 2000 and would have
terminated on December 4, 2001, while the term for the services of the
Consultants would have terminated on June 4, 2001. The December 2000 Services
Agreement was replaced by the August 2001 Services Agreement, pursuant to which
the term of the services of Mr. Shull and the Consultants began on August 1,
2001 and would have terminated on June 30, 2002. The August 2001 Services
Agreement was replaced by the December 2001 Services Agreement. Effective
September 1, 2002, the Company and Mr. Shull entered into the 2002 Employment
Agreement, which replaced the August 2001 Services Agreement. The 2002
Employment Agreement will expire on March 31, 2006. See "Employment Contracts,
Termination of Employment and Change-in-Control Arrangements."
NONDEDUCTIBLE COMPENSATION
Section 162(m) of the Internal Revenue Code, as amended (the "Code"),
generally disallows a tax deduction to public companies for compensation over
$1,000,000 (the "$1 Million Limit") paid to a company's chief executive officer
and four (4) other most highly compensated executive officers, as reported 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
32
based annual management incentive plans) in a manner that complies with the
statute. Payments of compensation in 2002 relating to Thomas Shull, Edward
Lambert and Michael Contino exceeded the $1 Million Limit; consequently, in each
case, the excess of such payments over the $1 Million Limit was not deductible.
Respectfully Submitted,
The Stock Option and Executive
Compensation
Committee (April 2003)
Kenneth J. Krushel (Chairman)
E. Pendleton James
Robert H. Masson
33
REPORT OF THE AUDIT COMMITTEE
The Audit Committee has reviewed and discussed with management and KPMG
LLP, the Company's independent auditors, the Company's audited financial
statements as of and for the year ended December 28, 2002.
The Audit Committee has discussed with the independent auditors the matters
required to be discussed by Statement on Auditing Standards ("SAS") No. 61,
Communication with Audit Committees, as amended by SAS 90.
The Audit Committee has received and reviewed the written disclosures and
the letter from the independent auditors required by Independence Standard No.
1, Independence Discussions with Audit Committees, as amended, by the
Independence Standards Board, and has discussed with the auditors the auditors'
independence.
Based on the review and discussions referred to above, we recommend to the
Board of Directors that the financial statements referred to above be included
in the Company's Annual Report on Form 10-K for the year ended December 28,
2002.
Respectfully Submitted,
The Audit Committee (April 2003)
Robert H. Masson (Chairman)
E. Pendleton James
Kenneth J. Krushel
34
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative
total stockholder return on the Company's Common Stock for each of the Company's
last five fiscal years with the cumulative total return (assuming reinvestment
of dividends) of (i) the Standard & Poor's 500 Stock Index (which includes the
Company) and (ii) peer issues from the Company's line of business selected by
the Company in good faith.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG HANOVER DIRECT, INC., THE S&P 500 INDEX AND A PEER GROUP
[COMPARISON GRAPH]
<Table>
<Caption>
Cumulative Total Return
---------------------------------------------------------
- --------------------------------------------------------------------------------
12/97 12/98 12/99 12/00 12/01 12/02
- --------------------------------------------------------------------------------
HANOVER DIRECT,
INC. 100.00 114.58 120.83 12.50 12.33 6.33
S&P 500 100.00 128.58 155.64 141.46 124.65 97.10
PEER GROUP 100.00 172.48 186.68 90.72 177.12 214.36
</Table>
* 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.
NOTE: Assumes $100 invested on December 31, 1997 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.
DIRECTOR COMPENSATION
Standard Arrangements. Non-employee directors of the Company or its
subsidiaries currently receive an annual cash fee of $58,000. During fiscal year
2002, non-employee directors received an annual cash fee of $40,000 and an
additional $16,000, $8,000, $8,000, $8,000 and $8,000 annual cash fee for
serving as the Chairman of the Audit, Compensation, Transaction, Executive and
Nominating Committees, respectively, of the Board of Directors. During fiscal
year 2002, certain directors also received per diem fees for extraordinary
35
services not exceeding $40,000 in the aggregate per person. Non-employee
directors also participate in the Eighteen Month Compensation Continuation Plan
for Directors, the 1999 Stock Option Plan for Directors and the 2002 Stock
Option Plan for Directors. See "Employment Contracts, Termination of Employment
and Change-in-Control Arrangements." The Company does not compensate its
employees, or employees of its subsidiaries, who serve as directors. During
fiscal 2002 and 2003, the Company provided $50,000 of term life insurance for
each director.
During 2002, a total of 50,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the 1999 Stock Option
Plan for Directors. During 2002, no options to purchase shares of Common Stock
under the 1999 Stock Option Plan for Directors were exercised. A total of
250,000 options to purchase shares of Common Stock which were granted to
eligible directors under the 1999 Stock Option Plan for Directors have expired
following the resignation of such directors from the Company's Board of
Directors. As of November 10, 2003, 420,000 options to purchase Common Stock
under the 1999 Stock Option Plan for Directors were outstanding, of which
366,667 options were exercisable.
During 2002, a total of 100,000 options to purchase shares of Common Stock
were granted to eligible directors all in accordance with the 2002 Stock Option
Plan for Directors. During 2002, no options to purchase shares of Common Stock
under the 2002 Stock Option Plan for Directors were exercised. No options to
purchase shares of Common Stock which were granted to eligible directors under
the 2002 Stock Option Plan for Directors have expired following the resignation
of such directors from the Company's Board of Directors. As of November 10,
2003, 560,000 options to purchase Common Stock under the 2002 Stock Option Plan
for Directors were outstanding, 49,999 of which were exercisable.
Effective January 1, 2003, the 2002 Stock Option Plan for Directors was
amended to increase the annual service award for directors who are not employees
of the Company from 25,000 to 35,000 options to purchase shares of Common Stock.
Hanover Direct, Inc. Directors Change of Control Plan. Effective May 3,
2001, the Company's Board of Directors established the Hanover Direct, Inc.
Directors Change of Control Plan (the "Directors Plan") for all Directors of the
Company except for (i) any Director who is also an employee of the Company for
purposes of the Federal Insurance Contributions Act; or (ii) any persons (and
their successors from time to time) who are designated by a holder of
thirty-three percent (33%) or more of the Voting Shares to stand for election
and serve as a Director. For purposes of the Directors Plan, a "Change of
Control" will occur upon the occurrence of any of the events specified in item
(i), (ii) or (iii) of the definition of "Change in Control" under the Executive
Plan, as discussed above.
A participant in the Directors Plan shall be entitled to receive a Change
of Control Payment under the Directors Plan if there occurs a Change of Control
and he/she is a Director on the effective date of such Change of Control. A
Change of Control Payment under the Directors Plan shall be an amount equal to
the greater of (i) $40,000 or (ii) 150% of the sum of the annual retainer fee,
meeting fees and per diem fees paid to a Director for his/her service on the
Board of Directors of the Company during the 12-month period immediately
preceding the effective date of the Change of Control.
The Recapitalization transaction is a "Change of Control" for purposes of
the Directors Plan. The Company will be permitted to make any payments
thereunder on or after the closing of the Recapitalization. Each of the eight
non-employee directors (Messrs. Brown, James, Krushel, Sonnenfeld, Masson,
Regan, Garten and Edelman) will be paid $87,000 on the closing date of the
Recapitalization under the terms of the Directors Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 10, 2003, the Company entered into 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. The Recapitalization is a
"Change of Control" for purposes of all of the Company's existing Compensation
Continuation (Change of Control) Plans, the
36
2002 Employment Agreement, and the Transaction Bonus Letters between the Company
and its executive officers. The Company is permitted to make any payments
required thereunder on or after the closing of the Recapitalization. See the
disclosure under the caption "Employment Contracts, Termination of Employment
and Change-in-Control Arrangements." The Closing of the Recapitalization will
occur as promptly as practicable following the execution of the Recapitalization
Agreement, but not later than December 17, 2003, unless extended by Chelsey or
the Company, at which time such Closing will occur not later than February 29,
2004. In the MOU and the Recapitalization Agreement, the Company acknowledges
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 agree 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 will discontinue, with prejudice, all pending
litigation between such parties. Pending the closing of the Recapitalization,
neither the Company nor Chelsey will take any action to prosecute any 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, 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. For a further
discussion of the terms and conditions of the MOU, the Recapitalization
Agreement and the Recapitalization, see "Recapitalization."
Edward M. Lambert resigned as Chief Financial Officer effective November
11, 2003. In connection with his resignation, Mr. Lambert and the Company
entered into a severance agreement dated November 4, 2003 providing a minimum of
$600,000 and a maximum of $640,000 of cash payments, as well as other benefits
that will be accrued and paid in the fourth quarter of 2003. Mr. Lambert is also
entitled to receive a payment under the Company's 2003 Management Incentive
Plan, although at this time the Company does not forecast that any payments
under the Company's 2003 Management Incentive Plan will be earned by senior
executives.
At December 28, 2002, Richemont owned approximately 21.3% of the Company's
Common Stock outstanding and 100% of the Company's Series B Preferred Stock
through direct and indirect ownership. Pursuant to the terms and conditions of
that certain Purchase and Sale Agreement, dated as of May 19, 2003, between
Richemont and Chelsey, Chelsey purchased all of Richemont's securities in the
Company, consisting of 29,446,888 shares of Common Stock and 1,622,111 shares of
Series B Preferred Stock, for a purchase price of $40,000,000. As a result of
this transaction, Chelsey is the beneficial owner of 21.3% of the Company's
Common Stock and 100% of the Company's Series B Preferred Stock.
At December 28, 2002, current and former officers and executives of the
Company owed the Company approximately $0.3 million, excluding accrued interest,
under the 1993 Executive Equity Incentive Plan. These amounts due to the Company
bear interest at rates ranging from 5.54% to 7.75% and are due or will be due
during 2003.
During November 2002, the Company entered into Transaction Bonus Letters
with each of Mr. Lambert and Mr. Harriss.
During October 2002, the Company entered into the Compensation Continuation
Agreements with Mr. Lambert, Mr. Harriss and Mr. Contino.
On October 2, 2002, the Company issued options to purchase 600,000 shares
of the Company's common stock to an Executive Vice President at a price of $0.27
per share and services under the Company's 2000 Management Stock Option Plan.
37
During September 2002, Charles F. Messina resigned as Executive Vice
President, Chief Administrative Officer and Secretary of the Company. In
connection with such resignation, the Company and Mr. Messina entered into a
severance agreement dated September 30, 2002 providing for cash payments of
$884,500 and other benefits which were accrued in the fourth quarter of 2002.
As of September 1, 2002, Mr. Shull and the Company entered into the 2002
Employment Agreement, which replaced the December 2001 Services Agreement. As of
June 23, 2003 and August 3, 2003, Mr. Shull and the Company amended the 2002
Employment Agreement. As of September 1, 2002, Mr. Shull and the Company amended
the Shull 2000 Stock Option Agreement, the Shull 2001 Stock Option Agreement and
the Shull Transaction Bonus Letter.
On August 8, 2002, the Company issued options to purchase 3,750,000 shares
of the Company's Common Stock to certain Management Incentive Plan ("MIP") Level
7 and 8 employees, including various executive officers, at a price of $0.24 per
share and services 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 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, and appointment
as Executive Advisor to the Chairman, the Company and Mr. Harriss entered into a
severance agreement. In connection with Mr. Harriss' appointment as Executive
Vice President, Human Resources and Legal and Secretary of the Company effective
December 2, 2002, Mr. Harriss waived his rights to certain payments under such
severance agreement.
On December 19, 2001, the Company consummated a transaction with Richemont
(the "Richemont Transaction"). In the Richemont Transaction, the Company
repurchased from Richemont all of the outstanding shares of the Series A
Preferred Stock and 74,098,769 shares of the Common Stock of the 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.
38
John F. Shull, the brother of Thomas C. Shull, the President and Chief
Executive Officer of the Company, acted as a consultant under the December 2001
Services Agreement, and received an option to purchase 100,000 shares of the
Company's Common Stock under the December 2001 Services Agreement and an option
to purchase 500,000 shares of the Company's Common Stock under the December 2000
Services Agreement.
In January 1998, the Company made a $75,000 non-interest bearing loan to
Mr. Contino for the purchase by Mr. Contino of a new principal residence in the
State of New Jersey. The terms of the loan agreement included a provision for
the Company to forgive the original amount of the principal on the fifth
anniversary of the loan. The loan was secured by the residence which the
proceeds were used to purchase. The loan was forgiven in full in accordance with
its terms during January 2003.
Either the Company's Board of Directors, a committee of the Company's Board
of Directors, or the stockholders have approved these relationships and
transactions and, to the extent that such arrangements are available from
nonaffiliated parties, all relationships and transactions are on terms no less
favorable to the Company than those available from non affiliated parties.
39
PRINCIPAL HOLDERS OF VOTING SECURITIES OF THE COMPANY
CERTAIN BENEFICIAL OWNERS
The following table lists the beneficial owners known by management of at
least 5% of the Company's Common Stock or 5% of the Company's Series B Preferred
Stock as of November 13, 2003. 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 our knowledge, each person named in the table has sole
voting and investment power with respect to all shares of Common Stock and
Series B Preferred Stock shown as beneficially owned by them.
<Table>
<Caption>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS(1)
- -------------- ------------------- ----------------------- -----------
Series B Participating
Preferred Stock......... Chelsey Direct, LLC, 1,622,111(2) 100%
William B. Wachtel and
Stuart Feldman
c/o Wachtel & Masyr, LLP
110 East 59th Street
New York, New York 10022
Common Stock.............. Chelsey Direct, LLC, 29,607,788(2) 21.4%
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 38,838,350(3) 28.0%
Basil P. Regan
32 East 57th Street
New York, New York 10022
</Table>
- ---------------
(1) In the case of Common Stock, includes shares of Common Stock issued upon
exercise of options or warrants exercisable within 60 days for the subject
individual only. Percentages of Common Stock are computed on the basis of
138,315,800 shares of Common Stock and 1,622,111 shares of Series B
Preferred Stock outstanding as of November 13, 2003.
(2) Information concerning the number of shares beneficially owned has been
taken from Amendment No. 6 to the Statement on Schedule 13D filed by Chelsey
Direct, LLC on November 12, 2003 with the Commission. Chelsey is the record
holder of 29,466,888 shares of Common Stock and 1,622,111 shares of Series B
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 29,466,888
shares of Common Stock and 1,622,111 shares of Series B 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. The shares of Common
Stock and Series B Preferred Stock owned by Chelsey and Messrs. Wachtel and
Feldman collectively represent approximately 29.6% of the combined voting
power of the Company's securities.
(3) Information concerning the number of shares beneficially owned has been
taken from Amendment No. 3 to the Statement on Schedule 13D filed by Regan
Partners L.P. on June 5, 2003 with the Commission. Mr. Regan and Regan
Partners L.P. have shared voting and dispositive power with respect to
37,798,450 shares of Common Stock and Mr. Regan has sole voting and
dispositive power with respect to 979,900 shares of Common Stock. Also
includes options to purchase 110,000 shares of Common Stock exercisable
within 60 days, assuming the Closing occurs within 60 days.
40
The following table lists the beneficial owners known by management of at
least 5% of the Company's Common Stock or 5% of the Company's Series C Preferred
Stock after the Closing as if it occurred prior to December 17, 2003. 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, giving effect to the Closing as if
it occurred prior to December 17, 2003. Except as noted below, to our knowledge,
after the Closing each person named in the table will have sole voting and
investment power with respect to all shares of Common Stock and Series C
Preferred Stock shown as beneficially owned by them.
<Table>
<Caption>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS(1)
- -------------- ------------------- ----------------------- -----------
Series C Participating
Preferred Stock......... Chelsey Direct, LLC, 564,819(2) 100%
William B. Wachtel and
Stuart Feldman
c/o Wachtel & Masyr, LLP
110 East 59th Street
New York, New York 10022
Common Stock.............. Chelsey Direct, LLC, 111,565,621(2) 50.6%
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 38,838,350(3) 17.6%
Basil P. Regan
32 East 57th Street
New York, New York 10022
</Table>
- ---------------
(1) In the case of Common Stock, includes shares of Common Stock issued upon
exercise of options or warrants exercisable within 60 days for the subject
individual only. Percentages of Common Stock are computed on the basis of
220,173,633 shares of Common Stock and 564,819 shares of Series C Preferred
Stock outstanding after the Closing as if it occurred prior to December 17,
2003.
(2) Information concerning the number of shares beneficially owned has been
taken from Amendment No. 6 to the Statement on Schedule 13D filed by Chelsey
Direct, LLC on November 12, 2003 with the Commission, and has been adjusted
to reflect the Closing as if it occurred prior to December 17, 2003. Chelsey
will be the record holder of 111,304,721 shares of Common Stock and 564,819
shares of Series C Preferred Stock. Chelsey Capital Profit Sharing Plan (the
"Chelsey Plan") is the sole member of Chelsey and Mr. Wachtel is the Manager
of Chelsey. The sponsor of the Chelsey Plan is DSJ International Resources
Ltd. ("DSJI"). Mr. Feldman is the sole officer and director of DSJI and a
principal beneficiary of the Chelsey Plan. Mr. Feldman is also the owner of
160,900 shares of Common Stock. Mr. Wachtel, in his capacity as the Manager
of Chelsey, will have sole voting and dispositive power with respect to
111,304,721 shares of Common Stock and 564,819 shares of Series B 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, assuming the Closing
occurs within 60 days. The shares of Common Stock and Series C Preferred
Stock which will be owned by Chelsey and Messrs. Wachtel and Feldman will
collectively represent approximately 60.7% of the combined voting power of
the Company's securities.
(3) Information concerning the number of shares beneficially owned has been
taken from Amendment No. 3 to the Statement on Schedule 13D filed by Regan
Partners L.P. on June 5, 2003 with the Commission, and has been adjusted to
reflect the Closing as if it occurred prior to December 17, 2003. Mr. Regan
and Regan Partners L.P. will have shared voting and dispositive power with
respect to 37,798,450 shares of Common Stock and Mr. Regan has sole voting
and dispositive power with respect to 979,900 shares of Common Stock. Also
includes options to purchase 110,000 shares of Common Stock exercisable
within 60 days.
41
SECURITY OWNERSHIP OF MANAGEMENT OF THE COMPANY
MANAGEMENT OWNERSHIP
The following table lists share ownership of the Company's Common Stock and
Series B Preferred Stock as of November 13, 2003. The information includes
beneficial ownership by (i) each of our current directors and executive officers
as of such date and (ii) all directors and executive officers as a group as of
such date. 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 our knowledge, each person named in the table has sole voting
and investment power with respect to all shares of Common Stock and Series B
Preferred Stock shown as beneficially owned by them.
<Table>
<Caption>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENTAGE OF CLASS(1)
- ------------------------ ----------------------- ----------------------
Robert H. Masson.............................. 85,000(2) *
Basil P. Regan(5)............................. 38,838,350(3) 28.0%
Martin L. Edelman............................. 50,000(4) *
Wayne P. Garten............................... 51,905(5) *
A. David Brown................................ 50,000(4) *
William B. Wachtel............................ 29,446,888(6) 21.3%
1,622,111(6)(15) 100%
Stuart Feldman................................ 29,607,788(6) 21.4%
1,622,111(6)(15) 100%
Thomas C. Shull............................... 3,250,000(7) 2.3%
Michael D. Contino............................ 1,452,400(8) 1.0%
Brian C. Harriss.............................. 653,600(9) *
Charles E. Blue............................... 294,000(10) *
William C. Kingsford.......................... 235,117(11) *
Edward M. Lambert............................. 1,300,000(12) *
Steven Lipner................................. 71,174(13) *
Current Directors and Executive............... 75,939,334(14) 54.9%
Officers as a Group (14 persons).............. 1,622,111(15) 100%
</Table>
- ---------------
* Less than one percent
(1) Includes in each case shares of Common Stock issuable upon exercise of
options or warrants exercisable within 60 days for the subject individual
only, assuming that the Closing occurs within 60 days. Percentages are
computed on the basis of 138,315,800 shares of Common Stock outstanding as
of November 13, 2003.
(2) Represents options to purchase 85,000 shares exercisable within 60 days,
assuming that the Closing occurs within 60 days.
(3) Mr. Regan and Regan Partners L.P. have shared voting and dispositive power
with respect to 37,798,450 shares of Common Stock and Mr. Regan has sole
voting and dispositive power with respect to 979,900 shares of Common
Stock. Also includes options to purchase 110,000 shares exercisable within
60 days, assuming that the Closing occurs within 60 days.
(4) Represents options to purchase 50,000 shares exercisable within 60 days,
assuming that the Closing occurs within 60 days.
(5) Includes options to purchase 50,000 shares exercisable within 60 days,
assuming that the Closing occurs within 60 days.
(6) Chelsey is the record holder of 29,466,888 shares of Common Stock and
1,622,111 shares of Series B Preferred Stock. Chelsey Capital Profit
Sharing Plan (the "Chelsey Plan") is the sole member of
42
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 Manger of Chelsey, has sole
voting and dispositive power with respect to 29,466,888 shares of Common
Stock and 1,622,111 shares of Series B 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. The shares of Common Stock and
Series B Preferred Stock owned by Chelsey and Messrs. Wachtel and Feldman
collectively represent approximately 29.6% of the combined voting power of
the Company's securities.
(7) Includes options to purchase 3,200,000 shares exercisable within 60 days,
assuming that the Closing occurs within 60 days.
(8) Includes options to purchase 1,450,000 shares exercisable within 60 days,
assuming that the Closing occurs within 60 days.
(9) Includes options to purchase 600,000 shares exercisable within 60 days,
assuming that the Closing occurs within 60 days.
(10) Represents options to purchase 294,000 shares exercisable within 60 days,
assuming that the Closing occurs within 60 days.
(11) Represents options to purchase 235,117 shares exercisable within 60 days,
assuming that the Closing occurs within 60 days.
(12) Represents options to purchase 1,300,000 shares exercisable within 60 days,
assuming that the Closing occurs within 60 days.
(13) Includes options to purchase 70,000 shares exercisable within 60 days,
assuming that the Closing occurs within 60 days.
(14) Shares of Common Stock; includes options to purchase 7,494,117 shares
exercisable within 60 days, assuming that the Closing occurs within 60
days.
(15) Shares of Series B Preferred Stock.
43
The following table lists share ownership of the Company's Common Stock and
Series C Preferred Stock after the Closing. The information includes beneficial
ownership by (i) each of our directors and executive officers after the Closing
as if it occurred prior to December 17, 2003 and (ii) all directors and
executive officers after the Closing 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 our knowledge, each person named
in the table will have sole voting and investment power with respect to all
shares of Common Stock and Series C Preferred Stock shown as beneficially owned
by them.
<Table>
<Caption>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENTAGE OF CLASS(1)
- ------------------------ ----------------------- ----------------------
Robert H. Masson.............................. 85,000(2) *
Basil P. Regan(3)............................. 38,838,350(3) 17.6%
Thomas C. Shull............................... 3,250,000(4) 1.4%
Martin L. Edelman............................. 50,000(5) *
Wayne P. Garten............................... 51,905(6) *
A. David Brown................................ 50,000(5) *
Michael D. Contino............................ 1,452,400(7) *
Brian C. Harriss.............................. 653,600(8) *
Charles E. Blue............................... 294,000(9) *
William C. Kingsford.......................... 235,117(10) *
Edward M. Lambert............................. 1,300,000(11) *
Steven Lipner................................. 71,174(12) *
William B. Wachtel............................ 111,354,721(13) 50.5%
564,819(13) 100%
Stuart Feldman................................ 111,565,621(13) 50.6%
564,819(13) 100%
Donald Hecht.................................. 0 *
Directors and Executive Officers.............. 157,947,167(14) 71.7%
after the Closing as a Group (15 persons)..... 564,819(15) 100%
</Table>
- ---------------
* Less than one percent
(1) Includes in each case shares of Common Stock issuable upon exercise of
options or warrants exercisable within 60 days for the subject individual
only, assuming that the Closing occurs within 60 days. Percentages are
computed on the basis of 220,173,633 shares of Common Stock and 564,819
shares of Series B Preferred Stock outstanding after the Closing.
(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 37,798,450 shares of Common Stock and Mr. Regan has sole
voting and dispositive power with respect to 979,900 shares of Common Stock.
Also includes options to purchase 110,000 shares exercisable within 60 days.
(4) Includes options to purchase 3,200,000 shares exercisable within 60 days.
(5) Represents options to purchase 50,000 shares exercisable within 60 days.
(6) Includes options to purchase 50,000 shares exercisable within 60 days.
(7) Includes options to purchase 1,450,000 shares exercisable within 60 days.
(8) Includes options to purchase 600,000 shares exercisable within 60 days.
(9) Represents options to purchase 294,000 shares exercisable within 60 days.
(10) Represents options to purchase 235,117 shares exercisable within 60 days.
(11) Represents options to purchase 1,300,000 shares exercisable within 60 days.
44
(12) Includes options to purchase 70,000 shares exercisable within 60 days.
(13) Chelsey will be the record holder of 111,404,721 shares of Common Stock and
564,819 shares of Series C Preferred Stock. Chelsey Capital Profit Sharing
Plan (the "Chelsey Plan") is the sole member of Chelsey and Mr. Wachtel is
the Manager of Chelsey. The sponsor of the Chelsey Plan is DSJ
International Resources Ltd. ("DSJI"). Mr. Feldman is the sole officer and
director of DSJI and a principal beneficiary of the Chelsey Plan. Mr.
Feldman is also the owner of 160,900 shares of Common Stock. Mr. Wachtel,
in his capacity as the Manager of Chelsey, will have sole voting and
dispositive power with respect to 111,304,721 shares of Common Stock and
564,819 shares of Series B 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, assuming the Closing occurs within 60 days. The shares of Common
Stock and Series C Preferred Stock owned by Chelsey and Messrs. Wachtel and
Feldman collectively represent approximately 60.7% of the combined voting
power of the Company's securities.
(14) Common Stock; includes options to purchase 7,594,117 shares exercisable
within 60 days.
(15) Shares of Series C Preferred Stock.
45
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires officers, directors and
beneficial owners of more than 10% of the Company's shares to file reports with
the Commission and the American Stock Exchange. Based solely on a review of the
reports and representations furnished to the Company during the last fiscal year
by such persons, the Company believes that each of these persons is in
compliance with all applicable filing requirements except for Messrs. Kingsford
and Lipner, who each failed to file one report in a timely fashion.
By Order of the Board of Directors
[/s/ Brian C. Harriss]
Brian C. Harriss
Secretary
Dated: November 19, 2003
46