-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F2h452A7KMv89ZVF+ZcLI8R5EGXwCpBvFuStColAliZ8GymE/I9Pl+rWUpN87R59 z3d9rKwzO75zWwSrICYYlA== 0000950123-04-008339.txt : 20040712 0000950123-04-008339.hdr.sgml : 20040712 20040712164714 ACCESSION NUMBER: 0000950123-04-008339 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040708 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20040712 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANOVER DIRECT INC CENTRAL INDEX KEY: 0000320333 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 138053260 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08056 FILM NUMBER: 04910537 BUSINESS ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 BUSINESS PHONE: 2018653800 MAIL ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 FORMER COMPANY: FORMER CONFORMED NAME: HORN & HARDART CO /NV/ DATE OF NAME CHANGE: 19920703 8-K 1 y98976e8vk.txt FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 8, 2004 ------------ HANOVER DIRECT, INC. -------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) 1-12082 ------------------------ (COMMISSION FILE NUMBER) DELAWARE 13-0853260 - ---------------------------- ---------------------- (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION) IDENTIFICATION NUMBER) 115 RIVER ROAD, BUILDING 10 EDGEWATER, NEW JERSEY 07020 - --------------------------- ---------- (ADDRESS OF PRINCIPAL (ZIP CODE) EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 863-7300 - -------------------------------------------------------------------------------- (FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT) ITEM 5. OTHER EVENTS. On July 8, 2004, Hanover Direct, Inc. (the "Company") entered into a $20 million junior secured term loan facility (the "Term Loan Facility") with Chelsey Finance, LLC ("Chelsey Finance"), an affiliate of its controlling shareholder, Chelsey Direct LLC ("Chelsey Direct"), which was fully funded on July 9, 2004. The Term Loan Facility is for a three-year term, subject to earlier maturity upon the occurrence of a change in control or sale of the Company, and carries an interest rate of 5% above the prime rate publicly announced by Wachovia Bank, N.A., payable currently. The Term Loan Facility is secured by a second priority lien on the assets of the Company. In connection therewith, Chelsey Finance concurrently entered into an intercreditor and subordination agreement with the Company's senior secured lender, Congress Financial Corporation ("Congress"). In consideration for providing the Term Loan Facility to the Company, Chelsey Finance received a closing fee of $200,000, which was paid in cash, and will receive a warrant to purchase 30% of the fully diluted shares of common stock of the Company at an exercise price of $.01 per share. Pending shareholder approval of such issuance, Chelsey Finance received a warrant to purchase a newly-issued series of nonvoting preferred stock of the Company, called Series D Participating Preferred Stock, that will be automatically exchanged for such common stock warrant upon the receipt of shareholder approval of the issuance thereof anticipated at the Company's 2004 Annual Meeting of Shareholders tentatively scheduled for August 12, 2004. In connection with the closing of the Term Loan Facility, Chelsey Direct received a waiver fee equal to 1% of the liquidation preference of the Company's outstanding Series C Participating Preferred Stock, payable in common stock of the Company, or 4,344,762 additional shares of common stock (calculated based upon the fair market value thereof two business days prior to the closing date), in consideration for the waiver by Chelsey Direct of its blockage rights over the issuance of senior securities. The terms of the Term Loan Facility with Chelsey Finance were approved by the Company's Audit Committee, all of whose members are independent, and the Company's Board of Directors. Concurrently with the closing of the Term Loan Facility with Chelsey Finance, the Company amended its existing senior credit facility with Congress (the "Congress Credit Facility") to (1) release certain existing availability reserves and remove the excess loan availability covenant, increasing availability to the Company by approximately $10 million, (2) reduce the amount of the maximum credit, the revolving loan limit and the inventory and accounts sublimits of revolving loan borrowers, (3) release certain existing availability reserves and remove the excess loan availability covenant, (4) defer for three months the payment of principal with respect to the Tranche A Term Loan, (5) permit the secured indebtedness to Chelsey Finance arising under the Term Loan Facility, (6) modify certain provisions of the Congress Credit Facility with respect to asset sales and the application of proceeds thereof by borrowers, (7) extend the term of the Congress Credit Facility until July 8, 2007, (8) amend certain other provisions of the Congress Credit Facility and (9) permit the secured indebtedness to Chelsey Finance arising under the Term Loan Facility and other related transactions in connection with the Term Loan Facility. In addition, Congress consented to (a) the issuance by the Company of the common stock warrant, the Series D Preferred Stock warrant, the common stock pursuant to the common stock warrant and the Series D Preferred Stock pursuant to the Series D Preferred Stock warrant, (b) the filing of the Certificate of Designation of the Series D Preferred Stock, (c) the proposed reverse split and the Company making payments in cash to holders of common stock to repurchase fractional shares of such common stock from such shareholders as contemplated by the proposed reverse split, (d) certain amendments to the Company's Certificate of Incorporation, and (e) the issuance by the Company of common stock to Chelsey Finance as payment of a waiver fee. The amendment required the payment of fees in the amount of $400,000. Together, these two arrangements have increased the Company's liquidity by approximately $25 million. Proceeds from the Term Loan Facility with Chelsey Finance have been used to refinance the Tranche B Term Loan of approximately $4.9 million under the Congress Credit Facility and to pay fees and expenses in connection with the two transactions and will provide ongoing working capital for the Company which will be used to reduce outstanding payables. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS. (c) Exhibits Exhibit 3.1 Certificate of the Designations, Powers, Preferences and Rights of Series D Participating Preferred Stock of Hanover Direct, Inc., dated July 8, 2004 Exhibit 10.1 Loan and Security Agreement, dated as of July 8, 2004, among Chelsey Finance, LLC, a Delaware limited liability company, and the Borrowers named therein Exhibit 10.2 Intercreditor and Subordination Agreement, dated as of July 8, 2004, between Lender and Congress Financial Corporation, as acknowledged by Borrowers and Guarantors Exhibit 10.3 Thirty-first Amendment to Loan and Security Agreement, dated as of July 8, 2004, among Congress Financial Corporation and the Borrowers and Guarantors named therein Exhibit 10.4 Series D Preferred Stock Purchase Warrant dated July 8, 2004 issued by Hanover Direct, Inc. to Chelsey Finance, LLC Exhibit 99.1 Press Release, dated July 12, 2004 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. HANOVER DIRECT, INC. ------------------------------------- (Registrant) July 12, 2004 By: /s/ Charles E. Blue --------------------------------- Name: Charles E. Blue Title: Senior Vice President and Chief Financial Officer EX-3.1 2 y98976exv3w1.txt CERTIFICATE Exhibit 3.1 CERTIFICATE OF THE DESIGNATIONS, POWERS, PREFERENCES AND RIGHTS OF SERIES D PARTICIPATING PREFERRED STOCK OF HANOVER DIRECT, INC. (Pursuant to Section 151 of the Delaware General Corporation Law) Hanover Direct, Inc., a Delaware corporation (the "Company"), hereby certifies that the following resolution (this "Resolution") was adopted by the Board of Directors of the Company: "RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Company (the "Board of Directors") by the provisions of the Certificate of Incorporation of the Company (the "Certificate of Incorporation"), there is hereby created, out of the 5,000,000 shares of preferred stock, par value $0.01 per share, of the Company authorized in Article Fourth of the Certificate of Incorporation (the "Preferred Stock"), a series of the Preferred Stock consisting of 100 shares, which series shall have the following powers, designations, preferences and relative, participating, optional and other rights, and the following qualifications, limitations and restrictions (in addition to any powers, designations, preferences and relative, participating, optional or other rights, and any qualifications, limitations and restrictions, set forth in the Certificate of Incorporation which are applicable to the Preferred Stock): Section 1. Designation; Amount. The shares of Preferred Stock created hereby shall be designated the "Series D Participating Preferred Stock" (the "Series D Preferred Stock") and the authorized number of shares constituting such series shall be 100. Section 2. Dividends. In the event any dividends are declared or paid or any other distribution is made on or with respect to the Common Stock, subject to the prior payment in full of any accrued but unpaid cumulative dividends on the Series C Preferred Stock, if the same are then outstanding, the holders of the Series D Preferred Stock as of the record date established by the Board of Directors for such dividend or distribution on the Common Stock shall be entitled to receive dividends ("Participating Dividends") per share of Series D Preferred Stock, in an amount (whether in the form of cash, securities or other property) determined by multiplying (i) the Liquidation Preference per share of Series D Preferred Stock plus the amount of any declared but unpaid dividends thereon as of the record date of such Participating Dividend by (ii) the Applicable Rate. Such Participating Dividends shall be payable to the holders of the Series D Preferred Stock on the record date for such dividend or distribution on the Common Stock, which date shall be the record date for the Participating Dividends, and such dividends are to be payable on the same payment date established by the Board of Directors for the payment of such dividend or distribution on the Common Stock to the persons in whose name the Series D Preferred Stock is registered at the close of business on the applicable record date. (a) No dividend shall be paid or declared on any share of Common Stock, unless a dividend, payable in the same consideration and manner, is simultaneously paid or declared, as the case may be, on each share of Series D Preferred Stock in an amount determined as set forth above. For purposes hereof, the term "dividends" shall include any pro rata distribution by the Company of cash, property, securities (including, but not limited to, rights, warrants or options) or other property or assets to the holders of the Common Stock, whether or not paid out of capital, surplus or earnings. (b) Prior to declaring any dividend or making any distribution on or with respect to shares of Common Stock, the Company shall take all prior corporate action necessary to authorize the issuance of any securities payable as a dividend in respect of the Series D Preferred Stock. (c) The terms "declared dividends" and "dividends declared" or any similar reference to "declared but unpaid dividends," whenever used in this Resolution with reference to shares of Series D Preferred Stock shall be deemed to include dividends required by Section 2(a) hereof to be declared, whether or not the same have in fact been declared at the time in question. (d) No dividend may be declared or paid in respect of the shares of Series D Preferred Stock, except to the extent permitted by law and in accordance with the terms and conditions of the Debt Documents. Section 3. Liquidation Preference. In the event of a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary (a "Liquidation"), the holders of the Series D Preferred Stock then outstanding shall, to the extent permitted by and subject to the terms and conditions of the Debt Documents and to the prior payment in full of the liquidation preference on the Series C Preferred Stock, plus declared or accrued but unpaid dividends thereon, if the same are then outstanding, be entitled to receive out of the available assets of the Company, whether such assets are stated capital or surplus of any nature, an amount on such date equal to the Liquidation Preference per share of Series D Preferred Stock plus (without duplication) the amount of any declared but unpaid dividends thereon as of such date. Such payment shall be made before any payment shall be made or any assets distributed to the holders of any class or series of the Common Stock or any other class or series of the Company's capital stock ranking junior as to liquidation rights to the Series D Preferred Stock. If upon any Liquidation the assets available for distribution to the holders of the Series D Preferred Stock are insufficient to permit the payment to the holders of the Series D Preferred Stock of the full preferential amounts described in this paragraph, then all the remaining available assets shall be distributed among the holders of the then outstanding shares of Series D Preferred Stock pro rata according to the number of the then outstanding shares of Series D Preferred Stock held by each holder thereof. In connection with a Corporate Transaction (as defined below) of the Company (other than an Excluded Corporation Transaction (as defined below)), the holders of a majority of the shares of Series D Preferred Stock outstanding at the time may elect to require the 2 Company to redeem the Series D Preferred Stock outstanding prior to the consummation of the Corporate Transaction, but only out of funds legally available therefor, applying the redemption procedures set forth in Section 4 below as if it were a mandatory redemption on the date of such Corporate Transaction. Section 4. Final Redemption and Redemption at the Option of the Company. (a) On the first Business Day following January 1, 2009 (the "Final Redemption Date"), the Company shall, to the extent permitted by and subject to the terms and conditions of the Debt Documents and to the prior payment in full of the final redemption price of the Series C Preferred Stock, if the same are then outstanding, redeem for cash (but only out of funds legally available therefor) all shares of Series D Preferred Stock that are then outstanding at a redemption price per share equal to the Liquidation Preference thereof plus (without duplication) the amount of any declared but unpaid dividends thereon as of such date (the "Final Redemption Price"). Not more than sixty (60) nor less than thirty (30) days prior to the Final Redemption Date, notice by first class mail, postage prepaid, shall be given to each holder of record of the Series D Preferred Stock, at such holder's address as it shall appear upon the stock register of the Company on such date. Each such notice of redemption shall be irrevocable and shall specify the date that is the Final Redemption Date, the Final Redemption Price, the identification of the shares to be redeemed, the place or places of payment in New York, New York and that payment will be made upon presentation and surrender of the certificate(s) evidencing the shares of Series D Preferred Stock to be redeemed. On or after the Final Redemption Date, each holder of shares of Series D Preferred Stock shall surrender the certificate(s) evidencing such shares to the Company at the place designated in such notice and shall thereupon be entitled to receive payment of the Final Redemption Price. If, on the Final Redemption Date, funds in cash in an amount sufficient to pay the aggregate Final Redemption Price for all outstanding shares of Series D Preferred Stock shall be available therefor and shall have been irrevocably set aside and deposited with a bank or trust company in trust for purposes of payment of such Final Redemption Price, then, notwithstanding that the certificates evidencing any shares so called for redemption shall not have been surrendered, the shares shall no longer be deemed outstanding, the holders thereof shall cease to be stockholders, and all rights whatsoever with respect to the shares so called for redemption (except the right of the holders to receive the Final Redemption Price upon surrender of their certificates therefor) shall terminate. If, at the Final Redemption Date, the Company does not have sufficient capital and surplus legally available to redeem all the outstanding shares of Series D Preferred Stock, the Company shall take all measures permitted under the Delaware General Corporation Law to increase the amount of its capital and surplus legally available, including, without limitation, sales of assets of the Company to the extent permitted by and subject to the terms and conditions of the Debt Documents, and the Company shall redeem as many shares of Series D Preferred Stock as it may legally redeem, ratably from the holders thereof in proportion to the number of shares held by them, and shall thereafter from time to time, as soon as it shall have funds available therefor, redeem as many shares of Series D Preferred Stock as it legally may until it has redeemed all of the outstanding shares of Series D Preferred Stock. (b) To the extent permitted by and subject to the terms and conditions of the Debt Documents and to the prior payment in full of the optional redemption price of the Series C Preferred Stock, if the same are then outstanding, the Company may, at any time at its option, 3 redeem all (but not less than all) of the then outstanding shares of Series D Preferred Stock for cash at a redemption price per share (the "Optional Redemption Price") equal to the Liquidation Preference thereof plus (without duplication) the amount of all declared but unpaid dividends thereon as of the redemption date. In order to exercise its right of optional redemption, the Company shall, not more than sixty (60) nor less than thirty (30) days prior to the redemption date, give notice by first class mail, postage prepaid, to each holder of record of the Series D Preferred Stock, at such holder's address as it shall appear upon the stock register of the Company on such date. Each such notice of redemption shall be irrevocable and shall specify the redemption date (the "Optional Redemption Date"), the Optional Redemption Price, the place or places of payment in New York, New York and that payment will be made upon presentation and surrender of the certificate(s) evidencing the shares of Series D Preferred Stock to be redeemed. Section 5. Redemption at Option of Holders and Mandatory Redemption upon Certain Transactions. (a) In the event that a Change of Control (as defined below) shall occur at any time while any shares of Series D Preferred Stock are outstanding, each of the holders of the then outstanding shares of Series D Preferred Stock shall have the right to give notice that they are exercising a Change of Control election (a "Change of Control Election") with respect to all or any number of such holder's shares of Series D Preferred Stock, during the period ending on the 30th day after the earlier of (i) such holder's receipt of the notice referred to in Section 5(c) hereof or (ii) the date as of which such holder obtains actual knowledge of such Change of Control. Upon any such election, the Company shall, to the extent permitted by and subject to the terms and conditions of the Debt Documents and to the prior payment in full of the Liquidation Preference on the Series C Preferred Stock plus (without duplication) the amount equal to declared or accrued but unpaid dividends thereon if the same are then outstanding and to the extent that the holders of the Series C Preferred Stock have so elected, redeem for cash (but only out of funds legally available therefor) each of such holder's shares for which such an election is made at a redemption price equal to the Liquidation Preference thereof plus (without duplication) the amount of any declared but unpaid dividends thereon as of the Change of Control Payment Date. (b) As used herein, "Change of Control" means the occurrence of any of the following events: (1) the acquisition, in a transaction approved by the Board of Directors, by any Person, other than Chelsey or its affiliates, including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of more than 50% of either (i) the then outstanding shares of Common Stock (the "Outstanding Company Common Stock") or 4 (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); (2) a majority of the individuals who, as of the date of the closing of the transactions contemplated by the Recapitalization Agreement, dated as of November 18, 2003, between Chelsey and the Company (the "Recapitalization Agreement"), constitute the members of the Board of Directors (the "Incumbent Board") cease for any reason to serve on such Board of Directors; provided that any individual who becomes a director of the Company subsequent to the date of the closing of the transactions contemplated by the Recapitalization Agreement, whose election, or nomination for election by the Company's stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed a member of the Incumbent Board; and provided, further, that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board of Directors, shall not be deemed a member of the Incumbent Board; or (3) approval by the stockholders of the Company of a reorganization, merger or consolidation of the Company or sale or other disposition of all or substantially all of the assets of the Company (a "Corporate Transaction"); excluding, however, a Corporate Transaction (an "Excluded Corporate Transaction") pursuant to which the individuals or entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 50% of, respectively, the outstanding shares of common stock, and the combined voting power of the outstanding securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from, or the transferee Person in, such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns 100% of the Outstanding Company Common Stock or all or substantially all of the Company's assets either directly or indirectly) in substantially the same proportions relative to each other as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be. (c) On or before the third (3rd) Business Day after a Change of Control, the Company shall mail to all holders of record of the Series D Preferred Stock at their respective addresses as the same shall appear on the books of the Company as of such date, a notice disclosing (i) the Change of Control, (ii) that, if such holder exercises the Change of Control Election, the Company will redeem (but only out of funds legally available therefor) any or all of such holder's shares of Series D Preferred Stock at a redemption price equal to the Liquidation Preference thereof plus (without duplication) the amount of declared and unpaid dividends as of the Change of Control Payment Date and (iii) the procedure which the holder must follow to exercise the Change of Control Election. To exercise the Change of Control Election, a holder of the Series D Preferred Stock must deliver, during the 30-day period referred to in Section 5(a) hereof, written notice to the Company (or an agent designated by the Company for such purpose) of the holder's exercise of the Change of Control Election, accompanied by each certificate 5 evidencing shares of the Series D Preferred Stock with respect to which the Change of Control Election is being exercised, duly endorsed for transfer to the Company. On or prior to the third (3rd) Business Day after the end of such 30-day period or after such earlier date as elections are received from all holders of the Series D Preferred Stock (the "Change of Control Payment Date") after receipt of written notice from the Company, the Company shall redeem all shares of Series D Preferred Stock properly surrendered to the Company (or an agent designated by the Company for such purpose) during the 30-day period referred to in Section 5(a) hereof for redemption in connection with the exercise of the Change of Control Election and shall cause payment to be made on such day in cash for such shares of Series D Preferred Stock. If in connection with any Change of Control Election, the Company does not have sufficient capital and surplus legally available to redeem all of the outstanding shares of Series D Preferred Stock with respect to which a Change of Control Election has been made, the Company shall take all measures permitted under the Delaware General Corporation Law to increase the amount of its capital and surplus legally available, including, without limitation, sales of assets of the Company to the extent permitted by and subject to the terms and conditions of the Debt Documents, and the Company shall redeem as many shares of Series D Preferred Stock with respect to which the Change of Control Election has been made as it has capital and surplus legally available therefor, ratably from the holders thereof in proportion to the total number of shares tendered, and shall thereafter from time to time, as soon as it shall have capital and surplus legally available therefor, redeem as many shares of Series D Preferred Stock as it has capital and surplus available therefor until it has redeemed all of the outstanding shares of Series D Preferred Stock with respect to which the Change of Control Election has been made. (d) In the event that an Equity Sale shall occur at any time while any shares of Series D Preferred Stock are outstanding, the Company shall, to the extent permitted by and subject to the terms and conditions of the Debt Documents, subject to the prior payment in full of the liquidation preference of the Series C Preferred Stock, plus an amount equal to any declared or accrued but unpaid dividends thereon, if the same are then outstanding, redeem for cash the outstanding shares of each holder of Series D Preferred Stock, pro rata according to the number of the then outstanding shares of Series D Preferred Stock held by each holder thereof, to the extent of the remaining Available Cash from such Equity Sale after application of clause (iii)(A) and (B) below and as permitted by applicable law, at a redemption price equal to the Liquidation Preference thereof plus (without duplication) the amount of declared but unpaid dividends thereon as of the Equity Sale Payment Date (as defined below) (the "Equity Sale Redemption Price") on the terms and subject to the conditions set forth in this Section 5(f). The Company will not, and will not permit any of the Company's Subsidiaries to, directly or indirectly, consummate any Equity Sale without the vote of two-thirds of the outstanding shares of Series D Preferred Stock unless the following conditions are satisfied: (i) such Equity Sale is permitted by the Debt Documents; (ii) the Company or such Subsidiary receives consideration at the time of such Equity Sale at least equal to the fair market value (including as to the value of all non-cash consideration) of such equity, as determined in good faith by the Company's Board of Directors; provided, however, that such condition shall not be applicable if the holders of at least two-thirds of the 6 outstanding shares of Series D Preferred Stock consent to the waiver of the provisions of this clause (ii), and (iii) an amount equal to 100% of the Available Cash from such Equity Sale is applied by the Company (or such Subsidiary, as the case may be) as provided in subparagraphs (A) and (B) below; provided, however, that such condition shall not be applicable if the holders of at least two-thirds of the outstanding shares of Series D Preferred Stock consent to the waiver of the provisions of this clause (iii); (A) first, to prepay, repay, redeem or purchase indebtedness under the Debt Documents required by the Debt Documents to be prepaid, repaid or purchased; (B) second, to the extent of the balance of such Available Cash after application in accordance with Clause (A), to redeem the Series C Preferred Stock for cash if the same are then outstanding, pursuant to and subject to the conditions contained in the Series C Preferred Stock Certificate of Designations; (C) third, to the extent of the balance of such Available Cash after application in accordance with clauses (A) and (B), to redeem the Series D Preferred Stock for cash pursuant to and subject to the conditions contained in this Certificate of Designations; provided, however, that (1) in connection with any prepayment, repayment or purchase of indebtedness pursuant to clause (iii)(A) above, the Company or any such Subsidiary will permanently retire such indebtedness and will cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased, to the extent permitted by and in accordance with the terms and conditions of the Debt Documents, and (2) any application of the Available Cash from such Equity Sale shall be subject to the terms and conditions of the Debt Documents. (e) On or before the third (3rd) Business Day after an Equity Sale, the Company shall mail to all holders of record of the Series D Preferred Stock at their respective addresses as the same shall appear on the books of the Company as of such date, a notice (the "Equity Sale Notice"), which shall be irrevocable, disclosing (i) the Equity Sale, (ii) the Equity Sale Redemption Price, (iii) the identification of the shares to be redeemed, (iv) the date when holders of the Series D Preferred Stock may first surrender their shares to the Company for redemption, which date shall not be more than ten (10) Business Days after the mailing of the Equity Sale Notice (the "Equity Sale Payment Date"), (v) the place or places of payment in New York, New York and (vi) that payment will be made upon presentation and surrender of the certificate(s) evidencing the shares of Series D Preferred Stock to be redeemed; provided, that the Company will not be required to mail such notice if and to the extent that there is no balance of Available Cash for application in accordance with clause (iii)(B) of Section 5(f) above. On or after the Equity Sale Payment Date, to the extent permitted by and subject to the terms and conditions of the Debt Documents, the Company shall, to the extent of the balance of Available Cash pursuant to clause (iii)(B) of Section 5(f) above, redeem all shares of Series D Preferred 7 Stock properly surrendered to the Company (or an agent designated by the Company for such purpose) for redemption in connection with the Equity Sale Notice and shall cause payment to be made on such day in cash for such shares of Series D Preferred Stock. If, in connection with any Equity Sale Notice, there is Available Cash but the Company does not have sufficient capital and surplus legally available to redeem all of the outstanding shares of Series D Preferred Stock set forth in the Equity Sale Notice, the Company shall, to the extent permitted by and subject to the terms and conditions of the Debt Documents, take all measures permitted under the Delaware General Corporation Law to increase the amount of its capital and surplus legally available, including, without limitation, sales of assets of the Company to the extent permitted by and subject to the terms and conditions of the Debt Documents, and the Company shall redeem as many shares of Series D Preferred Stock set forth in the Equity Sale Notice as it has capital and surplus legally available therefor, ratably from the holders thereof in proportion to the total number of then outstanding shares of Series D Preferred Stock, and shall thereafter from time to time, to the extent permitted by and subject to the terms and conditions of the Debt Documents, as soon as it shall have capital and surplus legally available therefor, redeem as many shares of Series D Preferred Stock as it has capital and surplus available therefor until it has redeemed all of the shares of Series D Preferred Stock set forth in the Equity Sale Notice. (f) In the event that the Company does not have sufficient funds to take any of the actions required by this Section 5, then the Company shall, to the extent permitted by and subject to the terms and conditions of the Debt Documents, purchase, redeem or otherwise acquire the shares of Series D Preferred Stock from the holders thereof who make an election pursuant to this Section 5 pro rata according to the number of then outstanding shares of Series D Preferred Stock. Section 6. Status of Redeemed Shares. Any shares of Series D Preferred Stock which shall at any time have been redeemed pursuant to Sections 4 or 5 hereof shall, after such redemption, be retired and, upon the taking of any action required by applicable law, have the status of authorized but unissued shares of Preferred Stock, without designation as to series, and shall not be reissued as Series D Preferred Stock. Section 7. Voting Rights. (a) Except as required by law, the Series D Preferred Stock shall have no voting rights except the right to vote on the approval of certain matters set forth in Section 7(b). (b) So long as any shares of Series D Preferred Stock remain outstanding, the Company shall not, without the written consent or affirmative vote of the holders of at least two-thirds of the outstanding shares of Series D Preferred Stock, (i) amend, alter or repeal, whether by merger, consolidation, combination, reclassification or otherwise, the Certificate of Incorporation or By-laws of the Company or any provisions thereof (including the adoption of a new provision thereof), (ii) create, authorize or issue any class, series or shares of Preferred Stock or any other class of capital stock (A) ranking either as to payment of dividends or distribution of assets upon Liquidation prior to or on a parity with the Series D Preferred Stock and (B) if such securities may be redeemed, in any circumstance, on or prior to the Final Redemption Date, (iii) (A) pay, declare, make or set aside for payment any dividends or other distribution on the Common Stock or any other capital stock of the Company ranking junior to or 8 on a parity with the Series D Preferred Stock as to dividends or as to distributions upon Liquidation other than in shares of, or warrants or rights to acquire, solely Junior Stock and (B) redeem, retire, purchase or otherwise acquire for any consideration (or any payment made to or available for a sinking fund for the redemption of any such shares) any shares of capital stock of the Company ranking junior to or on a parity with the Series D Preferred Stock as to dividends or as to distributions upon Liquidation by the Company or any Subsidiary (except by conversion into or exchange for solely shares of Junior Stock) or (iv) create, incur, assume or cause or permit any of its Subsidiaries to create, incur or assume, any indebtedness for borrowed money other than any such indebtedness permitted by the Debt Documents (without giving effect to any waivers by the lenders under the Debt Documents other than for such indebtedness incurred in the ordinary course of business not to exceed $500,000 in the aggregate). The vote of the holders of at least two-thirds of the outstanding shares of Series D Preferred Stock, voting separately as one class, shall be necessary to adopt any alteration, amendment or repeal of any provision of the Certificate of Designations setting forth a copy of this Resolution, in addition to any other vote of stockholders required by law. Section 8. Certain Definitions. The following terms shall have the following respective meanings herein: "Applicable Rate" means, with respect to any dividend required to be paid pursuant to Section 2(a) hereof due to the declaration or payment of a dividend on the Common Stock, a fraction (x) the numerator of which is the dividend per share of Common Stock so declared or paid and (y) the denominator of which is the per share Fair Market Value of the Common Stock as of the close of business on the Business Day immediately preceding the record date for such dividend on the Common Stock. "Approved Option Plan" means, collectively, (i) the 1996 Stock Option Plan, as amended, 1999 Stock Option Plan for Directors, 2002 Stock Option Plan for Directors and 2000 Management Stock Option Plan, and options granted pursuant to the Services Agreement between the Company and Meridian Ventures, LLC and Thomas C. Shull and the Employment Agreements, as amended, between Thomas C. Shull and the Company, together providing for the aggregate issuance of not more than 33,200,000 shares of Common Stock thereunder (subject to adjustment as therein provided for certain capital events) and (ii) a stock option plan or plans adopted after November 10, 2003 providing for the grant of options to employees and directors of the Company to purchase not more than 1,800,000 shares of Common Stock at an exercise price per share as of the date of the grant not less than the fair market value per share of Common Stock as of the date of the grant. "Available Cash" from an Equity Sale means cash payments, cash equivalents and Marketable Securities received therefrom after payment of underwriting discounts, placement fees or similar commissions. "Business Day" means a day other than a Saturday, Sunday or day on which banking institutions in New York are authorized or required to remain closed. 9 "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Chelsey" means Chelsey Finance, LLC and its affiliates and its and their respective successors and assigns. "Congress" means Congress Financial Corporation, and its affiliates and their respective successors and assigns (including, without limitation, any replacement or take out lender with respect to the Debt Documents). "Common Stock" means the common stock, par value $0.01 per share, of the Company or any other Capital Stock of the Company into which such stock is reclassified or reconstituted. "Corporate Transaction" shall have the meaning set forth in Section 5(b)(3). "Debt Documents" shall mean, collectively, the Working Capital Facility Documents, the Junior Secured Term Loan Documents and the Intercreditor Agreement. "Equity Sale" means, to the extent permitted by and subject to the terms and conditions of the Debt Documents, the issuance or sale by the Company or a Subsidiary of Capital Stock of the Company or a Subsidiary (or any series of related issuances or sales) where the cumulative aggregate gross proceeds to the Company and its Subsidiaries equal or exceed $1.0 million; provided, that there shall be excluded from the foregoing the sale of Common Stock of the Company upon the exercise of options issued under an Approved Option Plan and the sale of common stock of a Subsidiary which constitutes an Asset Disposition (as defined in the Certificate of Designations with respect to the Series C Preferred Stock.). "Fair Market Value" means, per share of Common Stock, the Twenty Day Average of the average closing prices of the Common Stock's sales on all domestic securities exchanges on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ National Market System (including the NASDAQ Small Cap Market) as of 4:00 P.M., New York City time, on such day, or, if on any day the Common Stock is not quoted in the NASDAQ National Market System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the OTC Bulletin Board, or if not so reported, as reported by the Pink Sheets LLC, or any similar or successor organization (and in each such case excluding any trades that are not bona fide, arm's length transactions). If at any time the Common Stock is not listed on any domestic securities exchange or quoted in the NASDAQ National Market System or the domestic over-the-counter market, the "Fair Market Value" of the Common Stock shall be the fair market value thereof as determined (i) jointly by the Company and Chelsey if Chelsey then owns a majority in aggregate Liquidation Preference of the shares of Series D Preferred Stock then outstanding or (ii) if Chelsey and the Company cannot so agree, by an internationally recognized investment banking firm selected by Chelsey and reasonably 10 acceptable to the Company or (iii) if Chelsey does not then own a majority in aggregate liquidation preference of the shares of Series D Preferred Stock then outstanding, by an internationally recognized investment banking firm selected by the Company and reasonably acceptable to the holder of a majority in aggregate Liquidation Preference of the shares of Series D Preferred Stock then outstanding. "GAAP" means U.S. generally accepted accounting principles consistently applied. "Intercreditor Agreement" means the intercreditor and subordination agreement, dated as of July 8, 2004, between Congress and Chelsey, as acknowledged by the Company and certain Subsidiaries and affiliates of the Company, and shall include subsequent amendments, modifications, supplements, restatements and replacements thereto. "Junior Secured Term Loan Documents" means the Term Loan and Security Agreement, dated July 8, 2004, by and among Chelsey Finance, LLC, the Company and certain Subsidiaries and affiliates of the Company, together with the other agreements, documents and instruments referred to therein or at any time executed or delivered in connection therewith or related thereto, as the same exist and are in effect, in each case, as of the date hereof; provided, that the term Junior Secured Term Loan Documents shall include subsequent amendments, modifications, supplements, restatements and replacements thereto. "Junior Stock" means capital stock of the Company ranking junior to the Series D Preferred Stock both as to dividends and as to distributions upon liquidation, dissolution or winding up of the Company. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). "Liquidation Preference" means $81,868.40 per share of Series D Preferred Stock. "Marketable Securities" means publicly traded debt or equity securities that are listed for trading on a national securities exchange. "Original Issuance Date" means July 8, 2004. "Outstanding Company Common Stock" shall have the meaning set forth in Section 5. "Outstanding Company Voting Securities" shall have the meaning set forth in Section 5. "Participating Dividends" shall have the meaning set forth in Section 2(a). "Person" means and includes all natural persons, corporations, business trusts, associations, companies, partnerships, limited liability companies and other entities and governments and agencies and political subdivisions. "Preferred Stock", as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or 11 as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. "Recapitalization Agreement" shall have the meaning set forth in Section 5(b)(2). "Series C Preferred Stock" means the Series C Participating Preferred Stock of the Company. "Subsidiary" means any corporation, partnership, limited liability company, trust, association or other entity (i) at least 50% of the outstanding voting securities of which are at the time owned or controlled, directly or indirectly, by the Company or (ii) with respect to which the Company possesses, directly or indirectly, the power to direct or cause the direction of the affairs or management of such person. "Twenty Day Average" means, with respect to any prices and in connection with the calculation of Fair Market Value, the average of such prices over the twenty Business Days ending on the Business Day immediately prior to the day as of which "Fair Market Value" is being determined. "Working Capital Facility Documents" means the revolving loan and term loan facilities provided by Congress to the Company and certain of its Subsidiaries and affiliates as set forth in the Amended and Restated Loan and Security Agreement, dated November 14, 1995, as amended, by and among Congress, the Company and certain Subsidiaries and affiliates of the Company, together with the other agreements, documents and instruments referred to therein or at any time executed or delivered in connection therewith or related thereto, as the same exist and are in effect, in each case, as of the date hereof; provided, that the aggregate amount of indebtedness outstanding under the Debt Documents shall not exceed at any time $5,474,000, with respect to amounts outstanding under any term loan facilities issued pursuant to the Debt Documents, and $35,474,000 in the aggregate; provided, that the term Debt Documents shall include subsequent amendments, modifications, supplements, restatements and replacements thereto (including, without limitation, with a take out or replacement lender) so long as such amendments, modifications, supplements, restatements or replacements do not increase the amounts outstanding under term loan facilities or in the aggregate above the amounts set forth above in this paragraph. Section 9. Dividend Received Deduction. For federal income tax purposes, the Company shall report distributions on the Series D Preferred Stock as dividends, to the extent of the Company's current and accumulated earnings and profits (as determined for federal income tax purposes). Section 10. Withholding Taxes. All amounts payable with respect to the Series D Preferred Stock, including without limitation actual or "deemed" dividends thereon or payments upon redemption thereof, will be made free and clear of and without withholding or deduction for or on account of any present or future taxes, duties, levies, assessments or other governmental charges of whatever nature, including interest, penalties and additions to tax, imposed or levied by or on behalf of the United 12 States or any political subdivision thereof or any authority or agency thereof or therein having the power to tax payments in respect of the Series D Preferred Stock (all such present or future taxes, duties, levies, and assessments being hereinafter referred to as "Taxes"). If the Company shall be required by law to withhold or deduct any Taxes from or in respect of any actual or "deemed" dividend or any other sum payable in respect of the Series D Preferred Stock (i) the amount required to be withheld and/or the sum payable shall be increased as necessary so that after making all required withholdings and deductions the holders of the then outstanding shares of Series D Preferred Stock receive (or are treated as receiving) an amount equal to the amount they would have received (or been treated as receiving) had no such withholdings or deductions been made, (ii) the Company shall make such withholdings or deductions, (iii) the Company shall pay the full amount withheld and/or deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) the Company shall furnish each holder of the then outstanding shares of Series D Preferred Stock, at its address referred to in the stock records of the Company, or as otherwise noticed with respect thereto, with the original or a certified copy of a receipt evidencing payment thereof. The holders of the then outstanding shares of Series D Preferred Stock shall supply the Company with such documentation as it reasonably may request including, without limitation, Form W-8BEN. The foregoing shall not apply to any entity not subject to the withholding taxes set forth in this Section. Section 11. No Reissuance. After the Original Issuance Date, no shares of Series D Preferred Stock shall be issued or reissued as shares of Series D Preferred Stock but shall be restored to the status of authorized but unissued shares of Preferred Stock. All shares of Series D Preferred Stock surrendered for redemption or otherwise acquired by the Company or any Subsidiary shall be retired and shall not be reissued as shares of Series D Preferred Stock. Section 12. Severability. To the extent that any provision hereof is found to be invalid or unenforceable, such invalidity or unenforceability shall not affect the validity or enforceability of any other provision of this Certificate of Designations. Section 13. Delivery of Documents. The Company will deliver to any stockholder of the Company, upon its request, copies of the Debt Documents and any other agreements or documents referred to herein, as well as any amendments to the foregoing. 13 IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to be signed by Wayne P. Garten, its President, this 8th day of July, 2004. HANOVER DIRECT, INC. By: /s/ Wayne p. Garten ----------------------------- Name: Wayne P. Garten Title: President EX-10.1 3 y98976exv10w1.txt LOAN AND SECURITY AGREEMENT Exhibit 10.1 ALL AMOUNTS AT ANY TIME OWING BY THE BORROWERS UNDER THIS AGREEMENT TO THE LENDER HEREUNDER ARE SUBORDINATED IN RIGHT OF PAYMENT TO THE INDEFEASIBLE PAYMENT AND SATISFACTION IN FULL OF ALL PRESENT AND FUTURE OBLIGATIONS, LIABILITIES AND INDEBTEDNESS OF THE BORROWERS TO CONGRESS FINANCIAL CORPORATION, AND ITS SUCCESSORS AND ASSIGNS, AS PROVIDED BY AND AS OTHERWISE SUBJECT TO THE TERMS AND CONDITIONS OF THE INTERCREDITOR AND SUBORDINATION AGREEMENT, DATED AS OF THE DATE HEREOF, BETWEEN THE LENDER AND CONGRESS FINANCIAL CORPORATION. LOAN AND SECURITY AGREEMENT by and among CHELSEY FINANCE, LLC And BRAWN OF CALIFORNIA, INC. GUMP'S BY MAIL, INC. GUMP'S CORP. HANOVER REALTY, INC. HANOVER COMPANY STORE, LLC KEYSTONE INTERNET SERVICES, LLC THE COMPANY STORE GROUP, LLC DOMESTICATIONS, LLC SILHOUETTES, LLC THE COMPANY OFFICE, INC. THE COMPANY STORE FACTORY, INC. Dated as of July 8, 2004 ALL AMOUNTS AT ANY TIME OWING BY THE BORROWERS UNDER THIS AGREEMENT TO THE LENDER HEREUNDER ARE SUBORDINATED IN RIGHT OF PAYMENT TO THE INDEFEASIBLE PAYMENT AND SATISFACTION IN FULL OF ALL PRESENT AND FUTURE OBLIGATIONS, LIABILITIES AND INDEBTEDNESS OF THE BORROWERS TO CONGRESS FINANCIAL CORPORATION, AND ITS SUCCESSORS AND ASSIGNS, AS PROVIDED BY AND AS OTHERWISE SUBJECT TO THE TERMS AND CONDITIONS OF THE INTERCREDITOR AND SUBORDINATION AGREEMENT, DATED AS OF THE DATE HEREOF, BETWEEN THE LENDER AND CONGRESS FINANCIAL CORPORATION. TABLE OF CONTENTS
Page INDEX TO EXHIBITS AND ATTACHMENTS............................................... iv SECTION 1. DEFINITIONS......................................................... 1 SECTION 2. TERM LOAN........................................................... 21 2.1. Loan.................................................................... 21 2.2. Fees.................................................................... 23 2.3. Interest................................................................ 24 2.4. Conduct of Accounts..................................................... 24 2.5. Principal Payments...................................................... 26 2.6. Use of Proceeds......................................................... 27 SECTION 3. CONDITIONS PRECEDENT TO LOANS AND OTHER FINANCIAL ACCOMMODATIONS..... 27 3.1. Conditions to Loans..................................................... 27 SECTION 4. COLLATERAL........................................................... 28 4.1. Security Interests in Borrowers' Property............................... 28 4.2. Guarantees.............................................................. 29 4.3. Security Interests in Property of Guarantors............................ 29 SECTION 5. REPRESENTATIONS AND WARRANTIES....................................... 30 5.1. Organization............................................................ 30 5.2. Corporate Power and Authority........................................... 30 5.3. Capitalization; Solvency................................................ 31 5.4. Compliance with Other Agreements and Applicable Law..................... 31 5.5. Environmental Compliance................................................ 32 5.6. Governmental Approval................................................... 33 5.7. State of Formation; Mailing Addresses................................... 33 5.8. Priority of Liens; Title to Properties.................................. 34 5.9. Taxes................................................................... 34 5.10. Litigation.............................................................. 34 5.11. Intellectual Property................................................... 35 5.12. Employee Benefits....................................................... 36 5.13. Investment Company...................................................... 36 5.14. Regulation U; Securities Exchange Act of 1934........................... 37 5.15. No Material Adverse Change.............................................. 37 5.16. Financial Statements.................................................... 37 5.17. Disclosure.............................................................. 38 5.18. Labor Disputes.......................................................... 38 5.19. Corporate Name; Prior Transactions...................................... 38 5.20. Schedule of Indebtedness................................................ 38 5.21. Common Enterprise....................................................... 39 5.22. Subordination of Certain Obligations.................................... 39
i SECTION 6. ADDITIONAL COVENANTS................................................. 39 6.1. Tradenames.............................................................. 40 6.2. Subsidiaries............................................................ 40 6.3. Indebtedness............................................................ 41 6.4. Limitation on Liens..................................................... 41 6.5. Loans; Investments; Guarantees; Etc..................................... 42 6.6. Transactions with Affiliates............................................ 43 6.7. Maintenance of Existence................................................ 44 6.8. Sale and Leasebacks..................................................... 45 6.9. Sale of Assets, Consolidation, Merger, Dissolution, Etc................. 45 6.10. Compliance with Laws, Regulations, Etc.................................. 45 6.11. Compliance with Environmental Laws...................................... 46 6.12. Payment of Taxes and Claims............................................. 47 6.13. Properties in Good Condition............................................ 48 6.14. Insurance............................................................... 49 6.15. Compliance with ERISA................................................... 50 6.16. Notice of Default....................................................... 51 6.17. Financial Statements and Other Information.............................. 51 6.18. Consolidated Working Capital............................................ 51 6.19. Consolidated Net Worth.................................................. 52 6.20. Further Assurances...................................................... 52 6.21. Sales of Outdated and Surplus Inventory................................. 53 6.22. Maintenance and Delivery of Customer Lists; MACS Software............... 53 6.23. Rental or License of Customer Lists..................................... 53 6.24. No Termination or Amendment of Credit Card Agreements................... 54 6.25. Obligations to be Senior Indebtedness................................... 54 6.26. Litigation Notices...................................................... 54 6.27. Capital Expenditures.................................................... 55 6.28. EBITDA.................................................................. 55 SECTION 7. EVENTS OF DEFAULT AND REMEDIES....................................... 57 7.1. Events of Default....................................................... 57 7.2. Remedies................................................................ 60 SECTION 8. COLLECTION AND ADMINISTRATION........................................ 63 8.1. Receipts................................................................ 63 8.2. Right of Inspection; Access............................................. 63 8.3. Specific Powers......................................................... 63 SECTION 9. EFFECTIVE DATE; TERMINATION; COSTS; MISCELLANEOUS.................... 64 9.1. Term.................................................................... 64 9.2. Expenses and Additional Fees............................................ 65 9.3. Survival of Agreement................................................... 66 9.4. No Waiver; Remedies Cumulative.......................................... 66 9.5. Notices................................................................. 66 9.6. Entire Agreement........................................................ 67 9.7. Amendments and Waivers.................................................. 67 9.8. Applicable Law.......................................................... 67 9.9. Successors and Assigns.................................................. 68
ii 9.10. Indemnification......................................................... 68 9.11. Severability............................................................ 68 9.12. Headings................................................................ 69 9.13. Security Interests of Participants...................................... 69 9.14. WAIVER OF JURY TRIAL.................................................... 69 9.15. Waiver of Counterclaims; Jurisdiction; Service of Process............... 69 9.16. Counterparts............................................................ 70
iii INDEX TO EXHIBITS AND ATTACHMENTS EXHIBIT A JURISDICTIONS OF QUALIFICATION Section 5.1 EXHIBIT B-1 EXISTING SUBSIDIARIES Section 5.1 EXHIBIT B-2 EXISTING RESTAURANT BUSINESS SUBSIDIARIES Section 5.1 EXHIBIT B-3 ADDITIONAL EXISTING NON-GUARANTOR SUBSIDIARIES Section 5.1 EXHIBIT C STATES OF INCORPORATION AND CHIEF EXECUTIVE Section 5.7 OFFICES EXHIBIT D EXISTING LIENS Section 5.8 EXHIBIT E PENDING LITIGATION Section 5.10 EXHIBIT F TRADENAMES Sections 5.19, 6.1 EXHIBIT G-1 EXISTING INDEBTEDNESS Section 5.20 EXHIBIT G-2 EXISTING LETTERS OF CREDIT Section 5.20 EXHIBIT H LIST OF LABOR DISPUTES Section 5.18 EXHIBIT I ENVIRONMENTAL DISCLOSURE Section 5.5 ATTACHMENT I FORM OF TERM NOTES Section 3.1(d) ATTACHMENT II FORM OF SERIES D PREFERRED WARRANT Section 3.1(c) ATTACHMENT III FORM OF COMMON STOCK WARRANT Section 3.1(c) ATTACHMENT IV FORM OF GUARANTEE Section 3.1(e)
iv ALL AMOUNTS AT ANY TIME OWING BY THE BORROWERS UNDER THIS AGREEMENT TO THE LENDER HEREUNDER ARE SUBORDINATED IN RIGHT OF PAYMENT TO THE INDEFEASIBLE PAYMENT AND SATISFACTION IN FULL OF ALL PRESENT AND FUTURE OBLIGATIONS, LIABILITIES AND INDEBTEDNESS OF THE BORROWERS TO CONGRESS FINANCIAL CORPORATION, AND ITS SUCCESSORS AND ASSIGNS, AS PROVIDED BY AND AS OTHERWISE SUBJECT TO THE TERMS AND CONDITIONS OF THE INTERCREDITOR AND SUBORDINATION AGREEMENT, DATED AS OF THE DATE HEREOF, BETWEEN THE LENDER AND CONGRESS FINANCIAL CORPORATION. LOAN AND SECURITY AGREEMENT (this "Agreement"), dated as of July 8, 2004, by and among Chelsey Finance, LLC, a Delaware limited liability company ("Lender", as hereinafter further defined), BRAWN OF CALIFORNIA, INC., a California corporation ("Brawn"), GUMP'S BY MAIL, INC., a Delaware corporation ("GBM"), GUMP'S CORP., a California corporation ("Gump's"), HANOVER REALTY, INC., a Virginia corporation ("Hanover Realty"), THE COMPANY STORE FACTORY, INC., a Delaware corporation ("TCS Factory"), THE COMPANY OFFICE, INC., a Delaware corporation ("TCS Office"), SILHOUETTES, LLC, a Delaware limited liability company ("Silhouettes LLC"), HANOVER COMPANY STORE, LLC, a Delaware limited liability company ("HCS LLC"), DOMESTICATIONS, LLC, a Delaware limited liability company ("Domestications LLC"), KEYSTONE INTERNET SERVICES, LLC, a Delaware limited liability company ("KIS LLC"), and THE COMPANY STORE GROUP, LLC, a Delaware limited liability company ("CSG LLC"; and, together with Brawn, GBM, Gump's, Hanover Realty, TCS Factory, TCS Office, Silhouettes LLC, HCS LLC, Domestications LLC and KIS LLC, collectively, "Borrowers" and each, individually, a "Borrower"). W I T N E S S E T H : WHEREAS, Borrowers operate a direct mail order and retail merchandise business and also provide a range of Internet, e-commerce and fulfillment services to businesses; and WHEREAS, Borrowers have requested that Lender make a junior secured term loan to Borrowers; and WHEREAS, Lender is willing to make such loan, subject to the terms and conditions set forth herein and in the other Financing Agreements (as hereinafter defined); NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements herein contained and other good and valuable consideration, the adequacy and receipt of which is hereby acknowledged, Lender and Borrowers hereby mutually covenant, warrant and agree as follows (the covenants, warranties and agreements of Borrowers, except as otherwise expressly set forth herein, being joint and several). SECTION 1. DEFINITIONS For the purposes of this Agreement, the following terms shall have the respective meanings given to them below: 1.1. "Account Debtor" shall mean account debtor, as such term is defined in the UCC, including, without limitation, each debtor or obligor in any way obligated on or in connection with any Account. 1.2. "Accounts" shall mean, as to any Person, all present and future rights of such Person to payment of a monetary obligation, whether or not earned by performance, which is not evidenced by chattel paper or an instrument, (A) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (B) for services rendered or to be rendered, (C) for a secondary obligation incurred or to be incurred, or (D) arising out of the use of a credit or charge card or information contained on or for use with the card. 1.3. "ADT LLC" shall mean American Down & Textile, LLC, a Delaware limited liability company, and its successors and assigns. 1.4. "Affiliate" shall mean with respect to a specified Person, a partnership, corporation or any other Person which, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with such Person, and without limiting the generality of the foregoing, includes, with respect to a Person (a) any other Person which beneficially owns or holds twenty percent (20%) or more of any class of voting securities or other securities convertible into voting securities of such Person or beneficially owns or holds twenty percent (20%) or more of any other equity interests in such Person, (b) any other Person with respect to which such Person beneficially owns or holds twenty percent (20%) or more of any class of voting securities or other securities convertible into voting securities of such Person, or owns or holds twenty percent (20%) or more of the equity interests of the other Person, and (c) any director, officer or employee of such Person. For purposes of this definition, the term "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. Notwithstanding the foregoing, for purposes of this Agreement and the other Financing Agreements, Lender and Chelsey Direct, LLC shall be deemed not to be an Affiliate of Borrowers. 1.5. "Affiliated Borrower Group" shall mean each of Borrowers, Guarantors, and any other entity that is now or hereafter a direct or indirect Subsidiary of Hanover, other than a Non-Guarantor Subsidiary. 1.6. "Asset Sale" shall mean, as to Gump's, GBM, Brawn, Silhouettes LLC, ADT LLC, and Scandia Down LLC, any sale, conveyance or other disposition (including, without limitation, any sale or other disposition of Capital Stock of Gump's, GBM, Brawn, Silhouettes LLC, ADT LLC or Scandia Down LLC or disposition by way of merger or consolidation) of the Gump's Main Store Assets, the GBM Catalog Assets, the International Male Catalog Assets, the Silhouettes Catalog Assets, the Scandia Down Assets, and the General Intangibles related to the Gump's Main Store Assets, the GBM Catalog Assets, the International Male Catalog Assets, the Silhouettes Catalog Assets and the Scandia Down Assets, except in each case, for transactions in the ordinary course of business consistent with past practices previously disclosed to Lender. 1.7. "Bankruptcy Code" shall mean the United States Bankruptcy Code, being Title 11 of the United States Code as enacted in 1978, as the same may have heretofore been or may hereafter be amended, recodified, modified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 2 1.8. "Board" shall mean the Board of Governors of the Federal Reserve System, and any successor or replacement board, governmental agency or other entity having the same or similar authority and responsibilities. 1.9. "Borrowers" shall mean, jointly and severally, individually and collectively, Brawn, GBM, Gump's, Hanover Realty, TCS Factory, TCS Office, Silhouettes LLC, HCS LLC, Domestications LLC, KIS LLC, and CSG LLC. 1.10. "Brawn" shall mean Brawn of California, Inc., a California corporation, and its successors and assigns. 1.11. "Brawn Term Loan" shall have the meaning set forth in Section 2.1. 1.12. "Brawn Term Note" shall mean that certain Term Note, in form and substance satisfactory to Lender, made by Brawn in favor of the Lender, in the form attached hereto as Attachment I, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.13. "Business Day" shall mean any day other than a Saturday, Sunday, or other day on which commercial banks are authorized or required to close under the laws of the State of New York or the State of North Carolina, and a day on which Lender is open for the transaction of business. 1.14. "Capital Expenditures" shall mean (A) all expenditures for any fixed or capital assets or improvements, for all replacements, substitutions or additions thereto, which should be capitalized on a balance sheet in accordance with GAAP, whether acquired by way of purchase, capital or finance lease, increased product service charges, offset items or otherwise, plus (B) to the extent not included in clause (A), any expenditures for any fixed or capital assets or improvements in connection with the acquisition, construction, expansion or improvement of any present or future fulfillment center or warehouse facility owned, leased or otherwise used by Borrowers. 1.15. "Capital Stock" shall mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock at any time outstanding, and any and all rights, warrants or options exchangeable for or convertible into such capital stock (but excluding any debt security that is exchangeable for or convertible into such capital stock). 1.16. "Certificate of Designation of the Series C Preferred Stock" shall mean the Certificate of the Designations, Powers, Preferences and Rights of Series C Participating Preferred Stock of Hanover Direct, Inc. filed with the Delaware Secretary of State, as the same exists on the date hereof or may thereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.17. "Change of Control" shall mean: (a) other than an Asset Sale by a Lender, the transfer (in one transaction or a series of transactions) of all or substantially all of the assets of any Borrower or Guarantor to any Person or group (as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934); (b) the liquidation or dissolution of any Borrower or 3 Guarantor or the adoption of a plan by the stockholders of any Borrower or Guarantor relating to the dissolution or liquidation of such Borrower or Guarantor; (c) the acquisition by any Person or group (as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934), except for one or more Permitted Holders, of beneficial ownership, directly or indirectly, of a majority of the voting power of the total outstanding voting stock or shares or interests of Hanover or the Board of Directors of Hanover; (d) during any period of two (2) consecutive years, individuals who at the beginning of such period constituted the Board of Directors of Hanover (together with any new directors who have been appointed by any Permitted Holder, or whose nomination for election by the stockholders of Hanover was approved by a vote of at least sixty-six and two-thirds (66 2/3%) percent of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason (other than by reason of death or disability) to constitute a majority of the Board of Directors of Hanover then still in office; or (e) other than an Asset Sale by a Lender, the failure of Hanover to own directly or indirectly one hundred (100%) percent of the voting power of the total outstanding voting stock or shares or interests of any Borrower or Guarantor (other than Hanover). 1.18. "Chelsey" shall mean Chelsey Finance, LLC, a Delaware limited liability company, and its successors and assigns. 1.19. "Clearance World" shall mean Clearance World Outlets, LLC, a Delaware limited liability company, and its successors and assigns. 1.20. "Closing Date" shall mean the date on which the Term Loans are funded after the fulfillment or waiver by Lender of each condition set forth on Section 3.1. 1.21. "Collateral" shall have the meaning set forth in Section 4 hereof. 1.22. "Common Stock Warrant" shall mean that certain warrant, in form and substance acceptable to Lender, in the form attached hereto as Attachment III. 1.23. "Congress" shall mean Congress Financial Corporation, a Delaware corporation, and its successors and assigns. 1.24. "Congress Credit Agreements" shall mean, (i) that certain Loan and Security Agreement (as used in this definition of Congress Credit Agreements, the "Congress Loan Agreement"), by and among Congress, Borrowers, and Guarantors, dated November 14, 1995, as amended by the First Amendment to Loan and Security Agreement, dated February 22, 1996, the Second Amendment to Loan and Security Agreement, dated April 16, 1996, the Third Amendment to Loan and Security Agreement, dated May 24, 1996, the Fourth Amendment to Loan and Security Agreement, dated May 31, 1996, the Fifth Amendment to Loan and Security Agreement, dated September 11, 1996, the Sixth Amendment to Loan and Security Agreement, dated as of December 5, 1996, the Seventh Amendment to Loan and Security Agreement, dated as of December 18, 1996, the Eighth Amendment to Loan and Security Agreement, dated as of March 26, 1997, the Ninth Amendment to Loan and Security Agreement, dated as of April 18, 1997, the Tenth Amendment to Loan and Security Agreement, dated as of October 31, 1997, the Eleventh Amendment to Loan and Security Agreement, dated as of March 25, 1998, the Twelfth 4 Amendment to Loan and Security Agreement, dated as of September 30, 1998, the Thirteenth Amendment to Loan and Security Agreement, dated as of September 30, 1998, the Fourteenth Amendment to Loan and Security Agreement, dated as of February 28, 2000, the Fifteenth Amendment to Loan and Security Agreement, dated as of March 24, 2000, the Sixteenth Amendment to Loan and Security Agreement, dated as of August 8, 2000, the Seventeenth Amendment to Loan and Security Agreement, dated as of January 5, 2001, the Eighteenth Amendment to Loan and Security Agreement, dated as of November 12, 2001, the Nineteenth Amendment to Loan and Security Agreement, dated as of December 18, 2001, the Twentieth Amendment to Loan and Security Agreement, dated as of March 5, 2002, the Twenty-First Amendment to Loan and Security Agreement, dated as of March 21, 2002, the Twenty-Second Amendment to Loan and Security Agreement, dated as of August 16, 2002, the Twenty-Third Amendment to Loan and Security Agreement, dated as of December 27, 2002, the Twenty-Fourth Amendment to Loan and Security Agreement, dated as of February 27, 2003, the Twenty-Fifth Amendment to Loan and Security Agreement, dated as of April 21, 2003, the Twenty-Sixth Amendment to Loan and Security Agreement, dated as of August 29, 2003, the Twenty-Seventh Amendment to Loan and Security Agreement, dated as of October 31, 2003, the Twenty-Eighth Amendment to Loan and Security Agreement, dated as of November 4, 2003, the Twenty-Ninth Amendment to Loan and Security Agreement, dated as of November 25, 2003, the Thirtieth Amendment to Loan and Security Agreement, dated as of March 25, 2004 and the Thirty-First Amendment to Loan and Security Agreement, dated as of the date hereof, as such Congress Loan Agreement may be further amended, modified, supplemented, extended, renewed, restated or replaced and (ii) the Financing Agreements, as such term is defined in the Congress Loan Agreement. 1.25. "Consolidated Net Income" shall mean, with respect to any Person and its Subsidiaries for any period, the aggregate of the net income (loss) of such Person and its Subsidiaries, on a consolidated basis, for such period (excluding to the extent included therein any extraordinary or unusual and non-recurring gains) after deducting all charges which should be deducted before arriving at the net income (loss) for such period and, without duplication, after deducting the Provision for Taxes for such period, all as determined in accordance with GAAP; provided, that, (A) the net income of any Person that is not a wholly-owned Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid or payable to such Person or a wholly-owned Subsidiary of such Person; (B) except to the extent included pursuant to the foregoing clause, the net income of any Person accrued prior to the date it becomes a wholly-owned Subsidiary of such Person or is merged into or consolidated with such Person or any of its wholly-owned Subsidiaries or that Person's assets are acquired by such Person or by its wholly-owned Subsidiaries shall be excluded; and (C) the net income (if positive) of any wholly-owned Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such wholly-owned Subsidiary to such Person or to any other wholly-owned Subsidiary of such Person is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such wholly-owned Subsidiary shall be excluded. For the purposes of this definition, (1) net income excludes any gain (or loss) together with any related Provision for Taxes for such gain (or loss) realized upon the sale or other disposition of any assets that are not sold in the ordinary course of business (including, without limitation, Asset Sales and dispositions pursuant to sale and leaseback transactions) or of any Capital Stock of such Person or a Subsidiary of such Person 5 and any net income realized or loss incurred as a result of changes in accounting principles or the application thereof to such Person, (2) the term "Provision for Taxes" shall mean an amount equal to all taxes imposed on or measured by net income, whether Federal, State, Provincial, county or local, and whether foreign or domestic, that are paid or payable by any Person in respect of any period in accordance with GAAP, and (3) the term "Capital Stock" shall mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock at any time outstanding, and any and all rights, warrants or options exchangeable for or convertible into such capital stock (but excluding any debt security that is exchangeable for or convertible into such capital stock). 1.26. "Consolidated Net Worth" shall mean, as to any Person, at any time, in accordance with generally accepted accounting principles, as in effect from time to time consistently applied, on a consolidated basis for such Person and its Subsidiaries, the amount equal to the result obtained by taking total assets and subtracting therefrom total liabilities of such Person and its Subsidiaries; provided, however, (a) that, solely for purposes of calculating Consolidated Net Worth of Hanover and its Subsidiaries each fiscal month, to the extent that goodwill or intangible assets (or both) of Hanover or its Subsidiaries is impaired under the provisions of Financial Accounting Standards No. 142 ("FAS No. 142"), such that Hanover is required pursuant to FAS No. 142 to take a charge to write off part or all of goodwill or intangible assets (or both) of Hanover or its Subsidiaries, then such write off of goodwill or intangible assets (or both) shall not be considered a reduction of total assets of such Subsidiaries or Hanover, (b) solely for purposes of calculating Consolidated Net Worth of Hanover and its Subsidiaries for each fiscal month commencing with the fiscal month in which Hanover would be required under GAAP to account for the gain (or charge) referred to in this subsection (b) and subject to any adjustment with respect to the Kaul Litigation as required by the Congress Credit Agreements, (i) if the outcome of the Kaul Litigation is unfavorable to Hanover (after final disposition of any pending appeals) such that Hanover shall be required to increase its reserves for losses on its books that results in a charge to income under GAAP, then Hanover may exclude up to $2,000,000 of any such charges to the calculation of income, and (ii) if the outcome of the Kaul Litigation is favorable to Hanover (after final disposition of any pending appeals) such that Hanover shall be required to decrease its reserves for losses on its books that results in a gain to income under GAAP, then Hanover shall exclude up to $2,000,000 of any gain to the calculation of income, and (c) solely for purposes of calculating Consolidated Net Worth of Hanover and its Subsidiaries for each fiscal month to the extent that the provisions of Financial Accounting Standards No.150 ("FAS No.150") would not require Hanover to treat the Series C Participating Preferred Stock as a financial instrument and would not require Hanover to classify the liquidation preference feature of the Series C Participating Preferred Stock as a liability as provided by FAS 150, then the aggregate amounts of accretion for the liquidation preference of the Series C Participating Preferred Stock (utilizing the interest method of accounting) shall nevertheless be considered liabilities for purposes of determining compliance during applicable measurement periods set forth in Section 6.19. 1.27. "Consolidated Working Capital" shall mean as to any Person, at any time, in accordance with generally accepted accounting principles as in effect from time to time, consistently applied, on a consolidated basis for such Person and its Subsidiaries, the amount equal to the difference between: (a) the aggregate net book value of all assets of such Person and its Subsidiaries, on a consolidated basis, which would, in accordance with generally accepted 6 accounting principles as in effect from time to time, consistently applied, be classified as current assets, calculating the book value of Inventory for this purpose on a first-in-first-out basis, and (b) all Indebtedness (including, for this purpose, notwithstanding clause (c) of the definition of Indebtedness, trade accounts payable incurred in the ordinary course of business whether current or any number of days past due) of such Person and its Subsidiaries, on a consolidated basis, which would in accordance with generally accepted accounting principles as in effect from time to time, consistently applied, be classified as current liabilities; provided, however, that solely for purposes of calculating Consolidated Working Capital hereunder, the outstanding balance of the Senior Credit Facility and the amount of Obligations owing under the Financing Agreements shall not be considered current liabilities; provided, further, that, solely for purposes of calculating Consolidated Working Capital of Hanover and its Subsidiaries for each fiscal month commencing with the fiscal month in which Hanover would be required under GAAP to account for the gain (or charge) referred to in this proviso and subject to any adjustment with respect to the Kaul Litigation as required by the Congress Credit Agreements, (i) if the outcome of the Kaul Litigation is unfavorable to Hanover (after final disposition of any pending appeals) such that Hanover shall be required to increase its reserves for losses on its books that results in a decrease in asset charge to income under GAAP, then Hanover may exclude up to $2,000,000 of any such charges to the calculation of income, and (ii) if the outcome of the Kaul Litigation is favorable to Hanover (after final disposition of any pending appeals) such that Hanover shall be required to decrease its reserves for losses on its books that results in a gain to income under GAAP, then Hanover shall exclude up to $2,000,000 of any gain to the calculation of income. 1.28. "Copyright Collateral Assignment and Security Agreement" shall mean that certain Copyright Collateral Assignment and Security Agreement, dated on or about the date hereof, by and among Gump's, HCS LLC, Domestications LLC, and Lender, providing for, among other things, the grant by Borrowers of a security interest in the copyrights of such Borrowers. 1.29. "Credit Card Agreements" shall mean all agreements now or hereafter entered into by a Borrower or a Guarantor with any Credit Card Issuer or any Credit Card Processor, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.30. "Credit Card Issuer" shall mean any person (other than Borrower) who issues or whose members issue credit cards, including, without limitation, MasterCard or VISA bank credit or debit cards or other bank credit or debit cards issued through MasterCard International, Inc., Visa, U.S.A., Inc. or Visa International and American Express, Discover, Diners Club, Carte Blanche and other non-bank credit or debit cards, including, without limitation, credit or debit cards issued by or through American Express Travel Related Services Company, Inc. and Novus Services, Inc. 1.31. "Credit Card Processor" shall mean any servicing or processing agent or any factor or financial intermediary who facilitates, services, processes or manages the credit authorization, billing transfer and/or payment procedures with respect to any of Borrower's or Guarantor's sales transactions involving credit card or debit card purchases by customers using credit cards or debit cards issued by any Credit Card Issuer, and shall include, without limitation, Paymentech and Capital One. 7 1.32. "Credit Card Receivables" shall mean, collectively, all present and future rights of Borrower or a Guarantor to payment from any Credit Card Issuer or Credit Card Processor, including, without limitation, all receivables arising from sales of goods or rendition of services to customers who have purchased such goods or services using a credit or debit card and all present and future rights of Borrower to payment from any Credit Card Issuer, Credit Card Processor or other third party in connection with the sale or transfer of Accounts arising pursuant to the sale of goods or rendition of services to customers who have purchased such goods or services using a credit card or a debit card, including, but not limited to, all amounts at any time due or to become due from any Credit Card Issuer or Credit Card Processor under the Credit Card Agreements or otherwise. 1.33. "CSG LLC" shall mean The Company Store Group, LLC, a Delaware limited liability company, and its successors and assigns. 1.34. "CSG LLC Term Loan" shall have the meaning set forth in Section 2.1. 1.35. "CSG LLC Term Note" shall mean that certain Term Note, in form and substance satisfactory to Lender, made by CSG LLC in favor of the Lender, in the form attached hereto as Attachment I, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.36. "Customer Lists" shall mean the existing and future mailing and customer lists used in the direct mail marketing business of Borrowers, together with all software (including, without limitation, all manuals, upgrades, modifications, enhancements and additions thereto), computer tapes, disks, other electronic data storage media, documentation of file and record formats and source code and all other property useful or necessary to gain access to, transfer and fully utilize for all purposes, including, without limitation, analysis, cross-checking and compilation of, and the sale, rental or license of such mailing and customer lists, together with all updates and additions thereto, including, without limitation, all such mailing and customer lists which may be purchased, created or compiled in the future, but not including any customer lists owned by third parties who are not Affiliates of Borrowers, which are leased to, or otherwise licensed for use by Borrowers, with permission of such third party owners. 1.37. "Discover Lien" shall mean that certain security interest granted by Hanover in favor of Discover Financial Services, Inc. on deposit accounts pursuant to that certain Merchant Services Agreement, dated October 14, 1986 and amended to date, by and between Hanover and Discover Financial Services, Inc. 1.38. "DM Advertising" shall mean D.M. Advertising, LLC, a Delaware limited liability company, and its successors and assigns. 1.39. "Domestications LLC" shall mean Domestications, LLC, a Delaware limited liability company, and its successors and assigns. 1.40. "Domestications LLC Term Loan" shall have the meaning set forth in Section 2.1. 8 1.41. "Domestications LLC Term Note" shall mean that certain Term Note, in form and substance satisfactory to Lender, made by Domestications LLC in favor of the Lender, in the form attached hereto as Attachment I, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.42. "EBITDA" shall mean, as to any Person and its Subsidiaries, with respect to any period, an amount equal to: (A) the Consolidated Net Income of such Person and its Subsidiaries for such period determined in accordance with GAAP, plus (B) depreciation, amortization and other non-cash charges (including, but not limited to, imputed interest and deferred compensation) for such period (to the extent deducted in the computation of Consolidated Net Income of such Person), all in accordance with GAAP, plus (1) Interest Expense for such period (to the extent deducted in the computation of Consolidated Net Income of such Person), plus (2) charges for Federal, State, local and foreign income taxes for such period (to the extent deducted in the computation of Consolidated Net Income of such Person). For purposes of this definition, EBITDA for any period (i) shall include all cash payments, charges or expenditures made by any Borrower pursuant to the Series C Participating Preferred Agreements for such period (to the extent deducted in the computation of Consolidated Net Income), all in accordance with GAAP and (ii) shall exclude any non-cash payments, charges and expenditures made by any Borrower or Guarantor pursuant to the Series C Participating Preferred Agreements, all in accordance with GAAP, only if such exclusions are approved in writing by Lender in its good faith judgment. 1.43. "Environmental Laws" shall mean all federal, state and local laws, rules, regulations, ordinances, and consent decrees relating to health, hazardous substances, pollution and environmental matters, as now or at any time hereafter in effect, applicable to the Borrowers' business and facilities (whether or not owned by it), including laws relating to emissions, discharges, releases or threatened releases of pollutants, contamination, chemicals, or hazardous, toxic or dangerous substances, materials or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals, or hazardous, toxic or dangerous substances, materials or wastes. 1.44. "Equipment" shall mean, as to any Person, all of such Person's now owned and hereafter acquired equipment, wherever located, including machinery, data processing and computer equipment and computer hardware and software (whether owned or licensed and including embedded software), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located; provided, however, Equipment shall not include any rights or interests in any computer software (unless embedded) if under the terms of the contract or license agreement with respect to such software, the grant of a security interest or lien therein to Lender is prohibited and such prohibition has not been or is not waived or the consent of the other party to such contract or license agreement has not been obtained or under applicable law such prohibition cannot be waived, except, the foregoing exclusion shall in no way be construed (A) to apply if any such prohibition is unenforceable under Sections 9-406, 9-407 or 9-408 of the UCC or other applicable law or (B) so as to limit, impair or otherwise affect Lender's unconditional continuing security interests in and liens upon any rights or interests of 9 Borrowers in or to monies due or to become due under any such contract or license agreement (including any Receivables). 1.45. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same now exists or may hereafter from time to time be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.46. "Event of Default" shall have the meaning set forth in Section 7.1 hereof. 1.47. "Financing Agreements" shall mean this Agreement, the Mortgages, the Guarantee, the Term Notes, the Intercompany Subordination Agreement, the General Security Agreements, the Pledge and Security Agreements, the Copyright Collateral Assignment and Security Agreement, and the Trademark Collateral Assignment and Security Agreement, together with all supplements, agreements, documents and instruments, heretofore, now or at any time hereafter executed and/or delivered to Lender in connection therewith or otherwise relating to this Agreement, the Obligations of Borrowers or the Collateral, as this Agreement and the foregoing and such supplements, agreements, documents and instruments now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.48. "GAAP" shall mean generally accepted accounting principles in the United States of America in effect from time to time. 1.49. "GBM" shall mean Gump's By Mail, Inc., a Delaware corporation, and its successors and assigns. 1.50. "GBM Catalog Assets" shall mean all of the assets and properties of GBM and the General Intangibles of CSG LLC, in each case, that are primarily related to or primarily used in connection with or arise from the sale of merchandise or services through the "Gump's By Mail" mail order catalog business, including, without limitation, all Accounts, Inventory, Customer Lists and other General Intangibles so related, used or sold. 1.51. "GBM Term Loan" shall have the meaning set forth in Section 2.1. 1.52. "GBM Term Note" shall mean that certain Term Note, in form and substance satisfactory to Lender, made by GBM in favor of the Lender, in the form attached hereto as Attachment I, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.53. "General Security Agreement" shall have the meaning set forth in Section 4.3. 1.54. "Guarantee" shall mean those certain Guarantees of the repayment of the Obligations, in the form attached hereto as Attachment IV, of each Guarantor and a cross-guaranty in the same form by each Borrower of the obligations of the other Borrowers. 1.55. "Guarantor Collateral" shall have the meaning set forth in Section 4.3. 10 1.56. "Guarantors" shall mean, individually and collectively, each of Hanover, HHFG LLC, Clearance World, Scandia Down LLC, LaCrosse LLC, DM Advertising LLC, ADT LLC, and Hanover Gifts. 1.57. "Gump's" shall mean Gump's Corp., a California corporation, and its successors and assigns. 1.58. "Gump's Main Store" shall mean the retail store operated by Gump's, known as Gump's San Francisco, located at 135 Post Street, San Francisco, California. 1.59. "Gump's Main Store Assets" shall mean all of the assets and properties of Gump's and the general intangibles of CSG LLC, in each case, that are primarily related to or primarily used in connection with or arise from the retail business and operations of the Gump's Main Store, including, without limitation, all Accounts, Inventory, and other general intangibles so related, used or sold. 1.60. "Gump's Term Loan" shall have the meaning set forth in Section 2.1. 1.61. "Gump's Term Note" shall mean that certain Term Note, in form and substance satisfactory to Lender, made by Gump's in favor of the Lender, in the form attached hereto as Attachment I, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.62. "Hanover" shall mean Hanover Direct, Inc., a Delaware corporation, and its successors and assigns. 1.63. "Hanover Gifts" shall mean Hanover Gifts, Inc., a Virginia corporation, and its successors and assigns. 1.64. "Hanover Realty" shall mean Hanover Realty, Inc., a Virginia corporation, and its successors and assigns. 1.65. "Hanover Realty Term Loan" shall have the meaning set forth in Section 2.1. 1.66. "Hanover Realty Term Note" shall mean that certain Term Note, in form and substance satisfactory to Lender, made by Hanover Realty in favor of the Lender, in the form attached hereto as Attachment I, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.67. "Hazardous Materials" shall mean any hazardous, toxic or dangerous substances, materials and wastes, including, without limitation, hydrocarbons (excluding hydrocarbons naturally occurring on the premises), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including, without limitation, materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are or become regulated under any Environmental Law 11 (including, without limitation any that are or become classified as hazardous or toxic under any Environmental Law). 1.68. "HCS LLC" shall mean Hanover Company Store, LLC, a Delaware limited liability company, and its successors and assigns. 1.69. "HCS LLC Term Loan" shall have the meaning set forth in Section 2.1. 1.70. "HCS LLC Term Note" shall mean that certain Term Note, in form and substance satisfactory to Lender, made by HCS in favor of the Lender, in the form attached hereto as Attachment I, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.71. "HHFG LLC" shall mean Hanover Home Fashions Group, LLC, a Delaware limited liability company, and its successors and assigns. 1.72. "Incipient Default" shall mean the occurrence of an event or existence of a condition which, upon the lapse of time or giving of notice or both, would constitute an Event of Default. 1.73. "Indebtedness" shall mean, as to any Person, any obligation or liability which is required by generally accepted accounting principles to be shown as part of liabilities on a balance sheet of such Person (other than trade accounts payable, incurred in the ordinary course of business that are ninety (90) days or less past due) and, in any event, shall also include: (a) obligations for borrowed money or capital leases; (b) obligations evidenced by bonds, debentures, notes or other similar instruments; (c) obligations to pay the deferred purchase price of property or for services (other than trade accounts payable incurred in the ordinary course of business that are sixty (60) days or less past due); (d) obligations or liabilities secured by a lien on any asset of the obligor thereunder, whether or not such obligation or liability is assumed; (e) contingent obligations (other than those incurred in the ordinary course of business); (f) obligations under or in connection with letters of credit; (g) obligations under acceptance facilities; and (h) any guarantees of any of the foregoing obligations. 1.74. "Indebtedness for Borrowed Money" shall mean, as to any Person, Indebtedness of the kind described in clauses (a), (b), (c), (f) or (g) described in the definition of Indebtedness, and guarantees thereof. 1.75. "Intellectual Property" shall mean, as to each Borrower, such Borrower's now owned and hereafter arising or acquired: (A) patents, patent rights, patent applications, copyrights, works which are the subject matter of copyrights, copyright registrations, trademarks, trade names, trade styles, trademark and service mark applications, and licenses and rights to use any of the foregoing; (B) all extensions, renewals, reissues, divisions, continuations, and continuations-in-part of any of the foregoing; (C) all rights to sue for past, present and future infringement of any of the foregoing; (D) inventions, trade secrets, formulae, processes, compounds, drawings, designs, blueprints, surveys, reports, manuals, and operating standards; (E) goodwill (including any goodwill associated with any trademark or the license of any trademark); (F) customer and other lists in whatever form maintained, including, without limitation the Customer Lists; (G) trade secret rights, copyright rights, rights in works of 12 authorship, domain names and domain name registration; and (H) software and contract rights relating to computer software programs, in whatever form created or maintained; provided, however, the Intellectual Property shall not include any rights or interests in any customer lists or computer software if under the terms of the contract or license agreement with respect thereto, the grant of a security interest or lien therein to Lender is prohibited and such prohibition has not been or is not waived or the consent of the other party to such contract or license agreement has not been obtained or under applicable law such prohibition cannot be waived, except, the foregoing exclusion shall in no way be construed (1) to apply if any such prohibition is unenforceable under Sections 9-406, 9-407 or 9-408 of the UCC or other applicable law or (2) so as to limit, impair or otherwise affect Lender's unconditional continuing security interests in and liens upon any rights or interests of Borrowers in or to monies due or to become due under any such contract or license agreement (including any Receivables). 1.76. "Intercompany Subordination Agreement" shall mean that certain Intercompany Subordination Agreement, dated as of the date hereof, between Lender and Hanover, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.77. "Intercreditor Agreement" shall mean that certain Intercreditor and Subordination Agreement, dated as of the date hereof, between Lender and Congress, as acknowledged by Borrowers and Guarantors, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.78. "Interest Rate" shall mean a rate of five percent (5%) per annum in excess of the Prime Rate or, after the occurrence and during the continuance of any Event of Default, or after termination hereof, a rate of seven percent (7%) per annum in excess of the Prime Rate. The Interest Rate shall increase or decrease by an amount equal to each increase or decrease, respectively, in the Prime Rate, effective on the first day of the month after any change in the Prime Rate, based on the Prime Rate in effect on the last day of the month in which any such change occurs. 1.79. "Interest Expense" shall mean, for any period, as to any Person and its Subsidiaries, all of the following as determined in accordance with GAAP: (A) total interest expense, whether paid or accrued (including the interest component of capitalized lease obligations for such period), including, without limitation, all bank fees, commissions, discounts and other fees and charges owed with respect to letters of credit, banker's acceptances or similar instruments, but excluding (1) amortization of discount and amortization of deferred financing fees and closing costs, (2) interest paid in property other than cash and (3) any other interest expense not payable in cash, minus (B) any net payments received during such period as interest income received in respect of its investments in cash and cash equivalents. 1.80. "International Male Catalog Assets" shall mean all of the assets and properties of Brawn and the general intangibles of CSG LLC, in each case, that are primarily related to or primarily used in connection with or arise from the sale of merchandise or services through the "International Male" mail order catalog business, including, without limitation, all Accounts, Inventory, Customer Lists and other General Intangibles so related, used or sold. 13 1.81. "Inventory" shall mean, as to any Person, all of such Person's now owned and hereafter existing or acquired goods, wherever located, which (A) are leased by such Person as lessor; (B) are held by such Person for sale or lease or to be furnished under a contract of service; (C) are furnished by such Person under a contract of service; or (D) consist of raw materials, work in process, finished goods or materials used or consumed in its business. 1.82. "IRC" shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.83. "Kaul Litigation" shall mean the action originally commenced on June 28, 2001 by Rakesh K. Kaul against Hanover, entitled Rakesh K. Kaul v. Hanover Direct, Inc., Civil No. 01 Civ. 6810 (DC), presently pending before the United District Court for the Southern District of New York. 1.84. "Kaul Litigation Order" shall mean an order issued by the United District Court for the Southern District of New York in the Kaul Litigation with respect to (A) the summary judgment motion filed by Rakesh K. Kaul on or about June 28, 2002 regarding the Amended Complaint filed by Rakesh K. Kaul on September 21, 2001 and the Answer, Defenses, and Counterclaims to the Amended Complaint filed by Hanover on October 11, 2001 and (A) the summary judgment motion filed by Hanover on July 3, 2002 regarding the Amended Complaint filed by Rakesh K. Kaul on September 21, 2001 and the Answer, Defenses, and Counterclaims to the Amended Complaint filed by Hanover on October 11, 2001. 1.85. "KIS LLS" shall mean Keystone Internet Services, LLC, a Delaware limited liability company, and its successors and assigns. 1.86. "KIS LLC Term Loan" shall have the meaning set forth in Section 2.1. 1.87. "KIS LLC Term Note" shall mean that certain Term Note, in form and substance satisfactory to Lender, made by KIS LLC in favor of the Lender, in the form attached hereto as Attachment I, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.88. "LaCrosse LLC" shall mean LaCrosse Fulfillment, LLC, a Delaware limited liability company, and its successors and assigns. 1.89. "Lender" shall mean Chelsey Finance, LLC, a Delaware limited liability company, and its successors and assigns. 1.90. "Mortgages" shall mean, individually and collectively, each of the following (as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced): (a) the Deed of Trust, Assignment and Security Agreement, dated as of the date hereof, by Hanover Realty in favor of Lender with respect to the Real Property and related assets of Hanover Realty in Roanoke, Virginia, (b) the Mortgage and Security Agreement, dated as of the date hereof, by TCS Factory in favor of Lender with respect to the Real Property and related assets of TCS Factory located at 2929 Airport Road, La Crosse, Wisconsin, (c) the Mortgage and Security Agreement, dated as of the date hereof, by TCS Office 14 in favor of Lender with respect to the Real Property and related assets of TCS Office located at 455 Park Plaza Drive, La Crosse, Wisconsin, (d) the Subordination of Lease, dated as of the date hereof, among TCS Factory, American Down & Textile, LLC and Lender, and (e) the Subordination of Lease, dated as of the date hereof, among TCS Office, Hanover Home Fashions Group, LLC and Lender. 1.91. "Multiemployer Plan" shall mean a "multi-employer plan" as defined in Section 4001(a)(3) of ERISA which is or was at any time during the current year or the immediately preceding six (6) years contributed to by any Borrower, Guarantor or any Affiliate that would be subject to ERISA. 1.92. "Net Proceeds" shall mean the aggregate cash proceeds received by any of Borrowers or Guarantors in respect of any Asset Sale, less the amount of any sales or transfer taxes and other direct expenses of such Borrowers or Guarantors relating to such Asset Sale. 1.93. "Non-Guarantor Subsidiary" shall mean each of the Restaurant Business Subsidiaries. In addition, Non-Guarantor Subsidiaries shall mean any Subsidiary of Hanover that: (i) is formed or acquired after the date hereof on not less than thirty (30) days prior written notice to Lender that is received by Lender prior to the occurrence of an Event of Default or Incipient Default which is continuing at the time of receipt of such notice; (ii) is not a direct or indirect Subsidiary of or in the same business as any Borrower or any Guarantor, other than Hanover; (iii) has been formed or acquired without any direct or indirect investment, whether in cash or in property, other than capital stock of any member of the Affiliated Borrower Group upon which no dividends are paid or payable (except dividends paid or payable in additional capital stock similarly restricted as to dividends), by Borrowers or any other member of the Affiliated Borrower Group and without the incurrence of any Indebtedness in connection with such acquisition, or the business to be engaged in by such Subsidiary, directly or indirectly, by any of Borrowers or any other member of the Affiliated Borrower Group; (iv) engages in no transaction, direct or indirect, with Borrowers or any other member of the Affiliated Borrower Group, other than such Subsidiary's declaration and payment to members of the Affiliated Borrower Group of dividends in its own capital stock, or the payment by such Subsidiary to Borrowers or any other member of the Affiliated Borrower Group, of overhead and other administrative charges in the ordinary course of business; and (v) obtains financing, if any, on a completely stand alone basis, i.e., not requiring any direct or indirect guarantee or other form of financial support or credit enhancement from Borrowers or any other member of the Affiliated Borrower Group, other than the non-recourse pledge of the capital stock of another Non-Guarantor Subsidiary and cross-corporate guaranties between or among Non-Guarantor Subsidiaries formed or acquired at the same time as part of a single transaction upon the consummation of which such cross- 15 guaranties are executed in favor of the provider of such stand alone financing; and subject to the right of first refusal with respect to such financings held by Congress, if Congress declines to provide such financing, provide Lender with a thirty (30) day right of first refusal to elect to provide financing to such Subsidiary on the same terms as set forth in any bona fide commitment, proposal or offer solicited or received by such Subsidiary or an Affiliate thereof. If Lender elects to exercise its right of first refusal, by written notice, within such thirty (30) day period, of Lender's willingness to provide such financing on such terms, the Seven Hundred Fifty Dollars ($750) per person per diem field examination charges of Lender plus all out-of-pocket expenses of Lender incurred in respect of its initial field work or other preliminary review and due diligence shall be payable by such Subsidiary or charged to Borrowers' loan accounts hereunder whether or not the transaction closes. If Lender does not exercise its right of first refusal, such charges and expenses of Lender shall not be charged to such Subsidiary or Borrowers' loan accounts hereunder. If any Subsidiary of Hanover formed or acquired after the date hereof at any time, with respect to clauses (ii), (iv) or (v), at any time, does not meet or no longer meets any of the foregoing requirements, such Subsidiary shall not be considered, for purposes hereof, or if initially so considered, shall lose its status as, a Non-Guarantor Subsidiary and shall be subject to all of the requirements set forth herein with respect to Subsidiaries which are members of the Affiliated Borrower Group. 1.94. "Obligations" shall mean, as to any Person, any and all now existing and hereafter arising obligations, liabilities and Indebtedness of such Person to Lender of every kind and description, however evidenced, whether direct or indirect, absolute or contingent, joint or several, secured or unsecured, due or not due, primary or secondary, liquidated or unliquidated, whether arising before, during or after the initial or any renewal term hereof or any other Financing Agreement, or after the commencement of any bankruptcy, reorganization, insolvency, receivership or similar proceeding with respect to such Person under the Bankruptcy Code or any similar statute, whether arising directly or acquired by Lender from any other Person, conditionally or as collateral security, by assignment, merger with any other Person, assumption, subrogation or otherwise (excluding participations or interests of Lender in the obligations of such Person to others), whether arising under this Agreement, the other Financing Agreements, by operation of law or otherwise and whether incurred by such Person as principal, surety, endorser, guarantor or otherwise. Without limiting the generality of the foregoing, "Obligations" shall include: (a) such Person's liability to Lender for all balances owing to Lender in any account maintained on Lender's books under this Agreement, the other Financing Agreements or under any other agreement or arrangement now or hereafter entered into between such Person and Lender, (b) such Person's liability to Lender as maker or endorser of any promissory note or other instrument for the payment of money, (c) such Person's liability to Lender under any instrument of guaranty or indemnity, or arising under or with respect to any letter of credit, acceptance, instrument, guarantee, endorsement or undertaking which Lender may make, endorse or issue to others for the account of such Person, (d) Indebtedness owing by such Person to Lender or to present Participants of or with Lender arising under or in connection with any of the foregoing types of agreements, instruments or transactions, and (e) all principal, interest, financing charges, letter of credit fees, closing fees, facility fees, unused line fees, servicing fees, early termination and other fees, commissions and expenses payable or reimbursable to Lender, including, but not limited to, reasonable attorneys', paralegals' and 16 accountants' fees and disbursements, chargeable to such Person and due from such Person under this Agreement, the other Financing Agreements, or under any other agreement or arrangement which was heretofore or may be now or hereafter entered into between such Person and Lender. Unless the context otherwise requires, the term "Obligations" refers to Obligations of Borrowers. 1.95. "Participant" shall mean any Person which at any time participates with Lender in respect of this Agreement, any Term Loan or other Obligations of Borrowers or any portion thereof. 1.96. "Permitted Holders" shall mean, collectively, Chelsey, Chelsey Direct, LLC, Chelsey Capital Profit Sharing Plan, DSJ International Resources Ltd., Stuart Feldman and William Wachtel and each of their respective Affiliates; each sometimes being referred to individually as a "Permitted Holder". 1.97. "Person" or "person" shall mean an individual, a partnership, a limited partnership, a corporation (including a business trust), a joint stock company, a trust, an unincorporated association, a joint venture, a limited liability company, a limited liability partnership or other entity or a government or any agency, instrumentality or political subdivision thereof. 1.98. "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) which any Borrower sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a Multiemployer Plan has made contributions at any time during the immediately preceding six (6) plan years. 1.99. "Pledge and Security Agreement" shall mean those certain Pledge and Security Agreements, dated on or about the date hereof, by and among (i) CSG LLC and Lender in respect of membership interests owned by it, (ii) CSG LLC and Lender in respect of capital stock interests owned by it, and (iii) Hanover and Lender in respect of membership interests owned by it, providing for, among other things, the pledge by such Persons to Lender of the equity interests in Borrowers and Guarantors held by such Persons. 1.100. "Prime Rate" shall mean the prime commercial interest rate from time to time publicly announced by Wachovia Bank, N.A., or its successors whether or not such announced rate is the best rate available at such bank. 1.101. "Purchase Money Lien" shall mean the liens meeting the requirements in Section 6.4(e) hereof. 1.102. "Real Property" shall mean all now owned and hereafter acquired real property of each Borrower, together with all buildings, structures, and other improvements located thereon and all licenses, easements and appurtenances relating thereto, wherever located, including the real property and related assets more particularly described in the Mortgages. 1.103. "Receivables" shall mean all of the following now owned or hereafter arising or acquired property of each Borrower: (A) all Accounts, including, without limitation, all Credit Card Receivables, and all monies, credit balances and other amounts due from or through or held by Credit Card Issuers, or other parties to the Credit Card Agreements, all rentals 17 or license fees receivable in respect of the sale, lease, or license of Customer Lists, all monies, securities and other property and the proceeds thereof, now or hereafter held or received by, or in transit to, Lender from or for it, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of its respective deposits (general or special), balances, sums and credits with Lender at any time existing; (B) all interest, fees, late charges, penalties, collection fees and other amounts due or to become due or otherwise payable in connection with any Account; (C) all payment intangibles of such Borrower; (D) letters of credit, indemnities, guarantees, security or other deposits and proceeds thereof issued payable to any Borrower or otherwise in favor of or delivered to any Borrower in connection with any Account; or (E) all other accounts, contract rights, chattel paper, instruments, notes, general intangibles and other forms of obligations owing to any Borrower, whether from the sale and lease of goods or other property, licensing of any property (including Intellectual Property or other general intangibles), rendition of services or from loans or advances by any Borrower or to or for the benefit of any third person (including loans or advances to any Affiliates or Subsidiaries of any Borrower) or otherwise associated with any Accounts, Inventory or general intangibles of any Borrower (including, without limitation, choses in action, causes of action, tax refunds, tax refund claims, any funds which may become payable to any Borrower in connection with the termination of any Plan or other employee benefit plan and any other amounts payable to any Borrower from any Plan or other employee benefit plan, rights and claims against carriers and shippers, rights to indemnification, business interruption insurance and proceeds thereof, casualty or any similar types of insurance and any proceeds thereof, proceeds of insurance covering the lives of employees on which any Borrower is a beneficiary, catalogs and promotional materials, Customer Lists, and all right, title and interest in and to joint ventures and other partnerships and other Persons). 1.104. "Restaurant Business Subsidiaries" shall mean, the Subsidiary of Hanover listed on Exhibit B-2 attached hereto. 1.105. "Responsible Officer" shall mean any one or more of the following: the President, Chief Executive Officer, Chief Financial Officer, Treasurer, Controller or, Secretary or General Counsel of Hanover or any Borrower. 1.106. "Scandia Down Assets" shall mean all of the assets and properties of Scandia Down LLC, Scandia and American Down and the general intangibles of CSG LLC, in each case, that are primarily related to or primarily used in connection with or arise from the sale of merchandise or services through license arrangements with retail stores and through the Scandia Down mail order catalog business, including, without limitation, all Accounts, Inventory, Customer Lists and other general intangibles so related, used or sold. 1.107. "Scandia Down LLC" shall mean Scandia Down, LLC, a Delaware limited liability company, and its successors and assigns. 1.108. "Senior Credit Facility" shall mean those certain credit facilities available to Borrowers pursuant to the Congress Credit Agreements. 1.109. "Series C Participating Preferred Agreements" shall mean, collectively (as the same now exists or as may thereafter be amended, modified, supplemented, extended, 18 renewed, restated or replaced): (A) the Certificate of Designation of the Series C Participating Preferred Stock, (B) the Series C Participating Preferred Recapitalization Agreement, and (C) all related agreements, documents and instruments executed, delivered or filed in connection with, or otherwise evidencing, the offering of Series C Participating Preferred Stock. 1.110. "Series C Participating Preferred Recapitalization Agreement" shall mean the Recapitalization Agreement, dated as of November 18, 2003, between Chelsey Direct, LLC and Hanover, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.111. "Series C Participating Preferred Stock" shall mean the Capital Stock of Hanover consisting of the Series C Participating Preferred Stock issued and outstanding. 1.112. "Series D Preferred Stock Warrant" shall mean that certain warrant, in form and substance acceptable to Lender, in the form attached hereto as Attachment II. 1.113. "Silhouettes Catalog Assets" shall mean all of the assets and properties of Silhouettes LLC and the general intangibles of CSG LLC, in each case, that are primarily related to or primarily used in connection with or arise from the sale of merchandise or services through the "Silhouettes" mail order catalog business, including, without limitation, all Accounts, Inventory, Customer Lists and other General Intangibles so related, used or sold. 1.114. "Silhouettes LLC" shall mean Silhouettes, LLC, a Delaware limited liability company, and its successors and assigns. 1.115. "Silhouettes LLC Term Loan" shall have the meaning set forth in Section 2.1. 1.116. "Silhouettes LLC Term Note" shall mean that certain Term Note, in form and substance satisfactory to Lender, made by Silhouettes LLC in favor of the Lender, in the form attached hereto as Attachment I, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.117. "Solvent" shall mean, at any time with respect to any Person, that at such time such Person (a) is able to pay its debts as they mature and has (and has a reasonable basis to believe it will continue to have) sufficient capital (and not unreasonably small capital) to carry on its business consistent with its practices as of the date hereof, and (b) the assets and properties of such Person at a fair valuation (and including as assets for this purpose at a fair valuation all rights of subrogation, contribution or indemnification arising pursuant to any guarantees given by such Person) are greater than the Indebtedness of such Person, and including subordinated and contingent liabilities computed at the amount which, such person has a reasonable basis to believe, represents an amount which can reasonably be expected to become an actual or matured liability (and including as to contingent liabilities arising pursuant to any guarantee the face amount of such liability as reduced to reflect the probability of it becoming a matured liability). 1.118. "Subsidiary" or "subsidiary" shall mean, as to any Person, any corporation, association or organization, active or inactive, as to which fifty percent (50%) or more of the outstanding voting stock or shares or interests shall now or hereafter be owned or 19 controlled, directly or indirectly, by such Person or any direct or indirect Subsidiary of such Person. 1.119. "Tax Sharing Agreement" shall mean that certain Tax Sharing Agreement, dated as of February 1, 1987, presently by and among Hanover and HDPI, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.120. "TCS Factory" shall mean The Company Store Factory, Inc., a Delaware corporation, and its successors and assigns. 1.121. "TCS Factory Term Loan" shall have the meaning set forth in Section 2.1. 1.122. "TCS Factory Term Note" shall mean that certain Term Note, in form and substance satisfactory to Lender, made by TCS Factory in favor of the Lender, in the form attached hereto as Attachment I, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.123. "TCS Office" shall mean The Company Office, Inc., a Delaware corporation and its successors and assigns. 1.124. "TCS Office Term Loan" shall have the meaning set forth in Section 2.1. 1.125. "TCS Office Term Note" shall mean that certain Term Note, in form and substance satisfactory to Lender, made by TCS Office in favor of the Lender, in the form attached hereto as Attachment I, as such note now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.126. "Term" shall have the meaning set forth in Section 9.1(a) hereof. 1.127. "Term Loans" shall mean, individually and collectively, the Brawn Term Loan, the GBM Term Loan, the Gump's Term Loan, the Hanover Realty Term Loan, the TCS Factory Term Loan, the TCS Office Term Loan, the Silhouettes LLC Term Loan, the HCS LLC Term Loan, the Domestications LLC Term Loan, the KIS LLC Term Loan and the CSG LLC Term Loan. 1.128. "Term Notes" shall mean, individually and collectively, the Brawn Term Note, the GBM Term Note, the Gump's Term Note, the Hanover Realty Term Note, the TCS Factory Term Note, the TCS Office Term Note, the Silhouettes LLC Term Note, the HCS LLC Term Note, the Domestications LLC Term Note, the KIS LLC Term Note and the CSG LLC Term Note. 1.129. "Thirty-First Amendment to the Congress Loan Agreement" shall mean that certain Thirty-First Amendment to the Congress Loan Agreement, dated as of the date hereof. 1.130. "Trademark Collateral Assignment and Security Agreement" shall mean the Trademark Collateral Assignment and Security Agreement, dated on or about the date hereof, 20 by and among Gump's, CSG LLC, Brawn and Lender, providing for, among other things, the grant by Borrowers of a security interest in the trademarks of such Borrowers. 1.131. "Tradename" shall have the meaning set forth in Section 6.1 hereof. 1.132. "UCC" shall mean the Uniform Commercial Code as in effect in the State of New York, and any successor statute, as in effect from time to time (except that terms used herein which are defined in the Uniform Commercial Code as in effect in the State of New York on the date hereof shall continue to have the same meaning notwithstanding any replacement or amendment of such statute except as Lender may otherwise determine). 1.133. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles from time to time in effect, consistently applied, except as otherwise stated herein. To the extent generally accepted accounting principles require a change in accounting practices, references herein to "generally accepted accounting principles from time to time in effect, consistently applied", shall include such required changes. 1.134. Other Defined Terms. The words "hereof", "herein", "hereunder", "this Agreement" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. Whether or not expressly so provided herein or in a separate amendment, all references to the "Loan Agreement" or the "Loan and Security Agreement" or words of similar import contained in the other Financing Agreements shall mean this Agreement and references therein to the respective parties to and borrowers under the "Loan Agreement" or the "Loan and Security Agreement" or words of similar import are each hereby amended to refer to the respective parties and Borrowers under this Agreement. 1.135. Uniform Commercial Code Definitions. All terms not specifically defined herein which are defined in the UCC shall have the meanings as defined in the UCC. 1.136. Interpretation. For purposes of this Agreement, unless the context otherwise requires, all other terms hereinbefore or hereinafter defined, including but not limited to those terms defined in the recitals hereto, shall have the meanings herein assigned to such terms. All references to Borrowers, Guarantors and other Persons pursuant to the definitions set forth in the recitals hereto shall include their respective successors and assigns. All references to Borrowers and Guarantors shall mean each of them, and all of them, jointly and severally, individually and collectively. All references to any term in the plural shall include the singular and all references to any term in the singular shall include the plural. SECTION 2. TERM LOAN 2.1. Loan. (a) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, on the Closing Date Lender shall make a term loan to Brawn in the aggregate original principal amount of $1,500,000 (the "Brawn Term Loan"). The Brawn 21 Term Loan is (i) evidenced by the Brawn Term Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith, (ii) to be repaid, together with interest and other amounts, in accordance with this Agreement, the Brawn Term Note, and the other Financing Agreements, and (iii) secured by all of the Collateral. (b) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, on the Closing Date Lender shall make a term loan to GBM in the aggregate original principal amount of $1,000,000 (the "GBM Term Loan"). The GBM Term Loan is (i) evidenced by the GBM Term Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith, (ii) to be repaid, together with interest and other amounts, in accordance with this Agreement, the GBM Term Note, and the other Financing Agreements, and (iii) secured by all of the Collateral. (c) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, on the Closing Date Lender shall make a term loan to Gump's in the aggregate original principal amount of $1,500,000 (the "Gump's Term Loan"). The Gump's Term Loan is (i) evidenced by the Gump's Term Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith, (ii) to be repaid, together with interest and other amounts, in accordance with this Agreement, the Gump's Term Note, and the other Financing Agreements, and (iii) secured by all of the Collateral. (d) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, on the Closing Date Lender shall make a term loan to Hanover Realty in the aggregate original principal amount of $10,000 (the "Hanover Realty Term Loan"). The Hanover Realty Term Loan is (i) evidenced by the Hanover Realty Term Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith, (ii) to be repaid, together with interest and other amounts, in accordance with this Agreement, the Hanover Realty Term Note, and the other Financing Agreements, and (iii) secured by all of the Collateral. (e) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, on the Closing Date Lender shall make a term loan to TCS Factory in the aggregate original principal amount of $10,000 (the "TCS Factory Term Loan"). The TCS Factory Term Loan is (i) evidenced by the TCS Factory Term Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith, (ii) to be repaid, together with interest and other amounts, in accordance with this Agreement, the TCS Factory Term Note, and the other Financing Agreements, (iii) secured by all of the Collateral. (f) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, on the Closing Date Lender shall make a term loan to TCS Office in the aggregate original principal amount of $10,000 (the "TCS Office Term Loan"). The TCS Office Term Loan is (i) evidenced by the TCS Office Term Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith, (ii) to be repaid, together with interest and other amounts, in accordance with this Agreement, the TCS Office Term Note, and the other Financing Agreements, and (iii) secured by all of the Collateral. 22 (g) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, on the Closing Date Lender shall make a term loan to Silhouettes LLC in the aggregate original principal amount of $2,200,000 (the "Silhouettes LLC Term Loan"). The Silhouettes LLC Term Loan is (i) evidenced by the Silhouettes LLC Term Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith, (ii) to be repaid, together with interest and other amounts, in accordance with this Agreement, the Silhouettes LLC Term Note, and the other Financing Agreements, and (iii) secured by all of the Collateral. (h) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, on the Closing Date Lender shall make a term loan to HCS LLC in the aggregate original principal amount of $7,250,000 (the "HCS LLC Term Loan"). The HCS LLC Term Loan is (i) evidenced by the HCS LLC Term Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith, (ii) to be repaid, together with interest and other amounts, in accordance with this Agreement, the HCS LLC Term Note, and the other Financing Agreements, and (iii) secured by all of the Collateral. (i) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, on the Closing Date Lender shall make a term loan to Domestications LLC in the aggregate original principal amount of $6,500,000 (the "Domestications LLC Term Loan"). The Domestications LLC Term Loan is (i) evidenced by the Domestications LLC Term Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith, (ii) to be repaid, together with interest and other amounts, in accordance with this Agreement, the Domestications LLC Term Note, and the other Financing Agreements, and (iii) secured by all of the Collateral. (j) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, on the Closing Date Lender shall make a term loan to KIS LLC in the aggregate original principal amount of $10,000 (the "KIS LLC Term Loan"). The KIS LLC Term Loan is (i) evidenced by the KIS LLC Term Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith, (ii) to be repaid, together with interest and other amounts, in accordance with this Agreement, the KIS LLC Term Note, and the other Financing Agreements, and (iii) secured by all of the Collateral. (k) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, on the Closing Date Lender shall make a term loan to CSG LLC in the aggregate original principal amount of $10,000 (the "CSG LLC Term Loan"). The CSG LLC Term Loan is (i) evidenced by the CSG LLC Term Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith, (ii) to be repaid, together with interest and other amounts, in accordance with this Agreement, the CSG LLC Term Note, and the other Financing Agreements, and (iii) secured by all of the Collateral. 2.2. Fees. (a) Closing Fee. Borrowers shall pay to Lender, in cash, on the Closing Date, a closing fee in the amount of Two Hundred Thousand Dollars ($200,000), which fee is fully earned as of the date hereof. 23 (b) Waiver Fee. Borrowers shall pay to Chelsey Direct, LLC, on the Closing Date, a waiver fee equal to one percent (1%) of the accreted liquidation preference of Series C Participating Preferred Stock (the "Waiver Fee"), which fee is fully earned as of the date hereof. The Waiver Fee shall be payable by the issuance of common stock of Hanover, valued at $0.13 (i.e. the fair market value as of two (2) Business Days prior to Closing Date). The Waiver Fee shall be paid in consideration for the waiver by Chelsey Direct, LLC of its blockage rights over issuances of senior securities. (c) Fees as Obligations. The fees provided for in this Section 2.2 shall be in addition to all other amounts payable by Borrowers under this Agreement and the other Financing Agreements and shall constitute part of the Obligations of Borrowers. Such fees may, at Lender's option, be used to reduce the amount advanced under the Term Loan or be charged directly to any of the loan accounts of Borrowers maintained by Lender. 2.3. Interest. (a) Borrowers shall pay to Lender interest on the outstanding principal amount of the Obligations at the Interest Rate. All interest accruing hereunder on and after the date of any Event of Default or termination or non-renewal hereof shall be payable on demand. (b) Interest shall be payable by Borrowers to Lender monthly in arrears not later than the first day of each calendar month and shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. The interest rate on Obligations shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate effective on the first day of the month after any change in such Prime Rate is announced based on the Prime Rate in effect on the last day of the month in which any such change occurs. In no event shall charges constituting interest payable by Borrowers to Lender exceed the maximum amount of the rate permitted under any applicable law or regulation, and if any such part or provision of this Agreement is in contravention of any such law or regulation, such part or provision shall be deemed amended to provide for the highest permissible rate or amount. 2.4. Conduct of Accounts. (a) All Collateral or other collateral security held by or granted to Lender by Borrowers or any third persons shall be security for the payment and performance of any and all Obligations of Borrowers or such third persons to Lender, as the case may be, notwithstanding the maintenance of separate accounts for Borrowers or third persons or the existence of any notes. (b) The Term Loans and other Obligations of Borrowers shall be payable to Lender at its address specified herein or at such other place in the United States as Lender may hereafter designate in writing from time to time. Lender may apply payments received or collected from Borrowers or Guarantors or for the account of Borrowers or Guarantors (including, without limitation, the proceeds of sale, collection or other realization upon any Collateral or Guarantor Collateral) to such of the Obligations of Borrowers and/or Guarantors then due, in whatever order and manner Lender, in its discretion, determines. Lender shall have the continuing and exclusive right to apply and reverse and reapply any and all such 24 proceeds and payments to any portion of the Obligations of Borrowers then or thereafter due. Upon the request of Lender, Borrowers shall execute and deliver to Lender one or more promissory notes, in form and substance satisfactory to Lender, to further evidence the Term Loan and the Obligations of Borrowers. (c) Subject to the terms and conditions of this Agreement, the Borrowers may prepay the Term Loan, in whole or in part, at any time prior to an Event of Default, without payment of any separate prepayment premium or prepayment penalty. Any such partial prepayment of the Term Loans shall be applied to principal payments coming due thereunder in the inverse order of maturity. Any amounts paid or prepaid in respect of the Term Loan may not be thereafter reborrowed. (d) If Lender is for any reason required to surrender any payment of, or proceeds of Collateral or Guarantor Collateral applied to the payment of, all or any part of the Obligations of Borrowers and/or Guarantors to any Person (including any creditor or creditors' representative of any Borrower or any Guarantor), or if any interest of Lender in any Collateral or Guarantor Collateral is set aside or avoided, whether because such payment or proceeds is invalidated, declared fraudulent as to any Person (including any creditor or creditors' representative of any Borrower or any Guarantor), set aside, determined to be void or voidable as a preference, or a diversion of trust funds, or for any other reason, or are determined to be subject to a claim for restitution, or otherwise are required to be surrendered, set aside or avoided, then the Obligations of Borrowers and/or Guarantors or any part thereof intended to be reduced, paid or satisfied, as a result of such payment or application of proceeds or the apparent interests of Lender in such Collateral and Guarantor Collateral shall be revived and reinstated and this Agreement shall continue in full force and effect as if such payment or proceeds had not been received by Lender and Borrowers shall jointly and severally indemnify Lender and hold Lender harmless for, the amount of such payment or proceeds surrendered and the value of any such Collateral or Guarantor Collateral set aside or avoided, plus any interest and other amounts paid and all costs and expenses (including reasonable attorneys' fees and disbursements incurred by Lender in connection therewith). The provisions of this Section 2.4(d) shall be and remain effective notwithstanding any contrary action which may have been taken by Lender in reliance upon such payment or proceeds, and any such contrary action so taken shall be without prejudice to Lender's rights under this Agreement and shall be deemed to have been conditioned upon such payment or proceeds having become final and indefeasible. The provisions of this Section 2.4(d) shall survive the termination of this Agreement and the other Financing Agreements. (e) Lender shall deliver to Hanover, on behalf of the Borrowers at the address set forth in Section 9.5 hereof, each calendar month, one or more statements with respect to any loan account maintained by Lender with respect to Borrowers pursuant to the provisions hereof, as of the end of each calendar month while this Agreement is in effect. Such statements of account shall be considered correct, and deemed accepted by and conclusively binding upon Borrowers, except to the extent Lender shall have received from Borrowers written notice of all exceptions to such statement of account with specificity, within forty-five (45) days after the date of such statement. 25 2.5. Principal Payments. (a) Borrowers unconditionally and irrevocably promise to pay to Lender the Obligations in accordance with this Section 2.5. (b) Borrowers shall make payments of principal in cash in respect of the Obligations of up to the full amount of the Obligations on the final Business Day of each fiscal quarter of Hanover and its Subsidiaries commencing with the fiscal quarter of Hanover and its Subsidiaries ending September 25, 2004, but only to the extent that each of the following shall remain true following such payment of amount: (i) as of the date of any such payment and after giving effect thereto, the aggregate amount of the Excess Availability (as such term is defined in the Congress Credit Agreements as in effect on the date hereof) of Borrowers on such date and the immediately preceding thirty (30) consecutive days before such payment shall be not less than $7,000,000, (ii) the cumulative EBITDA of Hanover and its Subsidiaries calculated based on the immediately preceding four (4) fiscal quarters immediately preceding the quarter in which the date of such payment occurs and for which fiscal quarter Lender has received financial statements of Hanover and its Subsidiaries, shall be not less than $14,000,000; (iii) the aggregate amount of such principal prepayments shall not exceed $2,000,000 in any such fiscal quarter; (iv) any such payment shall not be made earlier than the date that is five (5) Business Days after receipt by Congress of quarterly financial statements of Hanover and its Subsidiaries for such immediately preceding fiscal quarter delivered to Congress in accordance with the terms and conditions of Section 6.18(a)(ii) of the Congress Loan Agreement; (v) as of the date of such payment and after giving effect thereto, Borrowers and Guarantors are and shall continue to be Solvent; and (vi) as of the date of such payment and after giving effect thereto, no Incipient Default or Event of Default under the Congress Financing Agreements shall exist or have occurred. (c) To the extent permitted under the Congress Credit Agreements and Section 8 of the Thirty-First Amendment to the Congress Loan Agreement, upon the receipt by Borrowers or Guarantors of Net Proceeds from an Asset Sale, Borrowers shall make payments of principal in cash in respect of the Obligations in accordance with the terms and conditions of this Agreement, up to the lesser of (1) such Net Proceeds from an Asset Sale or (2) the outstanding Obligations. (d) Borrowers and Hanover hereby agree and covenant that they shall exercise commercially reasonable efforts to satisfy the conditions set forth in Sections 2.5(b) and 2.5(c) in order to permit the repayment of the Obligations. 26 (e) To the extent not otherwise paid to Lender in accordance with this Section 2.5 prior to the end of the Term, the Obligations shall be immediately due and payable in full at 5:00 p.m. eastern time on the last day of the Term. 2.6. Use of Proceeds. Borrowers shall use the proceeds of the Term Loan made or arranged by Lender on the date hereof (a) for the repayment by Borrowers in an amount equal to the respective obligations of each Borrower under the Tranche B Term Loan (as such term is defined in the Congress Credit Agreements) to Congress, (b) for the costs, expenses and fees incurred by Borrowers in connection with this Agreement and the other Financing Agreements, and (c) and for general operating, working capital and capital expenditures of Borrowers, and other proper corporate purposes of Borrowers, not otherwise prohibited by the terms hereof. SECTION 3. CONDITIONS PRECEDENT TO LOANS AND OTHER FINANCIAL ACCOMMODATIONS 3.1. Conditions to Loans. The making and providing of the Term Loans, on the date hereof, shall be subject to the satisfaction of each of the following conditions precedent (any of which may be waived, in whole or in part, only by Lender in writing): (a) Payoff of Tranche B Term Loan to Congress. Borrowers shall have provided evidence to Lender of the repayment in full and termination of the Tranche B Term Loan (as such term is defined in the Congress Credit Agreements) to Congress. (b) Intercreditor Agreement. Lender, Congress and Borrowers shall have entered into an Intercreditor Agreement pursuant to which Lender shall subordinate, to the extent provided therein, its rights to payment of all Obligations of Borrowers and Guarantors to Congress. (c) Delivery of Warrants. Hanover shall have executed and delivered to Lender the Series D Preferred Stock Warrant. (d) Delivery of Financing Agreements. Borrowers and Guarantors shall have delivered the Financing Agreements required by Lender and all instruments and documents hereunder and thereunder shall have been executed and delivered to Lender, in form and substance satisfactory to Lender, and all UCC financing statements relating and other necessary filings, if any, to the Collateral and Guarantor Collateral shall have been duly filed and recorded. (e) Opinions of Counsel. Lender shall have received, in form and substance satisfactory to Lender, one or more opinion letters of independent counsel to Borrowers and Guarantors in respect of the Financing Agreements, the Collateral and Guarantor Collateral and such other matters as Lender may reasonably request. (f) Perfection. Lender's lien on and security interests in each item of Collateral and Guarantor Collateral shall have been perfected by the filing, recording or 27 registration of documents, instruments, or financing statements in the appropriate governmental offices or by possession by Congress as agent for Lender under the Intercreditor Agreement or such other action as is necessary to perfect each such lien or security interest, and Lender shall have received evidence satisfactory to it that all such liens and security interests are of second priority, subject only to permitted liens set forth in Section 6.4 hereof. (g) Insurance. Lender shall have received evidence of insurance required hereunder and under the other Financing Agreements, and mortgagee's and lender's loss payable endorsements in favor of Lender with respect thereto, all in form and substance satisfactory to Lender. SECTION 4. COLLATERAL 4.1. Security Interests in Borrowers' Property. Subject to the prior Lien of Congress as more fully set forth in the Intercreditor Agreement, as collateral security for the prompt performance, observance and payment in full of all of the Obligations of Borrowers, Borrowers hereby grant to Lender, a continuing security interest in, and liens upon, and rights of setoff against, and Borrowers hereby pledge and assign to Lender, all now owned and hereafter acquired and arising assets and properties of Borrowers (which assets and properties, together with all other collateral security for the Obligations of Borrowers heretofore, now or hereafter granted to or otherwise held or acquired by Lender are referred to herein as the "Collateral"), including, but not limited to, the following: (i) all of the following, whether now owned or hereafter acquired or arising: (A) all Accounts, including, without limitation, all Credit Card Receivables, and all monies, credit balances and other amounts due from or through or held by Credit Card Issuers, or other parties to the Credit Card Agreements, all rentals or license fees receivable in respect of sale, lease, or license of Customer Lists, all monies, securities and other property and the proceeds thereof, now or hereafter held or received by, or in transit to, Lender from or for Borrowers, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of Borrowers' deposits (general or special), balances, sums and credits with Lender at any time existing; (B) all right, title and interest, and all rights, remedies, security and liens, in, to and in respect of the Accounts and other Collateral, including, without limitation, rights of stoppage in transit, replevin, repossession and reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, guarantees or other contracts of suretyship with respect to the Accounts, deposits or other security for the obligations of any Account Debtor, all credit and other insurance; (C) all right, title and interest in, to and in respect of all goods relating to, or which by sale have resulted in, Accounts, including, without limitation, all goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, any Account or other Collateral, including, without limitation, all returned, reclaimed or repossessed goods; (D) all deposit accounts; and (E) all other general intangibles of every kind and description, including, without limitation, (1) tradenames and trademarks, and the goodwill of the business symbolized thereby, (2) patents, (3) copyrights, (4) licenses, (5) Federal, State and local tax and duty refund claims of all kinds, (6) catalogs and promotional materials, (7) all Customer Lists, and (8) all right, title and interest of Borrowers in and to any joint ventures, partnerships and other Persons; 28 (ii) all cash and cash equivalents; (iii) Inventory; (iv) Equipment; (v) Real Property; (vi) Intellectual Property; (vii) Receivables; (viii) all Capital Stock held by such Borrower (except any Capital Stock of Hanover); (ix) all insurance policies of the Borrowers and any proceeds thereof; (x) all present and future books, records, ledger cards, computer software (including all manuals, upgrades, modifications, enhancements and additions thereto), computer tapes, disks, other electronic data storage media, documentation of file and record formats and source code, documents, other property and general intangibles evidencing or relating to any of the above, any other Collateral or any Account Debtor, together with the file cabinets or containers in which the foregoing are stored; and (xi) all present and future products and proceeds of the foregoing, in any form whatsoever, including, without limitation, any insurance proceeds and any claims against third persons for loss or damage to or destruction of any or all of the foregoing. Notwithstanding the foregoing, the Collateral does not include any leasehold interests in Real Property. 4.2. Guarantees Concurrently herewith, in order to induce Lender to enter into this Agreement and the other Financing Agreements to be entered into on the date hereof, each Borrower shall execute and deliver to Lender, and Borrowers shall cause Guarantors to execute and deliver to Lender, in form and substance satisfactory to Lender, a Guarantee (as all of such Guarantees now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, individually a "Guarantee" and collectively the "Guarantees"). 4.3. Security Interests in Property of Guarantors As collateral security for the prompt performance, observance and payment in full of all of the Obligations of Guarantors, under their respective Guarantees and otherwise, Borrowers shall cause to be delivered to Lender a general security agreement by Guarantors in favor of Lender, providing for a grant of a security interest in and pledge of all assets of such 29 Guarantor, except for any capital stock of any Non-Guarantor Subsidiary owned by Hanover, in form and substance satisfactory to Lender (each, a "General Security Agreement"). (All of the collateral security now or hereafter granted to or held by Lender by the Guarantors pursuant to the General Security Agreements, or otherwise, and the products and proceeds thereof, herein the "Guarantor Collateral".) SECTION 5. REPRESENTATIONS AND WARRANTIES Borrowers, jointly and severally, represent and warrant to Lender, as follows, (a) which representations and warranties shall survive the execution and delivery hereof, and, except those, if any, expressly limited to the date hereof, or other specified dates, are continuing representations and warranties deemed repeated on each day this Agreement is in effect, and (b) the truth and accuracy of each of which, together with the representations and warranties in the other Financing Agreements shall be a continuing condition precedent of loans and other financial accommodations hereunder and under the other Financing Agreements: 5.1. Organization (a) Each Borrower and Guarantor is a duly organized and validly existing corporation or limited liability company in good standing under the laws of its state or jurisdiction of organization, with perpetual existence, and has the power and authority to own its properties and to transact the business in which it is engaged or presently proposes to engage. Each Borrower and Guarantor has qualified to do business as a foreign corporation or limited liability company in the states and other jurisdictions listed on Exhibit A attached hereto, which constitute all states or other jurisdictions where the nature of its business or the ownership or use of property requires such qualification and failure to so qualify would have a material adverse affect on either Borrower or on the rights and interests of Lender in the Collateral or Guarantor Collateral. (b) None of the Borrowers, Hanover or other Guarantors has any direct or indirect Subsidiaries as of the date hereof, except as set forth on Exhibit B-1 attached hereto, which sets forth the owner and ownership percentages as to each member of the Affiliated Borrower Group. None of the Borrowers has any direct or indirect interest in or is a party to any joint venture as of the date hereof, except as set forth on Exhibit B-1 attached hereto. (c) All of the direct or indirect Restaurant Business Subsidiaries are set forth on Exhibit B-2 attached hereto. (d) As of the date hereof, there are no Non-Guarantor Subsidiaries, except for the Restaurant Business Subsidiaries. 5.2. Corporate Power and Authority. Each Borrower and Guarantor has the corporate or limited liability company power and authority to execute, deliver and carry out the terms of the Financing Agreements to which it is a party and all other agreements, instruments and documents delivered such Borrower or Guarantor pursuant hereto and thereto applicable to each, and each Borrower and Guarantor has taken or caused to be taken all necessary corporate or limited liability company action to 30 authorize the execution, delivery and performance of the Financing Agreements and the other agreements relating hereto to which it is a party, the present and future borrowings and other financial accommodations which may be obtained by Borrowers hereunder and thereunder, and the execution, delivery and performance of the instruments and documents delivered and to be delivered by it pursuant hereto and thereto. This Agreement and the other Financing Agreements constitute the legal, valid and binding obligations of each Borrower and Guarantor signatory thereto, enforceable in accordance with their respective terms, except (a) to the extent the availability of equitable remedies may be subject to judicial discretion and (b) to the extent that enforcement of certain rights and remedies of Lender may be limited by provisions of the Bankruptcy Code or other laws affecting the rights of creditors generally. 5.3. Capitalization; Solvency. (a) All of the outstanding shares of common stock of each Borrower have been duly authorized, validly issued and are fully paid and non-assessable, free and clear of all claims, liens, pledges and encumbrances of any kind, other than security interests in favor of Congress. (b) Hanover and its Subsidiaries, including Borrowers, on a consolidated basis, have sufficient capital to carry on all businesses and transactions in which they now engage or propose to engage, are solvent and will continue to be solvent after the creation or incurrence of the Obligations and the security interests in favor of Lender, and are able to pay their debts as they mature. 5.4. Compliance with Other Agreements and Applicable Law. (a) Each Borrower and Guarantor is not in default in any respect under any indenture, mortgage, deed of trust, deed to secure debt, material lease, material license agreement or other material agreement or instrument to which it is a party or by which it or any of its assets or properties may be or are bound. (b) Neither the execution nor delivery of this Agreement, the other Financing Agreements, or any of the instruments and documents to be delivered pursuant hereto or thereto, nor the consummation of the transactions herein or therein contemplated, nor compliance with the provisions hereof or thereof, violates any law or regulation or any order or decree of any court or governmental instrumentality in any respect or does or will conflict with or result in the breach of, or constitute a default in any respect under, any indenture, mortgage, deed of trust, deed to secure debt, lease or agreement or instrument to which any Borrower or any Guarantor is a party or may be bound, which violation, breach or default could have or result in a material adverse effect on or change in the assets or business of Hanover and its Subsidiaries taken as a whole, or result in the creation or imposition of any lien, charge or encumbrance upon any of the property of any Borrower or any Guarantor (except as specifically contemplated hereunder or under the other Financing Agreements) or violate any provision of the Certificate of Incorporation, Certificate of Formation, By-Laws or Operating Agreement of any Borrower or any Guarantor. 31 (c) Subject to Sections 5.5 and 5.9 hereof as to the matters described therein, each Borrower and Guarantor has obtained all material permits, licenses, approvals, consents, orders or authorizations of any governmental regulatory authority or other governmental body or authority required for the lawful conduct of its business and is in compliance in all material respects with the requirements of all applicable laws, rules, regulations and orders of any governmental authority relating to its business (including, without limitation, those set forth in or promulgated pursuant to ERISA, the IRC, the Occupational Safety and Health Act of 1970, as amended, all Federal, State and local statutes, regulations, rules and orders relating to consumer credit (including, without limitation, as each has been amended, the Truth-in-Lending Act, the Fair Credit Billing Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act and regulations, rules and orders promulgated thereunder), the Fair Labor Standards Act of 1938, as amended, all Federal, State and local statues, regulations, rules and orders pertaining to sales of consumer goods and mail order sales (including, without limitation, the Consumer Products Safety Act of 1972, as amended, and the Federal Trade Commission Act of 1914, as amended, and all regulations, rules and orders promulgated thereunder). 5.5. Environmental Compliance. (a) Except as set forth on Exhibit I hereto, to the knowledge of each Responsible Officer of Borrowers and Guarantors, no Borrower or Guarantor has generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises (whether or not owned by it) in violation of any applicable Environmental Law or any license, permit, certificate, approval or similar authorization thereunder, and the operations of each Borrower and Guarantor complies with all Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder, except to the extent that any violation or non-compliance, would not result in either (i) a fine, judgment, penalty, loss or liability, including any remediation expenses and including costs and engineering and attorneys' fees, not covered by insurance, which exceeds $250,000 with respect to any individual violation or non-compliance, or series of related violations or non-compliance or (ii) a restraint on operations of any Borrower which prevents such Borrower from conducting its operations in the ordinary course, or (iii) any adverse effect on any Collateral having a value of $250,000 or more, or a material adverse effect on the business, assets, liabilities or financial condition of any Borrower or of the Affiliated Borrower Group taken as a whole. (b) Except as set forth on Exhibit I hereto, no Responsible Officer of any Borrower or Guarantor has knowledge of any investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other person nor, to the best of any such Responsible Officer's knowledge, is any of the same pending or threatened with respect to any non-compliance with or violation of the requirements of any Environmental Law by any Borrower, or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter, which affects any Borrower or Guarantor or its business, operations or assets or any properties at which any Borrower or Guarantor has transported, stored or disposed of any Hazardous Materials, except to the extent that any such matter, if adversely determined, would 32 not result in either (i) a fine, judgment, penalty, loss or liability, including remediation expenses and including costs and engineering and attorneys' fees, not covered by insurance, which exceeds $250,000 with respect to any individual violation or non-compliance or series of related violations or non-compliance or (ii) a restraint on operations of any Borrower which prevents such Borrower from conducting its operations in the ordinary course, or (iii) any adverse effect on any Collateral having a value of $250,000 or more, or a material adverse effect on the business, assets, liabilities or financial condition of any Borrower or of the Affiliated Borrower Group taken as a whole. (c) Except as set forth on Exhibit I hereto, no Responsible Officer of any Borrower or Guarantor has knowledge of any liability (contingent or otherwise) of any one or more Borrowers or Guarantor in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials, except to the extent the potential liability (contingent or otherwise) of any Borrowers or Guarantors with respect thereto (including any fines, liabilities, remediation expenses, costs and engineering and attorneys' fees), does or would not exceed $250,000 as to any individual releases, spill or discharge, threatened or actual, or any series of related releases, spills or discharges, threatened or actual, or any generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials. (d) Each Borrower and Guarantor has all licenses, permits, certificates, approvals or similar authorizations required to be obtained or filed in connection with the operations of such Borrower or Guarantor under any Environmental Law and all of such licenses, permits, certificates, approvals or similar authorizations are valid and in full force and effect, except where the failure to obtain the same would not have an adverse effect upon any Collateral having a value of $250,000 or more, or a material adverse effect upon business, assets, liabilities or financial condition of any Borrower or of the Affiliated Borrower Group taken as a whole. 5.6. Governmental Approval No action of, or filing with, any governmental or public body or authority is required in connection with the execution, delivery and performance by Borrowers and Guarantors of this Agreement, the other Financing Agreements or any of the instruments or documents to be delivered pursuant hereto or thereto, except for filing of UCC financing statements and the recording of the Mortgages and other instruments required to perfect security interests or liens in certain property constituting Collateral or Guarantor Collateral. 5.7. State of Formation; Mailing Addresses. The state of incorporation or formation and mailing addresses of each Borrower and each member of the Affiliated Borrower Group are set forth on Exhibit C attached hereto. The books and records of each Borrower and each member of the Affiliated Borrower Group are located at said addresses. 33 5.8. Priority of Liens; Title to Properties. (a) The security interests and liens granted to Lender under this Agreement and the other Financing Agreements constitute valid and perfected second priority liens and security interests in and upon the Collateral and Guarantor Collateral, subject only to the liens of Congress under the Congress Credit Agreements and the liens indicated on Exhibit D attached hereto and the liens permitted under Section 6.4 hereof or permitted under the other Financing Agreements. (b) Each Borrower and Guarantor has good and marketable title to all of its properties and assets subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind, except those in favor of Lender, the liens of Congress under the Congress Credit Agreements and those specifically permitted under the provisions of this Agreement or the other Financing Agreements. Each Borrower and Guarantor has peaceful and undisturbed possession of all of its Inventory, Equipment and such other assets as may be necessary for its business as presently conducted or proposed to be conducted and has all leases, licenses and easements necessary for the operation of its properties and business. All such leases, licenses and easements are valid and subsisting and in full force and effect. 5.9. Taxes. (a) Each Borrower and Guarantor has filed, or has caused to be filed all Federal, State, county, local, foreign and other tax returns, reports and declarations which are required to be filed by it and as to which an extension has not been granted, and has paid or caused to be paid all such taxes due and payable, and has collected, deposited and remitted all taxes applicable to the conduct of its business, except, in each case, taxes the validity or applicability of which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside on its books, in the determination of Lender, or if requested by Lender, to protect Lender's security interests or liens in any Collateral or Guarantor Collateral, adequate amounts have been escrowed with or reserved against availability by Lender or other arrangements satisfactory to Lender have been made to cover all amounts which are claimed due plus interest and possible penalties thereon. (b) Each Borrower and to the extent applicable each member of the Affiliated Borrower Group, has collected, deposited and remitted all sales and/or use taxes applicable to its business required to be collected under the valid laws of the United States and each possession or territory thereof, and each State or political subdivision thereof; provided, however, the representations and warranties as to sales and use taxes contained in this Section 5.9(b) shall be considered materially untrue if, but only if, the aggregate amount of such applicable sales and use taxes not collected, deposited or remitted shall in the aggregate be equal to or greater than Two Hundred Fifty Thousand Dollars ($250,000). 5.10. Litigation. Except as set forth in Exhibit E attached hereto, as of the date hereof there is no investigation by any governmental agency pending or threatened against or affecting any Borrower or any other member of the Affiliated Borrower Group or their properties or business, 34 and there is no action, suit, proceeding or claim by any Person pending or threatened against any Borrower or any other member of the Affiliated Borrower Group or their properties or business (other than future pending or threatened litigation involving the enforcement of lease obligations by or against Hanover as successor to The Horn & Hardart Company as to leased properties not used in or related to the business of Borrowers), or against or affecting any transactions contemplated by this Agreement, the other Financing Agreements, or other instruments, agreements or documents delivered in connection herewith or therewith, which could reasonably be expected to result in a determination adverse to any Borrower or any other member of the Affiliated Borrower Group, and which, if so adversely determined with respect to any of them, would result in either (i) a fine, judgment, penalty, loss or liability, including costs and attorneys' fees, not covered by insurance, which, individually, exceeds Three Hundred Thousand Dollars ($300,000) or (ii) any material adverse change in the business, assets, liabilities or financial condition of any Borrower or of the Affiliated Borrower Group taken as a whole, which, for the purposes of this Section 5.10, shall mean the incurrence of a liability equal to at least ten percent (10%) of the current assets of any Borrower or of the Affiliated Borrower Group taken as a whole. Except as set forth on Exhibit E attached hereto, (i) there are no product recall directives presently in effect, and (ii) to the knowledge of any Responsible Officer of Borrowers and Guarantors, there are no investigations by any governmental agency, pending or threatened, in each instance concerning a possible product recall involving goods of or sold by Borrowers or Guarantors having an aggregate value of Three Hundred Thousand Dollars ($300,000) or more. 5.11. Intellectual Property. Each Borrower individually and the other members of the Affiliated Borrower Group taken as a whole, own or license all patents, trademarks and copyrights and holds all licenses, which are necessary for the operation of their business as presently conducted or proposed to be conducted. No product, process, method, substance, part or other material presently sold by or employed by Borrowers or the other members of the Affiliated Borrower Group, infringes any patent, trademark, service-mark, trade name, copyright, license or other right owned by any other Person, and no claim or litigation is pending or threatened against or affecting any Borrower or the other members of the Affiliated Borrower Group, contesting its right to sell or use any such product, process, method, substance, part or other material, except as set forth on Exhibit F attached hereto, except for any claims or litigation, which if adversely determined against any one of them, would result in either (i) a fine, judgment, penalty, loss or liability, including costs and attorneys' fees not covered by insurance, which, individually exceeds Three Hundred Thousand Dollars ($300,000) or (ii) any material adverse change in the business, assets, liabilities or financial condition of any Borrower or of the Affiliated Borrower Group taken as a whole, which, for the purposes of this Section 5.11, shall mean the incurrence of a liability equal to at least ten percent (10%) of the current assets of any Borrower or of the Affiliated Borrower Group taken as a whole. No patent, invention, device or application is pending, or, to the best of Borrowers' knowledge, proposed which would substantially reduce the projected revenues of, or otherwise materially adversely affect the business, assets, liabilities, or financial condition of any Borrower individually, or the other members of the Affiliated Borrower Group taken as a whole. 35 5.12. Employee Benefits. (a) None of the Borrowers or any other member of the Affiliated Borrower Group has engaged in any transaction in connection with which any Borrower or any other member of the Affiliated Borrower Group could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the IRC, which, individually or in the aggregate, is greater than Two Hundred Fifty Thousand Dollars ($250,000). (b) No liability to the Pension Benefit Guaranty Corporation has been or is expected by Borrowers or any other member of the Affiliated Borrower Group to be incurred with respect to any employee pension benefit plan of any Borrower or any other member of the Affiliated Borrower Group, except for insurance premiums that are required to be paid to the Pension Benefit Guaranty Corporation that are not past due. There has been no reportable event (within the meaning of Section 4043(b) of ERISA) or any other event or condition with respect to any employee pension benefit plan which presents a risk of (i) termination of any such plan by the Pension Benefit Guaranty Corporation and (ii) potential liability of any Borrower or any other member of the Affiliated Borrower Group to the Pension Benefit Guaranty Corporation in connection with such termination which in the aggregate potential liability may be greater than Two Hundred Fifty Thousand ($250,000). (c) Full payment has been made of all amounts which any Borrower or any other member of the Affiliated Borrower Group is required to have paid under the terms of each employee pension benefit plan as contributions to such plan as of the last day of the most recent fiscal year of such plan, and no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the IRC), whether or not waived, exists with respect to any employee pension benefit plan. (d) The current value of all vested accrued benefits under all employee pension benefit plans of Borrowers or any other member of the Affiliated Borrower Group does not exceed the current value of the assets of such plans allocable to such vested accrued benefits. The terms "current value" and "accrued benefit" have the meanings specified in Section 3(26) and Section 3(23) of ERISA, respectively. (e) None of the Borrowers or any other member of the Affiliated Borrower Group is or has ever been obligated to contribute to any "multiemployer plan" (as such term is defined in Section 3(37) or 4001(a)(3) of ERISA or Section 414 of the IRC) that is subject to Title IV of ERISA. 5.13. Investment Company. None of the Borrowers or any Guarantor is an "investment company", or an "affiliated person" or "promoter" or "principal underwriter", as such terms are defined in the Investment Company Act of 1940, as amended (15 U.S.C. sub-section 80a-1, et seq.). The making of the loans and provisions of the other financial accommodations hereunder by Lender, the application of the proceeds and the repayment thereof by Borrowers and/or Guarantors and the performance of the transactions contemplated herein and in the other Financing Agreements 36 will not violate any provision of said Investment Company Act, or any rule, regulation or order issued pursuant thereto. 5.14. Regulation U; Securities Exchange Act of 1934. None of the Borrowers or any Guarantor owns any "margin stock" as such term is defined in Regulation U, as amended (12 C.F.R. Part 207) of the Board. The proceeds of the borrowings and other financial accommodations made pursuant to the Congress Credit Agreements, this Agreement and the other Financing Agreements have been and will be used by Borrowers only for the purposes contemplated thereunder and hereunder. None of the proceeds have been or will be used, directly or indirectly, for the purpose of purchasing or carrying any margin stock or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase or carry any margin stock or for any other purpose which might cause any portion of the loans and other financial accommodations under the Congress Credit Agreements or hereunder to be considered a "purpose credit" within the meaning of Regulation U of the Board, as amended. None of the Borrowers or any Guarantor will take, nor will they permit any agent acting in any of their behalves to take, any action which might cause this Agreement or the other Financing Agreements, or instruments delivered pursuant hereto or thereto, to violate any regulation of the Board or to violate the Securities Exchange Act of 1934 or any state or other securities laws, in each case as in effect on the date hereof or as amended hereafter. 5.15. No Material Adverse Change. There has been no material adverse change in the business, assets, liabilities or financial condition of the Affiliated Borrower Group taken as a whole since March 27, 2004. 5.16. Financial Statements. (a) None of the financial statements, reports and other information furnished or to be furnished by Borrowers to Lender with respect to Borrowers, Guarantors or any other member of the Affiliated Borrower Group contains, as of their respective dates, any untrue statement of material fact or omits to state any material fact necessary to make the information therein not misleading. Such financial statements and reports were and shall be prepared in accordance with generally accepted accounting principles, in effect on the date thereof, consistently applied, and shall fairly, completely and accurately present the financial condition and results of operations of the applicable Persons, as of the dates and for the periods indicated thereon. (b) The cash flow projections for Borrowers (together with any summaries of assumptions and projected assumptions, based on historical performance with respect thereto) furnished by Borrowers to Lender have been prepared in a manner consistent with the generally accepted accounting principles used to prepare their financial statements, and represent the reasonable, good faith opinion of Borrowers and their management as to the subject matter thereof and based on assumptions as set forth therein which Borrowers have determined to be fair and reasonable in view of current and reasonably foreseeable business conditions. 37 5.17. Disclosure. (a) The information contained in, and the representations and warranties set forth in this Agreement, the other Financing Agreements, or in any other instrument, document, list, certificate, written statement, oral statement by a Responsible Officer, schedule or exhibit delivered or to be delivered to Lender, as contemplated in this Agreement or in the other Financing Agreements, does not contain any untrue statement of a material fact and does not omit and will not omit to state a material fact necessary in order to make the information contained herein or therein not misleading. (b) After giving effect to the transactions contemplated by this Agreement, the other Financing Agreements, and the other instruments or documents delivered in connection herewith and therewith, there does not exist and there has not occurred any condition or event which constitutes an Event of Default or Incipient Default. 5.18. Labor Disputes. As of the date hereof, there is no collective bargaining agreement or other labor contract covering employees of Borrowers or any other member of the Affiliated Borrower Group. Except as set forth on Exhibit H attached hereto, as of the date hereof, no Borrower has any knowledge that any union or other labor organization is seeking to organize, or to be recognized as, a collective bargaining unit of employees of Borrowers or any other member of the Affiliated Borrower Group. As of the date hereof, there is no pending or, to the best knowledge of each Borrower, threatened strike, work stoppage, material unfair labor practice claims, or other material labor dispute against or affecting any Borrower or any other member of the Affiliated Borrower Group or any of their respective employees. 5.19. Corporate Name; Prior Transactions. Borrowers and Guarantors have not, during the one (1) year period ending on the date hereof, been known by or used any other corporate or fictitious name or been a party to any merger or consolidation, or acquired all or substantially all of the assets of any Person, or acquired any material amount of their property or assets out of the ordinary course of business, except as set forth on Exhibit F attached hereto. 5.20. Schedule of Indebtedness. (a) Exhibit G-1 attached hereto is a complete and correct list of (i) all credit agreements, notes, indentures, debt purchase agreements, agreements involving aggregate deferred payment obligations for the purchase of assets in excess of Two Hundred Fifty Thousand Dollars ($250,000), capitalized leases and other investments, arrangements and agreements in effect as of the date hereof providing for or relating to extensions of credit in which Hanover or any Subsidiaries of Hanover (including Borrowers and any of their Subsidiaries) are in any manner directly or contingently liable; (ii) the maximum principal amounts of the credit and the current amount outstanding under all such agreements; and (iii) an accurate description of any security interest, lien, mortgage or other charge or encumbrance whatsoever given as security therefor. 38 (b) Exhibit G-2 attached hereto is a complete and correct list of all (i) letters of credit in effect as of the date hereof pursuant to which Hanover or any Subsidiary of Hanover (including Borrowers and any of their Subsidiaries) are directly or contingently liable; (ii) the expiration date of each such letter of credit; and (iii) an accurate description of any security interest, lien, mortgage or other charge or encumbrance whatsoever given as security therefor and not released on or prior to the date hereof. 5.21. Common Enterprise. Borrowers or any other members of the Affiliated Borrower Group collectively operate as interdependent businesses and constitute a unitary business enterprise for the retail sale through direct mail marketing and stores of, among other things, men's fashions, women's fashions, home furnishings, general merchandise and giftware, down comforters, blankets, sheets, towels, outer garments, jewelry and giftware in which, among other things: (i) certain Borrowers effect the processing of orders and the collection and disbursement of funds by virtue of the same Credit Card Agreements and certain Borrowers are joint parties to, or have jointly appointed Hanover to act as their agent under, certain Credit Card Agreements in order to facilitate administrative efficiency and cost savings; (ii) the collections of customer payments of certain Borrowers are remitted to and otherwise deposited into a common account, (iii) the Borrowers and other members of the Affiliated Borrower Group share office and warehouse space, computer and accounting systems, distribution and other equipment; (iv) Borrowers operate a common telephonic answering, order taking and transmission service for the mail order business of Borrowers; (v) DM Advertising Inc., a Guarantor assists in the development and production of the mail order catalogs of each of Borrowers and of other promotional and advertising materials; (vi) Hanover furnishes managerial and other services on behalf of the other Borrowers and the other Subsidiaries of Hanover; (vii) Hanover and the Subsidiaries of Hanover file consolidated tax returns; (viii) certain Borrowers have made, and Borrowers may in the future make, intercompany loans to and borrow money from each other and (ix) Hanover and its Subsidiaries have many common officers and directors or managers. 5.22. Subordination of Certain Obligations. The payment terms and subordination provisions contained in the debt instruments of Hanover described in Exhibit G-1 attached hereto have not been amended, modified or revised and shall not be amended, modified or revised without the prior written consent of Lender, except for extensions of the maturity date beyond the then current Term which do not involve any increase in the principal amount outstanding greater than the amount outstanding as of the date hereof as set forth on Exhibit G-1 attached hereto. SECTION 6. ADDITIONAL COVENANTS In addition to the covenants set forth in the other Financing Agreements, Borrowers hereby, jointly and severally, covenant to and agree with Lender that Borrowers shall comply with the following covenants, or cause the same to be complied with, unless Lender shall otherwise consent in writing: 39 6.1. Tradenames. Borrowers may from time to time use the tradenames listed on Exhibit F attached hereto (which, together with any new tradenames used after the date hereof are referred to collectively as the "Tradenames" and individually, as a "Tradename"). As to the respective Tradenames used by each of them, each Borrower hereby agrees that: (a) Each Tradename is a tradestyle (and not an independent corporation or other legal entity) by which such Borrower may identify and sell or lease certain of its goods or services and conduct a portion of its respective business. (b) All proceeds (including any returned merchandise) which arise from the sale or lease of goods sold under a Tradename shall, except to the extent indicated on Exhibit F hereto, be owned solely by the respective Borrower whose goods were sold either directly or as assignee pursuant to an intercompany assignment (and further assignment to Lender) and shall be subject to the security interests of Lender and the other terms of this Agreement and the other Financing Agreements. (c) New Tradenames may be used by Borrowers, but only if (i) Lender is given at least thirty (30) days prior written notice of the intended use of any new Tradename and (ii) such supplemental financing statements or similar instruments Lender may request shall be executed and delivered to Lender by the respective Borrower intending to use same for filing or recording by Lender prior to the use of such new Tradename. 6.2. Subsidiaries. Borrowers shall not form or acquire, and Hanover shall not form or acquire, any direct or indirect Subsidiaries without the prior written consent of Lender, other than Non-Guarantor Subsidiaries acquired or formed by Hanover. In the sole discretion of Lender, in the event Lender's consent is required and Lender so consents, upon such formation or acquisition, each Borrower or Hanover, as the case may be, shall cause each such Subsidiary, so formed or acquired by it, that owns, or is contemplated to own, assets having a fair market value greater than Ten Thousand Dollars ($10,000) to execute and deliver to Lender, in form and substance satisfactory to Lender: (a) an absolute and unconditional guarantee of payment of any and all present and future Obligations of Borrowers to Lender, (b) an agreement to be bound by the terms of this Agreement as though it were an original party hereto or a General Security Agreement, as Lender may require, (c) related UCC financing statements, and (d) such other mortgages, security and other agreements, documents and instruments as Lender may require, including, but not limited to, supplements and amendments hereto and other loan agreements or instruments evidencing Indebtedness of such new Subsidiary to Lender. With respect to each direct or indirect Subsidiary of Hanover listed on Exhibit B attached hereto that owns assets with a fair market value greater than Ten Thousand Dollars ($10,000), Borrowers shall cause each such Subsidiary to execute and deliver to Lender each of the items referred to in subsections (a) through (d) of this Section 6.2, unless such Subsidiary is dissolved by July 31, 2004. 40 6.3. Indebtedness. Borrowers shall not, and shall not permit any of their respective Subsidiaries, and Hanover shall not permit any of its Subsidiaries, other than Non-Guarantor Subsidiaries, to incur, create, assume or permit to exist any Indebtedness for Borrowed Money, except: (a) the Obligations of Borrowers and any Subsidiary to Lender; (b) Indebtedness of Borrowers or such Subsidiary where payment is secured solely by liens permitted under Section 6.4 hereof; (c) Indebtedness of Borrowers and Guarantors in favor of Congress under the Congress Financing Agreements; (d) Indebtedness of Borrowers to the parties to the Credit Card Agreements pursuant to the terms thereof; (e) Indebtedness described on Exhibits G-1 or G-2 attached hereto and any successor or replacement financing with terms and evidenced by documents, instruments or agreements in form and substance acceptable to Lender in its discretion; (f) Intercompany loans or advances permitted under Section 6.5 hereof; and (g) Indebtedness of Borrowers or other Subsidiaries of Hanover and guaranties thereof by Hanover, incurred for the establishment or acquisition of, and improvements to, new fulfillment centers or warehouses, first leased or acquired by Borrowers after the date hereof, provided (i) the aggregate amount of all such Indebtedness at any one time outstanding does not exceed Five Million Dollars ($5,000,000) and (ii) the principal amounts or components of debt service and/or lease payments in respect of such Indebtedness and related expenditures for improvements do not exceed One Million Two Hundred Fifty Thousand Dollars ($1,250,000) in the aggregate in any one fiscal year of Borrowers. 6.4. Limitation on Liens. Each Borrower shall not, and shall not permit any of its respective Subsidiaries, and Hanover shall not permit any of its Subsidiaries, other than Non-Guarantor Subsidiaries, to create, incur, assume, or permit to exist any mortgage, pledge, security interest, lien, encumbrance, defect in title or restriction upon the use of its respective real or personal properties, whether now owned or hereafter acquired, except: (a) the liens, encumbrances, or security interests in favor of Lender; (b) the liens, encumbrances, or security interest in favor of Congress securing the Senior Credit Facility; (c) tax, mechanics and other non-consensual statutory liens arising in the ordinary course of Borrowers' or such Subsidiary's business to the extent: (i) such liens 41 secure Indebtedness which is not overdue or (ii) until foreclosure or similar proceedings shall have been commenced, such liens secure Indebtedness relating to claims or liabilities which are (A) fully insured and being defended at the sole cost and expense and at the sole risk of the insurer or (B) being contested in good faith by appropriate proceedings available to each Borrower and are adequately escrowed for or reserved against loan availability by Lender or as otherwise provided for under arrangements satisfactory to Lender; (d) liens arising in connection with worker's compensation, unemployment insurance, surety, insurance or financial responsibility, appeal and release bonds, in each case limited to securities pledged as collateral for any of the foregoing; (e) liens or security interests constituting purchase money liens or security interests upon specific fixed assets acquired, or liens or security interests existing on any such fixed assets at the time of acquisition thereof and including capital leases; provided, that: (i) no such purchase money lien or security interest (or capital lease, as the case may be) with respect to specific fixed assets shall extend to or cover any other property other than the specific fixed assets so acquired, or acquired subject to such lien or security interest (or lease), or accessions thereto and the proceeds thereof; (ii) such lien or security interest only secures the obligation to pay the purchase price of such specific fixed assets (or the obligations under the capital lease); (iii) the principal amount secured thereby shall not exceed one hundred percent (100%) of the cost of the fixed assets so acquired; and (iv) no Event of Default or Incipient Default shall have occurred and be continuing; (f) liens or rights of set off against credit balances, but not liens on or rights of set off against other property of Borrowers, arising under Credit Card Agreements; (g) liens on customer lists of the Borrowers, junior in priority to Lender's liens thereon; and (h) the Discover Lien. 6.5. Loans; Investments; Guarantees; Etc. Borrowers shall not, and shall not permit any of their respective Subsidiaries, and Hanover shall not permit any of its Subsidiaries, other than Non-Guarantor Subsidiaries, to, directly or indirectly, make any loans or advance money or property to any Person, or invest in (by capital contribution, dividend or otherwise) or purchase or repurchase the stock or Indebtedness or all or a substantial part of the assets or properties of any Person, or guarantee, assume, endorse, or otherwise become responsible for (directly or indirectly) or pay the Indebtedness, performance, obligations, stock or dividends of any person or agree to do any of the foregoing, except: 42 (a) The Guarantees of the Obligations of Borrowers in favor of Lender; (b) Provided no Event of Default or Incipient Default has occurred and is continuing, short-term loans or advances of money by one Borrower to another Borrower in the ordinary course of business, or by a Borrower to any other Subsidiary of Hanover, other than to a Non-Guarantor Subsidiary, in the ordinary course of business; and (c) the endorsement of instruments for collection or deposit in the ordinary course of business; (d) investments in the following instruments, which shall be pledged and (unless delivered to Congress under the Senior Credit Facility) delivered to Lender upon Lender's request, (i) marketable obligations issued or guaranteed by the United States of America or an instrumentality or agency thereof, maturing not more than one (1) year after the date of acquisition thereof, (ii) certificates of deposit or other obligations maturing not more than one (1) year after the date of acquisition thereof issued by any bank or trust company organized under the laws of and located in the United States of America or any State thereof and having capital, surplus and undivided profits of at least One Hundred Million Dollars ($100,000,000), and (iii) open market commercial paper with a maturity not in excess of two hundred seventy (270) days from the date of acquisition thereof which have the highest credit rating by either Standard & Poor's Corporation or Moody's Investors Service, Inc.; (e) guarantees by Borrowers and Guarantors of the repayment of obligations owing under the Senior Credit Facility; and (f) guarantees, existing as of the date hereof, of leases (including equipment leases) of Borrowers and/or Guarantors by other Borrowers and/or Guarantors. 6.6. Transactions with Affiliates. Borrowers shall not, and shall not permit any of their respective Subsidiaries, and Hanover shall not permit any of its Subsidiaries, other than Non-Guarantor Subsidiaries, to, directly or indirectly: (a) purchase, acquire or lease any property from, or sell, transfer or lease any property to, any shareholder, officer, director, agent, employee or Affiliate, except on prices or terms no less favorable than would have been obtained in an arm's length transaction with a non-Affiliated Person, unless such transaction either (i) involves the sale of Inventory in the ordinary course of business at no less than cost by a Borrower to another Borrower or (ii) is permitted by another provision of this Section 6.6 or Section 6.5 hereof, but in no event shall any such transaction be engaged in by Borrowers or other members of the Affiliated Borrower Group with a Non-Guarantor Subsidiary without Lender's prior written consent in each instance; or (b) make any payment of management fees, tax sharing payments, dividends, distributions (other than its own capital stock), or the principal amount of or interest on any Indebtedness owing to any Affiliate, except (i) with respect to any entire fiscal year of Borrowers for which a consolidated Federal income tax return is filed by Hanover that includes Borrowers and 43 a positive consolidated tax liability is due, as calculated and shown in the consolidated federal income tax return as filed by Hanover, as the case may be, each Borrower may pay to Hanover, as the case may be, an amount, not to exceed the lesser of (x) such Borrower's allocable share of the consolidated Federal income tax liability for each such year and (y) the accrued and unpaid liability of such Borrower to Hanover arising under the Tax Sharing Agreement in respect of the prior use by such Borrower of Hanover's net operating losses to reduce the amount of Federal income tax liability otherwise payable for any prior fiscal year of such Borrower had its Federal income tax liability for such year been computed on a separate Federal income tax return instead of a consolidated Federal income tax return with Hanover, as the case may be; provided, that, such Borrower is required to make each such payment to Hanover pursuant to the Tax Sharing Agreement; (ii) customary and reasonable directors' fees to directors of Borrowers or Hanover in the same amounts as are paid to its non-Affiliate directors, not to exceed $500,000 in the aggregate for all directors' fees in any calendar year; (iii) payments of reasonable legal expenses incurred by Hanover on behalf of Borrowers; and (iv) payments made by one Borrower to another Borrower to reconcile the payments posted in due course to the respective Accounts of such Borrower provided, however, in each case under clauses (i) through (v) of Section 6.6(b) hereof that no Event of Default or Incipient Default has occurred and is continuing; or (c) declare or pay any dividend on account of any share of any class of capital stock of Borrowers or any Subsidiary of Hanover, or any other Person, now or hereafter outstanding, or set aside or otherwise deposit or invest any sum for such purpose, or redeem, retire, defease, purchase, repurchase or otherwise acquire for value any share of any class of capital stock of Borrowers or any Subsidiary of Hanover (or set aside, pay into a sinking fund or otherwise deposit or invest any sum for such purpose) for any consideration other than its own capital stock or apply or set apart any sum, or make any other distribution (by reduction of capital or otherwise) in respect of any such shares or agree to do any of the foregoing, except that dividends may be declared and paid by Hanover on any preferred stock of Hanover issued or outstanding on the date hereof in accordance with its terms as of the date hereof, in each case out of legally available funds therefore, and provided no Event of Default or Incipient Default has occurred and is continuing. Notwithstanding anything to the contrary contained in this Section 6.6 or elsewhere in the Financing Agreements, the relevant Borrowers and/or Guarantors may repurchase, redeem or retire any or all of the Series C Participating Preferred Stock; provided that such Borrowers and/or Guarantors comply with the requirements set forth in the Congress Credit Agreements and the Certificate of Designation of the Series C Preferred Stock. 6.7. Maintenance of Existence. Each Borrower and each Guarantor shall at all times preserve, renew and keep in full force and effect its corporate existence and rights and franchises with respect thereto and 44 each Borrower and each Guarantor shall maintain in full force and effect all permits, licenses, trademarks, tradenames, approvals, authorizations, leases and contracts necessary to carry on the business as presently or proposed to be conducted; provided that any Guarantor, other than Hanover, may be dissolved at such time as it ceases to conduct business and owns less than Ten Thousand Dollars ($10,000) of assets. None of the Borrowers or any Guarantor shall engage, directly or indirectly, in any line of business other than the business in which it is engaged on the date hereof. 6.8. Sale and Leasebacks. None of the Borrowers shall enter into, and shall not permit any of its Subsidiaries to enter into, any arrangement, directly or indirectly, with any Person whereby such Borrower or Subsidiary shall sell or transfer any property, real or personal, whether now owned or hereafter acquired, and thereafter rent or lease such property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred, unless such sale and leaseback relates to real property first acquired and occupied after the date hereof and such Borrower delivers to Lender all applicable mortgagee and landlord waivers, access and use agreements, in the form of Exhibit H attached hereof. 6.9. Sale of Assets, Consolidation, Merger, Dissolution, Etc. (a) None of the Borrowers, any of their respective Subsidiaries or any Subsidiary of Hanover shall, directly or indirectly, merge into or with or consolidate with any other Person or permit any other Person to merge into or with or consolidate with Borrowers, any of their respective Subsidiaries, or any Subsidiary of Hanover, or sell, assign, lease, transfer, abandon or otherwise dispose of any stock or Indebtedness of Borrowers, or any of their respective Subsidiaries or of any Subsidiary of Hanover to any other Person, or any of their property or assets to any other Person (other than sales of Inventory in the ordinary course of business and sales of Equipment as permitted under Section 6.13 hereof and except as permitted under Sections 6.21 and 6.23 hereof) or wind up, liquidate or dissolve or agree to do any of the foregoing; provided, however, that the foregoing shall not restrict transactions otherwise permitted by the terms of Section 6.5(a), 6.6(b) or 6.7 hereof, as applicable. (b) Notwithstanding anything to the contrary contained in this Section 6.9 or elsewhere in the Financing Agreements, the relevant Borrowers or Guarantors may consummate an Asset Sale to the extent permitted by, and subject to the terms and conditions of, the Congress Credit Agreements, the Intercreditor Agreement and the Certificate of Designation of the Series C Preferred Stock. 6.10. Compliance with Laws, Regulations, Etc. Each Borrower and each member of the Affiliated Borrower Group shall at all times comply in all material respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders and duly observe all requirements, of any foreign, Federal, State or local governmental authority, including, without limitation, ERISA, the IRC, the Occupational Safety and Health Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, all Federal, State and local statutes, regulations, rules and orders relating to 45 consumer credit (including, without limitation, as each has been or may be amended the Truth-in-Lending Act, the Fair Credit Billing Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act and the regulations, rules and orders promulgated thereunder), all Federal, State and local statutes, rules and orders relating to sale of consumer goods and mail order sales (including, without limitation, the Consumer Product Safety Act of 1972, as amended, and the Federal Trade Commission Act of 1914, as amended, and the rules, regulations and orders promulgated thereunder) subject, in the case of any such law relating to the payment or collection and remittance of sales and/or use taxes, to the provisions of Section 5.9(b) hereof, which shall control with respect to such matters in lieu of this Section 6.10. 6.11. Compliance with Environmental Laws. (a) Each Borrower and Guarantor shall, at all times, comply in all material respects with all the Environmental Laws. (b) Each Borrower and Guarantor shall establish and maintain, at its expense, a system to assure and monitor its continued compliance with all Environmental Laws in all of its operations, which system shall include annual reviews of such compliance by employees or agents of each Borrower and Guarantor who are familiar with the requirements of the Environmental Laws. Copies of all environmental surveys, audits, assessments, feasibility studies and results of remedial investigations shall be promptly furnished, or caused to be furnished, by Borrowers and Guarantors to Lender. Each Borrower and Guarantor shall take prompt and appropriate action to respond to any non-compliance with any of the Environmental Laws and shall regularly report to Lender on such response. (c) Each Borrower and Guarantor shall give both oral and written notice to Lender, as soon as practicable after a Responsible Officer's receipt of any notice of, or his or her otherwise obtaining knowledge of, (i) the occurrence of any event involving the release, spill or discharge, threatened or actual, of any Hazardous Material or (ii) any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect to: (A) any non-compliance with or violation of any Environmental Law by any Borrower or Guarantor or (B) the release, spill or discharge, threatened or actual, of any Hazardous Material or (C) the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or (D) any other environmental matter, which can reasonably be expected to (1) involve any potential liability (contingent or otherwise) of any Borrowers or Guarantors with respect thereto (including any fines, liabilities, remediation expenses, costs and engineering and attorneys' fees) greater than Two Hundred Fifty Thousand Dollars ($250,000), or (2) result in a restraint on operations of any Borrower which prevents such Borrower from conducting its operations in the ordinary course, or (3) have an adverse effect on any Collateral having a value of Two Hundred Fifty Thousand Dollars ($250,000) or more, or a material adverse effect on the business, assets, liabilities or financial condition of any Borrower or of the Affiliated Borrower Group taken as a whole, or on any properties at or to which any Borrower or Guarantor transported, stored or disposed of any Hazardous Materials. (d) Without limiting the generality of the foregoing, whenever Lender reasonably determines that there is non-compliance, or any condition which requires any action by or on behalf of any Borrower or Guarantor in order to avoid any material non-compliance 46 with any Environmental Law, which could reasonably be expected to (i) involve any potential liability (contingent or otherwise) of any Borrowers or Guarantors with respect thereto (including any fines, liabilities, remediation expenses, costs and engineering and attorneys' fees) greater than Two Hundred Fifty Thousand Dollars ($250,000), or (ii) result in a restraint on operations of any Borrower which prevents such Borrower from conducting its operations in the ordinary course, or (iii) have an adverse effect on any Collateral having a value of Two Hundred Fifty Thousand Dollars ($250,000) or more, or a material adverse effect on the business, assets, liabilities or financial condition of any Borrower or of the Affiliated Borrower Group taken as a whole, each Borrower and Guarantor shall, at Lender's request and Borrowers' and Guarantors' expense: (i) cause an independent environmental engineer acceptable to Lender to conduct such tests as are reasonably necessary of the site where such non-compliance or alleged non-compliance with such Environmental Laws has occurred as to such non-compliance and prepare and deliver to Lender a report as to such non-compliance setting forth the results of such tests, a proposed plan for responding to any environmental problems described therein, and an estimate of the costs thereof and (ii) provide to Lender a supplemental report of such engineer whenever the scope of such non-compliance, or such Borrower's or Guarantor's response thereto or the estimated costs thereof, shall change in any material respect. (e) Each Borrower and Guarantor shall indemnify and hold harmless Lender, its directors, officers, employees, agents, invitees, representatives, successors and assigns, from and against any and all losses, claims, damages, liabilities, costs, and expenses (including reasonable attorneys' fees and legal expenses) directly or indirectly arising out of or attributable to the use, generation, manufacture, reproduction, storage, release, threatened release, spill, discharge, disposal or presence of a Hazardous Material, including, without limitation, the costs of any required or necessary repair, cleanup or other remedial work with respect to any property of any Borrower or Guarantor and the preparation and implementation of any closure, remedial or other required plans. All representations, warranties, covenants and indemnifications in this Section 6.11 shall survive the payment of the Obligations and the termination or expiration of this Agreement. (f) Borrowers and Guarantors may contest the assertion by any governmental authority or any third party of any obligation or liability for alleged non-compliance with Environmental Laws or otherwise relating to the release, spill or discharge, threatened or actual, of Hazardous Materials, or the generation use, storage, treatment, transportation, manufacturing, handling, production or disposal of Hazardous Materials, but no such contest shall relieve Borrowers and Guarantors from their obligations to Lender in regard to such matters as provided in this Agreement and the other Financing Agreements. 6.12. Payment of Taxes and Claims Borrowers shall duly pay and discharge all taxes, assessments, contributions and governmental charges upon or against them or their properties or assets, except for taxes which are being contested in good faith by appropriate proceedings and with respect to which reserves have been set aside in accordance with generally accepted accounting principles consistently applied, in the determination of Lender, or if requested by Lender to protect Lender's security interests or liens in any Collateral or Guarantor Collateral, adequate amounts have been escrowed with or reserved against by Lender or other arrangements satisfactory to Lender are 47 made to cover all amounts which are claimed due plus interest and possible penalties thereon; provided, however, that with respect to sales and/or use taxes the provisions of Section 5.9(b) hereof shall control with respect to such matters in lieu of this Section 6.12. Borrowers shall be liable for any tax or penalty imposed upon any transaction under this Agreement or any of the other Financing Agreements or giving rise to any Collateral or Guarantor Collateral or which Lender may be required to withhold or pay for any reason and Borrowers shall indemnify and hold Lender harmless with respect thereto, and shall repay to Lender on demand the amount thereof, and, until paid by Borrowers, such amount shall be added and deemed part of the Obligations, provided, that, nothing contained herein shall be construed to require Borrowers to pay any income tax attributable to the income of Lender in respect of any compensation charged or paid hereunder to Lender. 6.13. Properties in Good Condition. (a) Each Borrower and Guarantor shall keep its properties in good repair, working order and condition (reasonable wear and tear excepted) and, from time to time, make all needful and proper repairs, renewals, replacements, additions and improvements thereto, so that the business carried on may be properly and advantageously conducted at all times in accordance with prudent business management. The Inventory and the Equipment of each Borrower and Guarantor shall be used in its business and not for personal, family, household or farming use. (b) All of the Inventory of each Borrower is and shall be held for sale in the ordinary course of such Borrower's mail order and retail business and is and shall be fit for such purposes. Borrowers shall not sell or otherwise dispose of any Inventory except for mail order and retail sales in the ordinary course of business and except for sales of outdated and surplus Inventory in the absence of an Event of Default or Incipient Default which is continuing that comply with the provisions of Section 6.21 hereof. Borrowers shall maintain all Inventory according to a computerized perpetual inventory accounting system. Borrowers shall keep the Inventory in good and marketable condition, at their own expense. Borrowers shall not, without the prior written notice to Lender, acquire or accept any Inventory on consignment or approval; it being understood, however, that Gump's may from time to time acquire inventory on consignment. Borrowers shall conduct a physical count of the Inventory of Borrowers, at their expense, at least annually prior to an Event of Default and at least twice a year during the continuance of an Event of Default, and shall promptly supply Lender with a copy of each such count. Borrowers shall not, without the prior written consent of Lender, sell any Inventory on a bill-and-hold, guaranteed sale, sale and return, sale on approval, or other repurchase or return basis, except for Borrowers' existing return policies for their mail order sales and retail store sales, in each case in the ordinary course of business and prior to an Event of Default. (c) Borrowers shall use the Equipment with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with all applicable laws. (d) Borrowers shall not remove any Equipment from the locations set forth for the respective Borrowers on Exhibit C hereto or otherwise permitted herein for the applicable Borrower, except to the extent necessary to have any Equipment repaired or 48 maintained in the ordinary course of the business of Borrowers or to move Equipment directly from one location set forth on Exhibit C hereto for that Borrower or otherwise permitted herein for that Borrower, to another such location and except for the movement of motor vehicles used by or for the benefit of the Borrowers in the ordinary course of business. (e) The Equipment of Borrowers is now and shall remain personal property and Borrowers shall not permit any of their Equipment to be or become a part of or affixed to real property. (f) The Equipment of each Borrower, other than any Equipment constituting fixtures as of the date hereof, is now and shall remain personal property and Borrowers shall not permit any material part of such Equipment to be or become a part of or affixed to real property without (i) prior written notice to Lender and the written consent of Lender and (ii) first making all arrangements, and delivering or causing to be delivered to Lender, such agreements and other documentation requested by Lender for the protection and preservation of its security interests and liens, in form and substance satisfactory to Lender. (g) Borrowers shall not, without Lender's prior written consent, sell, lease as a lessor, or otherwise dispose of any part of their Equipment that has a fair market value greater than Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate for all such transactions in any fiscal year of Borrowers. In the event any such Equipment is sold, transferred or otherwise disposed of with Lender's prior written consent or as permitted hereunder without such consent and: (i) such sale, transfer or disposition is effected without replacement of such Equipment, or such Equipment is replaced by Equipment leased by Borrowers, or by Equipment purchased by Borrowers subject to a Purchase Money Lien, then Borrowers shall deliver all of the cash proceeds of any such sale, transfer or disposition to Lender, which proceeds shall be (A) applied to the repayment of the Obligations of Borrowers as applicable, in such order and manner as Lender shall determine or (B) retained by Lender as cash Collateral; or (ii) such sale, transfer or disposition is made in connection with the purchase by Borrowers of replacement Equipment, then Borrowers shall use the proceeds of such sale, transfer or disposition to finance the purchase by Borrowers of replacement Equipment and shall deliver to Lender written evidence of the use of the proceeds for such purchase. All replacement Equipment purchased by Borrowers shall be free and clear of all liens, claims and encumbrances, except as otherwise permitted hereunder. (h) Borrowers assume and shall indemnify Lender from and against all responsibility and liability arising from or relating to the use, sale or other disposition of their respective Inventory and Equipment. 6.14. Insurance Borrowers and Guarantors shall at all times maintain, with financially sound and reputable insurers, insurance with respect to the Collateral and Guarantor Collateral, insuring the same and their business against loss or damage of the kind and in the amounts customarily insured against by corporations of established reputation engaged in the same or similar business and similarly situated, and Borrowers and Guarantors shall maintain public liability insurance against claims for personal injury, death or property damage occurring upon, in, about or in 49 connection with the use of any properties owned, occupied or controlled by them and occurring in connection with the use (or otherwise) of any products manufactured or sold by them, worker's compensation insurance, and business interruption insurance. Said policies of insurance shall be satisfactory to Lender as to form, amount and insurer. Borrowers and Guarantors shall furnish certificates, policies or endorsements to Lender as proof of such insurance, and, if they fail to do so, Lender is authorized, but not required, to obtain such insurance at the expense of Borrowers and Guarantors. All policies shall provide for at least thirty (30) days prior written notice to Lender of any cancellation or reduction of coverage. Lender, and its designees, are hereby irrevocably appointed to act as attorney-in-fact for Borrowers and Guarantors in obtaining, and at any time during the continuance of an Event of Default, adjusting, settling, amending and canceling such insurance. Borrowers and each Guarantor shall obtain non-contributory lender's loss payable endorsements to all insurance policies in form and substance satisfactory to Lender specifying that the proceeds of such insurance shall be payable to Lender and further specifying that Lender shall be paid regardless of any act or omission by Borrowers and/or any Guarantor. At its option, Lender may apply any insurance proceeds received by Lender at any time to the cost of repairs or replacement of Collateral and/or to payment of the Obligations of Borrowers and/or any Guarantor, whether or not then due, in any order and in such manner as Lender, in its discretion, may determine. Lender may retain such proceeds as cash Collateral for the Obligations. 6.15. Compliance with ERISA None of the Borrowers, or any other member of the Affiliated Borrower Group, shall, with respect to all "employee pension benefit plans" maintained by Borrowers or any other member of the Affiliated Borrower Group: (a) (i) terminate any of such employee pension benefit plans so as to incur any liability to the Pension Benefit Guaranty Corporation established pursuant to ERISA, (ii) allow or suffer to exist any prohibited transaction involving any of such employee pension benefit plans or any trust created thereunder which would subject Borrowers or any other member of the Affiliated Borrower Group to a tax or penalty or other liability on prohibited transactions imposed under Section 4975 of the IRC or under ERISA, (iii) fail to pay to any such employee pension benefit plan any contribution which it is obligated to pay under the terms of such plan, (iv) allow or suffer to exist any accumulated funding deficiency, whether or not waived, with respect to any such employee pension benefit plan, (v) allow or suffer to exist any occurrence of a reportable event or any other event or condition which presents a material risk of termination by the Pension Benefit Guaranty Corporation of any such employee pension benefit plan that is a single employer plan, which termination could result in any liability to the Pension Benefit Guaranty Corporation, or (vi) incur any withdrawal liability with respect to any multiemployer plan which is not fully bonded; except only, in the case of any of the foregoing, if the resulting liability or potential liability of Borrowers or any other member(s) of the Affiliated Borrower Group would not, individually or in the aggregate, exceed Two Hundred Fifty Thousand Dollars ($250,000). (b) As used in this Section 6.15, the terms "employee pension benefit plan," "employee benefit plan", "single employer plan", "multiemployer plan", "accumulated funding deficiency" and "reportable event" shall have the respective meanings assigned to them 50 in ERISA, and the term "prohibited transaction" shall have the meaning assigned to it in Section 4975 of the IRC or under ERISA. 6.16. Notice of Default. Promptly upon any Responsible Officer becoming aware of the existence of any condition or event which constitutes an Event of Default or Incipient Default, Borrowers shall give Lender written notice thereof specifying the nature of such condition or event. 6.17. Financial Statements and Other Information. (a) Borrowers shall promptly furnish to Lender all such financial information regarding each Borrower and each member of the Affiliated Borrower Group as Lender shall reasonably request, and notify the auditors and accountants of Borrowers and each member of the Affiliated Borrower Group that Lender is authorized to obtain such information directly from them. Without limiting the foregoing, Borrowers shall furnish to Lender, immediately following any Lender request therefore, any financial statements or other information that is furnished to Congress pursuant to the Congress Credit Agreements. (b) Lender is authorized to deliver a copy of any financial statement or any other information relating to the business, operations or financial condition of Borrowers and any member of the Affiliated Borrower Group, which may be furnished to it hereunder or otherwise, to any court, regulatory body or agency having jurisdiction over Lender or to any other person which shall, or shall have any right or obligation to, succeed to all or any part of Lender's interests in any of the Obligations, this Agreement, the other Financing Agreements, or the Collateral or Guarantor Collateral, including, without limitation, any Participant. (c) Each Borrower and each Guarantor hereby irrevocably authorizes and directs all accountants, auditors and other third parties (but excluding Borrower's and Guarantor's attorneys) to deliver to Lender at Borrowers' expense, copies of the financial statements, papers related thereto or other accounting records of any nature in their possession and to disclose to Lender any information they may have regarding the business affairs and financial condition of Borrowers and each other member of the Affiliated Borrower Group. Lender shall obtain the applicable Borrower's or Guarantor's prior written consent before making any request pursuant to this Section 6.17(c), which consent such Borrower or Guarantor shall not unreasonably withhold or delay. 6.18. Consolidated Working Capital. Hanover shall, for each fiscal month in any fiscal year, maintain Consolidated Working Capital, calculated on a consolidated basis for Hanover and its Subsidiaries, of not less than the following amounts as at the end of each such fiscal month for each such fiscal month:
Period Amount - ------ -------- January $7,740,000 February $7,650,000 March $7,200,000
51 April $ 7,740,000 May $ 6,930,000 June $ 7,290,000 July $ 8,820,000 August $ 9,720,000 September $ 9,540,000 October $12,600,000 November $12,870,000 December $11,610,000
6.19. Consolidated Net Worth. Hanover shall, for each fiscal month in any fiscal year, maintain Consolidated Net Worth, calculated on a consolidated basis for Hanover and its Subsidiaries, of not less than the following amounts as at the end of each such fiscal month:
Period Amount - ------ ------ January ($53,235,000) February ($54,915,000) March ($54,075,000) April ($54,075,000) May ($54,705,000) June ($53,970,000) July ($54,285,000) August ($54,285,000) September ($51,660,000) October ($51,345,000) November ($48,510,000) December ($43,470,000)
6.20. Further Assurances. Each Borrower and Guarantor has executed or shall execute and deliver to Lender such of the other Financing Agreements to which it is a party and financing statements pursuant to the UCC, in form and substance satisfactory to Lender. Borrowers and each Guarantor shall, at their expense, at any time or times duly execute and deliver, or shall cause to be duly executed and delivered, such further agreements, instruments and documents, including, without limitation, additional security agreements, mortgages, deeds of trust, deeds to secure debt, collateral assignments, pledge agreements, Uniform Commercial Code financing statements or amendments or continuations thereof, landlord's or mortgagee's waivers of liens and consents to the exercise by Lender of all the rights and remedies hereunder, under any of the other Financing Agreements or applicable law with respect to the Collateral and/or Guarantor Collateral, and do or cause to be done such further acts as may be necessary or proper in Lender's opinion to evidence, perfect, maintain and enforce the security interest and the priority thereof in the Collateral and Guarantor Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any of the other Financing Agreements. Where permitted by law, Borrowers and 52 each Guarantor hereby authorize Lender to execute and file one or more Uniform Commercial Code financing statements signed only by Lender. Upon the request of Lender, at any time and from time to time, Borrowers and each Guarantor shall, at their cost and expense, do, make, execute, deliver and record, register or file financing statements, mortgages, deeds of trust, deeds to secure debt, and other instruments, acts, pledges, assignments and transfers (or cause the same to be done) and will deliver to Lender such instruments evidencing items of Collateral or Guarantor Collateral as may be requested by any of them. 6.21. Sales of Outdated and Surplus Inventory. Borrowers may sell, transfer or dispose of outdated and surplus Inventory to jobbers or other third parties only to the extent that any one transaction or series of related transactions does not involve Inventory having an aggregate original cost to Borrowers of greater than Four Million Dollars ($4,000,000); provided, that (i) Borrowers remit, or cause to be remitted, to Lender all the proceeds of such sales; (ii) Borrowers account for all such sales separately in the weekly Inventory reports provided to Lender; (iii) Borrowers provide to Lender written notice within five (5) calendar days after each such sale; and (iv) no Event of Default or Incipient Default has occurred and is continuing. 6.22. Maintenance and Delivery of Customer Lists; MACS Software Borrowers shall create and maintain all Customer Lists in industry standard formats stored on industry standard electronic data storage media and accessible using industry standard hardware and software. Customer Lists shall be updated and delivered to the storage and escrow agent under the Customer List Escrow Agreement, not less frequently than monthly, on or before the tenth (10th) day of each month. Updated revisions of the MACS Software shall be delivered to the storage and escrow agent as soon as practicable following the installation and use of such updated versions on Borrowers' systems (other than testing). Receipt of the delivery of such updated Customer Lists and, as applicable, updated MACS Software shall be acknowledged in writing by the storage and escrow agent and a copy of each receipt delivered to Lender on or before such tenth (10th) day of each month. Lender shall have the access to and the right to inspect the Customer Lists and MACS Software in Borrowers' possession or in the possession of the storage and escrow agent, at any time during normal business hours. Upon and at any time after the occurrence and during the continuance of an Event of Default or Incipient Default, Lender shall have the right to direct the storage and escrow agent to deliver the Customer Lists and MACS Software in its possession to Lender and Lender shall have the right to require Borrowers to deliver all Customer Lists and MACS Software and periodic updates thereof directly to Lender, without, in any case, limiting Lender's other rights and remedies hereunder or under the other Financing Agreements. 6.23. Rental or License of Customer Lists. Borrowers are and shall be the sole owners of all Customer Lists used in Borrowers' business. No portion of the Customer Lists shall be sold, leased, licensed or otherwise disposed of by Borrowers, except, that so long as no Event of Default or Incipient Default has occurred and is continuing, Borrowers may, in the ordinary course of business in accordance with past practices, enter into non-exclusive rental agreements or license agreements 53 permitting the use of Borrowers' mailing and customer lists; provided, that (a) such agreements do not impair the value, salability or disposability of the Customer Lists as a whole; and (b) all proceeds of such rentals or licensing by Borrowers are remitted to Lender hereunder. In addition, prior to an Event of Default or Incipient Default that has occurred and is continuing, Borrowers may sell outright to non-Affiliates such portions of the Customer Lists having a fair market value aggregating not more than Two Hundred Fifty Thousand Dollars ($250,000) in any one fiscal year for all such sales to non-Affiliates; provided, that all proceeds of such sale are remitted to Congress pursuant to the Senior Credit Facility and the Intercreditor Agreement. 6.24. No Termination or Amendment of Credit Card Agreements. Borrowers shall not, without Lender's prior written consent, terminate or not renew any of the Credit Card Agreements, unless replacement agreements satisfactory to Lender are entered into by Borrowers. Borrowers shall not, without Lender's prior written consent, enter into any amendment or supplement to the Credit Card Agreements which could in any manner adversely affect the Collateral, the Obligations or the rights and interests of Lender hereunder or under the other Financing Agreements. 6.25. Obligations to be Senior Indebtedness Notwithstanding anything to the contrary in this Agreement, but subject to the terms and provisions of the Intercreditor Agreement, the Indebtedness, if any, of Borrowers, Guarantors or any other direct or indirect Subsidiary of Hanover in respect of any debt instruments described on Exhibit G-1 (other than the Indebtedness owed to Congress) attached hereto shall be subordinated in right of payment to the Obligations of Borrowers and Guarantors to Lender, and the Obligations of Borrowers and Guarantors to Lender shall at all times be deemed senior in right of payment to all such Indebtedness. 6.26. Litigation Notices Borrowers and Guarantors shall provide written notice to Lender of each investigation by any governmental agency that, to the knowledge of any Responsible Officer, is pending or threatened against or affects any Borrower or any other member of the Affiliated Borrower Group or their properties or business, and of each action, suit, proceeding or claim by any Person that, to the knowledge of any Responsible Officer, is pending or threatened against any Borrower or any other member of the Affiliated Borrower Group or their properties or business (other than future pending or threatened litigation involving the enforcement of lease obligations by or against Hanover as successor to The Horn & Hardart Company as to leased properties not used in or related to the business of Borrowers), or against or affecting any transaction contemplated by this Agreement, the other Financing Agreements, or other instruments, agreements or documents delivered in connection herewith or therewith, which could reasonably be expected to result in a determination adverse to any Borrower or any other member of the Affiliated Borrower Group, and which, if so adversely determined with respect to any of them, would result in either (i) a fine, judgment, penalty, loss or liability, including costs and attorneys' fees, not covered by insurance, which, individually, exceeds Three Hundred Thousand Dollars ($300,000) or (ii) any material adverse change in the business, assets, liabilities or financial condition of any Borrower or of the Affiliated Borrower Group taken as a 54 whole. Borrowers and Guarantors shall also provide written notice to Lender of each investigation by any governmental agency or supplier that, to the knowledge of any Responsible Officer, is pending or threatened concerning a possible product recall, or that actually results in, a product recall, of goods of or sold by Borrowers or Guarantors having an aggregate value of Three Hundred Thousand dollars ($300,000) or more. 6.27. Capital Expenditures. Hanover and its Subsidiaries shall not, directly or indirectly, in any fiscal year of Hanover and its Subsidiaries make any Capital Expenditures of an aggregate amount not to exceed $5,000,000, plus the amount of any cash proceeds obtained by Hanover and its Subsidiaries from the sale of any Capital Stock to the extent permitted hereunder. 6.28. EBITDA (a) Hanover and its Subsidiaries shall not, as to any fiscal quarter during the fiscal year 2004 of Hanover and its Subsidiaries, permit EBITDA of Hanover and its Subsidiaries commencing on the first day of such fiscal year and ending on the last day of the applicable fiscal quarter set forth below on a cumulative year to date ("YTD") basis to be less than the respective amount set forth below opposite such fiscal quarter end YTD period: 55
Fiscal Quarter End YTD Periods Cumulative FOR FISCAL YEAR 2004 MINIMUM EBITDA - ----------------------------------------------- -------------- (i) December 28, 2003 through September 25, 2004 $ 4,500,000 (ii) December 28, 2003 through December 25, 2004 $10,800,000
(b) Hanover and its Subsidiaries shall not, as to any fiscal quarter during the fiscal year 2005 of Hanover and its Subsidiaries, permit EBITDA of Hanover and its Subsidiaries commencing on the first day of such fiscal year and ending on the last day of the applicable fiscal quarter set forth below on a cumulative YTD basis to be less than the respective amount set forth below opposite such fiscal quarter end YTD period:
Fiscal Quarter End YTD Periods Cumulative FOR FISCAL YEAR 2005 MINIMUM EBITDA - -------------------------------------------------- -------------- (i) December 26, 2004 through March 26, 2005 - $ 0 - (ii) December 26, 2004 through June 25, 2005 $ 1,575,000 (iii) December 26, 2004 through September 24, 2005 $ 4,500,000 (iv) December 26, 2004 through December 31, 2005 $10,800,000
(c) Hanover and its Subsidiaries shall not, as to any fiscal quarter during the fiscal year 2006 of Hanover and its Subsidiaries, permit EBITDA of Hanover and its Subsidiaries commencing on the first day of such fiscal year and ending on the last day of the applicable fiscal quarter set forth below on a cumulative YTD basis to be less than the respective amount set forth below opposite such fiscal quarter end YTD period:
Fiscal Quarter End YTD Periods Cumulative FOR FISCAL YEAR 2006 MINIMUM EBITDA - ------------------------------------------------ -------------- (i) January 1, 2006 through April 1, 2006 - $ 0 - (ii) January 1, 2006 through July 1, 2006 $ 1,575,000 (iii) January 1, 2006 through September 30, 2006 $ 4,500,000 (iv) January 1, 2006 through December 30, 2006 $10,800,000
56 (d) Hanover and its Subsidiaries shall not, as to any fiscal quarter during the fiscal year 2006 of Hanover and its Subsidiaries, permit EBITDA of Hanover and its Subsidiaries commencing on the first day of such fiscal year and ending on the last day of the applicable fiscal quarter set forth below on a cumulative YTD basis to be less than the respective amount set forth below opposite such fiscal quarter end YTD period:
Fiscal Quarter End YTD Periods Cumulative FOR FISCAL YEAR 2006 MINIMUM EBITDA - ------------------------------------------------ -------------- (i) December 31, 2006 through March 31, 2007 $900,000
SECTION 7. EVENTS OF DEFAULT AND REMEDIES 7.1. Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: (a) any Borrower shall fail to pay to Lender when due any amounts owing to Lender under any Obligation; or (b) any Borrower shall breach any of the terms, covenants, conditions or provisions of this Agreement, any supplement hereto or any other agreement between Lender and Borrowers, including any of the other Financing Agreements or any other default or Event of Default occurs or exists under any of the foregoing; or (c) any of the Guarantors or other endorser or other Person liable on the Obligations of Borrowers shall terminate or breach any of the terms, covenants, conditions or provisions of any guarantee, endorsement or other agreement of such Person with, or in favor of, Lender; or (d) an Event of Default (as such term is defined in the Congress Credit Agreements) has occurred and is continuing which event of default continues for more than any applicable cure period (if any) with respect thereto or is not waived in writing by Congress thereto; or (e) any representation, warranty or statement of fact made to Lender at any time by any Borrower or any Guarantor or on behalf of any Borrower or any Guarantor is false or misleading in any material respect; or (f) any Borrower, any Guarantor, or any other Person at any time liable on or in respect of the Obligations shall default in the payment of an amount greater than Two Hundred Fifty Thousand Dollars ($250,000), individually or in the aggregate, at any time due or any Indebtedness at any time owing to any Person other than Lender or in the performance of any other terms or covenants or any evidence of same or other agreement relating thereto or securing same, or with respect to any material contract, lease (other than leases under which Hanover, as successor to The Horn & Hardart Company, is the sole obligor 57 relating to property not used in the business of Borrowers), license or other obligation owed to any Person other than Lender, which default continues for more than the applicable cure period, if any, with respect thereto, but in no event more than thirty (30) days after the occurrence of any such default; or (g) the aggregate amount outstanding at any one time under the Credit Card Agreements collectively owed to Borrowers and not paid after the date such payment is due shall exceed Five Million Dollars ($5,000,000); or reserves or any other mechanism effecting a reduction of the amount actually paid to Borrowers pursuant to any such Credit Card Agreement have been implemented or imposed after the date hereof in an amount exceeding One Hundred Thousand Dollars ($100,000) in the aggregate; or Borrowers shall default in the performance of their obligations under any of the Credit Card Agreements; or any of the Credit Card Agreements shall be terminated or not renewed; or any party to the Credit Card Agreements shall cease purchasing and/or processing transactions involving Credit Card Receivables; or (h) any Borrower or Hanover or any other Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars ($250,000), shall become insolvent, fail to meet its debts as they mature, call a meeting of creditors or have a creditors' committee appointed, make an assignment for the benefit of creditors, commence or have commenced against it any action or proceeding for relief under the Bankruptcy Code or any other bankruptcy law or similar statute or statutes providing for reorganization, adjustment of debts, liquidation or dissolution (except in the case of any such action or proceeding commenced against any Borrower or Hanover or any other Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars ($250,000), such action or proceeding is dismissed within thirty (30) days from the date such action or proceeding was commenced, unless such Borrower, Hanover or Guarantor against whom such action was brought shall acquiesce to the relief sought or such relief sought is sooner granted) or if any Borrower or Hanover or any other Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars ($250,000) suspends or discontinues doing business for any reason, or if a receiver, custodian or trustee of any kind is appointed for any Borrower or Hanover or any other Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars ($250,000) or any of their respective properties; or (i) one (1) or more judgments, decrees or orders for the payment of damages in an amount greater than Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate at any time shall be issued by one or more courts, governmental agencies, administrative tribunals or other bodies having jurisdiction against any Borrower, Hanover or any other Guarantor with assets greater than Two Hundred Fifty Thousand Dollars ($250,000) and a stay of execution thereof shall not be procured within thirty (30) days after the date of entry thereof, or such judgment(s), decree(s) or order(s) shall not be fully bonded within such period of thirty (30) days, unless sooner enforced; or (j) [Intentionally Left Blank] (k) any event shall occur as a result of which: (i) the consolidated revenues of Hanover and its Subsidiaries (A) in any fiscal month is thirty (30%) percent less than the consolidated revenues of Hanover 58 and its Subsidiaries for the same fiscal month of the prior fiscal year or (B) in any twelve (12) month period in the aggregate is twenty (20%) percent less than the consolidated revenues of Hanover and its Subsidiaries for the immediately preceding twelve (12) month period; provided that, in either case, as to any applicable measurement period, if Borrowers or Guarantors have consummated an Asset Sale in accordance with the terms and conditions hereof during such period, any reduction in such consolidated revenues that is directly attributable to the revenues of such Borrower or Guarantor arising from the assets of such Borrower or Guarantor that were sold pursuant to such Asset Sale; then such reduction shall not be deemed a reduction for purposes of this clause (i); (ii) the operations are suspended or terminated (other than due to an embargo, condemnation, act of God or public enemy or other casualty loss or force majeure) for ten (10) days or more at any facility of a Borrower used in generating more than twenty (20%) percent of the revenues of Borrowers on a consolidated basis for the immediately preceding fiscal year; provided, that, if Borrowers or Guarantors have consummated an Asset Sale in accordance with the terms and conditions hereof involving the sale of any such facility, then the sale of a facility pursuant to such Asset Sale shall not be deemed to be a suspension or termination of operations at such facility; (iii) any strike, lockout, work stoppage or labor dispute affects twenty (20%) percent or more of the aggregate workforce of Borrowers; (iv) any law, regulation, order, judgment or decree of any governmental authority shall exist, or any action, suit, investigation, litigation or proceeding shall be pending or threatened in writing in any court or before any arbitrator or governmental authority that could reasonably be expected to result in the loss of the ability to conduct any portion of the business that accounted for more than ten (10%) percent of the revenues of Hanover and its Subsidiaries on a consolidated basis on the immediately preceding fiscal year; (v) the loss, suspension, revocation or failure to renew any permit or license now held or hereafter acquired by a Borrower required in connection with the sale or distribution of goods the sale of which gave rise to revenues of more than ten (10%) percent in the immediately preceding fiscal year; (vi) any vendor or group of vendors that accounts for sales of goods to Borrowers in excess of ten (10%) percent of the aggregate of Borrowers' then current goods sold to customers in the ordinary course of business for the immediately preceding fiscal year of Borrowers terminates its sale agreement(s) with any Borrower or stops delivery of goods to a Borrower for more than sixty (60) Business Days; (vii) a vendor or group of vendors change the credit terms of sale of goods to Borrowers so that Borrowers are required to purchase twenty (20%) percent or more of the aggregate inventory of all Borrowers on a cash on delivery or cash in advance basis; (viii) the aging of accounts payable of Borrowers reflects that twenty (20%) percent or more of the total balance owed is more than sixty (60) days past the due date; 59 (ix) any embargo, condemnation, act of God or public enemy or other casualty loss or force majeure occurs resulting in the cessation or substantial curtailment of the receipt of goods from vendors or from revenue producing activities of Borrowers for more than thirty (30) days; (x) contingent liabilities are incurred by Borrowers and Guarantors in excess of $10,000,000 which would be required to be reflected in a balance sheet prepared in accordance with GAAP and which liabilities are not permitted to be incurred under the terms and conditions hereof; or (xi) any of the President, Chief Executive Officer, Chief Financial Officer or Chief Operating Officer of Borrower is convicted of a felony criminal offense; or (l) any Change of Control. 7.2. Remedies. (a) Without limiting Lender's rights to demand payment sooner as provided in this Agreement, but subject to the terms and provisions of the Intercreditor Agreement, upon or at any time after the occurrence or existence of any one or more of such Events of Default, upon termination of this Agreement or any of the other Financing Agreements, or if this Agreement and the other Financing Agreements are not renewed, in addition to any other rights Lender may have under the Financing Agreements or otherwise: (i) Lender may, at any time thereafter, at its option, without presentment for payment, demand, notice of dishonor or notice of protest or any other or further notice, all of which are hereby expressly waived by Borrowers and Guarantors, declare any or all of the Obligations of Borrowers and/or Guarantors to be immediately due and payable, together with interest at the highest rate of interest hereunder until fully and indefeasibly paid; (ii) each Participant, to the fullest extent permitted by applicable law, shall have the right to (A) set off against the Obligations of Borrowers and Guarantors any and all deposits (whether general or special, time or demand, provisional or final), credits, balances, accounts, monies or other assets which are the property of Borrowers or any Guarantor and held by such Participant or owed by such Participant to Borrowers or any Guarantor and (B) remit the same to Lender for application to the Obligations of Borrowers and/or Guarantors; (iii) without further notice to Borrowers or Guarantors, Lender may appropriate, set off and apply to the payment of any or all of the Obligations of Borrowers and/or Guarantors, any or all Collateral, in such manner as Lender shall determine, enforce payment of any Collateral and/or Guarantor Collateral, settle, compromise or release in whole or in part, any amounts owing on the Collateral and/or Guarantor Collateral, make allowances and adjustments with respect thereto, issue credits in Lender's or Borrowers' name, sell, assign and deliver the Collateral and/or Guarantor Collateral (or any part thereof), at public or private sale, at broker's board, for cash, upon credit or otherwise, at Lender's option and discretion, and 60 Lender may bid or become purchaser at any such sale, if public, free from any right of redemption which is hereby expressly waived; (iv) without limiting the generality of the foregoing, Lender is hereby authorized at any time and from time to time, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other Indebtedness at any time owing by any Lender or any Affiliate of Lender to or for the credit or the account of Borrowers or any Guarantor against any and all of the Obligations of Borrowers and/or Guarantors, whether or not then due and payable; and (v) Lender shall have the right, without notice to Borrowers or any Guarantor (except as otherwise expressly provided herein), at any time and from time to time in its discretion, with or without judicial process or the aid or assistance of others and without cost to Lender (A) to enter upon any premises on or in which any of the Inventory or Equipment of Borrowers and/or Guarantors may be located and, without resistance or interference by Borrowers or any Guarantor, take possession of such Inventory or Equipment; (B) to sell, foreclose or otherwise dispose of any part or all of such Inventory or Equipment on or in any premises of Borrowers or any Guarantor or premises of any other party; (C) to require Borrowers and/or Guarantors, at their expense, to assemble and make available to Lender any part or all of such Inventory or Equipment at any place and time designated by Lender; and (D) to remove any or all of such Inventory or Equipment from any premises on or in which the same may be located, for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose. (b) Lender shall have all of the rights and remedies of a secured party under the UCC or applicable law of any other State in which any Collateral or Guarantor Collateral may be situated, in addition to all of the rights and remedies set forth in this Agreement and the other Financing Agreements, and in any instrument or document referred to herein or therein, and/or under any other applicable law relating to this Agreement, the other Financing Agreements, the Obligations of Borrowers and/or Guarantors, the Collateral or the Guarantor Collateral. (c) Each Borrower and Guarantor agrees that in any case where the giving of notice of sale or other disposition of Collateral and/or Guarantor Collateral is required by law, the giving of ten (10) days notice to such Borrower or Guarantor by Lender at their addresses set forth below, designating the place and time of any public sale or of the time after which any private sale or other intended disposition of the Collateral and/or Guarantor Collateral, as the case may be, is to be made, shall be deemed to be reasonable notice thereof and each Borrower and Guarantor waives any other notice with respect thereto. (d) The net cash proceeds resulting from the exercise of any of the foregoing rights or remedies shall be applied by Lender to the payment of the Obligations of Borrowers and/or Guarantors in such order as Lender may elect, and Borrowers and Guarantors shall remain liable to Lender for any deficiency. Without limiting the generality of the foregoing, if Lender enters into any credit transaction, directly or indirectly, in connection with the disposition of any Collateral and/or Guarantor Collateral, Lender shall have the option, at any time, in its discretion, to reduce the Obligations of Borrowers and/or Guarantors by the principal amount of such credit transaction or to defer the reduction thereof until actual receipt by Lender of cash or other immediately available funds in connection therewith. 61 (e) In the event Lender institutes an action to recover any Collateral and/or Guarantor Collateral or seeks recovery of any Collateral and/or Guarantor Collateral by way of prejudgment remedy or otherwise, Borrowers and Guarantors hereby irrevocably waive (i) the posting of any bond, surety or security with respect thereto which might otherwise be required, (ii) any demand for possession prior to the commencement of any suit or action to recover the Collateral and/or Guarantor Collateral, and (iii) any requirement that Lender retain possession and not dispose of any Collateral and/or Guarantor Collateral until after trial or final judgment. (f) Lender may, at its option, cure any default by Borrowers under any agreement, law, regulation, permit, license or approval with, or issued or promulgated by, any Person, which constitutes an Event of Default or Incipient Default hereunder or under any of the other Financing Agreements, or pay or bond on appeal any judgment entered against Borrowers (irrespective of the amount of said judgment or the time elapsed since entry thereof), and charge Borrowers' loan account(s) therefor, such amounts to be repayable by Borrowers on demand, together with interest thereon at the highest rate of interest hereunder; provided, however, Lender shall be under no obligation to effect such cure, payment or bonding and shall not, by making any payment for Borrowers' account, be deemed to have assumed any obligation or liability of Borrowers. (g) The enumeration of the foregoing rights and remedies is not intended to be exclusive, and such rights and remedies are in addition to and not by way of limitation of any other rights or remedies Lender may have under the other Financing Agreements, the UCC or other applicable law. Lender shall have the right to determine which rights and remedies, and in which order any of the same, are to be exercised, and to determine which Collateral or Guarantor Collateral is to be proceeded against and in which order, and the exercise of any right or remedy shall not preclude the exercise of any others, all of which shall be cumulative. (h) No act, failure or delay by Lender shall constitute a waiver of any of the rights and remedies of Lender. No single or partial waiver by Lender of any provision of this Agreement or any of the other Financing Agreements, or breach or default thereunder, or of any right or remedy which Lender may have, shall operate as a waiver of any other provision, breach, default, right or remedy or of the same provision, breach, default, right or remedy on a future occasion. (i) Each Borrower and Guarantor waives presentment, notice of dishonor, protest and notice of protest of all instruments included in or evidencing any of the Obligations of Borrowers and/or Guarantors or the Collateral or Guarantor Collateral and any and all notices or demands whatsoever (except as expressly provided herein). Lender may, at all times, proceed directly against any of the Borrowers or any of the Guarantors to enforce payment of the Obligations of Borrowers and/or Guarantors and shall not be required to take any action of any kind to preserve, collect or protect any rights in the Collateral or Guarantor Collateral. 62 SECTION 8. COLLECTION AND ADMINISTRATION 8.1. Receipts Subject to the terms and provisions of the Intercreditor Agreement, Borrowers shall, at their expense and on behalf of Lender, receive, as the property of Lender and in trust for Lender, all proceeds from the sale of Borrowers' Inventory, in whatever form, including, without limitation, all cash, checks, credit or debit card transaction records, and all forms of retail store receipts other than daily receipts of Brawn retail stores located in California used to fund the ordinary course of business operations of such retail stores of Brawn, as well as all other proceeds of Collateral, and Borrowers shall not commingle such proceeds with Borrowers' own funds. 8.2. Right of Inspection; Access. Lender and its representatives shall at any time have free access to and right of inspection of the Collateral and Guarantor Collateral have full access to and the right to examine and make copies of Borrowers' and each Guarantor's books and records, to confirm and verify all purchases and sales of Borrowers' Inventory and proceeds thereof including Accounts, to perform general audits and to do whatever else Lender deems necessary to protect the interests of Lender. Without limiting any of Lender's rights under this Section 8.2 or elsewhere herein or in the other Financing Agreements, but subject to the terms and provisions of the Intercreditor Agreement, upon and after the occurrence of an Event of Default that is continuing, Lender may, if Lender reasonably believes such action is necessary to preserve the books and records or to protect or effect Lender's rights and remedies with respect thereto, remove from the premises of Borrowers or Guarantors any books and records and Lender may, without cost or expense to it, use such of Borrowers' or any of the Guarantors' personnel, supplies, computer equipment (to the extent permitted by the lessor thereof, as to leased computer equipment or software) and space at their places of business as may be reasonably necessary for the handling of proceeds from the sale of Borrowers' Inventory or other proceeds of any Collateral or Guarantor Collateral. 8.3. Specific Powers. Each Borrower and Guarantor hereby constitutes Lender, and its designees, as its attorney-in-fact, at Borrowers' and Guarantors' own cost and expense, to exercise at any time all or any of the following powers which, being coupled with an interest, shall be irrevocable until all Obligations of Borrowers and Guarantors have been paid in full: (i) to receive, take, endorse, assign, deliver, accept and deposit, in the name of Lender, or such Borrower or Guarantor, as the case may be, any and all checks, notes, drafts, remittances and other instruments and documents relating to any Collateral and Guarantor Collateral as the case may be; (ii) after the occurrence and upon and during the continuance of an Event of Default or Incipient Default, to receive, open and dispose of all mail addressed to such Borrower or Guarantor, as the case may be, and to notify postal authorities to change the address for delivery thereof to such address as Lender may designate; (iii) to transmit to Account Debtors obligated in respect of any Collateral notice of Lender's interest therein and to request from such Account Debtors at any time, in the name of Lender, or such Borrower or Guarantor, as the case may be, or that of Lender's or designee, 63 information concerning the Accounts that are part of any Collateral and the amounts owing thereon; (iv) after the occurrence and upon and during the continuance of an Event of Default or Incipient Default, to notify Account Debtors obligated in respect of the Collateral to make payment directly to Lender; (v) after the occurrence and upon and during the continuance of an Event of Default or Incipient Default, to take or bring, in the name of Lender, or such Borrower or Guarantor, as the case may be, all steps, actions, suits or proceedings deemed by Lender necessary or desirable to effect collection of the Collateral and Guarantor Collateral; and (vi) to execute in such Borrower's or such Guarantor's name and on its behalf any UCC financing statements or amendments thereto. Each Borrower and Guarantor hereby releases Lender, and its officers, employees, attorneys, agents and designees, from any liability arising from any act or acts under this Agreement or in furtherance thereof, whether of omission or commission, and whether based upon any error of judgment or mistake of law or fact, other than for Lender's own gross negligence or willful misconduct, (vii) endorse such Borrower's or Guarantor's name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Receivable or any goods pertaining thereto or any other Collateral, including any warehouse or other receipts, or bills of lading and other negotiable or non-negotiable documents, and (viii) clear Inventory through U.S. Customs or other foreign export control authorities in such Borrower's or Guarantor's name, Lender's name or the name of Lender's designee, and to sign and deliver to customs officials powers of attorney in such Borrower's or Guarantor's name for such purpose, and to complete in such Borrower's or Guarantor's or Lender's name, any order, sale or transaction, obtain the necessary documents in connection therewith and collect the proceeds thereof. SECTION 9. EFFECTIVE DATE; TERMINATION; COSTS; MISCELLANEOUS 9.1. Term. (a) This Agreement and the other Financing Agreements shall become effective as of the date hereof and this Agreement shall continue in full force and effect for a term ending on the date three (3) years from the date hereof (the "Term"). (b) In addition, Lender shall have the right to terminate this Agreement and the other Financing Agreements immediately at any time after the occurrence and during the continuance of an Event of Default. Lender shall have no obligation to make additional loans or provide additional credit accommodations hereunder at any time after and during the continuance of an Event of Default or Incipient Default. (c) Upon the effective date of termination of the Financing Agreements, Borrowers shall pay to Lender in full, by wire transfer in federal funds to such bank account of Lender as Lender may, in its discretion, designate in writing to Borrowers for such purpose, all outstanding and unpaid non-contingent Obligations of Borrowers (including, but not limited to the Term Loans and all interest, fees, charges, expenses and other amounts provided for hereunder, under the other Financing Agreements or otherwise) and shall furnish cash Collateral to Lender, or a clean irrevocable letter of credit issued in Lender's favor by a bank acceptable to Lender in its discretion and having documentary requirements and other terms acceptable to Lender in its discretion, in order to secure and provide for payment in full of all contingent Obligations. Interest at the Interest Rate shall be due until and including the next 64 business day, if the amounts so paid by Borrowers to the bank account designated by Lender are received in such bank account later than 12:00 noon, New York, New York time. (d) No termination of the Financing Agreements shall relieve or discharge Borrowers or any Guarantor of their respective duties, obligations and covenants under the Financing Agreements until all Obligations of Borrowers and Guarantors have been fully indefeasibly paid and discharged, and following such termination, Lender's continuing security interests in the Collateral and Guarantor Collateral shall remain in effect until all such Obligations have been fully indefeasibly paid and discharged. At Borrowers' written request, following termination of this Agreement as provided herein, and after all Obligations have been fully and indefeasibly paid and discharged, Lender shall execute and deliver to Borrowers and Guarantors any and all documents and instruments reasonably required to terminate all liens and security interests granted to Lender pursuant hereto and pursuant to the other Financing Agreements, all at Borrowers' and Guarantors' expense. 9.2. Expenses and Additional Fees. (a) Borrowers and Guarantors shall pay to Lender on demand all costs and expenses that Lender pays or incurs in connection with the due diligence, negotiation, preparation, consummation, execution, administration, enforcement, and termination of this Agreement and the other Financing Agreements, including, without limitation: (i) reasonable attorneys' and paralegals' fees and disbursements of counsel to Lender and any Participant; (ii) costs and expenses (including reasonable attorneys' and paralegals' fees and disbursements) for any amendment, supplement, waiver, consent, or subsequent closing in connection with the Financing Agreements and the transactions contemplated thereby; (iii) costs and expenses of lien and title searches; (iv) taxes, fees and other charges for recording the Mortgages or any agreements or documents with the United States Office of Patents and Trademarks, The United States Office of Copyrights or any other governmental authority, and the filing of UCC financing statements and continuations, and other actions to perfect, protect, and continue the security interests and liens of Lender in the Collateral and/or Guarantor Collateral; (v) sums paid or incurred to take any action required of Borrowers and/or any Guarantors under the Financing Agreements that Borrowers and/or any Guarantors fail to pay or take; (vi) costs of appraisals, environmental audits, inspections, and verifications of the Collateral and/or Guarantor Collateral, including, without limitation, travel and lodging, plus a per diem charge at a rate of Seven Hundred Fifty Dollars ($750) per person for periodic field examinations of the Collateral and/or Guarantor Collateral and Borrowers' and/or any Guarantor's operations by Lender, or its agents; (vii) costs and expenses of forwarding loan proceeds, collecting checks and other items of payment, including, without limitation, wire transfer fees and check dishonor fees; (viii) costs and expenses of preserving and protecting the Collateral and/or Guarantor Collateral; (ix) costs and expenses and fees for title insurance and other insurance premiums, environmental audits, surveys, assessments, engineering reports and inspections, appraisal fees and search fees; and (x) costs and expenses (including reasonable attorneys' and paralegals' fees and disbursements) paid or incurred to obtain payment of the Obligations of Borrowers and/or Guarantors, enforce the security interests and liens of Lender, sell or otherwise realize upon the Collateral and/or Guarantor Collateral, and otherwise enforce the provisions of this Agreement and the other Financing Agreements (including, without limitation, premiums on bonds and undertakings, fees of marshals, sheriffs, custodians, auctioneers and others, travel expenses and all court costs and 65 collection charges), or to defend any claims made or threatened against Lender arising out of the transactions contemplated hereby (including, without limitation, preparations for and consultations concerning any such matters). The foregoing shall not be construed to limit any other provisions of the Financing Agreements regarding costs and expenses to be paid by Borrowers and/or Guarantors. (b) All sums provided for in this Section 9.2 shall be part of the Obligations of Borrowers and Guarantors, shall be payable on demand, and shall accrue interest after demand for payment thereof at the highest rate of interest then payable hereunder. Lender is hereby irrevocably authorized to charge any amounts payable hereunder directly to any of the account(s) maintained by Lender with respect to Borrowers and/or any Guarantors. 9.3. Survival of Agreement. All agreements, representations and warranties contained herein or made in writing by the parties hereto in connection with the transactions contemplated hereby shall survive the execution and delivery of this Agreement, the other Financing Agreements and the consummation of the transactions contemplated herein or therein regardless of any investigation made by or on behalf of Lender. 9.4. No Waiver; Remedies Cumulative. No failure to exercise, and no delay in exercising on the part of Lender of, any right, power or privilege under this Agreement or under any of the other Financing Agreements or other documents referred to herein or therein shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power and privilege. No notice to or demand on Borrowers or any Guarantor not required hereunder or any of the other Financing Agreements shall entitle Borrowers or Guarantors to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of Lender to any other or further action in any circumstances without notice or demand. The rights and remedies of Lender under this Agreement, the other Financing Agreements and any other present and future agreements between or among Lender, Borrowers and Guarantors, as the case may be, are cumulative and not exclusive of any rights or remedies provided by law or under any of the Financing Agreements or such other agreements and all such rights and remedies may be exercised successively or concurrently in whatever order and manner Lender shall elect. 9.5. Notices. All notices, requests and demands to or upon the respective parties hereto shall be in writing and shall be deemed to have been duly given or made: if by hand, immediately upon delivery; if by telex, telecopier or telegram, immediately upon sending; if by express mail or any other overnight delivery service, one (1) day after dispatch; and if by registered or certified mail, return receipt requested, five (5) days after mailing. All notices, requests and demands upon the parties are to be given to the following addresses and telecopier numbers (or to such other address or telecopier number as any party may designate by notice in accordance with this Section): 66 If to Hanover Hanover Direct, Inc. 115 River Road Edgewater, New Jersey 07020 Attention: Charles E. Blue, Chief Financial Officer Telecopier: (201) 272-3147 If to any Borrower: c/o Hanover Direct, Inc. 115 River Road Edgewater, New Jersey 07020 Attention: Charles E. Blue, Chief Financial Officer Telecopier: (201) 272-3147 If to Lender Chelsey Finance, LLC 712 Fifth Avenue, 45th Floor New York, New York 10019 Attention: Stuart Feldman Telecopier: (212) 765-3112 9.6. Entire Agreement. This Agreement, the other Financing Agreements, any supplements and any other instruments or documents delivered or to be delivered in connection herewith or therewith represent the entire agreement and understanding concerning the subject matter hereof among the parties hereto, and supersede all prior proposals, agreements, understandings, negotiations and discussions, representations, warranties, commitments, offers and contracts concerning the subject matter hereof, whether oral or written, including, without limitation, that certain Commitment Letter Agreement, dated as of June 16, 2004, by and between Chelsey Direct, LLC and Hanover. 9.7. Amendments and Waivers. Neither this Agreement, nor any of the other Financing Agreements or any other instrument or document referred to herein or therein may be changed, waived, discharged or terminated orally, except by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 9.8. Applicable Law. This Agreement and the other Financing Agreements and all other documents referred to herein or therein are being executed and delivered in New York, New York and together with all transactions and the obligations and rights thereunder, shall be governed by, construed and interpreted in accordance with the laws of the State of New York. 67 9.9. Successors and Assigns. This Agreement, the other Financing Agreements and any other document referred to herein or therein shall be binding upon Borrowers and Guarantors and their respective successors or assigns and inure to the benefit of and be enforceable by Lender and its successors and assigns. None of the Borrowers or any Guarantor may assign its respective rights under this Agreement, the other Financing Agreements and any other document referred to herein or therein without the prior written consent of Lender. Provided that such assignees and/or Participants enter into, or otherwise agree to be bound by the terms and provisions of, the Intercreditor Agreement, Lender may assign its rights and delegate its obligations under this Agreement and the other Financing Agreements and further may assign, or sell participations in, all or any part of the Term Loan or any other interest herein, in which event, the assignee or participant shall have, to the extent of such assignment or participation, the same rights and benefits as it would have if it were the Lender hereunder, except as otherwise provided by the terms of such assignment or participation. Lender may furnish any information concerning Borrowers or Guarantors in the possession of Lender from time to time to assignees and Participants (including prospective assignees and Participants). 9.10. Indemnification. The Borrowers and Guarantors agree to indemnify and hold harmless Lender and its Affiliates, and each of its and their respective directors, officers, partners, attorneys and advisors (each such person or entity referred to hereafter in this paragraph as an "Indemnified Person") from any and all losses, claims, costs, damages, expenses or liabilities (or actions, suits or proceedings, including any inquiry or investigation with respect thereto) ("Damages") to which any Indemnified Person may become subject, insofar as such Damages arise out of, in any way relate to, or result from, this Agreement, the other Financing Agreements, or the other transactions contemplated hereby and thereby and to reimburse upon demand each Indemnified Person for any and all legal and other expenses incurred in connection with investigating, preparing to defend, or defending against, any such Damages; provided, however, that the Borrowers and Guarantors shall not have any obligation under this Section 9.10 for liabilities determined in a judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of any Indemnified Person. The foregoing provisions of this Section 9.10 shall be in addition to any right that an Indemnified Person shall have at common law or otherwise. The Borrowers and Guarantors also agree that (x) no Indemnified Person shall be responsible or liable for any consequential damages that may be alleged as a result of this Agreement and the other Financing Agreements and (y) no third party, including security holders or creditors of the Borrowers and Guarantors, shall have any recourse against any Indemnified Person under this Agreement and/or the other Financing Agreements (whether direct or indirect, in contract or tort or otherwise). 9.11. Severability. If any provision of this Agreement or the other Financing Agreements is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement or the other Financing Agreements as a whole but this Agreement or the particular Financing Agreement, as the case may be, shall be construed as though it did not contain the 68 particular provision or provisions held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by law. 9.12. Headings. The headings used herein are for convenience only and do not constitute matters to be considered in interpreting this Agreement. 9.13. Security Interests of Participants. If a Participant shall at any time participate with Lender in the Term Loans or any portion thereof, Borrowers and Guarantors hereby grant to such Participant and Lender and such Participant shall have and is hereby given, a continuing lien on and security interest in any money, securities and other property of Borrowers and Guarantors in the custody or possession of the Participant, including the right of setoff, to the extent of the Participant's participation in the Obligations of Borrowers and Guarantors and such Participant shall be deemed to have the same right of setoff to the extent of its participation in the Obligations, as it would have if it were a direct lender. 9.14. WAIVER OF JURY TRIAL. THE PARTIES HERETO HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE OTHER FINANCING AGREEMENTS, THE OBLIGATIONS OF BORROWERS AND GUARANTORS, THE COLLATERAL, THE GUARANTOR COLLATERAL, OR ANY INSTRUMENT, DOCUMENT OR GUARANTY DELIVERED PURSUANT HERETO OR TO ANY OF THE FOREGOING, OR THE VALIDITY, PROTECTION, INTERPRETATION, ADMINISTRATION, COLLECTION OR ENFORCEMENT HEREOF OR THEREOF, OR ANY OTHER CLAIM OR DISPUTE HEREUNDER OR THEREUNDER. 9.15. Waiver of Counterclaims; Jurisdiction; Service of Process. Each Borrower and Guarantor hereby waives all rights of setoff and rights to impose counterclaims (other than compulsory counterclaims) in the event of any litigation with respect to any matter connected with this Agreement, the other Financing Agreements, the Obligations of Borrowers and Guarantors, the Collateral, the Guarantor Collateral or any transaction between the parties hereto, and irrevocably consents and submits to the non-exclusive jurisdiction of the Supreme Court of the State of New York in New York County, and of the United States District Court for the Southern District of New York and the courts of any State in which any of the Collateral and/or Guarantor Collateral is located and of any Federal Court located in such States in connection with any action, proceeding or claim arising out of or relating to this Agreement, the other Financing Agreements, the Obligations of Borrowers and Guarantors, the Collateral, the Guarantor Collateral or any document, instrument or guaranty delivered pursuant hereto or to any of the foregoing. In any such litigation, each Borrower and Guarantor waives personal service of any summons, complaint or other process and agrees that the service thereof may be made by certified or registered mail, return receipt requested, directed 69 to it at its chief executive office set forth herein, or designated in writing pursuant to this Agreement, or in any other manner permitted by the rules of said Courts. Within thirty (30) days after such mailing, Borrowers and any Guarantor named in any such summons, complaint or other process shall appear to answer such summons, complaint or other process, failing which Borrowers and such Guarantors shall be deemed in default and judgment may be entered by Lender against Borrowers and/or such Guarantors for the amount of the claim and other relief requested therein. 9.16. Counterparts. This Agreement may be executed in any number of counterparts, and by Lender and Borrowers and any of the Guarantors in separate counterparts, each of which shall be an original, but all of which shall together constitute one and the same agreement. [Signature pages follow] 70 ALL AMOUNTS AT ANY TIME OWING BY THE BORROWERS UNDERS THIS AGREEMENT TO THE LENDER HEREUNDER ARE SUBORDINATED IN RIGHT OF PAYMENT TO THE INDEFEASIBLE PAYMENT AND SATISFACTION IN FULL OF ALL PRESENT AND FUTURE OBLIGATIONS, LIABILITIES AND INDEB TEDNESS OFF THE BORROWERS TO CONGRESS FINANCIAL CORPORATION, AND ITS SUCCESSORS AND ASSIGNS, AS PROVIDED BY AND AS OTHERWISE SUBJECT TO THE TERMS AND CONDITIONS OF THE INTERCREDITOR AND SUBORDINATION AGREEMENT, DATED AS OF THE DATE HEREOF, BETWEEN THE LENDER AND CONGRESS FINANCIAL CORPORATION. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their duly authorized officers as of the day and year first above written. CHELSEY FINANCE, LLC By: ___/s/ Scott Lessot_____________________ Name: Scott Lesser Title: Executive Vice President BRAWN OF CALIFORNIA, INC. By: ___/s/ Steven Seymour_______________ Name: Steven Seymour Title: President GUMP'S BY MAIL, INC. By: __/s/ Jed Pogran______________________ Name: Jed Pogran Title: President GUMP'S CORP. By: __/s/ Jed Pogran______________________ Name: Jed Pogran Title: President HANOVER REALTY, INC. By: __/s/ Doug Mitchell_____________________ Name: Doug Mitchell Title: President HANOVER COMPANY STORE, LLC By: __/s/ Charles E. Blue___________________ Name: Charles E. Blue Title: President KEYSTONE INTERNET SERVICES, LLC By: __/s/ Charles E. Blue___________________ Name: Charles E. Blue Title: Vice President THE COMPANY STORE GROUP, LLC By: __/s/ Charles E. Blue__________________ Name: Charles E. Blue Title: President DOMESTICATIONS, LLC By: __/s/ Charles E. Blue________________ Name: Charles E. Blue Title: Vice President SILHOUETTES, LLC By: __/s/ Charles E. Blue________________ Name: Charles E. Blue Title: President THE COMPANY OFFICE, INC. By: __/s/ David Pipkorn__________________ Name: David Pipkorn Title: President THE COMPANY STORE FACTORY, INC. By: __/s/ David Pipkorn_______________ Name: David Pipkorn Title: President EX-10.2 4 y98976exv10w2.txt INTERCREDITOR AND SUBORDINATION AGREEMENT Exhibit 10.2 [Execution Version] INTERCREDITOR AND SUBORDINATION AGREEMENT THIS INTERCREDITOR AND SUBORDINATION AGREEMENT ("Intercreditor Agreement"), dated as of July 8, 2004, is by and between CONGRESS FINANCIAL CORPORATION, a Delaware corporation ("Senior Creditor" as hereinafter further defined), and CHELSEY FINANCE, LLC, a Delaware limited liability company ("Junior Creditor" as hereinafter further defined). Senior Creditor and Junior Creditor are sometimes individually referred to herein as a "Creditor" and collectively as "Creditors." W I T N E S S E T H: WHEREAS, Junior Creditor has made a loan or provided other financial accommodations to Brawn of California, Inc., Gump's By Mail, Inc., Gump's Corp., Hanover Realty, Inc., The Company Store Factory, Inc., The Company Office, Inc., Silhouettes, LLC, Hanover Company Store, LLC, Domestications, LLC, Keystone Internet Services, LLC, and The Company Store Group, LLC (collectively, "Borrowers" as hereinafter further defined), which loans or other financial accommodations are secured by assets and properties of Borrowers and Hanover Direct, Inc. ("Hanover" as hereinafter further defined), Hanover Home Fashions Group, LLC, Clearance World Outlets, LLC, Scandia Down, LLC, LaCrosse Fulfillment, LLC, D.M. Advertising, LLC, American Down & Textile, LLC and Hanover Gifts, Inc. (collectively, "Guarantors"; and together with Borrowers, collectively, "Debtors"); and WHEREAS, Senior Creditor has entered or is about to enter into financing arrangements with Debtors, pursuant to which Senior Creditor may, upon certain terms and conditions, make loans and provide other financial accommodations to Debtors secured by certain assets and properties of Debtors; and WHEREAS, Creditors desire to enter into this Intercreditor Agreement to (i) confirm the relative priority of the security interests of each Creditor in the assets and properties of Debtors, (ii) provide for the orderly sharing among Creditors, in accordance with such priorities, of proceeds of such assets and properties upon any foreclosure thereon or other disposition thereof, and (iii) agree upon the terms of the subordination of the obligations of Debtors to Junior Creditor and related matters; NOW, THEREFORE, in consideration of the mutual benefits accruing to Creditors hereunder and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby agree as follows: 1. DEFINITIONS As used above and in this Intercreditor Agreement, the following terms shall have the meanings ascribed to them below: 1.1 "Agreements" shall mean, collectively, the Senior Creditor Agreements and the Junior Creditor Agreements. 1.2 "Asset Sales" shall have the meaning given in the Loan Agreement. 1.3 "Borrowers" shall mean Brawn of California, Inc., a California corporation, Gump's By Mail, Inc., a Delaware corporation, Gump's Corp., a California corporation, Hanover Realty, Inc., a Virginia corporation, The Company Store Factory, Inc., a Delaware corporation, The Company Office, Inc., a Delaware corporation, Silhouettes, LLC, a Delaware limited liability company, Hanover Company Store, LLC, a Delaware limited liability company, Domestications, LLC, a Delaware limited liability company, Keystone Internet Services, LLC, a Delaware limited liability, and The Company Store Group, LLC, a Delaware limited liability company, and their respective successors and assigns. 1.4 "Business Day" shall have the meaning given in the Loan Agreement. 1.5 "Capital Stock" shall have the meaning given in the Loan Agreement. 1.6 "Certificate of Designation of the Series D Preferred Stock" shall have the meaning given in the Loan Agreement. 1.7 "Chelsey Warrants" shall have the meaning given in the Loan Agreement. 1.8 "Collateral" shall mean all of the property and interests in property, real or personal, tangible or intangible, now owned or hereafter acquired by any Debtor in or upon which either or both of Creditors at any time has a Lien, and including, without limitation, all proceeds of such property and interests in property. 1.9 "Creditors" shall mean, collectively, Senior Creditor and Junior Creditor, and their respective successors and assigns. 1.10 "Debtors" shall mean, collectively, Borrowers and Guarantors, and their successors and assigns, including, without limitation, a receiver, trustee or debtor-in-possession on behalf of such person or on behalf of any such successor or assign. 1.11 "EBITDA" shall have the meaning given in the Loan Agreement. 1.12 "Excess Availability" shall have the meaning given in the Loan Agreement. 1.13 "Event of Default" shall have the meaning given in the Loan Agreement. 1.14 "Guarantors" shall mean, collectively, Hanover, Hanover Home Fashions Group, LLC, a Delaware limited liability company, Clearance World Outlets, LLC, a Delaware limited liability company, Scandia Down, LLC, a Delaware limited liability company, LaCrosse Fulfillment, LLC, a Delaware limited liability company, D.M. Advertising, LLC, a Delaware limited liability company, American Down & Textile, LLC, a Delaware limited liability 2 company, and Hanover Gifts, Inc., a Virginia corporation, and their respective successors and assigns. 1.15 "Hanover" shall mean Hanover Direct, Inc., a Delaware corporation, and its successors and assigns. 1.16 "Incipient Default" shall have the meaning given in the Loan Agreement. 1.17 "Junior Creditor" shall mean Chelsey Finance, LLC, a Delaware limited liability company, and its successors and assigns. 1.18 "Junior Creditor Agreements" shall mean, collectively, the Loan and Security Agreement, dated as of the date hereof, among Junior Creditor and Debtors and all agreements, documents and instruments at any time executed and/or delivered by Debtors or any other person to, with or in favor of Junior Creditor in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.19 "Junior Debt" shall mean all obligations, liabilities and indebtedness of every kind, nature and description owing by Debtors to Junior Creditor, including principal, interest, charges, fees, premiums, indemnities and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under the Junior Creditor Agreements or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of the Junior Creditor Agreements or after the commencement of any case with respect to Debtors under the U.S. Bankruptcy Code or any similar statute (and including, without limitation, any principal, interest, fees, costs, expenses and other amounts, whether or not such amounts are allowable in whole or in part, in any such case or similar proceeding), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and whether arising directly or howsoever acquired by Junior Creditor. 1.20 "Lien" shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance (including, but not limited to, easements, rights of way and the like), lien (statutory or other), security agreement or transfer intended as security, including without limitation, any conditional sale or other title retention agreement, the interest of a lessor under a capital lease or any financing lease having substantially the same economic effect as any of the foregoing. 1.21 "Loan Agreement" shall mean the Loan and Security Agreement, dated November 14, 1995, among Senior Creditor, Borrowers and Guarantors, as heretofore amended and as the same may hereafter be amended, modified, supplemented, extended, renewed, restated, refinanced, replaced or restructured. 1.22 "Net Proceeds" shall have the meaning given in the Loan Agreement. 1.23 "Payment in full" or "payment in full" shall mean the indefeasible payment and satisfaction in full in immediately available funds of all of the Senior Debt and the termination of 3 the financing arrangements provided by Senior Creditor to Debtors (but not including for this purpose the refinancing or replacement of the Senior Creditor). If after receipt of any payment of, or proceeds of collateral applied to the payment of, any of the Senior Debt or Senior Creditor is required to surrender or return such payment or proceeds to any person for any reason, then the Senior Debt intended to be satisfied by such payment or proceeds shall be reinstated and continue and this Subordination Agreement shall continue in full force and effect as if such payment or proceeds had not been received by Senior Creditor. 1.24 "Person" or "person" shall mean any individual, sole proprietorship, partnership, corporation (including, without imitation, any corporation which elects subchapter S status under the Internal Revenue Code of 1986, as amended), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock company, trust, joint venture, or other entity or any government or any agency or instrumentality or political subdivision thereof. 1.25 "Senior Creditor" shall mean Congress Financial Corporation, a Delaware corporation, and its successors and assigns (and including any other lender or group of lenders that at any time refinances, replaces or succeeds to all or any portion of the Senior Debt or is otherwise party to the Senior Creditor Agreements). 1.26 "Senior Creditor Agreements" shall mean, collectively, the Loan Agreement and all agreements, documents and instruments at any time executed or delivered by Debtors or any other person to, with or in favor of Senior Creditor in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated, refinanced, replaced or restructured (in whole or in part and including any agreements with, to or in favor of any other lender or group of lenders that at any time refinances, replaces or succeeds to all or any portion of the Senior Debt). 1.27 "Senior Debt" shall mean any and all obligations, liabilities and indebtedness of every kind, nature and description owing by Debtors to Senior Creditor or its affiliates or participants, including principal, interest, charges, fees, premiums, indemnities and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, in connection with or related to the Senior Creditor Agreements, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of the Senior Creditor Agreements or after the commencement of any case with respect to Debtors under the U.S. Bankruptcy Code or any state insolvency law or similar statute (and including, without limitation, any principal, interest, fees, costs, expenses and other amounts, which would accrue and become due but for the commencement of such case, whether or not such amounts are allowed or allowable in whole or in part in any such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and whether arising directly or howsoever acquired by Senior Creditor. 1.28 "Solvent" shall have the meaning given in the Loan Agreement. 1.29 "Subsidiary" shall have the meaning given in the Loan Agreement. 4 1.30 All terms defined in the Uniform Commercial Code as in effect in the State of New York, unless otherwise defined herein shall have the meanings set forth therein. All references to any term in the plural shall include the singular and all references to any term in the singular shall include the plural. 2. SECURITY INTERESTS; PRIORITIES; REMEDIES 2.1 Acknowledgement of Liens. Each Creditor hereby acknowledges that the other Creditor has been granted a Lien upon the Collateral. 2.2 Priority of Liens. Notwithstanding the order or time of attachment, or the order, time or manner of perfection, or the order or time of filing or recordation of any document or instrument, or other method of perfecting a security interest in favor of each Creditor in any Collateral, and notwithstanding any conflicting terms or conditions which may be contained in any of the Agreements, the Liens upon the Collateral of Senior Creditor have and shall have priority over the Liens upon the Collateral of Junior Creditor and such Liens of Junior Creditor are and shall be, in all respects, subject and subordinate to the Liens of Senior Creditor therein to the full extent of the Senior Debt. 2.3 Priorities Unaffected by Action or Inaction. The lien priorities provided in Section 2.2 hereof shall not be altered or otherwise affected by any amendment, modification, supplement, extension, renewal, restatement or refinancing of either the Senior Debt or the Junior Debt, nor by any action or inaction which any Creditor may take or fail to take in respect of the Collateral. 2.4 Rights of Third Parties; No Contest of Lien. Each Creditor shall be solely responsible for perfecting and maintaining the perfection of its Lien in and to each item constituting the Collateral in which such Creditor has been granted a Lien. The foregoing provisions of this Agreement are intended solely to govern the respective lien priorities as between the Creditors and shall not impose on Senior Creditor any obligations in respect of the disposition of proceeds of foreclosure on any Collateral which would conflict with prior perfected claims therein in favor of any other person or any order or decree of any court or other governmental authority or any applicable law. Junior Creditor agrees that it will not contest the validity, perfection, priority or enforceability of the Liens upon the Collateral of Senior Creditor and that, as between Senior Creditor and Junior Creditor, the terms of this Intercreditor Agreement shall govern even if part or all of the Senior Debt or the Liens securing payment and performance thereof are not perfected or are avoided, disallowed, set aside or otherwise invalidated in any judicial proceeding or otherwise. 2.5 Right to Enforce Agreement. Senior Creditor shall have the exclusive right to manage, perform and enforce the terms of the Senior Creditor Agreements with respect to the Collateral, to exercise and enforce all privileges and rights thereunder according to its discretion and the exercise of its business judgment, including, without limitation, the exclusive right to take or retake control or possession of such Collateral and to hold, prepare for sale, process, sell, lease, dispose of, or liquidate such Collateral. Junior Creditor shall not have any right to direct Senior Creditor to exercise any right, remedy or power with respect to the Collateral and Junior Creditor consents to the exercise by Senior Creditor of any such right, remedy or power. Junior Creditor 5 shall not institute any suit or assert in any suit, bankruptcy, insolvency or other proceeding any claim against Senior Creditor seeking damages from or other relief by way of specific performance, instructions or otherwise, with respect to, and Senior Creditor shall not be liable for, any action take or omitted to be taken by Senior Creditor with respect to the Collateral. Nothing contained in this Section 2.5 shall be construed to relieve Senior Creditor from any liability to Junior Creditor for any losses suffered by Junior Creditor as a result of an action taken or omitted by Senior Creditor with respect to the Collateral which is determined to constitute gross negligence or willful misconduct pursuant to a final, non-appealable order of a court of competent jurisdiction. 2.6 Sale and Release of Collateral. (a) Notwithstanding anything to the contrary contained in any of the Agreements, only Senior Creditor shall have the right to restrict or permit, or approve or disapprove, the sale, transfer or other disposition of Collateral. Junior Creditor shall, upon receipt of written notice from Senior Creditor of a proposed sale or other disposition of Collateral: (i) be deemed to have automatically and without further action released and terminated any Liens it may have on the Collateral to the extent such Collateral is sold or otherwise disposed of either by Senior Creditor, any agent of Senior Creditor, or any Debtor with the consent of Senior Creditor, (ii) be deemed to have authorized Senior Creditor to file UCC amendments and terminations covering the Collateral so sold or otherwise disposed of as to UCC financing statements between Debtors and Junior Creditor to evidence such release and termination, (iii) promptly upon the request of Senior Creditor execute and deliver such other release documents and confirmations of the authorization to file UCC amendments and terminations provided for herein, in each case as Senior Creditor may reasonably require in connection with such sale or other disposition by Senior Creditor, Senior Creditor's agents or any Debtor with the consent of Senior Creditor to evidence and effectuate such termination and release; provided, that, any such release or UCC amendment or termination by Junior Creditor shall not extend to or otherwise affect any of the rights, if any, of Junior Creditor to the proceeds from any such sale or other disposition of Collateral; and (iv) be deemed to have consented under the Junior Creditor Agreements to such sale or other disposition. In the event that for any reason Junior Creditor shall fail within five (5) days after the date requested by Senior Creditor to execute and deliver to Senior Creditor any such release documents, Senior Creditor is hereby irrevocably authorized to execute and deliver such release documents on behalf of Junior Creditor. (b) Notwithstanding anything to the contrary contained in this Section 2.6, Junior Creditor shall not be deemed to release or terminate the Liens of Junior Creditor to the extent that any proceeds of the sale, transfer or other disposition of Collateral are in excess of the amount necessary to pay in full all of the Senior Debt in immediately available funds. 6 2.7 Limitation on Remedies. (a) Notwithstanding any rights or remedies available to a Creditor under any of the Agreements, applicable law or otherwise, Junior Creditor shall not, directly or indirectly, (i) seek to collect from any Debtor (including, without limitation, from or by way of any Collateral) any of the Junior Debt or exercise any of its rights or remedies upon a default or event of default by any Debtor under the Junior Creditor Agreements or otherwise, or (ii) seek to foreclose or realize upon (judicially or non-judicially) its Lien on any Collateral or assert any claims or interests therein (including, without limitation, by setoff or notification of account debtors), or (iii) commence any action or proceeding against any Debtor or its properties under the U.S. Bankruptcy Code or any state insolvency law or similar present or future statute, law or regulation or any proceedings for voluntary liquidation, dissolution or other winding up of any Debtor's business, or the appointment of any trustee, receiver or liquidator for any Debtor or any part of its properties or any assignment for the benefit of creditors or any marshalling of assets of any Debtor, or (iv) take any other action against any Debtor and the Collateral. (b) The foregoing provisions of Section 2.7(a) hereof shall not in any way limit or impair the right of Junior Creditor (i) to bid for and purchase Collateral at any private or judicial foreclosure upon such Collateral initiated by Senior Creditor, or (ii) to participate in any administrative, legal or equitable action or proceeding against any Debtor seeking any reorganization, liquidation, bankruptcy or any other action involving the readjustment of all or any part of the Junior Debt, or other similar relief under the United States Bankruptcy Code, or (iii) to send such notices of the existence of, or any evidence or confirmation of, the Junior Debt under the Junior Creditor Agreements or the Liens of Junior Creditor in the Collateral to Debtors or any court or governmental agency, or file or record any such notice or evidence to the extent necessary to prove or preserve the Liens of Junior Creditor in the Collateral or the Junior Debt. 3. SUBORDINATION OF JUNIOR DEBT 3.1 Subordination. Except as specifically set forth in Section 3.2 hereof, Junior Creditor hereby subordinates its right to payment and satisfaction of the Junior Debt and the payment thereof, directly or indirectly, by any means whatsoever, is deferred, to the payment in full of all Senior Debt. 3.2 Permitted Payments. Senior Creditor hereby agrees that, notwithstanding anything to the contrary contained in Section 3.1 hereof, Debtors may make and Junior Creditor may receive and retain from Debtors the following payments of principal, cash interest and fees, on an unaccelerated basis in respect of the Junior Debt in accordance with the terms of the Junior Creditor Agreements as in effect on the date hereof (but not any prepayments, non-mandatory payments or any payments pursuant to acceleration or claims of breach or any payment to acquire any Junior Debt or otherwise in respect of any Junior Debt): (a) Borrowers may pay the closing fee in respect of the Junior Debt on the date hereof in the amount of $200,000 in accordance with the terms and conditions of the Junior Creditor Agreements out of the initial loan proceeds made available by Junior Creditor to Borrowers; 7 (b) Borrowers and Guarantors may make regularly scheduled payments of interest in respect of the Junior Debt in accordance with the terms and conditions of the Junior Creditor Agreement so long as no Incipient Default or Event of Default shall exist or have occurred; (c) during any fiscal quarter of Hanover and its Subsidiaries commencing with the fiscal quarter of Hanover and its Subsidiaries ending September 25, 2004, Borrowers may make payments of principal in cash in respect of the Junior Debt in accordance with the terms and conditions of the Junior Creditor Agreements, so long as each of the following conditions shall have been satisfied as determined by Senior Creditor: (i) as of the date of any such payment and after giving effect thereto, the aggregate amount of the Excess Availability of Borrowers on such date and the immediately preceding thirty (30) consecutive days before such payment shall be not less than $7,000,000; (ii) the cumulative EBITDA of Hanover and its Subsidiaries, calculated based on the four (4) fiscal quarters immediately preceding the quarter in which the date of such payment occurs and for which fiscal quarter Senior Creditor has received financial statements of Hanover and its Subsidiaries, shall be not less than $14,000,000; (iii) the aggregate amount of such principal prepayments shall not exceed $2,000,000 in any such fiscal quarter; (iv) any such payment shall not be made earlier than the date that is five (5) Business Days after receipt by Senior Creditor of quarterly financial statements of Hanover and its Subsidiaries for such immediately preceding fiscal quarter delivered to Senior Creditor in accordance with the terms and conditions of Section 6.18(a)(ii) of the Loan Agreement; (v) as of the date of such payment and after giving effect thereto, Borrowers and Guarantors are and shall continue to be Solvent; and (vi) as of the date of such payment and after giving effect thereto, no Incipient Default or Event of Default shall exist or have occurred; (d) Borrowers may make payments of principal in cash in respect of the Junior Debt in accordance with the terms and conditions of the Junior Creditor Agreements using Net Proceeds of Asset Sales, so long as each of the following conditions shall have been satisfied as determined by Senior Creditor: (i) Senior Creditor shall have received at least ten (10) Business Days' prior written notice of the intention of Debtors to repay such Junior Debt, which notice shall set forth the proposed amount of principal to be repaid and such other information related thereto that Senior Creditor may reasonably request; (ii) Excess Availability of Borrowers for each of the immediately preceding thirty (30) days before any such repayment shall have been not less than $7,000,000 and on the date of any such repayment and after giving effect thereto, Excess Availability of Borrowers shall be not less than $7,000,000; 8 (iii) any such repayment of such Junior Debt under this clause (iii)(c) shall be paid using only Net Proceeds of Asset Sales and not any other funds of Borrowers or Guarantors; (iv) all of the Series C Preferred Participating Preferred Stock shall have been repurchased, redeemed or retired in accordance with the terms and conditions of Section 7 of the Thirty-First Amendment to Loan and Security Agreement, dated July 8, 2004, among Senior Creditor, Borrowers and Guarantors and the aggregate amount of all repurchases, redemptions and retirements of such Capital Stock shall not exceed the amount of the Net Proceeds derived from the Asset Sales after application of the Net Proceeds in accordance with the terms and conditions of Section 7 of Thirty-First Amendment to Loan and Security Agreement, dated July 8, 2004, among Senior Creditor, Borrowers and Guarantors; (v) as of the date of such payment and after giving effect thereto, Borrowers and Guarantors are and shall continue to be Solvent; and (vi) as of the date of any such repayment and after giving effect thereto, no Event of Default or Incipient Default shall exist or have occurred and be continuing; (e) Borrowers may make payments of reasonable fees and expenses as determined by Senior Creditor in its discretion in respect of the Junior Debt in accordance with the terms and conditions of the Junior Creditor Agreements, so long as each of the following conditions shall have been satisfied as determined by Senior Creditor: (i) Senior Creditor shall have received at least five (5) Business Days' prior written notice of the intention of Borrowers to pay such fees, which notice shall set forth the proposed amount of the fees, and reason for the incurrence of such fees and such other information related thereto that Senior Creditor may reasonably request; and (ii) as of the date of any such payment and after giving effect thereto, no Event of Default or Incipient Default shall exist or have occurred and be continuing; (f) Borrowers and Guarantors may make payments of fees to Junior Creditor on the date hereof in the form of the issuance of the Chelsey Warrants exercisable for Series D Preferred Stock or for Capital Stock of Hanover consisting of common stock, as the case may be; provided, that, Borrowers shall not make and Junior Creditor shall not receive or retain any payments in respect of the Chelsey Warrants, the Series D Preferred Stock or the Capital Stock of Hanover consisting of common stock. 3.3 Distributions. (a) In the event of any distribution, division, or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of any Debtor or the proceeds thereof to the creditors of any Debtor or readjustment of the obligations and indebtedness of any Debtor, whether by reason of liquidation, bankruptcy, arrangement, receivership, assignment for the benefit of creditors, marshalling of assets of any Debtor or any other action or proceeding involving the readjustment of all or any part of the indebtedness or other obligations of any Debtor or the application of the assets of any Debtor to the payment or 9 liquidation thereof, or upon the dissolution or other winding up of any Debtor's business, or upon the sale of all or substantially all of any Debtor's assets, then, and in any such event, (i) Senior Creditor shall first receive indefeasible payment in full in cash of all of the Senior Debt prior to the payment of all or any part of the Junior Debt, and (ii) Senior Creditor shall be entitled to receive any payment or distribution of any kind or character, whether in cash, securities or other property, which be payable or deliverable in respect of any or all of the Junior Debt. (b) In order to enable Senior Creditor to enforce its rights under Section 3.3(a) hereof, Senior Creditor is hereby irrevocably authorized and empowered (in its own name or in the name of Junior Creditor or otherwise), but shall have no obligation, to enforce claims comprising any of the Junior Debt by proof of debt, proof of claim, suit or otherwise and take generally any action which Junior Creditor might otherwise be entitled to take, as Senior Creditor may deem necessary or advisable for the enforcement of its rights or interests hereunder. (c) To the extent necessary for Senior Creditor to realize the benefits of the subordination of the Junior Debt provided for herein (including the right to receive any payment and distributions which might otherwise be payable or deliverable in respect of the Junior Debt in any proceeding described in Section 3.3(a) hereof or otherwise), Junior Creditor shall execute and deliver to Senior Creditor such instruments or documents (together with such assignments or endorsements as Senior Creditor shall deem necessary), as may be requested by Senior Creditor in good faith. 3.4 Payments Received by Junior Creditor. Except for payments received by Junior Creditor as provided in Section 3.2 hereof, should any payment or distribution or security or instrument or proceeds thereof be received by Junior Creditor in respect of the Junior Debt, Junior Creditor shall receive and hold the same in trust, as trustee, for the benefit of Senior Creditor, segregated from other funds and property of Junior Creditor and shall forthwith deliver the same to Senior Creditor (together with any endorsement or assignment of Junior Creditor where necessary), for application to any of the Senior Debt. In the event of the failure of the Junior Creditor to make any such endorsement or assignment to Senior Creditor, Senior Creditor, or any of its officers or employees, are hereby irrevocably authorized on behalf of Junior Creditor to make the same. 3.5 Instrument Legend and Notation. Any instrument at any time evidencing the Junior Debt, or any portion thereof, shall be permanently marked on its face with a legend conspicuously indicating that payment thereof is subordinate in right of payment to the Senior Debt and subject to the terms and conditions of this Intercreditor Agreement, and (a)after being so marked certified copies thereof shall be delivered to Senior Creditor and (b)the original of any such instrument shall be immediately delivered to Senior Creditor upon Senior Creditor's request, at any time on or after the occurrence of an event of default under the Senior Creditor Agreements. In the event any legend or endorsement is omitted, Senior Creditor or any of its officers or employees, are hereby irrevocably authorized on behalf of Junior Creditor to make the same. No specific legend, further assignment or endorsement or delivery of notes, guarantees or instruments shall be necessary to subject any Junior Debt to the subordination thereof contained in this Agreement. 10 4. COVENANTS, REPRESENTATIONS AND WARRANTIES 4.1 Additional Covenants. Junior Creditor and Debtors agree in favor of Senior Creditor that: (a) except as specifically set forth in Section 3.2 hereof, Debtors shall not, directly or indirectly, make and Junior Creditor shall not, directly or indirectly, accept or receive any payment of principal or interest or any prepayment or non-mandatory payment or any payment pursuant to acceleration or claims of breach or any payment to acquire Junior Debt or otherwise in respect of any Junior Debt; (b) Junior Creditor and Debtors shall not amend, modify, alter or change in any material respect the terms of any of the Junior Creditor Agreements or any other arrangements related to the Junior Debt except Debtors may, after prior written notice to Senior Creditor, amend, modify, alter or change the terms thereof so as to extend the maturity thereof or defer the timing of any payments in respect thereof, or to forgive or cancel any portion of the Junior Debt, or to reduce the interest rate or any fees in connection therewith, or to release any Liens in any assets and properties of Debtors, or to make any covenants contained therein less restrictive or burdensome as to Debtors or otherwise more favorable to Debtors; (c) Junior Creditor shall not sell, assign, pledge, encumber or otherwise dispose of any of the Junior Debt and guarantees, if any, except that Junior Creditor may sell, assign, pledge, encumber or otherwise dispose of the Junior Debt so long as Senior Creditor shall have received another instrument of transfer or encumbrance in form and substance satisfactory to Senior Creditor, from any purchaser, assignee, pledgee or other person acquiring any interest in the Junior Debt, acknowledging receipt of a copy of this Intercreditor Agreement together with the written Agreement of such person to be bound by the terms and conditions of this Intercreditor Agreement; (d) Junior Creditor shall not subordinate any of the Junior Debt to any indebtedness of Debtors other than the Senior Debt; (e) Junior Creditor and Debtors shall, at any time or times, upon the request of Senior Creditor, promptly furnish to Senior Creditor a true, correct and complete statement of the outstanding Junior Debt; and (f) Junior Creditor and Debtors shall execute and deliver to Senior Creditor such additional agreements, documents and instruments and take such further actions as may be necessary or desirable in the good faith opinion of Senior Creditor to effectuate the provisions and purposes of this Intercreditor Agreement. 4.2 Additional Representations and Warranties. (a) Junior Creditor and Debtors represent and warrant to Senior Creditor that: (i) as of the date hereof, the total principal amount of the Junior Debt is $20,000,000; 11 (ii) as of the date hereof, no default or event of default, or event which with notice or passage of time or both would constitute an event of default, exists or has occurred under the Junior Creditor Agreements; and (iii) none of the Junior Debt is subject to any lien, security interest, financing statements, subordination, assignment or other claim, except in favor of Senior Creditor. (b) Junior Creditor further represents and warrants to Senior Creditor that: (i) Junior Creditor is the exclusive legal and beneficial owner of all of the Junior Debt; (ii) this Intercreditor Agreement constitutes the legal, valid and binding obligations of Junior Creditor, enforceable in accordance with its terms; and (iii) to the best knowledge of Junior Creditor as of the date hereof, no court of competent jurisdiction has issued any injunction, restraining order or other order which prohibits consummation of the transactions contemplated by the Junior Creditor Agreements and, except as previously disclosed to Senior Creditor by Debtors in writing pursuant to the letter dated as of July 8, 2004, no governmental or other action or proceeding has been threatened or commenced against Junior Creditor, seeking any injunction, restraining order or other order which seeks to avoid or otherwise modify the transactions contemplated by the Junior Creditor Agreements. 4.3 Waivers. Notice of acceptance hereof, the making of loans, advances and extensions of credit or other financial accommodations to, and the incurring of any expenses by or in respect of, any Debtor by Senior Creditor, and presentment, demand, protest, notice of protest, notice of nonpayment or default and all other notices to which Junior Creditor and any Debtor are or may be entitled are hereby waived (except as expressly provided for herein or as to any such Debtor, in the Senior Creditor Agreements). Junior Creditor also waives notice of, and hereby consents to, (a) any amendment, modification, supplement, extension, renewal, or restatement of any of the Senior Debt or the Senior Creditor Agreements, including, without limitation, extensions of time of payment of or increase or decrease in the amount of any of the Senior Debt, the interest rate, fees, other charges, or any collateral, (b) the taking, exchange, surrender and releasing of Collateral or guarantees now or at any time held by or available to Senior Creditor for the Senior Debt, (c) the exercise of, or refraining from the exercise of, any rights against any Debtor or any other obligor or any Collateral, (d) the settlement, compromise or release of, or the waiver of any default with respect to, any of the Senior Debt, and/or (e)Senior Creditor's election, in any proceeding instituted under the U.S. Bankruptcy Code, of the application of Section 1111(b)(2) of the U.S. Bankruptcy Code. Any of the foregoing shall not, in any manner, affect the terms hereof or impair the obligations of Junior Creditor hereunder. All of the Senior Debt shall be deemed to have been made or incurred in reliance upon this Intercreditor Agreement. 4.4 Subrogation; Marshalling. (a) Junior Creditor shall not be subrogated to, or be entitled to any assignment of any Senior Debt or of any Collateral or guarantees or evidence of any thereof; provided, that, upon 12 the payment in full of all Senior Debt, Junior Creditor shall be subrogated to the extent permitted by applicable law to any of the Senior Debt. For purposes of such subrogation, no payments or distributions to Senior Creditor of any cash, property or securities to which Junior Creditor would be entitled except for the provisions of this Intercreditor Agreement and no payment over pursuant to the provisions of this Intercreditor Agreement to the Senior Creditor by or for the account of Junior Creditor shall, as among Debtors and their creditors (other than Senior Creditor and Junior Creditor) be deemed to be a payment or distribution by Debtors to or on account of the Senior Debt, it being understood that the provisions of this Intercreditor Agreement are intended solely for the purpose of defining the relative rights of Junior Creditor and Senior Creditor. If Junior Creditor have any rights to payment from Debtors as a result of any subrogation to Senior Creditor pursuant to this Section 4.4, Debtors shall, upon the written request of Junior Creditor, take such actions as may be required in order to enable Junior Creditor to obtain such payments but nothing contained herein shall obligate Senior Creditor to take any action. (b) Junior Creditor hereby waives any and all rights to have any Collateral or any part thereof granted to Senior Creditor marshalled upon any foreclosure or other disposition of such collateral by Senior Creditor or any Debtor. 4.5 No Offset. In the event Junior Creditor at any time incurs any obligation to pay money to any Debtor, Junior Creditor hereby irrevocably agrees that it shall pay such obligation in cash or cash equivalents in accordance with the terms of the contract governing such obligation and shall not deduct from or setoff against any amounts owed by the Junior Creditor to any Debtor in connection with any such transaction any amounts Junior Creditor claims are due to it with respect to the Junior Debt. 4.6 Bailee for Perfection. (a) Each Creditor hereby appoints the other as agent and bailee for the purposes of perfecting their respective Liens in and on any of the Collateral. All Collateral of a type of which a secured party is required to obtain possession in order to perfect a Lien in such Collateral under the Uniform Commercial Code shall be held by Senior Creditor on behalf of the Creditors, and possession of such Collateral by Senior Creditor shall be deemed to be possession by the Creditors for purposes of perfecting and maintaining the perfection of any Lien of any Creditor in such Held Collateral under the Uniform Commercial Code. (b) Notwithstanding the foregoing provisions of Section 4.6(a) hereof, in no event shall any Creditor have any duty or liability to protect or preserve any rights pertaining to any of the Collateral and, except for gross negligence or willful misconduct as determined pursuant to a final non-appealable order of a court of competent jurisdiction, each Creditor hereby waives, and releases the other Creditors from, all claims and liabilities arising pursuant to the other's role as agent and bailee with respect to the Collateral. 5. Junior Creditor Purchase Option in Bankruptcy. 13 (a) To the extent that Debtors may be subject to a proceeding under the United States Bankruptcy Code, Junior Creditor shall have the option at any time upon not less than thirty (30) days' prior written notice to Senior Creditor to purchase all of the Senior Debt from Senior Creditor. Such notice from Junior Creditor to Senior Creditor shall be irrevocable. (b) Senior Creditor agrees, subject to the terms and conditions set forth herein, to sell to Junior Creditor the Senior Debt so long as each of the following conditions shall have been satisfied as determined by Senior Creditor: (i) Senior Creditor shall have obtained all necessary approvals and consents of any court, governmental authority or other Person that Senior Creditor may determine is necessary or desirable in its good faith judgment, (ii) Senior Creditor shall retain all rights to be indemnified or held harmless by Borrowers and the other Debtors in accordance with the terms of the Senior Creditor Agreements; (iii) Junior Creditor shall pay to Senior Creditor as the purchase price for the Senior Debt the full amount of all the Senior Debt then outstanding and unpaid (including, without limitation, all principal, interest, fees and expenses, including attorneys' fees and legal expenses and including the early termination fee payable pursuant to the terms of the Senior Creditor Agreements), (iv) Junior Creditor shall furnish cash collateral to Senior Creditor in such amounts as Senior Creditor determines are reasonably necessary to secure Senior Creditor in connection with any issued and outstanding letters of credit provided by Senior Creditor (or letters of credit that Senior Creditor has arranged to be provided by third parties pursuant to the financing arrangements of Senior Creditor with Borrower or any Obligor) to Borrower or any Obligor (in an amount equal to 110% of the aggregate undrawn face amount of such letters of credit or such greater or lesser amount in accordance with Senior Creditors practices), (v) Junior Creditor shall agree to reimburse Senior Creditor for any loss, cost, damage or expense (including attorneys' fees and legal expenses) in connection with any commissions, fees, costs or expenses related to any issued and outstanding letters of credit as described above and any checks or other payments provisionally credited to the Senior Debt, or as to which Senior Creditor has not yet received final payment, (vi) Junior Creditor shall agree to reimburse Senior Creditor in respect of indemnification obligations of Debtors under the Senior Creditor Agreements, (vii) Junior Creditor shall pay to Senior Creditor the early termination fee payable pursuant to the terms and conditions of the Senior Creditor Agreements; and (viii) the sale by Senior Creditor shall be expressly made without any representation or warranty of any kind or nature by Senior Creditor as to the Senior Debt or otherwise and without recourse to Senior Creditor, except that Senior Creditor shall represent and warrant: (A) the amount of the Senior Debt being purchased, (B) that Senior Creditor owns 14 the Senior Debt free and clear of all Liens and (C) Senior Creditor has the right to assign the Senior Debt. 6. MISCELLANEOUS 6.1 Amendments. Any waiver, permit, consent or approval by any Creditor of or under any provision, condition or covenant to this Intercreditor Agreement must be in writing and shall be effective only to the extent it is set forth in writing and as to the specific facts or circumstances covered thereby. Any amendment of this Intercreditor Agreement must be in writing and signed by each of the parties to be bound thereby. 6.2 Successors and Assigns. (a) This Intercreditor Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of each of Creditors and its respective successors, participants and assigns. (b) Senior Creditor reserves the right to grant participations in, or otherwise sell, assign, transfer or negotiate all or any part of, or any interest in, the Senior Debt and the Collateral securing same; provided, that, Junior Creditor shall not be obligated to give any notices to or otherwise in any manner deal directly with any participant in the Senior Debt and no participant shall be entitled to any rights or benefits under this Intercreditor Agreement except through Senior Creditor. In connection with any participation or other transfer or assignment, Senior Creditor (i)may disclose to such assignee, participant or other transferee or assignee all documents and information which Senior Creditor now or hereafter may have relating to the Senior Debt or the Collateral and (ii)shall disclose to such participant or other transferee or assignee the existence and terms and conditions of this Intercreditor Agreement. (c) Junior Creditor agrees to execute and deliver an agreement containing terms substantially identical to those contained herein in favor of any assignee or transferee of any or all of the Senior Debt, or any or all rights of Senior Creditor in the property of any Debtor (other than pursuant to a participation) or any third person who otherwise refinances, succeeds to or replaces any or all of Senior Creditor's financing of Debtors 6.3 Insolvency. This Intercreditor Agreement shall be applicable both before and after the filing of any petition by or against any Debtor under the U.S. Bankruptcy Code and all converted or succeeding cases in respect thereof, and all references herein to any Debtor shall be deemed to apply to a trustee for such Debtor and any Debtor as debtor-in-possession. The relative rights of Senior Creditor and Junior Creditor to repayment of the Senior Debt and the Junior Debt, respectively, and in or to any distributions from or in respect of such Debtor or any Collateral or proceeds of Collateral, shall continue after the filing thereof on the same basis as prior to the date of the petition, subject to any court order approving the financing of, or use of cash collateral by, such Debtor as debtor-in-possession. 6.4 Bankruptcy Financing. If any Debtor shall become subject to a proceeding under the U.S. Bankruptcy Code and if Senior Creditor desires to permit the use of cash collateral or to 15 provide financing to Such Debtor under either Section 363 or Section 364 of the U.S. Bankruptcy Code, Junior Creditor agrees as follows: (a)adequate notice to Junior Creditor shall have been provided for such financing or use of cash collateral if Junior Creditor receives notice two (2) business days prior to the entry of the order approving such financing or use of cash collateral and (b)no objection will be raised by Junior Creditor to any such financing or use of cash collateral on the ground of a failure to provide "adequate protection" for Junior Creditor's junior Liens on the Collateral or any other grounds, provided Junior Creditor retains a Lien on the post-petition Collateral with the same priority as existed prior to the commencement of the proceeding under the U.S. Bankruptcy Code. For purposes of this Section, notice of a proposed financing or use of cash collateral shall be deemed given when given, in the manner prescribed by Section 5.5 hereof, to Junior Creditor. 6.5 Notices. All notices, requests and demands to or upon the respective parties hereto shall be in writing and shall be deemed duly given, made or received: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next business day, one (1) business day after sending; and if mailed by certified mail, return receipt requested, five (5) days after mailing to the parties at their addresses set forth below (or to such other addresses as the parties may designate in accordance with the provisions of this Section): To Senior Creditor: Congress Financial Corporation 1133 Avenue of the Americas New York, New York 10036 Re: Hanover Direct, Inc. Attention: Regional Portfolio Manager To Junior Creditor: Chelsey Finance, LLC 712 Fifth Avenue, 45th Floor New York, New York 10019 Attention: Stuart Feldman With a copy to: Swidler Berlin Shereff Friedman, LLP 405 Lexington Avenue New York, New York 10174 Attention: Richard A. Goldberg, Esq. Either Creditor may change the address(es) to which all notices, requests and other communications are to be sent by giving written notice of such address change to the other Creditor in conformity with this Section 5.5, but such change shall not be effective until notice of such change has been received by the other Creditors. 16 6.6 Counterparts. This Intercreditor Agreement may be executed in any number of counterparts, each of which shall be an original with the same force and effect as if the signatures thereto and hereto were upon the same instrument. 6.7 Governing Law. The validity, construction and effect of this Intercreditor Agreement shall be governed by the internal laws of the State of New York but excluding any principles of conflict of laws or other rule of law that would result in the application of the law of any jurisdiction other than the laws of the State of New York. 6.8 Consent to Jurisdiction; Waiver of Jury Trial. Each of the parties hereto hereby irrevocably consents to the non-exclusive jurisdiction of the Supreme Court of the State of New York for New York County and the United States District Court for the Southern District of New York and waives trial by jury in any action or proceeding with respect to this Intercreditor Agreement. 6.9 Complete Agreement. This written Intercreditor Agreement is intended by the parties as a final expression of their agreement and is intended as a complete statement of the terms and conditions of their agreement. 6.10 No Third Parties Benefited. Except as expressly provided in Section 5.2 hereof, this Intercreditor Agreement is solely for the benefit of the Creditors and their respective successors, participants and assigns, and no other person shall have any right, benefit, priority or interest under, or because of the existence of, this Intercreditor Agreement. 6.11 Disclosures; Non-Reliance. Each Creditor has the means to, and shall in the future remain, fully informed as to the financial condition and other affairs of Debtors and no Creditor shall have any obligation or duty to disclose any such information to any other Creditor. Except as expressly set forth in this Intercreditor Agreement, the parties hereto have not otherwise made to each other nor do they hereby make to each other any warranties, express or implied, nor do they assume any liability to each other with respect to: (a) the enforceability, validity, value or collectability of any of the Junior Debt or Senior Debt or any guarantee or security which may have been granted to any of them in connection therewith, (b) any Debtor's title to or right to transfer any of the Collateral, or (c)any other matter except as expressly set forth in this Intercreditor Agreement. 6.12 Term. This Intercreditor Agreement is a continuing agreement and shall remain in full force and effect until the indefeasible satisfaction in full of all Senior Debt and the termination of the financing arrangements between Senior Creditor and Debtors. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 17 IN WITNESS WHEREOF, the parties have caused this Intercreditor Agreement to be duly executed as of the day and year first above written. CONGRESS FINANCIAL CORPORATION By: ___/s/ Eric Storz________________ Title:_A/V//P____________________ CHELSEY FINANCE, LLC By: ____Scott Lesser_________ Title: _Executive Vice President___ 18 ACKNOWLEDGMENT The undersigned hereby acknowledges and agrees to the foregoing terms and provisions. By its signature below, the undersigned agrees that it will, together with its successors and assigns, be bound by the provisions hereof. The undersigned agrees that any Creditor holding Collateral does so as bailee (under the UCC) for the other and is hereby authorized to and may turn over to such other Creditor upon request therefor any such Collateral, after all obligations and indebtedness of the undersigned to the bailee Creditor have been fully paid and performed. The undersigned acknowledges and agrees that: (i) although it may sign this Intercreditor Agreement, it is not a party hereto and does not and will not receive any right, benefit, priority or interest under or because of the existence of the foregoing Intercreditor Agreement, (ii) in the event of a breach by the undersigned or Junior Creditor of any of the terms and provisions contained in the foregoing Intercreditor Agreement, such a breach shall constitute an "Event of Default" as defined in and under the Senior Creditor Agreements and (iii) it will execute and deliver such additional documents and take such additional action as may be necessary or desirable in the opinion of any Creditor to effectuate the provisions and purposes of the foregoing Intercreditor Agreement. BRAWN OF CALIFORNIA, INC. By: /s/ Steven Seymour ----------------------------- Name: Steven Seymour Title: President GUMP'S BY MAIL, INC. By: /s/ Jed Pogran ------------------------------- Name: Jed Pogran Title: President GUMP'S CORP. By: /s/ Jed Pogran ------------------------------- Name: Jed Pogran Title: President HANOVER REALTY, INC. By: /s/ Doug Mitchell -------------------------------- Name: Doug Mitchell Title: President [SIGNATURES CONTINUE ON FOLLOWING PAGE] 19 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] THE COMPANY STORE FACTORY, INC. By: /s/ David Pipkorn --------------------------------- Name: David Pipkorn Title: President THE COMPANY OFFICE, INC. By: /s/ David Pipkorn ---------------------------------- Name: David Pipkorn Title: President SILHOUETTES, LLC By: /s/ Charles E. Blue --------------------------------- Name: Charles E. Blue Title: President HANOVER COMPANY STORE, LLC By: /s/ Charles E. Blue ---------------------------------- Name: Charles E. Blue Title: President DOMESTICATIONS, LLC By: /s/ Charles E. Blue ----------------------------------- Name: Charles E. Blue Title: Vice President KEYSTONE INTERNET SERVICES, LLC By: /s/ Charles E. Blue ----------------------------------- Name: Charles E. Blue Title: Vice President THE COMPANY STORE GROUP, LLC By: /s/ Charles E. Blue ------------------------------------ Name: Charles E. Blue Title: President [SIGNATURES CONTINUE ON FOLLOWING PAGE] 20 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER DIRECT, INC. By: /s/ Charles E. Blue ------------------------------------- Name: Charles E. Blue Title: Senior Vice President and Chief Financial Officer HANOVER HOME FASHIONS GROUP, LLC By: /s/ Charles E. Blue ------------------------------------- Name: Charles E. Blue Title: Vice President CLEARANCE WORLD OUTLETS, LLC By: /s/ Charles E. Blue ------------------------------------ Name: Charles E. Blue Title: President SCANDIA DOWN, LLC By: /s/ David Pipkorn ------------------------------------- Name: David Pipkorn Title: President LA CROSSE FULFILLMENT, LLC By: /s/ Charles E. Blue -------------------------------------- Name: Charles E. Blue Title: President D.M. ADVERTISING, LLC By: /s/ Charles E. Blue -------------------------------------- Name: Charles E. Blue Title: President AMERICAN DOWN & TEXTILE, LLC By: /s/ David Pipkorn -------------------------------------- Name: David Pipkorn Title: President [SIGNATURES CONTINUE ON FOLLOWING PAGE] 21 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER GIFTS, INC. By: /s/ Doug Mitchell --------------------------------------- Name: Doug Mitchell Title: President 22 EX-10.3 5 y98976exv10w3.txt 31ST AMENDMENT TO LOAN AND SECURITY AGREEMENT Exhibit 10.3 [Execution Version] THIRTY-FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS THIRTY-FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment"), dated as of July 8, 2004, is entered into by and among CONGRESS FINANCIAL CORPORATION, a Delaware corporation ("Lender"), BRAWN OF CALIFORNIA, INC., a California corporation ("Brawn"), GUMP'S BY MAIL, INC., a Delaware corporation ("GBM"), GUMP'S CORP., a California corporation ("Gump's"), HANOVER REALTY, INC., a Virginia corporation ("Hanover Realty"), THE COMPANY STORE FACTORY, INC., a Delaware corporation ("TCS Factory"), THE COMPANY OFFICE, INC., a Delaware corporation ("TCS Office"), SILHOUETTES, LLC, a Delaware limited liability company ("Silhouettes LLC"), HANOVER COMPANY STORE, LLC, a Delaware limited liability company ("HCS LLC"), DOMESTICATIONS, LLC, a Delaware limited liability company ("Domestications LLC"), KEYSTONE INTERNET SERVICES, LLC, a Delaware limited liability company ("KIS LLC"), and THE COMPANY STORE GROUP, LLC, a Delaware limited liability company ("CSG LLC"; and, together with Brawn, GBM, Gump's, Hanover Realty, TCS Factory, TCS Office, Silhouettes LLC, HCS LLC, Domestications LLC and KIS LLC, collectively, "Borrowers" and each, individually, a "Borrower"), HANOVER DIRECT, INC., a Delaware corporation ("Hanover"), HANOVER HOME FASHIONS GROUP, LLC, a Delaware limited liability company ("HHFG LLC"), CLEARANCE WORLD OUTLETS, LLC, a Delaware limited liability company ("Clearance World"), SCANDIA DOWN, LLC, a Delaware limited liability company ("Scandia Down LLC"), LACROSSE FULFILLMENT, LLC, a Delaware limited liability company ("LaCrosse LLC"), D.M. ADVERTISING, LLC, a Delaware limited liability company ("DM Advertising LLC"), AMERICAN DOWN & TEXTILE, LLC, a Delaware limited liability company ("ADT LLC"), and HANOVER GIFTS, INC., a Virginia corporation ("Hanover Gifts"; and, together with Hanover, HHFG LLC, Clearance World, Scandia Down LLC, LaCrosse LLC, DM Advertising LLC and ADT LLC, collectively, "Guarantors" and each, individually, a "Guarantor"). W I T N E S S E T H: WHEREAS, Borrowers, Guarantors and Lender are parties to the Loan and Security Agreement, dated November 14, 1995, as amended by the First Amendment to Loan and Security Agreement, dated February 22, 1996, the Second Amendment to Loan and Security Agreement, dated April 16, 1996, the Third Amendment to Loan and Security Agreement, dated May 24, 1996, the Fourth Amendment to Loan and Security Agreement, dated May 31, 1996, the Fifth Amendment to Loan and Security Agreement, dated September 11, 1996, the Sixth Amendment to Loan and Security Agreement, dated as of December 5, 1996, the Seventh Amendment to Loan and Security Agreement, dated as of December 18, 1996, the Eighth Amendment to Loan and Security Agreement, dated as of March 26, 1997, the Ninth Amendment to Loan and Security Agreement, dated as of April 18, 1997, the Tenth Amendment to Loan and Security Agreement, dated as of October 31, 1997, the Eleventh Amendment to Loan and Security Agreement, dated as of March 25, 1998, the Twelfth Amendment to Loan and Security Agreement, dated as of September 30, 1998, the Thirteenth Amendment to Loan and Security Agreement, dated as of September 30, 1998, the Fourteenth Amendment to Loan and Security Agreement, dated as of February 28, 2000, the Fifteenth Amendment to Loan and Security Agreement, dated as of March 24, 2000, the Sixteenth Amendment to Loan and Security Agreement, dated as of August 8, 2000, the Seventeenth Amendment to Loan and Security Agreement, dated as of January 5, 2001, the Eighteenth Amendment to Loan and Security Agreement, dated as of November 12, 2001, the Nineteenth Amendment to Loan and Security Agreement, dated as of December 18, 2001 (as amended hereby, the "Nineteenth Amendment to Loan Agreement"), the Twentieth Amendment to Loan and Security Agreement, dated as of March 5, 2002, the Twenty-First Amendment to Loan and Security Agreement, dated as of March 21, 2002, the Twenty-Second Amendment to Loan and Security Agreement, dated as of August 16, 2002, the Twenty-Third Amendment to Loan and Security Agreement, dated as of December 27, 2002, the Twenty-Fourth Amendment to Loan and Security Agreement, dated as of February 27, 2003, the Twenty-Fifth Amendment to Loan and Security Agreement, dated as of April 21, 2003, the Twenty-Sixth Amendment to Loan and Security Agreement, dated as of August 29, 2003, the Twenty-Seventh Amendment to Loan and Security Agreement, dated as of October 31, 2003, the Twenty-Eighth Amendment to Loan and Security Agreement, dated as of November 4, 2003, the Twenty-Ninth Amendment to Loan and Security Agreement, dated as of November 25, 2003 (as amended hereby, the "Twenty-Ninth Amendment to Loan Agreement"), and the Thirtieth Amendment to Loan and Security Agreement (the "Thirtieth Amendment to Loan and Security Agreement"), dated as of March 25, 2004 (as so amended, the "Loan Agreement"), pursuant to which Lender has made loans and advances to Borrowers; WHEREAS, Borrowers and Guarantors have requested that Lender (a) consent to the issuance by Hanover of the Common Stock Warrant (as hereinafter defined), the Series D Preferred Warrant (as hereinafter defined), the common stock pursuant to the Common Stock Warrant and the Series D Preferred Stock pursuant to the Series D Preferred Warrant, (b) consent to the filing of the Certificate of Designation of the Series D Preferred Stock, (c) consent to the Reverse Split (as hereinafter defined) and to Hanover making payments in cash to holders of Hanover's common stock to repurchase fractional shares of such shareholder as contemplated by the Reverse Split, (d) consent to certain amendments to Hanover's Certificate of Incorporation, (e) consent to the issuance by Hanover of Capital Stock consisting of common stock to Chelsey Finance, LLC ("Chelsey", as hereinafter further defined) in lieu of cash as payment of a waiver fee as contemplated by the Chelsey Commitment Letter (as hereinafter defined) on the closing of the Chelsey Term Loans (as hereinafter defined), (f) reduce the amount of the Maximum Credit, the amount of the Revolving Loan Limit and the amount of the Inventory and Accounts sublimits of Revolving Loan Borrowers, (g) release certain existing Availability Reserves and remove the Excess Loan Availability covenant, (h) temporarily defer the payment of principal with respect to the Tranche A Term Loan, (i) permit certain secured indebtedness to Chelsey arising under term loans to be made by Chelsey to Borrowers in the principal amount of $20,000,000, a portion of which proceeds shall be used to repay in full the Tranche B Term Loan, (j) modify certain provisions of the Financing Agreements with respect to Asset Sales and the application of proceeds thereof by Borrowers, (k) extend the term of the Loan Agreement until July 8, 2007, and (l) amend certain other provisions of the Loan Agreement; and WHEREAS, Lender is willing to enter into such amendments and grant such waivers subject to the terms and conditions and to the extent set forth herein; 2 NOW, THEREFORE, in consideration of the premises and covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. (a) Additional Definitions. As used herein or in any of the other Financing Agreements, the following terms shall have the meanings given to them below, and the Loan Agreement shall be deemed and is hereby amended to include, in addition and not in limitation, the following definitions: (i) "Amendments to Hanover Certificate of Incorporation" shall mean the amendments to the Certificate of Incorporation of Hanover to be entered into upon approval of the shareholders of Hanover (A) to effect the Reverse Split, (B) reduce the par value of each share of common stock from $0.66 2/3 per share to $0.01 per share and reclassify the outstanding shares of common stock into such lower par value shares, (C) increase the number of shares of Additional Preferred Stock which Hanover would have authority to issue from 5,000,000 shares to 15,000,000 shares and make a corresponding change in the aggregate number of shares of all classes of stock in the aggregate which Hanover has authority to issue, and (D) after giving effect to the Reverse Split, increase the number of shares of common stock which Hanover would have authority to issue from 30,000,000 shares to 50,000,000 shares and make a corresponding change to the aggregate number of shares of all classes of stock in the aggregate which Hanover has authority to issue. (ii) "Certificate of Designation of the Series D Preferred Stock" shall mean the Certificate of the Designations, Powers, Preferences and Rights of Series D Participating Preferred Stock, dated as of July 8, 2004, of Hanover Direct, Inc., as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (iii) "Chelsey" shall mean Chelsey Finance, LLC, a Delaware limited liability company, and its successors and assigns. (iv) "Chelsey Commitment Letter" shall mean that certain letter agreement, dated June 16, 2004, between Hanover and Chelsey Direct, LLC. (v) "Chelsey Common Warrant" shall mean the Common Stock Purchase Warrant, dated as of the date hereof, by Hanover in favor of Chelsey, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (vi) "Chelsey Intercreditor Agreement" shall mean the Intercreditor and Subordination Agreement, dated as of the date hereof, between Lender and Chelsey, as acknowledged by Borrowers and Guarantors, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (vii) "Chelsey Series D Warrant" shall mean the Series D Preferred Stock Purchase Warrant, dated as of the date hereof, by Hanover in favor of Chelsey with respect to the issuance of the Series D Preferred Warrant and the exchange of the Series D Preferred Warrant 3 for the Common Stock Warrant, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (viii) "Chelsey Term Loans" shall mean the term loans made by Chelsey to Borrowers pursuant to the Chelsey Term Loan Documents in the original principal amount of $20,000,000. (ix) "Chelsey Term Loan Agreement" shall mean the Loan and Security Agreement, dated as of the date hereof, by and among Chelsey, Borrowers and Guarantors, as the same now exists or may hereafter be further amended, modified, supplemented, extended, renewed, restated or replaced. (x) "Chelsey Term Loan Documents" shall mean, collectively, the following (as the same now exist or may hereafter exist upon the execution and delivery thereof and may hereafter or thereafter, as the case may be, be amended, modified, supplemented, extended, renewed, restated or replaced): (A) the Chelsey Term Loan Agreement, (B) each of the documents listed on the Schedule 1(a)(x) attached hereto, and (C) all agreements, documents,, and instruments executed or delivered in connection with any of the foregoing. (xi) "Chelsey Warrants" shall mean, collectively (as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced): (A) the Chelsey Series D Warrant, (B) the Chelsey Common Warrant, and (C) the related agreements, documents and instruments to be executed, delivered or filed in connection therewith or with respect to the Common Stock Warrant or the Series D Preferred Warrant (xii) "Common Stock Warrant" shall mean the warrant to acquire shares of Capital Stock of Hanover consisting of common stock at an exercise price of $.01 per share in an amount equal to thirty (30%) percent of the outstanding shares of common stock of Hanover on a fully diluted basis. (xiii) "Reverse Split" shall mean the one-for-ten reverse split of Hanover's Capital Stock consisting of common stock referred to in the Revised Preliminary Proxy Statement of Hanover filed with the SEC on June 23, 2004. (xiv) "Series D Preferred Warrant" shall mean the warrant to acquire shares of Series D Preferred Stock at an exercise price of $.01 per share. (xv) "Series D Preferred Stock" shall mean the Capital Stock of Hanover consisting of the Series D Participating Preferred Stock issued pursuant to the Series D Preferred Warrant and the Certificate of Designation of the Series D Preferred Stock. (xvi) "Solvent" shall mean, at any time with respect to any Person, that at such time such Person (A) is able to pay its debts as they mature and has (and has a reasonable basis to believe it will continue to have) sufficient capital (and not unreasonably small capital) to carry on its business consistent with its practices as of the date hereof, and (B) the assets and properties of such Person at a fair valuation (and including as assets for this purpose at a fair valuation all rights of subrogation, contribution or indemnification arising pursuant to any guarantees given by such Person) are greater than the Indebtedness of such Person, and including subordinated 4 and contingent liabilities computed at the amount which, such person has a reasonable basis to believe, represents an amount which can reasonably be expected to become an actual or matured liability (and including as to contingent liabilities arising pursuant to any guarantee the face amount of such liability as reduced to reflect the probability of it becoming a matured liability). (b) Amendment to Definitions. (i) Banking Days. All references to the term "Banking Days" in the Loan Agreement and the other Financing Agreements shall be deemed and each such reference is hereby redesignated "Business Days" and hereby amended to mean any day other than a Saturday, Sunday, or other day on which commercial banks are authorized or required to close under the laws of the State of New York or the State of North Carolina, and a day on which Lender is open for the transaction of business, except that if a determination of a Business Day shall relate to any Eurodollar Rate Loans, the term Business Day shall also exclude any day on which banks are closed for dealings in dollar deposits in the London interbank market or other applicable Eurodollar Rate market. (ii) Eligible Fulfillment Contract Receivables. Section 1(a)(vi) of the Fifteenth Amendment to Loan Agreement is hereby amended by deleting clauses (M) and (N) in their entirety and replacing them with the following: "(M) such Fulfillment Contract Receivables of a single account debtor, other than Home Shopping Network, Inc., do not constitute more than twenty (20%) percent of all otherwise Eligible Fulfillment Contract Receivables (but the portion of the Fulfillment Contract Receivables not in excess of such percentage may be deemed Eligible Fulfillment Contract Receivables); (N) such Fulfillment Contract Receivables of Home Shopping Network, Inc. do not constitute more than forty (40%) percent of all otherwise Eligible Fulfillment Contract Receivables (but the portion of the Fulfillment Contract Receivables not in excess of such percentage may be deemed Eligible Fulfillment Contract Receivables);" (iii) Interest Rate. With respect to interest accruing on or after July 1, 2004, all references to the term "Interest Rate" in the Loan Agreement and the other Financing Agreements shall be deemed and each such reference is hereby amended to mean (A) as to Prime Rate Revolving Loans, a rate of one-half of one (.5%) percent per annum in excess of the Prime Rate, (B) as to Prime Rate Term Loans, a rate of one-half of one (.5%) percent per annum in excess of the Prime Rate, (C) as to Eurodollar Rate Revolving Loans, a rate of two and one-half (2.5%) percent per annum in excess of the Adjusted Eurodollar Rate, and (D) as to Eurodollar Rate Term Loans, a rate of three (3.0%) percent per annum in excess of the Adjusted Eurodollar Rate (in each case under clauses (C) or (D), based on the Eurodollar Rate applicable for the Interest Period selected by or on behalf of the applicable Borrower as in effect three (3) Business Days prior to the commencement of such Interest Period for such Eurodollar Rate Loans in accordance with the terms of the Loan Agreement as amended hereby, whether such rate is higher or lower than any rate previously quoted to or for such Borrower); provided, that, the Interest Rate, as to Prime Rate Loans and Eurodollar Rate Loans, shall mean the rate two percent (2%) per annum more than the otherwise applicable variable Interest Rate provided under clause (A), (B), (C), (D) or (E) above (as applicable), at Lender's option, without notice, for the period 5 from and after the date of the occurrence of any Event of Default, and for so long as such Event of Default is continuing, or after termination or non-renewal of the Loan Agreement and the other Financing Agreements. If the aggregate amount of Revolving Loans and Letter of Credit Accommodations to one or more Revolving Loan Borrowers exceeds the amounts determined by Lender to be available pursuant to the Revolving Loan Formulas, net of reserves and subject to the applicable lending sublimits as to each Revolving Loan Borrower, and subject to the Revolving Loan Limit as to all Revolving Loan Borrowers considered together, the Interest Rate, as to Prime Rate Revolving Loans and Eurodollar Rate Revolving Loans, shall mean the rate two percent (2%) per annum more than the otherwise applicable Interest Rate provided under clause (A) or (D) above (as applicable) as to the amount of any such excess(es) (whether or not such excess(es) arise or are made with or without Lender's knowledge or consent and whether made before or after an Event of Default); provided, that, if such excess(es) arise solely by reason of the exercise of Lender's discretion under the Loan Agreement to reduce the Revolving Loan Formulas in the absence of an Event of Default that is continuing, the Interest Rate, shall not be so increased as to the amount of any such excess(es) for a period of five (5) days after Lender notifies the affected Revolving Loan Borrowers of such discretionary reduction in the Revolving Loan Formulas and, at and after the expiration of such period of five (5) days, the Interest Rate, may be so increased by Lender as to the amount of any such excess(es) then remaining. (iv) Maximum Credit. Section 1.83 of the Loan Agreement is hereby deleted and replaced with the following: "1.83 `Maximum Credit' shall mean the aggregate principal amount of $39,974,000." (v) Net Orderly Liquidation Value. All references to the term "Net Orderly Liquidation Value" in the Loan Agreement and the other Financing Agreements shall be deemed, and each such reference is hereby amended, to mean (A) as to Eligible Inventory other than Gump's Eligible Inventory or TCS Eligible Inventory consisting of raw materials, an amount equal to eighty-five (85%) percent of the gross proceeds that could be realized in cash if such Inventory were sold within a six (6) to nine (9) month period in an orderly liquidation sale, and (B) as to TCS Eligible Inventory consisting of raw materials, an amount equal to eighty-five (85%) percent of the gross proceeds that could be realized in cash if such Inventory were sold within a six (6) to nine (9) month period in an orderly liquidation sale minus, in each case under clauses (A) and (B), the estimated costs, expenses, fees, including reasonable attorneys' fees, taxes and other charges which would be incurred in connection with such sales, and estimated returns, all as set forth in, or calculated using, the most recent Appraisal. (vi) Net GOB Value. All references to the term "Net GOB Value" in the Loan Agreement and the other Financing Agreements shall be deemed, and each such reference is hereby amended, to mean, as to Gump's Eligible Inventory, an amount equal to eighty-five percent (85%) of the gross proceeds that could be realized in cash if such Inventory were sold within a ninety (90) day period in a going out of business liquidation sale, as set forth or calculated in the most recent Appraisal, minus the estimated costs, expenses, fees, including reasonable attorneys' fees, taxes and other charges which would be incurred in connection with such sale, and estimated returns, all as set forth in, or calculated using, the most recent Appraisal. 6 (vii) Revolving Loan Limit. Section 1.119 of the Loan Agreement is hereby deleted and replaced with the following: "1.119 `Revolving Loan Limit' shall mean, at any time, the amount equal to $34,500,000." (viii) Term Loans. All references to the "Term Loans" or the "Tranche A Term Loans" in the Loan Agreement and the other Financing Agreements are hereby redesignated "Term Loans" and hereby amended to mean, individually and collectively, the Obligations evidenced by the Second Restated Hanover Realty Term Note, the Restated TCS Factory Term Note and the Restated TCS Office Term Note. (c) Interpretation. All capitalized terms used herein and not defined herein shall have the meanings given to such terms in the Loan Agreement. 2. Consent to Issuance of Series D Preferred Warrant and Exchange of Series D Preferred Warrant for Common Stock Warrant. (a) Subject to the terms and conditions contained in this Amendment and the Loan Agreement, Lender hereby consents to the issuance of the Series D Preferred Warrant, the filing of the Certificate of Designation of the Series D Preferred Stock, the issuance of Series D Preferred Stock upon the exercise of the Series D Preferred Warrant, the exchange of the Series D Preferred Warrant for the Common Stock Warrant pursuant to the Chelsey Series D Warrant, and the issuance of Capital Stock consisting of common stock upon the exercise of the Common Stock Warrant, so long as each of the following conditions shall have been satisfied as determined by Lender: (i) the terms and conditions of the Certificate of Designation of the Series D Preferred Stock, the Series D Preferred Warrant and the Common Stock Warrant are satisfactory to Lender; (ii) Lender shall have received, in form and substance satisfactory to Lender, true, correct and complete photocopies of the Certificate of Designation of the Series D Preferred Stock, the Chelsey Series D Warrant and a form of the Chelsey Common Warrant prior to the date hereof; (iii) neither the execution and delivery of the Chelsey Warrants or any other agreements, documents or instruments in connection therewith, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof (A) shall violate any Federal or State securities laws or any other law or regulation or any order or decree of any court or governmental instrumentality in any respect, or (B) shall conflict with or result in the breach of, or constitute a default in any respect under any mortgage, deed of trust, security agreement, agreement or instrument to which any Borrower or Guarantor is a party or may be bound, or (C) shall violate any provision of the Certificate of Incorporation or By-Laws of any Borrower or Guarantor; (iv) Lender shall have received, in form and substance satisfactory to Lender, Secretary's or Assistant Secretary's Certificates of Directors' Resolutions evidencing the 7 adoption and subsistence of corporate resolutions approving the execution, delivery and performance by Hanover with respect to the Certificate of Designation of the Series D Preferred Stock and the Chelsey Warrants; (v) on or before the consummation of the issuance of the Series D Preferred Warrant, each of Borrowers and Guarantors shall have delivered, or have caused to be delivered, to Lender a true and correct copy of any consent, waiver or approval to or of the Series D Preferred Warrant, which any Borrower or Guarantor is required to obtain from any Person other than Lender in connection with the transactions contemplated by the Chelsey Warrants, and such consent, approval or waiver shall be in a form reasonably acceptable to Lender; (vi) as of the date of the consummation of the issuance of the Series D Preferred Warrant, and after giving effect to such issuance, no Event of Default or Incipient Default shall exist or have occurred and be continuing; and (vii) the closing of the issuance of the Series D Preferred Warrant shall have occurred on the date hereof and the exchange of the Series D Preferred Warrant for the Common Stock Warrant shall have occurred on or before September 30, 2004, or such later date as Lender may agree to in writing. (b) Effective on the effective date Lender determines that the conditions set forth in Section 2(a) hereof have been satisfied, Borrowers and Guarantors hereby acknowledge, confirm and agree that, notwithstanding anything to the contrary that may be contained in Sections 6.3, 6.5 and 6.6 of the Loan Agreement or in any other provisions of the Loan Agreement or in any of the other Financing Agreements, or in any of the Chelsey Warrants, without the prior written consent of Lender, Borrowers and Guarantors shall not, and shall not permit any of their Subsidiaries, directly or indirectly, to make any loans, advances, dividends, redemptions or other payments in respect of the Capital Stock of Hanover with respect to the Common Stock Warrant or the Series D Preferred Warrant, whether in cash, property or otherwise; provided, that, Hanover may make dividend payments in Capital Stock, but not cash, to Chelsey with respect to the Common Stock Warrant or the Series D Preferred Warrant, so long as each of the following conditions shall have been satisfied as determined by Lender: (i) at the time of and after giving effect to both the declaration and payment of such dividends, neither the declaration not the payment of such dividend (A) shall violate any Federal or State securities laws or any other law or regulation or any order or decree of any court or governmental authority, (B) shall conflict with or result in the breach of, or constitute a default under any mortgage, deed of trust, security agreement, agreement or instrument to which any Borrower or Guarantor is a party or may be bound, or (C) shall violate any provision of the Certificate of Incorporation or By-Laws of any Borrower or Guarantor; (ii) at the time of and after giving effect to both the declaration and payment of such dividends, Borrowers and Guarantors are and shall continue to be Solvent; and (iii) as of the date of the declaration and payment of such dividends and after giving effect thereto, no Event of Default or Incipient Default shall exist or have occurred and be continuing. 8 3. Consent to Reverse Split. (a) Subject to the terms and conditions contained in this Amendment and the Loan Agreement, Lender hereby consents to the Reverse Split, so long as each of the following conditions shall have been satisfied as determined by Lender: (i) the terms and conditions of the Reverse Split are satisfactory to Lender; (ii) Lender shall have received, in form and substance satisfactory to Lender, true, correct and complete forms of certain of the agreements, documents and instruments related to the Reverse Split prior to the date hereof and Lender shall have received, in form and substance satisfactory to Lender, true, correct and complete photocopies of all of the agreements, documents and instruments to be executed and delivered in connection with the Reverse Split prior to the execution and delivery thereof; (iii) neither the consummation of the transactions contemplated by the Reverse Split, nor compliance with the provisions thereof (A) shall violate any Federal or State securities laws or any other law or regulation or any order or decree of any court or governmental instrumentality in any respect, or (B) shall conflict with or result in the breach of, or constitute a default in any respect under any mortgage, deed of trust, security agreement, agreement or instrument to which any Borrower or Guarantor is a party or may be bound, or (C) shall violate any provision of the Certificate of Incorporation or By-Laws of any Borrower or Guarantor; (iv) Lender shall have received, in form and substance satisfactory to Lender, Secretary's or Assistant Secretary's Certificates of Directors' Resolutions evidencing the adoption and subsistence of corporate resolutions approving the performance by Hanover of the Reverse Split; (v) on or before the consummation of the Reverse Split, Hanover shall have delivered, or have caused to be delivered, to Lender a true and correct copy of any consent, waiver or approval to or of the Reverse Split, which Hanover is required to obtain from any Person other than Lender in connection with the transactions contemplated by the Reverse Split, and such consent, approval or waiver shall be in a form reasonably acceptable to Lender; and (vi) the closing of the Reverse Split shall have occurred on or before September 30, 2004, or such later date as Lender may agree to in writing. (b) Effective on the effective date Lender determines that the conditions set forth in Section 3(a) hereof have been satisfied, Hanover hereby acknowledges, confirms and agrees that, notwithstanding anything to the contrary that may be contained in Sections 6.3, 6.5 and 6.6 of the Loan Agreement or in any other provisions of the Loan Agreement or in any of the other Financing Agreements, without the prior written consent of Lender, Hanover shall not, and shall not permit any of its Subsidiaries, directly or indirectly, to make any loans, advances, dividends, redemptions or other payments in respect of the Capital Stock of Hanover in connection with the Reverse Split, whether in cash, property or otherwise; provided, that, Hanover may make 9 payments to holders of Capital Stock of Hanover consisting of common stock to repurchase the fractional shares of Hanover contemplated by and upon the consummation of the Reverse Split, so long as each of the following conditions shall have been satisfied as determined by Lender: (i) the aggregate amount of such payments to repurchase such fractional shares in cash shall not exceed $9,000 in the aggregate; and (ii) at the time of and after giving effect to such payment, such payment (A) shall not violate any Federal or State securities laws or any other law or regulation or any order or decree of any court or governmental authority, (B) shall not conflict with or result in the breach of, or constitute a default under any mortgage, deed of trust, security agreement, agreement or instrument to which any Borrower or Guarantor is a party or may be bound, or (C) shall not violate any provision of the Certificate of Incorporation or By-Laws of any Borrower or Guarantor. 4. Consent to Amendments to Hanover Certificate of Incorporation. (a) Subject to the terms and conditions contained in this Amendment and the Loan Agreement, Lender hereby consents to the Amendments to the Hanover Certificate of Incorporation so long as each of the following conditions shall have been satisfied as determined by Lender: (i) the terms and conditions of the Amendments to the Hanover Certificate of Incorporation are satisfactory to Lender; (ii) Lender shall have received, in form and substance satisfactory to Lender, true, correct and complete forms of certain of the agreements, documents and instruments to be executed and delivered in connection with the Amendments to the Hanover Certificate of Incorporation prior to the date hereof and Lender shall have received, in form and substance satisfactory to Lender, true, correct and complete photocopies of all of the agreements, documents and instruments to be executed and delivered in connection with the Amendments to the Hanover Certificate of Incorporation prior to the filing thereof with the Secretary of State of the State of Delaware; (iii) neither the execution and delivery of the agreements, documents and instruments to be executed and delivered in connection with the Amendments to the Hanover Certificate of Incorporation, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof (A) shall violate any Federal or State securities laws or any other law or regulation or any order or decree of any court or governmental instrumentality in any respect, or (B) shall conflict with or result in the breach of, or constitute a default in any respect under any mortgage, deed of trust, security agreement, agreement or instrument to which any Borrower or Guarantor is a party or may be bound, or (C) shall violate any provision of the Certificate of Incorporation as so amended or By-Laws of any Borrower or Guarantor; (iv) Lender shall have received, in form and substance satisfactory to Lender Secretary's or Assistant Secretary's Certificates of Directors' Resolutions evidencing the adoption and subsistence of corporate resolutions approving the execution, delivery and performance by Hanover with respect to the agreements, documents and instruments to be 10 executed and delivered in connection with the Amendments to the Hanover Certificate of Incorporation; (v) on or before the effectiveness of the Amendments to the Hanover Certificate of Incorporation, each of Borrowers and Guarantors shall have delivered, or have caused to be delivered, to Lender a true and correct copy of any consent, waiver or approval to or of the Amendments to the Hanover Certificate of Incorporation, which any Borrower or Guarantor is required to obtain from any Person other than Lender in connection with the transactions contemplated by the Amendments to the Hanover Certificate of Incorporation, and such consent, approval or waiver shall be in a form reasonably acceptable to Lender; and (vi) the closing of the transactions contemplated by the Amendments to the Hanover Certificate of Incorporation shall have occurred on or before September 30, 2004, or such later date as Lender may agree to in writing. (b) To the extent that Lender determines that conditions set forth in Section 4(a) hereof have been satisfied and after giving effect to the Amendments to the Hanover Certificate of Incorporation, nothing contained in this Section 4 shall modify or alter the applicability of any of the covenants or other provisions of the Loan Agreement and the other Financing Agreements to any of the Capital Stock of Hanover or its Subsidiaries. 5. Consent to Payment of Waiver Fee to Chelsey. Subject to the terms and conditions contained in this Amendment and the Loan Agreement, Lender hereby consents to the issuance by Hanover of Capital Stock consisting of common stock to Chelsey Direct, LLC as payment in lieu of cash of a waiver fee as contemplated by the Chelsey Commitment Letter on the closing of the Chelsey Term Loans. 6. Release of Availability Reserves; Removal of Excess Loan Availability Test. (a) Borrowers and Guarantors acknowledge and agree that Lender has heretofore established and maintained Availability Reserves from time to time against the amount of Revolving Loans and Letter of Credit Accommodations otherwise determined by Lender to be available to Revolving Loan Borrowers under the Loan Agreement and the other Financing Agreements. Borrowers and Guarantors have requested that Lender release a portion of such Availability Reserves of Borrowers at this time in the amount of $6,850,000. Lender hereby releases Availability Reserves in the amount of $6,850,000. (b) Section 6.32 of the Loan Agreement regarding the requirement that Borrowers at all times maintain Excess Loan Availability of not less than $3,000,000 is hereby deleted and replaced with the following: "6.32 [Intentionally Omitted]". (c) Notwithstanding anything to the contrary contained herein with respect to the release of the Availability Reserve in the amount of $6,850,000 or the deletion of the requirement that Borrowers maintain Excess Loan Availability of not less than $3,000,000, Lender shall have the right to continue to establish and maintain from time to time any other and further reserves against the availability of Revolving Loans and Letter of Credit Accommodations under the Loan Agreement and the other Financing Agreements. 11 7. Lending Sublimits. Section 2.2 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(a) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to Brawn shall not exceed Two Million Dollars ($2,000,000) at any one time outstanding. (b) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to GBM shall not exceed One Million Five Hundred Thousand Dollars ($1,500,000) at any one time outstanding. (c) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to Gump's shall not exceed Two Million Dollars ($2,000,000) at any one time outstanding. (d) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to HCS LLC shall not exceed Ten Million Dollars ($10,000,000) at any one time outstanding. (e) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to Domestications LLC shall not exceed Nine Million Dollars ($9,000,000) at any one time outstanding. (f) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to Silhouettes LLC shall not exceed Three Million Dollars ($3,000,000) at any one time outstanding. (g) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to CSG LLC shall not exceed Zero Dollars (-$0-) at any one time outstanding. (h) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to KIS LLC shall not exceed Zero Dollars (-$0-) at any one time outstanding. (i) Without limiting the foregoing lending sublimits, (i) the aggregate amount of Revolving Loans shall not at any one time outstanding exceed the Revolving Loan Limit for all Revolving Loan Borrowers and (ii) the aggregate amount of Revolving Accounts Loans for all Deferred Billing Borrowers, Installment Billing Borrowers, Fulfillment Contract Borrowers and any other applicable Revolving Loan Borrowers shall not at any 12 one time outstanding exceed $7,000,000. Lender shall have the right, from time to time, to establish and revise Revolving Accounts Loan sublimits for each Deferred Billing Borrower, Installment Billing Borrower, Fulfillment Contract Borrower and each other applicable Revolving Loan Borrower within the overall $7,000,000 sublimit applicable to all Revolving Accounts Loans." 8. Unused Line Fee. Section 2.7(c) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(c) Unused Line Fee. With respect to each calendar month (or part thereof) during the Term, Borrowers shall pay to Lender monthly an unused line fee, fully earned and payable on the first day of each month, at a rate equal to one half of one percent (.5%) per annum, calculated upon the excess, if any, of (i) Thirty-Four Million Five Hundred Thousand Dollars ($34,500,000) over (ii) the average of the daily aggregate principal balances of the outstanding Revolving Loans and Letter of Credit Accommodations during the preceding month (or part thereof); provided, however, that if Lender, solely on the basis of the exercise of its discretion, reduces any Inventory Loan Formula for any calendar month (or part thereof) in the absence of an Event of Default or Incipient Default which is continuing, the amount of the unused line fee shall be calculated for such month by decreasing the base amount of Thirty-Four Million Five Hundred Thousand Dollars ($34,500,000) set forth in clause (i) by a percentage thereof equal to the difference between the Inventory Loan Formula otherwise applicable under Section 2.1(b) hereof and the Inventory Loan Formula as so reduced solely by virtue of Lender's discretion." 9. Modifications to Asset Sales Provisions. (a) Asset Sale Lending Adjustments. Notwithstanding anything to the contrary contained in the Nineteenth Amendment to Loan Agreement and the Twenty-Ninth Amendment to Loan Agreement, subject to the terms and conditions contained herein, the Asset Sale Lending Adjustments shall no longer be applicable to Assets Sales and shall have no further force and effect. (b) Amendments to Permitted Redemptions of Series C Participating Preferred Stock. Notwithstanding anything to the contrary contained in Section 2(b) of the Twenty-Ninth Amendment to Loan Agreement, Borrowers and Guarantors hereby acknowledge, confirm and agree that, notwithstanding anything to the contrary that may be contained in Sections 6.3, 6.5 and 6.6 of the Loan Agreement or in any other provisions of the Loan Agreement or in any of the other Financing Agreements, or in any of the Series C Participating Preferred Agreements, without the prior written consent of Lender, Borrowers and Guarantors shall not, and shall not permit any of their Subsidiaries, directly or indirectly, to make any loans, advances, dividends, redemptions or other payments in respect of the Capital Stock of Hanover consisting of the Series C Participating Preferred Stock, whether in cash, property or otherwise; provided, that, (i) Hanover may make dividend payments in Capital Stock, but not cash, to the holders of the Series C Participating Preferred Stock, so long as each of the following conditions shall have been satisfied as determined by Lender: 13 (A) neither the declaration nor payment of such dividends (1) shall violate any Federal or State securities laws or any other law or regulation or any order or decree of any court or governmental authority, (2) shall conflict with or result in the breach of, or constitute a default under any mortgage, deed of trust, security agreement, agreement or instrument to which any Borrower or Guarantor is a party or may be bound, or (3) shall violate any provision of the Certificate of Incorporation or By-Laws of any Borrower or Guarantor; (B) at the time of and after giving effect to both the declaration and payment of such dividends, Borrowers and Guarantors are and shall continue to be Solvent; and (C) as of the date of the declaration and payment of such dividends and after giving effect thereto, no Event of Default or Incipient Default shall exist or have occurred and be continuing. (ii) Hanover may, subject to the terms and conditions contained herein, repurchase, redeem or retire in cash, Capital Stock consisting of the Series C Participating Preferred Stock, so long as each of the following conditions shall have been satisfied as determined by Lender: (A) Lender shall have received at least ten (10) Business Days' prior written notice of the intention of Hanover to repurchase, redeem or retire any of the Series C Participating Preferred Stock, which notice shall set forth the proposed number of shares Hanover intends to repurchase, redeem or retire, the price per share, the aggregate purchase price of such shares and such other information related thereto that Lender may reasonably request; (B) Excess Availability of Borrowers for each of the immediately preceding thirty (30) days before any such repurchase, redemption or retirement shall have been not less than $7,000,000 and on the date of any such repurchase, redemption or retirement and after giving effect thereto, Excess Availability of Borrowers shall be not less than $7,000,000; (C) Borrowers and Guarantors shall furnish to Lender, upon Lender's request, any agreements, documents or instruments evidencing or relating to any such repurchases, redemptions or retirements of Series C Participating Preferred Stock; (D) any such repurchase, redemption or retirement of Series C Participating Preferred Stock shall be paid using only Net Proceeds of Asset Sales and not any other funds of any Borrower or Guarantor and shall be paid with legally available funds therefor; (E) at the time of and after giving effect to any such repurchase, redemption or retirement of Series C Participating Preferred Stock, Borrowers and Guarantors are and shall continue to be Solvent; (F) the aggregate amount of all repurchases, redemptions and retirements of such Capital Stock shall not exceed the amount of the Net Proceeds derived from the Asset Sales after application of the Net Proceeds in accordance with the terms and conditions of Section 10 hereof; (G) any such repurchase, redemption or retirement (1) shall not violate any Federal or State securities laws or any other law or regulation or any order or decree of any court 14 or governmental authority, (2) shall not conflict with or result in the breach of, or constitute a default under any mortgage, deed of trust, security agreement, agreement or instrument to which any Borrower or Guarantor is a party or may be bound, or (3) shall not violate any provision of the Certificate of Incorporation or By-Laws of any Borrower or Guarantor; and (H) as of the date of any such repurchase, redemption or retirement of such Capital Stock and after giving effect thereto, no Event of Default or Incipient Default shall exist or have occurred and be continuing. (iii) Borrowers, Hanover and the other Guarantors shall not amend, modify or supplement any of the Series C Participating Preferred Agreements without the prior written consent of Lender. 10. Amendments to Application of Proceeds from Asset Sales. Notwithstanding anything to the contrary contained in Section 3 of the Twenty-Ninth Amendment to Loan Agreement, (a) Upon receipt of the Net Proceeds of any Asset Sale, Lender shall prior to an Event of Default that has occurred and is continuing apply such Net Proceeds as follows: (i) first, to pay the Obligations of the Borrower or Guarantor whose assets are being sold pursuant to such Asset Sale in the amount equal to the amount of the Obligations consisting of Revolving Loans then outstanding of such Borrower or Guarantor and, subject to Section 10(b) hereof, to hold as cash collateral for the Obligations of such Borrower or Guarantor an amount equal to one hundred and ten percent (110%) (or such greater amount in accordance with Lender's policies and practices) of the Letter of Credit Accommodations then outstanding of such Borrower or Guarantor; (ii) second, to pay the Obligations of Borrowers and Guarantors in such order and manner as Lender may determine in its sole discretion (other than a prepayment of any of the Term Loans), and immediately thereafter, the full remaining amount of such proceeds after application pursuant to clause (i) of this Section 10 shall be credited on a dollar for dollar basis to the loan account(s) of Revolving Loan Borrowers for purposes of determining the amount of Revolving Loans that may be made available to Revolving Loan Borrowers in accordance with the terms and conditions of the Loan Agreement to then be used, subject to the conditions set forth in Section 9 hereof and in the Loan Agreement and the other Financing Agreements, for the purpose of repurchasing, redeeming or retiring shares of the Series C Participating Preferred Stock held by Chelsey in accordance with the terms and conditions of the Series C Participating Preferred Agreements as in effect on the date of execution and delivery thereof; and (iii) third, to pay the Obligations of Borrowers and Guarantors in such order and manner as Lender may determine in its sole discretion (other than a prepayment of any of the Term Loans), and immediately thereafter, the full remaining amount of such proceeds after application pursuant to clauses (i) and (ii) of this Section 10 shall be credited on a dollar for dollar basis to the loan account(s) of Revolving Loan Borrowers for purposes of determining the amount of Revolving Loans that may be made available to Revolving Loan Borrowers in accordance with the terms and conditions of the Loan Agreement to then be used, subject to the conditions set forth in Section 9 hereof and Section 6.4(j) of the Loan Agreement and the other Financing Agreements, for the purpose of prepaying the principal amount of Indebtedness in 15 respect of the Chelsey Term Loan Agreement and the other Term Loan Agreements as in effect on the date of execution and delivery thereof. (b) If Lender holds cash collateral with respect to any Letter of Credit Accommodations as of the date of an Asset Sale as provided in Section 10(a)(i) hereof, then to the extent that the letters of credit with respect to such Letter of Credit Accommodations expire and no reimbursement obligation on the part of any Borrower or Guarantor (or Lender on behalf of any Borrower or Guarantor) remains with respect to such letters of credit as determined by Lender in its discretion, then the amount of such cash collateral shall be released and made available for purposes of redeeming the Series C Participating Preferred Stock in accordance with the terms and conditions of Section 10(a)(ii) hereof and the other terms and conditions of the Loan Agreement. If such cash collateral is so released, then the conditions set forth in Section 9 hereof shall be satisfied as of the date of the release of such cash collateral. (c) After an Event of Default that has occurred and is continuing, Lender may apply Net Proceeds of any Asset Sales to any of the Obligations of Borrowers and Guarantors in whatever order and manner Lender may in its discretion determine. 11. Indebtedness. Section 6.3 of the Loan Agreement is hereby amended by deleting the word "and" appearing at the end of Section 6.3(i), replacing the period with a semicolon and the word "and" appearing at the end of Section 6.3(j) and adding a new Section 6.3(k) immediately thereafter as follows: "(j) Indebtedness of Borrowers and Guarantors to Chelsey consisting of the Chelsey Term Loans evidenced by or arising under the Chelsey Term Loan Documents; provided, that, (i) the principal amount of such Indebtedness shall not in the aggregate exceed $20,000,000, (ii) such Indebtedness is and shall be subject and subordinate in right of payment to the right of Lender to receive the prior indefeasible payment in full of all of the Obligations in accordance with the terms and conditions of the Chelsey Intercreditor Agreement; (iii) Borrowers and Guarantors shall not, directly or indirectly, make any payments in respect of such Indebtedness, including, but not limited to, any prepayments or other non-mandatory payments; provided, that, (A) Borrowers may pay to Chelsey on July 8, 2004 the closing fee in the amount of $200,000 out of the proceeds of the Chelsey Term Loans; (B) Borrowers may make regularly scheduled payments of interest in respect of such Indebtedness in accordance with the terms and conditions of the Chelsey Term Loan Agreement so long as no Incipient Default or Event of Default shall exist or have occurred. (B) during any fiscal quarter of Hanover and its Subsidiaries commencing with the fiscal quarter of Hanover and its Subsidiaries ending September 25, 2004, 16 Borrowers may make payments of principal in cash in respect of such Indebtedness in accordance with the terms and conditions of the Chelsey Term Loan Agreement, so long as each of the following conditions shall have been satisfied as determined by Lender: (1) as of the date of any such payment and after giving effect thereto, the aggregate amount of the Excess Availability of Borrowers on such date and the immediately preceding thirty (30) consecutive days before such payment shall be not less than $7,000,000; (2) the cumulative EBITDA of Hanover and its Subsidiaries calculated based on the immediately preceding four (4) fiscal quarters immediately preceding the quarter in which the date of such payment occurs and for which fiscal quarter Lender has received financial statements of Hanover and its Subsidiaries, shall be not less than $14,000,000; (3) the aggregate amount of such principal prepayments shall not exceed $2,000,000 in any such fiscal quarter; (4) any such payment shall not be made earlier than the date that is five (5) Business Days after receipt by Lender of quarterly financial statements of Hanover and its Subsidiaries for such immediately preceding fiscal quarter delivered to Lender in accordance with the terms and conditions of Section 6.18(a)(ii) of the Loan Agreement; (5) as of the date of such payment and after giving effect thereto, Borrowers and Guarantors are and shall continue to be Solvent; and (6) as of the date of such payment and after giving effect thereto, no Incipient Default or Event of Default shall exist or have occurred; (C) Borrowers may make payments of principal in cash in respect of such Indebtedness in accordance with the terms and conditions of the Chelsey Term Loan Agreement using Net Proceeds of Asset Sales, so long as each of the following conditions shall have been satisfied as determined by Lender: (1) Lender shall have received at least ten (10) Business Days' prior written notice of the intention of Hanover to repay such Indebtedness, which notice shall set forth the proposed amount of principal to be repaid and such other information related thereto that Lender may reasonably request; (2) Excess Availability of Borrowers for each of the immediately preceding thirty (30) days before any such repayment shall have been not less than $7,000,000 and on the date of any such repayment and after giving effect thereto, Excess Availability of Borrowers shall be not less than $7,000,000; (3) any such repayment of such Indebtedness under this clause (iii)(C) shall be paid using only Net Proceeds of Asset Sales and not any other funds of Borrowers or Guarantors; 17 (4) all of the Series C Preferred Participating Preferred Stock shall have been repurchased, redeemed or retired in accordance with the terms and conditions of Section 10 hereof and the aggregate amount of all repurchases, redemptions and retirements of such Capital Stock shall not exceed the amount of the Net Proceeds derived from the Asset Sales after application of the Net Proceeds in accordance with the terms and conditions of Section 10 hereof; (5) as of the date of such payment and after giving effect thereto, Borrowers and Guarantors are and shall continue to be Solvent; and (6) as of the date of any such repayment and after giving effect thereto, no Event of Default or Incipient Default shall exist or have occurred and be continuing; (D) Borrowers may make payments of reasonable fees and expenses as determined by Lender in its discretion in respect of such Indebtedness in accordance with the terms and conditions of the Chelsey Term Loan Documents, so long as each of the following conditions shall have been satisfied as determined by Lender: (1) Lender shall have received at least five (5) Business Days' prior written notice of the intention of Borrowers to pay such fees, which notice shall set forth the proposed amount of the fees, and reason for the incurrence of such fees and such other information related thereto that Lender may reasonably request; and (2) as of the date of any such payment and after giving effect thereto, no Event of Default or Incipient Default shall exist or have occurred and be continuing; (iv) such Indebtedness shall only be secured by security interests in and liens upon the assets of Borrowers and Guarantor to the extent permitted under Section 6.4(j) hereof; (v) Borrowers and Guarantors shall not, directly or indirectly, amend, modify, alter or change any terms of such Indebtedness or any agreement, document or instrument related thereto, except, that, Borrowers and Guarantors may, only after prior written notice to Lender, amend, modify, alter or change the terms thereof so as to extend the maturity thereof or defer the timing of any payments in respect thereof, or to forgive or cancel any portion of such Indebtedness (other than pursuant to payments thereof), or to reduce the interest rate or any fees in connection therewith, or to release any liens or security interests in any assets and properties of Borrowers and Guarantors, or to make any covenants contained therein less restrictive or burdensome as to Borrowers and Guarantors or otherwise more favorable to Borrowers and Guarantors or redeem, retire, defease, purchase or otherwise acquire such Indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (vi) Borrowers and Guarantors shall furnish to Lender all notices, demands or other materials concerning such Indebtedness either received by any of Borrowers or Guarantors or on its or their behalf, promptly after receipt thereof, or sent by any of 18 Borrowers or Guarantors or on its or their behalf, concurrently with the sending thereof, as the case may be." 12. Encumbrances. Section 6.4 of the Loan Agreement is hereby amended by deleting the word "and" appearing at the end of Section 6.4(h), replacing the period with a semicolon and the word "and" appearing at the end of Section 6.4(i) and adding new Section 6.4(j) immediately thereafter, as follows: "(j) liens and security interests in favor of Chelsey on the assets and properties of Borrowers and Guarantors under the Chelsey Term Loan Documents as in effect on July 8, 2004; provided, that, (i) such security interests in and mortgages and liens in favor of Chelsey shall at all times be subject to the terms and conditions set forth in the Chelsey Intercreditor Agreement, in form and substance satisfactory to Lender." 13. Appraisals. Section 6.15 of the Loan Agreement is hereby deleted and replaced with the following: "6.15 Appraisals (a) Borrowers shall, at Borrowers' expense, upon the request of Lender not more than once during any three (3) month period, and at any time or times as Lender may request on and after an Event of Default, deliver to Lender appraisals by the Appraiser of any or all of the Inventory of Borrowers, in form, scope and methodology acceptable to Lender, and including, but not limited to, a report as to the Net Orderly Liquidation Value of the Inventory of Borrowers, other than Inventory of Gump's at the Gump's Main Store, and of the Net GOB Value of the Inventory of Gump's at the Gump's Main Store. (b) Upon Lender's request, Borrowers shall, at their expense, once in any calendar year during the Term (excluding any such reports or appraisals delivered in connection with the closing hereunder) and at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to their Real Property or Equipment, in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender." 14. Second Restated Hanover Realty Term Note. (a) Each of Borrowers and Guarantors hereby acknowledges, confirms and agrees that Hanover Realty is indebted to Lender as of July 8, 2004, in respect of the Obligations evidenced by the Second Restated Hanover Realty Term Note in the aggregate principal amount of $ 3,885,714 (the "Existing Hanover Realty Term Loan Balance"), together with interest accrued and accruing thereon and costs, expenses, fees (including attorneys' fees and legal expenses) and other charges now or hereafter owed by Borrowers to Lender attributable to the Existing Hanover Realty Term Loan Balance, all of which are unconditionally owing by Hanover Realty to Lender, without offset, defense or counterclaim of any kind, nature and description whatsoever. 19 (b) Effective as of the date hereof, the Second Restated Hanover Realty Term Note is hereby amended to provide that, unless sooner payable in accordance with the terms and conditions of the Loan Agreement, the Second Restated Hanover Realty Term Note and any other Financing Agreement, Hanover Realty shall pay to Lender principal in respect of the Second Restated Hanover Realty Term Note on the dates and in the amounts as follows:
Principal Principal Payment Date Amount Due - --------------------------- ---------- August 1, 2004 $-0- September 1, 2004 $-0- October 1, 2004 $-0- November 1, 2004 and each month thereafter $121,429
(c) Principal in respect of the Hanover Realty Term Loan Second Amended and Restated Note shall be paid in immediately available funds and in the manner of payment otherwise provided in the Second Amended and Restated Note. All principal and interest (together with any fees, costs, expenses and other charges in respect of the Hanover Realty Term Loan payable by Borrowers to Lender) shall be automatically, without notice or demand, absolutely and unconditionally due and payable on July 8, 2007. (d) The amendment of the Second Restated Hanover Realty Term Note as set forth herein, shall not, in any manner, be construed to constitute payment of, or impair, limit, cancel or extinguish, or constitute a novation in respect of, any of the obligations, liabilities or indebtedness evidenced by or arising under the Second Restated Hanover Realty Term Note. Interest accrued and accruing shall continue to be paid as provided in the Second Restated Hanover Realty Term Note. The liens and security interests securing such obligations, liabilities or indebtedness shall not in any manner be impaired, limited, terminated, waived or released hereby and the Second Restated Hanover Realty Term Note shall continue to be secured by all the Collateral. 15. Restated TCS Factory Term Note. (a) Each of Borrowers and Guarantors hereby acknowledges, confirms and agrees that TCS Factory is indebted to Lender as of July 8, 2004, in respect of the Obligations evidenced by the Second Restated TCS Factory Term Note in the aggregate principal amount of $1,062,857 (the "Existing TCS Factory Term Loan Balance"), together with interest accrued and accruing thereon and costs, expenses, fees (including attorneys' fees and legal expenses) and other charges now or hereafter owed by TCS Factory to Lender attributable to the Existing TCS Factory Term Loan Balance, all of which are unconditionally owing by TCS Factory to Lender, without offset, defense or counterclaim of any kind, nature and description whatsoever. (b) Effective as of the date hereof, the Restated TCS Factory Term Note is hereby amended to provide that, unless sooner payable in accordance with the terms and conditions of the Loan Agreement, the Restated TCS Factory Term Note and any other Financing Agreement, TCS Factory shall pay to Lender principal in respect of the Restated TCS Factory Term Note on the dates and in the amounts as follows: 20
Principal Principal Payment Date Amount Due - ------------------------- ---------- August 1, 2004 $-0- September 1, 2004 $-0- October 1, 2004 $-0- November 1, 2004 and each month thereafter $33,215
(c) Principal in respect of the TCS Factory Term Loan shall be paid in immediately available funds and in the manner of payment otherwise provided in the Restated TCS Factory Term Note. All principal and interest (together with any fees, costs, expenses and other charges in respect of the TCS Factory Term Loan payable by TCS Factory to Lender) shall be automatically, without notice or demand, absolutely and unconditionally due and payable on July 8, 2007. (d) The amendment of the Restated TCS Factory Term Note as set forth herein, shall not, in any manner, be construed to constitute payment of, or impair, limit, cancel or extinguish, or constitute a novation in respect of, any of the obligations, liabilities or indebtedness evidenced by or arising under the Restated TCS Factory Term Note. Interest accrued and accruing shall continue to be paid as provided in the Restated TCS Factory Term Note. The liens and security interests securing such obligations, liabilities or indebtedness shall not in any manner be impaired, limited, terminated, waived or released hereby and the Restated TCS Factory Term Note shall continue to be secured by all the Collateral. 16. Restated TCS Office Term Note. (a) Each of Borrowers and Guarantors hereby acknowledges, confirms and agrees that TCS Office is indebted to Lender as of July 8, 2004, in respect of the Obligations evidenced by the Second Restated TCS Office Term Note in the aggregate principal amount of $360,000 (the "Existing TCS Office Term Loan Balance"), together with interest accrued and accruing thereon and costs, expenses, fees (including attorneys' fees and legal expenses) and other charges now or hereafter owed by TCS Office to Lender attributable to the Existing TCS Office Term Loan Balance, all of which are unconditionally owing by TCS Office to Lender, without offset, defense or counterclaim of any kind, nature and description whatsoever. (b) Effective as of the date hereof, the Restated TCS Office Term Note is hereby amended to provide that, unless sooner payable in accordance with the terms and conditions of the Loan Agreement, the Restated TCS Office Term Note and any other Financing Agreement, TCS Office shall pay to Lender principal in respect of the Restated TCS Office Term Note on the dates and in the amounts as follows:
Principal Principal Payment Date Amount Due - ------------------------- ---------- August 1, 2004 $-0- September 1, 2004 $-0- October 1, 2004 $-0-
21 November 1, 2004 and each month thereafter $11,250
(c) Principal in respect of the TCS Office Term Loan shall be paid in immediately available funds and in the manner of payment otherwise provided in the Restated Factory Term Note. All principal and interest (together with any fees, costs, expenses and other charges in respect of the TCS Office Term Loan payable by TCS Office to Lender) shall be automatically, without notice or demand, absolutely and unconditionally due and payable on July 8, 2007. (d) The amendment of the Restated TCS Office Term Note as set forth herein, shall not, in any manner, be construed to constitute payment of, or impair, limit, cancel or extinguish, or constitute a novation in respect of, any of the obligations, liabilities or indebtedness evidenced by or arising under the Restated TCS Office Term Note. Interest accrued and accruing shall continue to be paid as provided in the Restated TCS Office Term Note. The liens and security interests securing such obligations, liabilities or indebtedness shall not in any manner be impaired, limited, terminated, waived or released hereby and the Restated TCS Office Term Note shall continue to be secured by all the Collateral. 17. Term. The first sentence of Section 9.1(a) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(a) This Agreement and the other Financing Agreements shall become effective as of the date hereof and this Agreement shall continue in full force and effect for a term ending on July 8, 2007 (the "Renewal Date"), and from year-to-year thereafter, unless sooner terminated pursuant to the terms hereof." (b) The first sentence of Section 9.1(f) of the Loan Agreement is hereby deleted and replaced with the following, effective with respect to any termination after the date hereof: "(f) If Lender terminates this Agreement or the other Financing Agreements after the occurrence and during the continuance of an Event of Default or at the request of Borrowers prior to the Renewal Date, in view of the impracticality and extreme difficulty of ascertaining actual damages, and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result thereof, Borrowers hereby agree to pay to Lender, upon the effective date of such termination, a fee (the "Early Termination Fee") in the amount equal to:
Amount Period ------ ------ (i) 3% of Maximum Credit From the date hereof through and including July 7, 2005 (ii) 1% of Maximum Credit From and after July 8, 2005 through and including July 7, 2006
22 (iii) 1% of Maximum Credit From and after July 8, 2006 to but not including July 8, 2007"
18. Fees. In addition to all other fees, charges, interest and expenses payable by Borrowers to Lender under the Loan Agreement and the other Financing Agreements, Borrowers shall pay to Lender, contemporaneously herewith, an amendment fee in the amount of $400,000, which fee is fully earned as of the date hereof and may be charged into the loan account(s) of any Borrower. 19. Use of Chelsey Term Loans Proceeds. Borrowers shall use and hereby direct Lender to apply the initial proceeds of the Chelsey Term Loans provided by Chelsey: (a) to repay in full the outstanding Obligations in respect of the Tranche B Term Loan, and (b) for general operating, working capital, and other proper corporate purposes of Borrowers and Guarantors not otherwise prohibited by the terms of the Loan Agreement, including fees and expenses of the transactions contemplated hereunder set forth in the Chelsey Commitment Letter. 20. Representations, Warranties and Covenants. Borrowers and Guarantors represent, warrant and covenant with and to Lender as follows, which representations, warranties and covenants (other than the representation, warranty and covenant contained in Section 20(e) hereof, which is made as of the date hereof) are continuing and shall survive the execution and delivery hereof, the truth and accuracy of, or compliance with each, together with the representations, warranties and covenants in the other Financing Agreements, being a condition of the effectiveness of this Amendment and a continuing condition of the making or providing of any Revolving Loans or Letter of Credit Accommodations by Lender to Borrowers: (a) This Amendment and each other agreement or instrument to be executed and delivered by each Borrower or Guarantor hereunder have been duly authorized, executed and delivered by all necessary action on the part of each Borrower and each Guarantor which is a party hereto and thereto and, if necessary, their respective stockholders (with respect to any corporation) or members (with respect to any limited liability company), and is in full force and effect as of the date hereof, as the case may be, and the agreements and obligations of each Borrower and Guarantor, as the case may be, contained herein and therein constitute legal, valid and binding obligations of each Borrower and Guarantor, as the case may be, enforceable against them in accordance with their terms. (b) No action of, or filing with, or consent of any governmental or public body or authority, and no consent of any party other than Chelsey, is required to authorize, or is otherwise required in connection with, the execution, delivery and performance of this Amendment and each other agreement or instrument to be executed and delivered pursuant hereto and thereto. (c) Neither the execution and delivery of this Agreement, the Chelsey Warrants, the Chelsey Term Loan Documents, the Amendments to the Hanover Certificate of Incorporation, the Certification of Designation of Series D Preferred Stock, or any other agreements, documents or instruments in connection therewith, nor the consummation of the transactions herein and therein contemplated, nor compliance with the provisions thereof (i) has violated or shall violate any Federal or State securities laws or any other law or regulation or any 23 order or decree of any court or governmental instrumentality in any respect, or (ii) does, or shall conflict with or result in the breach of, or constitute a default in any respect under any mortgage, deed of trust, security agreement, agreement or instrument to which any Borrower or Guarantor is a party or may be bound, or (iii) does or shall violate any provision of the Certificate of Incorporation or By-Laws of any Borrower or Guarantor. (d) Notwithstanding anything to the contrary that may be contained in any of the Chelsey Warrants, the Certification of Designation of Series D Preferred Stock or the Amendments to the Hanover Certificate of Incorporation, Borrowers and Guarantors shall not, and shall not permit any of their Subsidiaries, directly or indirectly, to make any loans, advances, dividends, redemptions or other payments in respect of the Capital Stock of Hanover with respect to the Common Stock Warrant, the Certification of Designation of Series D Preferred Stock or the Series D Preferred Warrant, or in connection with the Reverse Split, whether in cash, property or otherwise, except for the payments in the form of Capital Stock permitted hereunder or payments in cash permitted hereunder in connection with the repurchase of the fractional shares held by shareholders of Hanover pursuant to the Reverse Split. (e) To the best knowledge of Borrowers and Guarantors as of the date hereof, no court of competent jurisdiction has issued any injunction, restraining order or other order which prohibits consummation of the issuance of the Chelsey Warrants, the Certification of Designation of Series D Preferred Stock, the Amendments to the Hanover Certificate of Incorporation, the Chelsey Term Loan Documents and the transactions related thereto and, except as previously disclosed to Lender in writing pursuant to the letter dated as of July 8, 2004, no governmental or other action or proceeding has been threatened or commenced against Borrowers or Guarantors, seeking any injunction, restraining order or other order which seeks to avoid or otherwise modify the transactions contemplated by the Chelsey Warrants, the Amendments to the Hanover Certificate of Incorporation, the Certification of Designation of Series D Preferred Stock or the Chelsey Term Loan Documents. (f) Neither the execution and delivery of the Chelsey Warrants, the Amendments to the Hanover Certificate of Incorporation, the Certification of Designation of Series D Preferred Stock or the Chelsey Term Loan Documents, nor the consummation of the transactions contemplated by the Chelsey Warrants, the Amendments to the Hanover Certificate of Incorporation, the Certification of Designation of Series D Preferred Stock or the Chelsey Term Loan Documents, nor compliance with the provisions thereof, shall result in the creation or imposition of any lien, charge or encumbrance upon any of the Collateral, other than pursuant to the Chelsey Term Loan Documents to the extent permitted herein and in the Chelsey Intercreditor Agreement. (g) The Chelsey Warrants and the Certification of Designation of Series D Preferred Stock have been duly authorized, issued and delivered by Hanover and the transactions contemplated thereunder shall be performed in accordance with their terms by the respective parties thereto in all respects, including the fulfillment (not merely the waiver) of all conditions precedent set forth therein. (h) The Chelsey Term Loan Documents have been duly authorized, executed and delivered by Borrowers and Guarantors, as the case may be, and the transactions contemplated thereunder shall be performed in accordance with their terms by the respective parties thereto in 24 all respects, including the fulfillment (not merely the waiver) of all conditions precedent set forth therein. (i) The Amendments to the Hanover Certificate of Incorporation shall be duly authorized, executed and delivered by Hanover and the transactions contemplated thereunder shall be performed in accordance with their terms by the respective parties thereto in all respects, including the fulfillment (not merely the waiver) of all conditions precedent set forth therein. (j) All actions and proceedings required by the Chelsey Warrants, the Amendments to the Hanover Certificate of Incorporation, the Certification of Designation of Series D Preferred Stock, the Chelsey Term Loan Documents, and applicable law or regulations, including, without limitation, all Securities Laws, shall have been taken, and the transaction required thereunder shall have been duly and validly taken and consummated, other than with respect to the exchange of the Series D Preferred Warrant for the Common Stock Warrant and the Amendments to the Hanover Certificate of Incorporation on or before September 30, 2004 (at which time all such actions and proceedings shall have been taken, and the transaction required thereunder shall have been duly and validly taken and consummated). (k) All of the representations and warranties set forth in the Loan Agreement as amended hereby, and the other Financing Agreements, are true and correct in all material respects after giving effect to the provisions of this Amendment, except to the extent any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such date. (l) After giving effect to the provisions of this Agreement, the consummation of the transactions contemplated by the Chelsey Warrants, the Certification of Designation of Series D Preferred Stock, the Chelsey Term Loan Documents, the Amendments to the Hanover Certificate of Incorporation, or any other agreements, documents or instruments in connection therewith, when consummated will not constitute an Incipient Event of Default or Event of Default. (m) After the date hereof, the Chelsey Warrants, the Chelsey Term Loan Documents (except as permitted under the Loan Agreement as amended hereby), the Amendments to the Hanover Certificate of Incorporation, or any other agreements, documents or instruments in connection therewith, shall not be amended, modified, supplemented, extended, renewed, restated or replaced with the prior written consent of Lender. (n) Notwithstanding the provisions of Section 8(d) of the Thirtieth Amendment to Loan Agreement or the letter agreement, dated as of May 11, 2004, by Lender in favor of Brawn and Hanover, Borrowers and Guarantors shall enter into, on or before August 15, 2004, an Amended and Restated Loan and Security Agreement among Lender, Borrowers and Guarantors and an amendment and restatement of such other Financing Agreements or amendments to or amendments and restatements of any existing Financing Agreements as Lender shall request in connection with the amendment and restatement of the Loan Agreement. (o) After giving effect to the provisions of this Amendment, no Event of Default or Incipient Default exists or has occurred and is continuing. 25 21. Conditions Precedent. Concurrently with the execution and delivery hereof (except to the extent otherwise indicated below), and as a further condition to the effectiveness of this Amendment and the agreement of Lender to the modifications and amendments set forth in this Amendment: (a) Lender shall have received a photocopy of an executed original or executed original counterparts of this Amendment by facsimile (with the originals to be delivered within five (5) Business Days after the date hereof), as the case may be, duly authorized, executed and delivered by Borrowers and Guarantors; (b) Lender shall have received, in form and substance satisfactory to Lender, true and complete copies of all of the Chelsey Term Loan Documents, the Certificate of Designation of the Series D Preferred Stock, the Chelsey Series D Warrant and the form of the Amendments to the Hanover Certificate of Incorporation; (c) Lender shall have received, in form and substance satisfactory to Lender, the Chelsey Intercreditor Agreement; (d) Lender shall have received at the payment direction of Borrowers for the account of Borrowers, the proceeds of the Chelsey Term Loans in the amount of not less than $19,800,000 from Chelsey, a portion of which loan proceeds shall be used to repay in full Tranche B Term Loan; (e) as of the closing and after giving effect to the transactions contemplated by this Amendment, Borrowers shall have Excess Availability of not less than $20,000,000; (f) Lender shall have received, in form and substance satisfactory to Lender, Secretary's or Assistant Secretary's Certificates of Directors' Resolutions and Shareholders' Consent evidencing the adoption and subsistence of corporate resolutions approving the execution, delivery and performance by Borrowers and Guarantors (other than the consent of the shareholders of Hanover) that are corporations of this Amendment and the agreements, documents and instruments to be delivered pursuant to this Amendment; (g) Lender shall have received, in form and substance satisfactory to Lender, the consent of all Participants to this Amendment and the transactions contemplated hereby; and (h) each of Borrowers and Guarantors shall deliver, or cause to be delivered, to Lender a true and correct copy of any consent, waiver or approval to or of this Amendment that any Borrower or Guarantor is required to obtain from any other Person, and such consent, approval or waiver shall be in a form reasonably acceptable to Lender. 22. Effect of this Amendment. This Amendment constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedes all prior oral or written communications, memoranda, proposals, negotiations, discussions, term sheets and commitments with respect to the subject matter hereof. Except as expressly provided herein, no other changes or modifications to the Loan Agreement or any of the other Financing Agreements, or waivers of or consents under any provisions of any of the foregoing, are intended or implied by this Amendment, and in all other respects the Financing Agreements are hereby 26 specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent that any provision of the Loan Agreement or any of the other Financing Agreements conflicts with any provision of this Amendment, the provision of this Amendment shall control. 23. Further Assurances. Borrowers and Guarantors shall execute and deliver such additional documents and take such additional action as may be reasonably requested by Lender to effectuate the provisions and purposes of this Amendment. 24. Governing Law. The validity, interpretation and enforcement of this Amendment in any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise shall be governed by the internal laws of the State of New York, without regard to any principle of conflict of laws or other rule of law that would result in the application of the law of any jurisdiction other than the State of New York. 25. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 26. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 27 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed on the day and year first written. CONGRESS FINANCIAL CORPORATION By: /s/ Eric Storz ------------------------------------- Title: A/V/P BRAWN OF CALIFORNIA, INC. By: /s/ Steven Seymour ------------------------------------- Name: Steven Seymour Title: President GUMP'S BY MAIL, INC. By: /s/ Jed Pogran ------------------------------------- Name: Jed Pogran Title: President GUMP'S CORP. By: /s/ Jed Pogran ------------------------------------- Name: Jed Pogran Title: President HANOVER REALTY, INC. By: /s/ Doug Mitchell ------------------------------------- Name: Doug Mitchell Title: President THE COMPANY STORE FACTORY, INC. By: /s/ David Pipkorn ------------------------------------- Name: David Pipkorn Title: President [SIGNATURES CONTINUE ON FOLLOWING PAGE] 28 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] THE COMPANY OFFICE, INC. By: /s/ David Pipkorn ------------------------------------- Name: David Pipkorn Title: President SILHOUETTES, LLC By: /s/ Charles E. Blue ------------------------------------- Name: Charles E. Blue Title: President HANOVER COMPANY STORE, LLC By: /s/ Charles E. Blue ------------------------------------- Name: Charles E. Blue Title: President DOMESTICATIONS, LLC By: /s/ Charles E. Blue ------------------------------------- Name: Charles E. Blue Title: Vice President KEYSTONE INTERNET SERVICES, LLC By: /s/ Charles E. Blue ------------------------------------- Name: Charles E. Blue Title: Vice President THE COMPANY STORE GROUP, LLC By: /s/ Charles E. Blue ------------------------------------- Name: Charles E. Blue Title: President [SIGNATURES CONTINUE ON FOLLOWING PAGE] 29 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] By their signatures below, the undersigned Guarantors acknowledge and agree to be bound by the applicable provisions of this Amendment: HANOVER DIRECT, INC. By: /s/ Charles E. Blue ------------------------------- Name: Charles E. Blue Title: Senior Vice President and Chief Financial Officer HANOVER HOME FASHIONS GROUP, LLC By: /s/ Charles E. Blue ------------------------------- Name: Charles E. Blue Title: Vice President CLEARANCE WORLD OUTLETS, LLC By: /s/ Charles E. Blue ------------------------------- Name: Charles E. Blue Title: President SCANDIA DOWN, LLC By: /s/ David Pipkorn ------------------------------- Name: David Pipkorn Title: President LA CROSSE FULFILLMENT, LLC By: /s/ Charles E. Blue ------------------------------- Name: Charles E. Blue Title: President [SIGNATURES CONTINUE ON FOLLOWING PAGE] 30 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] D.M. ADVERTISING, LLC By: /s/ Charles E. Blue ------------------------------- Name: Charles E. Blue Title: President AMERICAN DOWN & TEXTILE, LLC By: /s/ David Pipkorn ------------------------------- Name: David Pipkorn Title: President HANOVER GIFTS, INC. By: /s/ Doug Mitchell ------------------------------- Name: Doug Mitchell Title: President 31 EX-10.4 6 y98976exv10w4.txt SERIES D PREFERRED STOCK PURCHASE WARRANT Exhibit 10.4 THIS SERIES D PREFERRED STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE PURCHASED HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE. THIS SERIES D PREFERRED STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE PURCHASED HEREUNDER MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND REGISTRATION OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL THAT THE PROPOSED TRANSACTION DOES NOT VIOLATE THE SECURITIES ACT OF 1933, AND APPLICABLE STATE SECURITIES LAWS. HANOVER DIRECT, INC. SERIES D PREFERRED STOCK PURCHASE WARRANT Date of Issuance: July 8, 2004 Certificate No. PW-1 THIS IS TO CERTIFY that CHELSEY DIRECT, LLC, a Delaware limited liability company, and its transferees, successors and assigns (the "Holder"), for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, is entitled to purchase from HANOVER DIRECT, INC., a Delaware corporation (the "Company"), at the price of $0.01 per share (the "Exercise Price"), at any time after September 30, 2004 (the "Commencement Date") and expiring on July 8, 2014 unless sooner exchanged pursuant to Section 1(c) hereof (the "Expiration Date"), one hundred (100) shares of the fully paid and nonassessable Series D Preferred Stock (as defined in Section 9 hereof), of the Company (as such number may be adjusted as provided herein). The one hundred (100) shares of Series D Preferred Stock which may be purchased pursuant to this Warrant, as the same may be adjusted pursuant to Section 6, are referred to herein as the "Aggregate Number." Capitalized terms used herein shall have the meanings ascribed to such terms in Section 9 hereof unless otherwise defined herein. SECTION 1. THE WARRANT; TRANSFER AND EXCHANGE. (a) The Warrant. This Series D Preferred Stock Purchase Warrant (the "Warrant") is issued in connection with the Junior Secured Term Loan Agreement. This Warrant and the rights and privileges of the Holder and the Company hereunder may be exercised by the Holder in whole or in part as provided herein; shall survive any termination of the Junior Secured Term Loan Agreement; and, as more fully set forth in Sections 1(b) and 8 hereof, may be transferred by the Holder to any other Person or Persons at any time or from time to time, in whole or in part, regardless of whether the Holder retains any or all rights under the Junior Secured Term Loan Agreement. (b) Transfer and Exchanges. The Company shall initially record this Warrant on a register to be maintained by the Company with its other stock books and, subject to Section 8 hereof, from time to time thereafter shall reflect the transfer of this Warrant on such register when surrendered for transfer in accordance with the terms hereof and properly endorsed, accompanied by appropriate instructions, and further accompanied by payment in cash or by check, bank draft or money order payable to the order of the Company, in United States currency, of an amount equal to any stamp or other tax or governmental charge or fee required to be paid in connection with the transfer thereof. Upon any such transfer, a new warrant or warrants shall be issued to the transferee and the Holder (in the event the Warrant is only partially transferred) and the surrendered warrant shall be canceled. This Warrant may be exchanged at the option of the Holder, when surrendered at the Principal Office of the Company, for another warrant or other warrants of like tenor and representing in the aggregate the right to purchase a like number of shares of Series D Preferred Stock. (c) Mandatory Exchange of Warrant. Notwithstanding any other provision of this Warrant, upon (x) the approval by the stockholders of the Company, at the Company's next meeting of stockholders, of the issuance of equity securities of the Company to the Holder (the "Stockholder Approval") and (y) the filing with the Secretary of State of the State of Delaware of an amendment to the Certificate of Incorporation of the Company as contemplated by the Stockholder Approval (the "Required Filing"), this Warrant shall be automatically exchanged for a warrant in the form attached hereto as Exhibit A (the "Common Stock Purchase Warrant") to purchase 30.00% of the issued and outstanding shares of common stock, par value $0.01 per share (the "Common Stock"), of the Company on a Fully Diluted basis (which for these purposes assumes the full exercise of the Common Stock Purchase Warrant) at an exercise price of $0.01 per share of Common Stock. Upon the Company's receipt of the Stockholder Approval and the completion of the Required Filing, the Holder shall surrender this Warrant at the Principal Office of the Company and receive in consideration therefor the Common Stock Purchase Warrant. SECTION 2. EXERCISE. (a) Right to Exercise. At any time after the Commencement Date and on or before the Expiration Date unless sooner exchanged pursuant to Section 1(c) hereof, the Holder, in accordance with the terms hereof, may exercise this Warrant, in whole at any time or in part from time to time, by delivering this Warrant to the Company during normal business hours on any Business Day at the Company's Principal Office, together with the Election to Purchase, in the form attached hereto as Exhibit B and made a part hereof (the "Election to Purchase"), duly executed, and payment of the Exercise Price per share for the number of shares to be purchased (the "Exercise Amount"), as specified in the Election to Purchase. If the Expiration Date is not a Business Day, then this Warrant may be exercised on the next succeeding Business Day. (b) Payment of Exercise Price. Payment of the Exercise Price shall be made to the Company as follows (or any combination thereof): (i) in cash or other immediately available funds or (ii) as provided in Section 2(c). In the case of payment of all or a portion of the Exercise Price pursuant to Section 2(c), the direction by the Holder to make a "Cashless Exercise" shall serve as accompanying payment for that portion of the Exercise Price. The amount of the Exercise Price to be paid shall equal the product of (i) the Exercise Amount multiplied by (ii) the Exercise Price per share. 2 (c) Cashless Exercise. The Holder shall have the right to pay all or a portion of the Exercise Price by making a "Cashless Exercise" pursuant to this Section 2(c), in which case the portion of the Exercise Price to be so paid shall be paid by reducing the number of shares of Series D Preferred Stock otherwise issuable pursuant to the Election to Purchase (the "Exercised Shares") by an amount (the "Cashless Exercise Shares") equal to (i) the Exercise Price multiplied by the Exercised Shares and divided by (ii) the Fair Market Value Per Share. The number of shares of Series D Preferred Stock to be issued to the Holder as a result of a Cashless Exercise will therefore be equal to the Exercised Shares minus the Cashless Exercise Shares. (d) Issuance of Shares of Series D Preferred Stock. Upon receipt by the Company of this Warrant at its Principal Office in proper form for exercise, and accompanied by payment of the Exercise Price as aforesaid, the Holder shall be deemed to be the holder of record of the shares of Series D Preferred Stock issuable upon such exercise, notwithstanding that certificates representing such shares of Series D Preferred Stock may not then be actually delivered. Upon such surrender of this Warrant and payment of the Exercise Price as aforesaid, the Company shall issue and cause to be delivered with all reasonable dispatch to, or upon the written order of, the Holder (and in such name or names as the Holder may designate) a certificate or certificates for the Exercise Amount, subject to any reduction as provided in Section 2(c) for a Cashless Exercise. (e) Fractional Shares. The Company shall not be required to deliver fractions of shares of Series D Preferred Stock upon exercise of this Warrant. If any fraction of a share of Series D Preferred Stock would be deliverable upon an exercise of this Warrant, the Company may, in lieu of delivering such fraction of a share of Series D Preferred Stock, make a cash payment to the Holder in an amount equal to the same fraction of the Fair Market Value Per Share determined as of the Business Day immediately preceding the date of exercise of this Warrant. (f) Partial Exercise. In the event of a partial exercise of this Warrant, the Company shall issue to the Holder a Warrant in like form for the unexercised portion thereof. 3 SECTION 3. PAYMENT OF TAXES. The Company shall pay all stamp taxes attributable to the initial issuance of shares or other securities issuable upon the exercise of this Warrant or issuable pursuant to Section 6 hereof, excluding any tax or taxes which may be payable because of the transfer involved in the issuance or delivery of any certificates for shares or other securities in a name other than that of the Holder in respect of which such shares or securities are issued. SECTION 4. REPLACEMENT WARRANT. In case this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing an equivalent right or interest, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of such Warrant and upon receipt of indemnity reasonably satisfactory to the Company (provided, that if the Holder is a financial institution or other institutional investor its personal undertaking to provide an indemnity is hereby deemed to be reasonably satisfactory to the Company; provided, further, the form of such undertaking shall be reasonably satisfactory to the Company). SECTION 5. RESERVATION OF SERIES D PREFERRED STOCK AND OTHER COVENANTS. (a) Reservation of Authorized Series D Preferred Stock. The Company shall at all times reserve and keep available out of the aggregate of its authorized but unissued shares, free of preemptive rights, such number of its duly authorized shares of Series D Preferred Stock, or other stock or securities deliverable pursuant to Section 6 hereof, as shall be sufficient to enable the Company at any time to fulfill all of its obligations under this Warrant. (b) Affirmative Actions to Permit Exercise and Realization of Benefits. If any shares of Series D Preferred Stock reserved or to be reserved for the purpose of the exercise of this Warrant, or any shares or other securities reserved or to be reserved for the purpose of issuance pursuant to Section 6 hereof, require registration with or approval of any governmental authority under any federal or state law (other than securities laws) before such shares or other securities may be validly delivered upon exercise of this Warrant, then the Company covenants that it will, at its sole expense, secure such registration or approval, as the case may be (including but not limited to approvals or expirations of waiting periods required under the Hart Scott Rodino Antitrust Improvements Act). (c) Regulatory Requirements and Restrictions. In the event of any reasonable determination by the Holder that, by reason of any existing or future federal or state law, statute, rule, regulation, guideline, order, court or administrative ruling, request or directive (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) (collectively, a "Regulatory Requirement"), the Holder is effectively restricted or prohibited from holding this Warrant or the Warrant Shares (including any shares of capital stock or other securities distributable to the Holder in any merger, reorganization, readjustment or other reclassification), or otherwise realizing upon or receiving the benefits intended under this Warrant, the Company shall, and shall use its reasonable best efforts to have its shareholders, take such action as the Holder and the Company shall jointly agree in good faith to be reasonably necessary to permit the Holder to comply with such Regulatory Requirement. The reasonable 4 costs of taking such action, whether by the Company, the Holder or otherwise, shall be borne by the Holder. (d) Validly Issued Shares. The Company covenants that all shares of Series D Preferred Stock that may be delivered upon exercise of this Warrant, assuming full payment of the Exercise Price, (including those issued pursuant to Section 6 hereof), shall upon delivery by the Company be duly authorized and validly issued, fully paid and nonassessable, free from all stamp taxes, liens and charges with respect to the issue or delivery thereof and otherwise free of all other security interests, encumbrances and claims of any nature whatsoever other than such security interests, encumbrances and claims granted by the Holder. (e) No Additional Issuances of Series D Preferred Stock. The Company covenants that it shall not issue or sell any shares of Series D Preferred Stock, or securities convertible into or exercisable for Series D Preferred Stock, in excess of the Aggregate Number. Under certain conditions, the Aggregate Number is subject to adjustment as set forth in this Section 6. SECTION 6. ADJUSTMENTS TO AGGREGATE NUMBER. (a) Equitable Adjustments. In case the Company shall (i) subdivide its outstanding shares of Series D Preferred Stock into a larger number of shares of Series D Preferred Stock, including without limitation by means of a stock split, (ii) combine its outstanding shares of Series D Preferred Stock into a smaller number of shares of Series D Preferred Stock, or (iii) take or propose to take any other action that may have a dilutive effect on the Warrant Shares issuable upon exercise of this Warrant, as reasonably determined by the Board of Directors of the Company, the Aggregate Number in effect immediately prior thereto shall be equitably adjusted so as to prevent the dilution of the Warrant Shares issuable upon exercise of this Warrant. No adjustments shall be made under this Section 6 as a result of the issuance by the Company of the Warrant Shares upon exercise of this Warrant. (b) Changes in Series D Preferred Stock. In case at any time the Company shall initiate any transaction or be a party to any transaction (including, without limitation, a merger, consolidation, share exchange, sale, lease or other disposition of all or substantially all of the Company's assets, liquidation, recapitalization or reclassification of the Series D Preferred Stock) in connection with which the outstanding Series D Preferred Stock shall be changed into or exchanged for different securities of the Company or capital stock or other securities of another corporation or interests in a non-corporate entity or other property (including cash) or any combination of the foregoing (each such transaction being herein called a "Transaction"), then, as a condition of the consummation of the Transaction, lawful, enforceable and adequate provision shall be made so that the Holder shall be entitled to elect, by written notice to the Company, to receive (i) a new warrant in form and substance similar to, and in exchange for, this Warrant to purchase all or a portion of such securities or other property or (ii) upon exercise of this Warrant at any time on or after the consummation of the Transaction, in lieu of the Warrant Shares issuable upon such exercise prior to such consummation, the securities or other property (including cash) to which such Holder would have been entitled upon consummation of the Transaction if such Holder had exercised this Warrant immediately prior thereto (subject to adjustments from and after the consummation date as nearly equivalent as possible to the 5 adjustments provided for in this Section 6). The Company will not effect any Transaction unless prior to the consummation thereof each corporation or other entity (other than the Company) which may be required to deliver any new warrant, securities or other property as provided herein shall assume, by written instrument delivered to the Holder, the obligation to deliver to such Holder such new warrant, securities or other property as in accordance with the foregoing provisions such Holder may be entitled to receive and such corporation or entity shall have similarly delivered to the Holder an opinion of counsel for such corporation or entity, satisfactory to the Holder, which opinion shall state that all of the terms of the new warrant or this Warrant shall be enforceable against the Company and such corporation or entity in accordance with the terms hereof and thereof, together with such other matters as the Holder may reasonably request. The foregoing provisions of this Section 6(b) shall similarly apply to successive Transactions. (c) Notices. (i) Notice of Proposed Actions. In case the Company shall propose (A) to pay any dividend payable in stock of any class to the holders of its Capital Stock or to make any other distribution to the holders of its Capital Stock, (B) to offer to the holders of its Capital Stock rights to subscribe for or to purchase any Convertible Securities or additional shares of Capital Stock or shares of stock of any class or any other securities, warrants, rights or options (other than the exercise of pre-emptive rights by a Holder) (C) to effect any reclassification of its Capital Stock, (D) to effect any recapitalization, stock subdivision, stock combination or other capital reorganization, (E) to effect any consolidation or merger, share exchange, or sale, lease or other disposition of all or substantially all of its property, assets or business, (F) to effect the liquidation, dissolution or winding up of the Company or (G) to effect any other action which would require an adjustment under this Section 6, then in each such case the Company shall give to the Holder written notice of such proposed action, which shall specify the date on which a record is to be taken for the purposes of such stock dividend, stock subdivision, stock combination, distribution or rights, or the date on which such reclassification, recapitalization, reorganization, consolidation, merger, share exchange, sale, lease, transfer, disposition, liquidation, dissolution, winding up or other transaction is to take place and the date of participation therein by the holders of Capital Stock, if any such date is to be fixed, or the date on which the transfer of Capital Stock is to occur, and shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action on the Capital Stock and on the Aggregate Number after giving effect to any adjustment which will be required as a result of such action. Such notice shall be so given in the case of any action covered by clause (A) or (B) above at least 30 days prior to the record date for determining holders of the Capital Stock for purposes of such action and, in the case of any other such action, at least 30 days prior to the earlier of the date of the taking of such proposed action or the date of participation therein by the holders of Capital Stock. (ii) Adjustment Notice. Whenever the Aggregate Number is to be adjusted pursuant to this Section 6, unless otherwise agreed by the Holder, the Company shall promptly (and in any event within 10 Business Days after the event requiring the adjustment) prepare a certificate signed by the chief financial officer of the Company, setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment is to be calculated. The certificate shall set forth, if applicable, a description of the basis on which 6 the Board of Directors in good faith determined, as applicable, the Fair Market Value Per Share, the fair market value of any evidences of indebtedness, shares of stock, other securities, warrants, other subscription or purchase rights, or other property or the equitable nature of any adjustment under Section 6(b) hereof, the new Aggregate Number and, if applicable, any new securities or property to which the Holder is entitled. The Company shall promptly cause a copy of such certificate to be delivered to the Holder. The Company shall keep at its Principal Office copies of all such certificates and cause the same to be available for inspection at said office during normal business hours by the Holder or any prospective purchaser of the Warrant (in whole or in part) if so designated by the Holder. SECTION 7. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, share exchange, dissolution or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, including without limitation the adjustments required under Section 6 hereof, and will at all times in good faith assist in the carrying out of all such terms and in taking of all such action as may be necessary or appropriate to protect the rights of the Holder against dilution or other impairment. Without limiting the generality of the foregoing and notwithstanding any other provision of this Warrant to the contrary (including by way of implication), the Company (a) will not increase the par value of any shares of Series D Preferred Stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise or (b) will take all such action as may be necessary or appropriate so that the Company may validly and legally issue fully paid and nonassessable shares of Series D Preferred Stock on the exercise of this Warrant. SECTION 8. TRANSFERS OF THE WARRANT. (a) Generally. Subject to the restrictions set forth in this Section 8, the Holder may at any time and from time to time freely transfer this Warrant and the Warrant Shares in whole or in part. This Warrant and the Warrant Shares are issued or issuable subject to the provisions and conditions contained herein, and every Holder hereof by accepting the same agrees with the Company to such provisions and conditions, and represents to the Company that this Warrant has been acquired and the Warrant Shares will be acquired for the account of the Holder for investment and not with a view to or for sale in connection with any distribution thereof. (b) Compliance with Securities Laws. The Holder agrees that the Warrant and the Warrant Shares may not be sold or otherwise disposed of except pursuant to an effective registration statement under the Securities Act and applicable state securities laws or pursuant to an applicable exemption from the registration requirements of the Securities Act and such state securities laws. In the event that the Holder transfers this Warrant or the Warrant Shares pursuant to an applicable exemption from registration, the Company may request, at its expense, an opinion of counsel that the proposed transfer does not violate the Securities Act and applicable state securities laws. (c) Restrictive Securities Legend. The certificate representing the shares of Series D Preferred Stock issued upon the exercise of the Warrant shall bear the restrictive legends set forth below: 7 "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or the securities laws of any State and may not be sold or otherwise disposed of except pursuant to an effective registration statement under such Act and applicable State securities laws or pursuant to an applicable exemption from the registration requirements of such Act and such laws." SECTION 9. DEFINITIONS. As used herein, in addition to the terms defined elsewhere herein, the following terms shall have the following meanings. "Affiliate" means, with respect to any Person, a Person (a) directly or indirectly controlling, controlled by, or under common control with, such Person, (b) directly or indirectly owning or holding ten percent (10%) or more of any equity interest in such Person or (c) ten percent (10%) or more of whose voting stock or other equity interest is directly or indirectly owned or held by such Person. For purposes of this definition, "control" (including with correlative meanings, the terms "controlling," controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Aggregate Number" has the meaning set forth in the Preamble. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in The City of New York, New York are authorized or required by law or executive order to close. "Capital Stock" means (i) with respect to any Person that is a corporation, any and all shares, interests or equivalents in capital stock (whether voting or nonvoting, and whether common or preferred) of such corporation, and (ii) with respect to any Person that is not a corporation, any and all partnership, membership, limited liability company or other equity interests of such Person that confer on a Person the right to receive a share of the profits and losses of, or the distribution of assets of, the issuing Person; and in each case, any and all warrants, rights or options to purchase any of the foregoing. "Cashless Exercise Shares" has the meaning set forth in Section 2(c). "Certificate of Incorporation" means, as to a Person, unless the context in which it is used shall otherwise require, the Certificate of Incorporation (or equivalent or similar organizational documents) of such Person as in effect on the Commencement Date. "Commencement Date" has the meaning set forth in the Preamble. "Commission" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Common Stock" has the meaning set forth in Section 1(c). "Common Stock Purchase Warrant" has the meaning set forth in Section 1(c). "Company" has the meaning set forth in the Preamble. 8 "Convertible Securities" means evidences of indebtedness, shares of stock or other securities (including, but not limited to options and warrants) which are directly or indirectly convertible, exercisable or exchangeable, with or without payment of additional consideration in cash or property, for shares of Series D Preferred Stock, either immediately or upon the onset of a specified date or the happening of a specified event. "Election to Purchase" has the meaning set forth in Section 2(a). "Exercise Amount" has the meaning set forth in Section 2(a). "Exercise Price" has the meaning set forth in the Preamble. "Exercised Shares" has the meaning set forth in Section 2(c). "Expiration Date" has the meaning set forth in the Preamble. "Fair Market Value Per Share" means, per share of Series D Preferred Stock on any date: (a) the fair market value of the outstanding Series D Preferred Stock based upon an arm's length sale of the Company on such date (including its ownership interest in all Persons) as an entirety, such sale being between a willing buyer and a willing seller and determined without reference to any discount for minority interest, restrictions on transfer, disparate voting rights among classes of capital stock or lack of marketability with respect to capital stock divided by (b) the aggregate number of shares of Series D Preferred Stock outstanding. The Fair Market Value Per Share shall be determined by the Board of Directors of the Company in good faith within 10 days of any event for which such determination is required and such determination (including the basis therefor) shall be promptly provided to the Holder. Such determination shall be binding on the Holder unless the Holder objects thereto in writing within 10 Business Days of receipt. In the event the Company and the Holder cannot agree on the Fair Market Value Per Share within 10 Business Days of the date of the Holder's objection, the Fair Market Value Per Share shall be determined by a disinterested appraiser (which shall be a nationally recognized investment banking firm) mutually selected by the Company and the Holder, the fees and expenses of which shall be paid 50% by the Company and 50% by the Holder unless such determination results in a Fair Market Value Per Share more than 110% of the Fair Market Value Per Share initially determined by the Company in which case such fees and expenses shall be borne by the Company. Any selection of a disinterested appraiser shall be made in good faith within seven Business Days after the end of the last 10 Business Day period referred to above and any determination of Fair Market Value Per Share by a disinterested appraiser shall be made within 30 days of the date of selection. "Fully Diluted" means, with respect to the Series D Preferred Stock as of a particular time (taking into account the transaction in respect of which the "Fully Diluted" basis is being calculated at such time), the total number of outstanding shares of Series D Preferred Stock as of such time as determined by treating all outstanding and then exercisable options, warrants and other rights for the purchase or other acquisition of Series D Preferred Stock as having been exercised and by treating all outstanding Convertible Securities which at the time of such calculation may be converted as having been so converted. "Holder" or "Holders" means any holder of an interest in the Warrant or the outstanding Warrant Shares. 9 "Junior Secured Term Loan Agreement" means that certain Loan and Security Agreement, dated as of July 8, 2004, by and among Chelsey Finance, LLC, Hanover Direct, Inc. and the other borrowers named therein as the same may be amended, modified, supplemented or restated. "Person" means any individual, firm, corporation, partnership, limited liability company, joint venture, incorporated or unincorporated association, joint stock company, governmental authority, or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Principal Office" means the Company's principal office as set forth in Section 14 hereof or such other principal office of the Company in the United States of America, the address of which first shall have been set forth in a notice to the Holder. "Regulatory Requirement" has the meaning set forth in Section 5(c). "Required Filing" has the meaning set forth in Section 1(c). "Securities Act" means the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations thereunder as the same shall be in effect at the time. "Series D Preferred Stock" means the Series D Preferred Stock, par value $0.01 per share, of the Company or any other Capital Stock of the Company into which such stock is reclassified or reconstituted. "Stockholder Approval" has the meaning set forth in Section 1(c). "Subsidiary(ies)" means, with respect to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. "Transaction" has the meaning set forth in Section 6(b). "Twenty Day Average" means, with respect to any prices and in connection with the calculation of Fair Market Value Per Share, the average of such prices over the twenty Business Days ending on the Business Day immediately prior to the day as of which "Fair Market Value Per Share" is being determined. "Warrant" has the meaning set forth in Section 1(a). "Warrant Securities" means the Warrant and the Warrant Shares, collectively. "Warrant Shares" means (a) the shares of Series D Preferred Stock issued or issuable upon exercise of this Warrant in accordance with its terms and (b) all other shares of the Company's capital stock issued with respect to such shares by way of stock dividend, stock split or other reclassification or in connection with any merger, consolidation, recapitalization or other reorganization affecting the Company's capital stock. 10 SECTION 10. SURVIVAL OF PROVISIONS. Notwithstanding the full exercise by the Holder of its rights to purchase Series D Preferred Stock hereunder, the provisions of Sections 5(c), 5(d) and 11 through 21 of this Warrant shall survive such exercise and the Expiration Date. SECTION 11. DELAYS, OMISSIONS AND INDULGENCES. It is agreed that no delay or omission to exercise any right, power or remedy accruing to the Holder upon any breach or default of the Company under this Warrant shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the Holder's part of any breach or default under this Warrant, or any waiver on the Holder's part of any provisions or conditions of this Warrant must be in writing and that all remedies, either under this Warrant, or by law or otherwise afforded to the Holder, shall be cumulative and not alternative. SECTION 12. RIGHTS OF TRANSFEREES. Subject to Section 8, the rights granted to the Holder hereunder of this Warrant shall pass to and inure to the benefit of all subsequent transferees of all or any portion of the Warrant (provided that the Holder and any transferee shall hold such rights in proportion to their respective ownership of the Warrant and Warrant Shares) until extinguished pursuant to the terms hereof. SECTION 13. CAPTIONS. The titles and captions of the Sections and other provisions of this Warrant are for convenience of reference only and are not to be considered in construing this Warrant. SECTION 14. NOTICES. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopy, overnight courier service or personal delivery: (a) if to the Company: Hanover Direct, Inc. 115 River Road, Building 10 Edgewater, New Jersey 07020 Attention: Chief Executive Officer Facsimile No.: (201) 272-3465 with a copy to: Brown Raysman Millstein Felder & Steiner LLP 900 Third Avenue New York, New York 10022 Attention: Sarah Hewitt, Esq. Facsimile No.: (212) 895-2900 (b) if to the Holder: 11 Chelsey Direct, LLC 712 Fifth Avenue, 45th Floor New York, New York 10019 Attention: Stuart Feldman Facsimile No.: (212) 765-3112 with a copy to: Swidler Berlin Shereff Friedman, LLP 405 Lexington Avenue New York, New York 10174 Attention: Richard A. Goldberg, Esq. Facsimile No.: (212) 891-9598 All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; five Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. SECTION 15. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon and inure to the benefit of the parties hereto and their respective successors or heirs and personal representatives and permitted assigns; provided, that the Company shall have no right to assign its rights, or to delegate its obligations, hereunder without the prior written consent of the Holder. SECTION 16. GOVERNING LAW. THIS WARRANT IS TO BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK AND WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE. SECTION 17. JURISDICTION, JURY TRIAL WAIVER, ETC. (a) THE COMPANY AND THE HOLDER HEREBY IRREVOCABLY AGREE THAT ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS WARRANT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND EACH HEREBY EXPRESSLY SUBMITS TO THE PERSONAL JURISDICTION AND VENUE OF SUCH COURTS FOR THE PURPOSES THEREOF AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND ANY CLAIM THAT SUCH COURTS ARE AN INCONVENIENT FORUM. THE COMPANY AND THE HOLDER EACH HEREBY IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN THIS AGREEMENT, SUCH SERVICE TO BECOME EFFECTIVE 10 DAYS AFTER SUCH MAILING. (b) THE COMPANY AND THE HOLDER EACH HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT 12 OF ANY DISPUTE IN CONNECTION WITH THIS WARRANT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. THE COMPANY (I) CERTIFIES THAT NO HOLDER OR ATTORNEY OR OTHER REPRESENTATIVE OF THE HOLDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE HOLDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (II) ACKNOWLEDGES THAT THE HOLDER HAS BEEN INDUCED TO PURCHASE THIS WARRANT BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED HEREIN. (c) FINAL JUDGMENT AGAINST THE COMPANY, IN ANY ACTION, SUIT OR PROCEEDING HEREUNDER SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER JURISDICTIONS (I) BY SUIT, ACTION, OR PROCEEDING ON THE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ANY LIABILITY OF THE COMPANY THEREIN DESCRIBED OR (II) IN ANY OTHER MANNER PROVIDED BY OR PURSUANT TO THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED, HOWEVER, THAT ANY HOLDER MAY AT ITS OPTION BRING SUIT, OR INSTITUTE OTHER JUDICIAL PROCEEDING, TO ENFORCE A FINAL JUDGMENT AGAINST THE COMPANY OR ANY OF ITS PROPERTIES IN THE STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE COMPANY OR ITS PROPERTIES MAY BE FOUND. SECTION 18. SEVERABILITY. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. The parties hereto further agree to replace such invalid, illegal or unenforceable provision of this Warrant with a valid, legal and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such invalid, illegal or unenforceable provision. SECTION 19. ENTIRE AGREEMENT. This Warrant contains the entire agreement among the parties with respect to the subject matter hereof and thereby supercedes all prior and contemporaneous agreements or understandings with respect thereto. SECTION 20. HEADINGS. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 13 SECTION 21. NO STRICT CONSTRUCTION. The Company and the Holder each acknowledge that they have been represented by counsel in connection with this Warrant. The Company and the Holder have participated jointly in the negotiation and drafting of this Warrant. In the event an ambiguity or question of intent or interpretation arises under any provision of this Warrant, this Warrant shall be construed as if drafted jointly by the parties thereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Warrant. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 14 IN WITNESS WHEREOF, the Company has caused this Warrant to be issued and executed in its corporate name by its duly authorized officers as of the date below written. DATED: JULY 8, 2004 HANOVER DIRECT, INC. By: /s/ Wayne P. Garten ______________________________ Name: Wayne P. Garten Title: President and Chief Executive Officer ATTEST: By: /s/ Charles E. Blue ___________________________________ Name: Charles E. Blue Title: Senior Vice President and Chief Financial Officer EXHIBIT A FORM OF COMMON STOCK PURCHASE WARRANT EXHIBIT A THIS COMMON STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE PURCHASED HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE. THIS COMMON STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE PURCHASED HEREUNDER MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND REGISTRATION OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL THAT THE PROPOSED TRANSACTION DOES NOT VIOLATE THE SECURITIES ACT OF 1933, AND APPLICABLE STATE SECURITIES LAWS. HANOVER DIRECT, INC. COMMON STOCK PURCHASE WARRANT Date of Issuance: [______], 2004 Certificate No. W-1 THIS IS TO CERTIFY that CHELSEY FINANCE, LLC, a Delaware limited liability company, and its transferees, successors and assigns (the "Holder"), for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, is entitled to purchase from HANOVER DIRECT, INC., a Delaware corporation (the "Company"), at the price of $0.01 per share (the "Exercise Price"), at any time after the date hereof (the "Commencement Date") and expiring on [____], 2014 (the "Expiration Date"), [__________] shares of the fully paid and nonassessable Common Stock (as defined in Section 9 hereof) of the Company (as such number may be adjusted as provided herein). The [__________] shares of Common Stock which may be purchased pursuant to this Warrant are referred to herein as the "Aggregate Number," which represents the number of shares that as of the date hereof would constitute 30.00% of all issued and outstanding shares of Common Stock of the Company on a Fully Diluted basis, which for these purposes assumes the full exercise of this Warrant. Capitalized terms used herein shall have the meanings ascribed to such terms in Section 9 hereof unless otherwise defined herein. SECTION 22. THE WARRANT; TRANSFER AND EXCHANGE. (a) The Warrant. This Common Stock Purchase Warrant (the "Warrant") is issued in connection with the Junior Secured Term Loan Agreement. This Warrant and the rights and privileges of the Holder and the Company hereunder may be exercised by the Holder in whole or in part as provided herein; shall survive any termination of the Junior Secured Term 1 Loan Agreement; and, as more fully set forth in Sections 1(b) and 8 hereof, may be transferred by the Holder to any other Person or Persons at any time or from time to time, in whole or in part, regardless of whether the Holder retains any or all rights under the Junior Secured Term Loan Agreement. (b) Transfer and Exchanges. The Company shall initially record this Warrant on a register to be maintained by the Company with its other stock books and, subject to Section 8 hereof, from time to time thereafter shall reflect the transfer of this Warrant on such register when surrendered for transfer in accordance with the terms hereof and properly endorsed, accompanied by appropriate instructions, and further accompanied by payment in cash or by check, bank draft or money order payable to the order of the Company, in United States currency, of an amount equal to any stamp or other tax or governmental charge or fee required to be paid in connection with the transfer thereof. Upon any such transfer, a new warrant or warrants shall be issued to the transferee and the Holder (in the event the Warrant is only partially transferred) and the surrendered warrant shall be canceled. This Warrant may be exchanged at the option of the Holder, when surrendered at the Principal Office of the Company, for another warrant or other warrants of like tenor and representing in the aggregate the right to purchase a like number of shares of Common Stock. SECTION 23. EXERCISE. (a) Right to Exercise. At any time after the Commencement Date and on or before the Expiration Date, the Holder, in accordance with the terms hereof, may exercise this Warrant, in whole at any time or in part from time to time, by delivering this Warrant to the Company during normal business hours on any Business Day at the Company's Principal Office, together with the Election to Purchase, in the form attached hereto as Exhibit A and made a part hereof (the "Election to Purchase"), duly executed, and payment of the Exercise Price per share for the number of shares to be purchased (the "Exercise Amount"), as specified in the Election to Purchase. If the Expiration Date is not a Business Day, then this Warrant may be exercised on the next succeeding Business Day. (b) Payment of Exercise Price. Payment of the Exercise Price shall be made to the Company as follows (or any combination thereof): (i) in cash or other immediately available funds or (ii) as provided in Section 2(c). In the case of payment of all or a portion of the Exercise Price pursuant to Section 2(c), the direction by the Holder to make a "Cashless Exercise" shall serve as accompanying payment for that portion of the Exercise Price. The amount of the Exercise Price to be paid shall equal the product of (i) the Exercise Amount multiplied by (ii) the Exercise Price per share. (c) Cashless Exercise. The Holder shall have the right to pay all or a portion of the Exercise Price by making a "Cashless Exercise" pursuant to this Section 2(c), in which case the portion of the Exercise Price to be so paid shall be paid by reducing the number of shares of Common Stock otherwise issuable pursuant to the Election to Purchase (the "Exercised Shares") by an amount (the "Cashless Exercise Shares") equal to (i) the Exercise Price multiplied by the Exercise Shares and divided by (ii) the Fair Market Value Per Share. The number of shares of Common Stock to be issued to the Holder as a result of a Cashless Exercise will therefore be equal to the Exercised Shares minus the Cashless Exercise Shares. 2 (d) Issuance of Shares of Common Stock. Upon receipt by the Company of this Warrant at its Principal Office in proper form for exercise, and accompanied by payment of the Exercise Price as aforesaid, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that certificates representing such shares of Common Stock may not then be actually delivered. Upon such surrender of this Warrant and payment of the Exercise Price as aforesaid, the Company shall issue and cause to be delivered with all reasonable dispatch to, or upon the written order of, the Holder (and in such name or names as the Holder may designate) a certificate or certificates for the Exercise Amount, subject to any reduction as provided in Section 2(c) for a Cashless Exercise. (e) Fractional Shares. The Company shall not be required to deliver fractions of shares of Common Stock upon exercise of this Warrant. If any fraction of a share of Common Stock would be deliverable upon an exercise of this Warrant, the Company may, in lieu of delivering such fraction of a share of Common Stock, make a cash payment to the Holder in an amount equal to the same fraction of the Fair Market Value Per Share determined as of the Business Day immediately preceding the date of exercise of this Warrant. (f) Partial Exercise. In the event of a partial exercise of this Warrant, the Company shall issue to the Holder a Warrant in like form for the unexercised portion thereof. SECTION 24. PAYMENT OF TAXES. The Company shall pay all stamp taxes attributable to the initial issuance of shares or other securities issuable upon the exercise of this Warrant or issuable pursuant to Section 6 hereof, excluding any tax or taxes which may be payable because of the transfer involved in the issuance or delivery of any certificates for shares or other securities in a name other than that of the Holder in respect of which such shares or securities are issued. SECTION 25. REPLACEMENT WARRANT. In case this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing an equivalent right or interest, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of such Warrant and upon receipt of indemnity reasonably satisfactory to the Company (provided, that if the Holder is a financial institution or other institutional investor its personal undertaking to provide an indemnity is hereby deemed to be reasonably satisfactory to the Company; provided, further, the form of such undertaking shall be reasonably satisfactory to the Company). SECTION 26. RESERVATION OF COMMON STOCK AND OTHER COVENANTS. (a) Reservation of Authorized Common Stock. The Company shall at all times reserve and keep available out of the aggregate of its authorized but unissued shares, free of preemptive rights, such number of its duly authorized shares of Common Stock, or other stock or securities deliverable pursuant to Section 6 hereof, as shall be sufficient to enable the Company at any time to fulfill all of its obligations under this Warrant. 3 (b) Affirmative Actions to Permit Exercise and Realization of Benefits. If any shares of Common Stock reserved or to be reserved for the purpose of the exercise of this Warrant, or any shares or other securities reserved or to be reserved for the purpose of issuance pursuant to Section 6 hereof, require registration with or approval of any governmental authority under any federal or state law (other than securities laws) before such shares or other securities may be validly delivered upon exercise of this Warrant, then the Company covenants that it will, at its sole expense, secure such registration or approval, as the case may be (including but not limited to approvals or expirations of waiting periods required under the Hart Scott Rodino Antitrust Improvements Act). (c) Regulatory Requirements and Restrictions. In the event of any reasonable determination by the Holder that, by reason of any existing or future federal or state law, statute, rule, regulation, guideline, order, court or administrative ruling, request or directive (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) (collectively, a "Regulatory Requirement"), the Holder is effectively restricted or prohibited from holding this Warrant or the Warrant Shares (including any shares of capital stock or other securities distributable to the Holder in any merger, reorganization, readjustment or other reclassification), or otherwise realizing upon or receiving the benefits intended under this Warrant, the Company shall, and shall use its reasonable best efforts to have its shareholders, take such action as the Holder and the Company shall jointly agree in good faith to be reasonably necessary to permit the Holder to comply with such Regulatory Requirement. The reasonable costs of taking such action, whether by the Company, the Holder or otherwise, shall be borne by the Holder. (d) Validly Issued Shares. The Company covenants that all shares of Common Stock that may be delivered upon exercise of this Warrant, assuming full payment of the Exercise Price (including those issued pursuant to Section 6 hereof), shall upon delivery by the Company be duly authorized and validly issued, fully paid and nonassessable, free from all stamp taxes, liens and charges with respect to the issue or delivery thereof and otherwise free of all other security interests, encumbrances and claims of any nature whatsoever other than such security interests, encumbrances and claims granted by the Holder. SECTION 27. ADJUSTMENTS TO AGGREGATE NUMBER. Under certain conditions, the Aggregate Number is subject to adjustment as set forth in this Section 6. No adjustments shall be made under this Section 6 as a result of (a) the issuance by the Company of the Warrant Shares upon exercise of this Warrant or (b) the issuance of shares of Common Stock (or options related thereto) upon the granting of any shares of Common Stock or upon the exercise of options granted or to be granted under the Company's current and future stock option and incentive plans (representing in the aggregate the right to receive or purchase shares aggregating up to [__________] (with all such adjustments for issuances in excess of such number of shares to be covered by, and subject to, Section 6(c)(ii)) (subject to adjustment for any of the circumstances described in Sections 6(a)(i)(A), (B) and (C)) shares of Common Stock) (collectively, the "Exempt Issuances"). 4 (a) Adjustments. The Aggregate Number, after taking into consideration any prior adjustments pursuant to this Section 6, shall be subject to adjustment from time to time as follows and, thereafter, as adjusted, shall be deemed to be the Aggregate Number hereunder. (i) Stock Dividends; Subdivisions and Combinations. In case at any time or from time to time the Company shall: (A) issue to the holders of its Common Stock a dividend payable in, or other distribution of, Common Stock (a "Stock Dividend"), (B) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, including without limitation by means of a stock split (a "Stock Subdivision"), or (C) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, other than the Reverse Stock Split (a "Stock Combination"), then the Aggregate Number in effect immediately prior thereto shall be (1) proportionately increased in the case of a Stock Dividend or a Stock Subdivision and (2) proportionately decreased in the case of a Stock Combination. In the event the Company shall declare or pay, without consideration, any dividend on the Common Stock payable in any right to acquire Common Stock for no consideration, then the Company shall be deemed to have made a Stock Dividend in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire Common Stock. (ii) Other Distributions. In case at any time or from time to time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution (collectively, a "Distribution") of: (A) cash; (B) any evidences of its indebtedness (other than Convertible Securities), any shares of its capital stock (other than additional shares of Common Stock or Convertible Securities) or any other securities or property of any nature whatsoever (other than cash); or (C) any options, warrants or other rights to subscribe for or purchase any of the following: any evidences of its indebtedness (other than Convertible Securities), any shares of its capital stock (other than additional shares of Common Stock or Convertible Securities) or any other securities or property of any nature whatsoever, then the Holder shall be entitled to elect by written notice to the Company to receive (1) immediately and without further payment the cash, evidences of indebtedness, stock, securities, other property, options, warrants and/or other rights (or any portion thereof) to which the Holder would have been entitled by way of such Distribution as if the Holder had fully exercised this Warrant immediately prior to such Distribution or (2) upon the exercise of this Warrant at any time on or after the taking of such record, the number of Warrant Shares to be received upon 5 exercise of this Warrant determined as stated herein and, in addition and without further payment, the cash, evidences of indebtedness, stock, securities, other property, options, warrants and/or other rights (or any portion thereof) to which the Holder would have been entitled by way of such Distribution and subsequent dividends and distributions through the date of exercise as if such Holder (x) had fully exercised this Warrant immediately prior to such Distribution and (y) had retained the Distribution in respect of the Common Stock and all subsequent dividends and distributions of any nature whatsoever in respect of any stock or securities paid as dividends and distributions and originating directly or indirectly from such Common Stock. A reclassification of the Common Stock into shares of Common Stock and shares of any other class of stock shall be deemed a Distribution by the Company to the holders of its Common Stock of such shares of such other class of stock and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such event shall be deemed a Stock Subdivision or Stock Combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 6(a)(i) hereof. (iii) Issuance of Common Stock. If at any time or from time to time the Company shall (except as hereinafter provided in this Section 6(a)(iii)) issue or sell any additional shares of Common Stock for a consideration per share less than the Fair Market Value Per Share, then, effective on the date specified below, the Aggregate Number shall be adjusted by multiplying (A) the Aggregate Number immediately prior thereto by (B) a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock (calculated on a Fully Diluted basis), the number of shares of Common Stock issuable upon the conversion or exercise of options, warrants, rights or other Convertible Securities (but only to the extent that such Convertible Securities are "in the money" and then exercisable but in any event subject to adjustment as provided in Section 6(a)(vii)(F)), and the number of such additional shares of Common Stock so issued and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares of Common Stock (calculated on a Fully Diluted basis), the number of shares of Common Stock issuable upon the conversion or exercise of options, warrants, rights or other Convertible Securities (but only to the extent that such Convertible Securities are "in the money" and then exercisable but in any event subject to adjustment as provided in Section 6(a)(vii)(F)), and the number of shares of Common Stock which the aggregate consideration for the total number of such additional shares of Common Stock so issued would purchase at the Fair Market Value Per Share. The date as of which the Fair Market Value Per Share shall be computed shall be the earlier of the date on which the Company shall enter into a firm contract or commitment for the issuance of such additional shares of Common Stock or the date of actual issuance of such additional shares of Common Stock. The provisions of this Section 6(a)(iii) shall not apply to any issuance of additional shares of Common Stock for which an adjustment is otherwise provided under Section 6(a)(i) hereof. No adjustment of the Aggregate Number shall be made under this Section 6(a)(iii) upon the issuance of any additional shares of Common Stock which are issued pursuant to (1) the exercise of this Warrant in whole or in part or pursuant to any other Exempt Issuances, (2) the exercise of other subscription or purchase rights or (3) the exercise of any conversion or exchange rights in 6 any Convertible Securities, provided that for purposes of clauses (2) or (3) an adjustment shall previously have been made upon the issuance of such other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrants or other rights therefor) pursuant to Section 6(a)(iv) or (v) hereof. (iv) Warrants and Options. If at any time or from time to time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly, by assumption in a merger in which the Company is the surviving corporation and in which the shareholders of the Company immediately prior to the merger continue to own more than 50% of the Outstanding Common Stock immediately after the merger and for a period of 180 days thereafter, or otherwise) issue or sell any warrants, options or other rights to subscribe for or purchase (A) any shares of Common Stock or (B) any Convertible Securities, whether or not the rights to subscribe, purchase, exchange or convert thereunder are immediately exercisable, and the consideration per share for which additional shares of Common Stock may at any time thereafter be issuable pursuant to such warrants, options or other rights or pursuant to the terms of such Convertible Securities shall be less than the Fair Market Value Per Share, then the Aggregate Number shall be adjusted as provided in Section 6(a)(iii) hereof on the basis that (1) the maximum number of additional shares of Common Stock issuable pursuant to all such warrants, options or other rights or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued as of the date of the determination of the Fair Market Value Per Share as hereinafter provided and (2) the aggregate consideration for such maximum number of additional shares of Common Stock shall be deemed to be the minimum consideration received and receivable by the Company for the issuance of such additional shares of Common Stock pursuant to the terms of such warrants, options or other rights or such Convertible Securities. For purposes of this Section 6(a)(iv), the effective date of such adjustment and the date as of which the Fair Market Value Per Share shall be computed shall be the earliest of (A) the date on which the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any such warrants, options or other rights, (B) the date on which the Company shall enter into a firm contract or commitment for the issuance of such warrants, options or other rights and (C) the date of actual issuance of such warrants, options or other rights. No adjustment of the Aggregate Number shall be made under this Section 6(a)(iv) upon the issuance of any warrants, options or other rights which are issued pursuant to the exercise of any Convertible Securities if an adjustment shall have been made or is contemporaneously made or if no such adjustment shall have been required upon the issuance of such Convertible Securities, pursuant to Section 6(a)(v) hereof. (v) Convertible Securities. If at any time or from time to time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of or shall in any manner (whether directly, by assumption in a merger in which the Company is the surviving corporation and in which the shareholders of the Company immediately prior to the merger continue to own more than 50% of the Outstanding Common Stock immediately after the merger and for a period of 180 days thereafter, or otherwise) issue or sell Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the consideration per share for the additional shares 7 of Common Stock which may at any time thereafter be issuable pursuant to the terms of such Convertible Securities shall be less than the Fair Market Value Per Share, then the Aggregate Number shall be adjusted as provided in Section 6(a)(iii) hereof on the basis that (A) the maximum number of additional shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued as of the date of the determination of the Fair Market Value Per Share as herein provided and (B) the aggregate consideration for such maximum number of additional shares of Common Stock shall be deemed to be the minimum consideration received and receivable by the Company for the issuance of such additional shares of Common Stock pursuant to the terms of such Convertible Securities. For purposes of this Section 6(a)(v), the effective date of such adjustment and the date as of which the Fair Market Value Per Share shall be computed shall be the earliest of (1) the date on which the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any such Convertible Securities, (2) the date on which the Company shall enter into a firm contract or commitment for the issuance of such Convertible Securities and (3) the date of actual issuance of such Convertible Securities. No adjustment of the Aggregate Number shall be made under this Section 6(a)(v) upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants, options or other subscription or purchase rights if an adjustment shall previously have been made or is contemporaneously made or if no such adjustment shall have been required upon the issuance of such warrants, options or other rights pursuant to Section 6(a)(iv) hereof. (vi) [Intentionally Omitted.] (vii) Subsequent Adjustments. If at any time after any adjustment of the Aggregate Number shall have been made pursuant to Section 6(a) (iv) or (v) hereof on the basis of the issuance of warrants, options or other rights or the issuance of Convertible Securities, or after any new adjustments of the Aggregate Number shall have been made pursuant to this Section 6(a)(vii), then: (A) such warrants, options or rights or the right of conversion or exchange in such Convertible Securities shall expire, and a portion of such warrants, options or rights, or the right of conversion or exchange in respect of a portion of such Convertible Securities, as the case may be, shall not have been exercised prior to such expiration, and (B) in the case of adjustments made pursuant to Section 6(a)(iv) or (v), the consideration per share for which shares of Common Stock are issuable pursuant to such warrants, options or rights per the terms of such Convertible Securities shall be irrevocably increased (provided, no remuneration was paid therefor), and such previous adjustment shall be rescinded and annulled and the additional shares of Common Stock which were deemed to have been issued by virtue of the computation made in connection with such adjustment shall no longer be deemed to have been issued by virtue of such computation. Simultaneously therewith, a recomputation shall be made of the effect of such warrants, options or rights or Convertible Securities on the determination of the Aggregate Number, which shall be made on the basis of: 8 (1) treating the number of additional shares of Common Stock, if any, theretofore actually issued pursuant to the previous exercise of such warrants, options or rights or such right of conversion or exchange as having been issued on the date or dates of such exercise and, in the case of a recomputation of a calculation originally made pursuant to Section 6(a)(iv) or (v), for the consideration actually received and receivable therefor, and (2) in the case of a recomputation of a calculation originally made pursuant to Section 6(a)(iv) or (v), treating any such warrants, options or rights or any such Convertible Securities which then remain outstanding as having been granted or issued immediately after the time of such irrevocable increase of the consideration per share for which shares of Common Stock are issuable under such warrants, options or rights or Convertible Securities; and, if and to the extent called for by the foregoing provisions of Section 6(a)(vii) on the basis aforesaid, a new adjustment of the Aggregate Number shall be made, such new adjustment shall supersede the previous adjustment so rescinded and annulled. (viii) Miscellaneous. The following provisions shall be applicable to the making of adjustments of the Aggregate Number provided above in this Section 6(a): (A) The sale or other disposition of any issued shares of Common Stock owned or held by or for the account of the Company or any of its Subsidiaries shall be deemed an issuance thereof for the purposes of this Section 6(a). (B) To the extent that any additional shares of Common Stock or any Convertible Securities or any warrants, options or other rights to subscribe for or purchase any additional shares of Common Stock or any Convertible Securities (1) are issued solely for cash consideration, the consideration received by the Company therefor shall be deemed to be the amount of the cash received by the Company therefor, (2) are offered by the Company for subscription, the consideration received by the Company shall be deemed to be the subscription price or (3) are sold to underwriters or dealers for public offering, the aggregate consideration received by the Company shall be deemed to be the consideration received by the Company therefor, in any such case excluding any amounts paid or receivable for accrued interest or accrued dividends. To the extent that such issuance shall be for a consideration other than cash, or partially for cash and partially for other consideration, then, except as otherwise expressly provided herein, the amount of such consideration shall be deemed to be the fair market value of such other consideration plus, if applicable, the amount of such cash at the time of such issuance, determined in the manner set forth in Section 6(d)(ii). In case any additional shares of Common Stock or any Convertible Securities or any warrants, options or other rights to subscribe for or purchase such additional shares of Common Stock or Convertible Securities shall be issued in connection with any merger in which the Company is the survivor and issues any securities, the amount of consideration therefor shall be deemed to be the fair market value of such additional shares of Common Stock, Convertible Securities, warrants, options or other rights, as the case may be, determined in the manner set forth in Section 6(d)(ii). 9 The consideration for any shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be equal to (x) the consideration received by the Company for issuing any warrants, options or other rights to subscribe for or purchase such Convertible Securities, plus (y) the consideration paid or payable to the Company in respect of the subscription for or purchase of such Convertible Securities, plus (z) the consideration, if any, payable to the Company upon the exercise of the right of conversion or exchange of such Convertible Securities. In case of the issuance at any time of any additional shares of Common Stock or Convertible Securities in payment or satisfaction of any dividends upon any class of stock other than Common Stock, the Company shall, be deemed to have received for such additional shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. (C) The adjustments required by the preceding paragraphs of this Section 6(a) shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that no adjustment of the Aggregate Number that would otherwise be required shall be made (except in the case of a Stock Subdivision or Stock Combination, as provided for in Section 6(a)(i) hereof) unless and until such adjustment either by itself or with other adjustments not previously made adds or subtracts at least one one-hundredth of one share to or from the Aggregate Number immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) shall be carried forward and made as soon as such adjustment, together with other adjustments required by this Section 6(a) and not previously made, would result in a minimum adjustment. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (D) In computing adjustments under this Section 6(a), fractional interests in Common Stock shall be taken into account to the nearest one-thousandth of a share. (E) If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to shareholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. (F) In making any adjustment, at the time of actual exercise of the Warrant, to the extent not already taken into account, securities convertible into capital stock which were not exercisable or in-the-money that are so exercisable and in the money or previously have been exercised shall be taken into account, at the time of the exercise of the Warrant, in the calculation of Fully Diluted shares of Common Stock. (b) Changes in Common Stock. In case at any time the Company shall initiate any transaction or be a party to any transaction (including, without limitation, a merger, consolidation, share exchange, sale, lease or other disposition of all or substantially all of the 10 Company's assets, liquidation, recapitalization or reclassification of the Common Stock) in connection with which the previous Outstanding Common Stock shall be changed into or exchanged for different securities of the Company or capital stock or other securities of another corporation or interests in a non-corporate entity or other property or any combination of the foregoing (each such transaction being herein called a "Transaction"), then, as a condition of the consummation of the Transaction, lawful, enforceable and adequate provision shall be made so that the Holder shall be entitled to elect, by written notice to the Company, to receive (i) a new warrant in form and substance similar to, and in exchange for, this Warrant to purchase all or a portion of such securities or other property or (ii) upon exercise of this Warrant at any time on or after the consummation of the Transaction, in lieu of the Warrant Shares issuable upon such exercise prior to such consummation, the securities or other property to which such Holder would have been entitled upon consummation of the Transaction if such Holder had exercised this Warrant immediately prior thereto (subject to adjustments from and after the consummation date as nearly equivalent as possible to the adjustments provided for in this Section 6). Notwithstanding the foregoing, in the event the Company shall initiate any Transaction or be a party to any Transaction in connection with which the previous Outstanding Common Stock shall be changed into or exchanged for cash, then upon consummation of such transaction, this Warrant shall automatically be converted into the right to receive a cash amount equal to (A) the Aggregate Number (subject to the adjustments provided for in this Section 6) multiplied by (B) the positive difference, if any between the Fair Market Value Per Share and the Exercise Price. The Company will not effect any Transaction unless prior to the consummation thereof each corporation or other entity (other than the Company) which may be required to deliver any new warrant, securities or other property as provided herein shall assume, by written instrument delivered to the Holder, the obligation to deliver to such Holder such new warrant, securities or other property as in accordance with the foregoing provisions such Holder may be entitled to receive and such corporation or entity shall have similarly delivered to the Holder an opinion of counsel for such corporation or entity, satisfactory to the Holder, which opinion shall state that all of the terms of the new warrant or this Warrant shall be enforceable against the Company and such corporation or entity in accordance with the terms hereof and thereof, together with such other matters as the Holder may reasonably request. The foregoing provisions of this Section 6(b) shall similarly apply to successive Transactions. (c) Other Action Affecting Common Stock. In case at any time or from time to time the Company shall take any action of the type contemplated in Section 6(a) or (b) hereof but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features) other than cash bonuses, then, unless in the opinion of the Company's board of directors such action will not have a material adverse effect upon the rights of the Holder (taking into consideration, if necessary, any prior actions which the Board of Directors deemed not to materially adversely affect the rights of the Holder), the Aggregate Number shall be adjusted in such manner and at such time as the Board of Directors of the Company may in good faith determine to be equitable in the circumstances. (d) Notices. (i) Notice of Proposed Actions. In case the Company shall propose (A) to pay any dividend payable in stock of any class to the holders of its Common Stock or to 11 make any other distribution to the holders of its Common Stock, (B) to offer to the holders of its Common Stock rights to subscribe for or to purchase any Convertible Securities or additional shares of Common Stock or shares of stock of any class or any other securities, warrants, rights or options (other than the exercise of pre-emptive rights by a Holder), (C) to effect any reclassification of its Common Stock, (D) to effect any recapitalization, stock subdivision, stock combination or other capital reorganization, (E) to effect any consolidation or merger, share exchange, or sale, lease or other disposition of all or substantially all of its property, assets or business, (F) to effect the liquidation, dissolution or winding up of the Company or (G) to effect any other action which would require an adjustment under this Section 6, then in each such case the Company shall give to the Holder written notice of such proposed action, which shall specify the date on which a record is to be taken for the purposes of such stock dividend, stock subdivision, stock combination, distribution or rights, or the date on which such reclassification, recapitalization, reorganization, consolidation, merger, share exchange, sale, lease, transfer, disposition, liquidation, dissolution, winding up or other transaction is to take place and the date of participation therein by the holders of Common Stock, if any such date is to be fixed, or the date on which the transfer of Common Stock is to occur, and shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action on the Common Stock and on the Aggregate Number after giving effect to any adjustment which will be required as a result of such action. Such notice shall be so given in the case of any action covered by clause (A) or (B) above at least 30 days prior to the record date for determining holders of the Common Stock for purposes of such action and, in the case of any other such action, at least 30 days prior to the earlier of the date of the taking of such proposed action or the date of participation therein by the holders of Common Stock. (ii) Adjustment Notice. Whenever the Aggregate Number is to be adjusted pursuant to this Section 6, unless otherwise agreed by the Holder, the Company shall promptly (and in any event within 10 Business Days after the event requiring the adjustment) prepare a certificate signed by the chief financial officer of the Company, setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment is to be calculated. The certificate shall set forth, if applicable, a description of the basis on which the Board of Directors in good faith determined, as applicable, the Fair Market Value Per Share, the fair market value of any evidences of indebtedness, shares of stock, other securities, warrants, other subscription or purchase rights, or other property or the equitable nature of any adjustment under Section 6(b) or (c) hereof, the new Aggregate Number and, if applicable, any new securities or property to which the Holder is entitled. The Company shall promptly cause a copy of such certificate to be delivered to the Holder. The Company shall keep at its Principal Office copies of all such certificates and cause the same to be available for inspection at said office during normal business hours by the Holder or any prospective purchaser of the Warrant (in whole or in part) if so designated by the Holder. SECTION 28. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, share exchange, dissolution or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, including without limitation the adjustments required under Section 6 hereof, and will at all times in good faith assist in the carrying out of all such terms and in taking of all such action as may be necessary or appropriate to protect the rights of the Holder against dilution or other impairment. Without 12 limiting the generality of the foregoing and notwithstanding any other provision of this Warrant to the contrary (including by way of implication), the Company (a) will not increase the par value of any shares of Common Stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise or (b) will take all such action as may be necessary or appropriate so that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock on the exercise of this Warrant. SECTION 29. TRANSFERS OF THE WARRANT. (a) Generally. Subject to the restrictions set forth in this Section 8, the Holder may at any time and from time to time freely transfer this Warrant and the Warrant Shares in whole or in part. This Warrant and the Warrant Shares are issued or issuable subject to the provisions and conditions contained herein, and every Holder hereof by accepting the same agrees with the Company to such provisions and conditions, and represents to the Company that this Warrant has been acquired and the Warrant Shares will be acquired for the account of the Holder for investment and not with a view to or for sale in connection with any distribution thereof. (b) Compliance with Securities Laws. The Holder agrees that the Warrant and the Warrant Shares may not be sold or otherwise disposed of except pursuant to an effective registration statement under the Securities Act and applicable state securities laws or pursuant to an applicable exemption from the registration requirements of the Securities Act and such state securities laws. In the event that the Holder transfers this Warrant or the Warrant Shares pursuant to an applicable exemption from registration, the Company may request, at its expense, an opinion of counsel that the proposed transfer does not violate the Securities Act and applicable state securities laws. It is expressly acknowledged that the Warrant Shares are Registrable Securities, within the meaning of that certain Registration Rights Agreement, dated as of November 30, 2003, by and among the Company, Chelsey Direct, LLC and Stuart Feldman. (c) Restrictive Securities Legend. The certificate representing the shares of Common Stock issued upon the exercise of the Warrant shall bear the restrictive legend set forth below: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or the securities laws of any State and may not be sold or otherwise disposed of except pursuant to an effective registration statement under such Act and applicable State securities laws or pursuant to an applicable exemption from the registration requirements of such Act and such laws." SECTION 30. DEFINITIONS. As used herein, in addition to the terms defined elsewhere herein, the following terms shall have the following meanings. 13 "Affiliate" means, with respect to any Person, a Person (a) directly or indirectly controlling, controlled by, or under common control with, such Person, (b) directly or indirectly owning or holding ten percent (10%) or more of any equity interest in such Person or (c) ten percent (10%) or more of whose voting stock or other equity interest is directly or indirectly owned or held by such Person. For purposes of this definition, "control" (including with correlative meanings, the terms "controlling," controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Aggregate Number" has the meaning set forth in the Preamble. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in The City of New York, New York are authorized or required by law or executive order to close. "Capital Stock" means (i) with respect to any Person that is a corporation, any and all shares, interests or equivalents in capital stock (whether voting or nonvoting, and whether common or preferred) of such corporation, and (ii) with respect to any Person that is not a corporation, any and all partnership, membership, limited liability company or other equity interests of such Person that confer on a Person the right to receive a share of the profits and losses of, or the distribution of assets of, the issuing Person; and in each case, any and all warrants, rights or options to purchase any of the foregoing. "Certificate of Incorporation" means, as to a Person, unless the context in which it is used shall otherwise require, the Certificate of Incorporation (or equivalent or similar organizational documents) of such Person as in effect on the Commencement Date. "Commencement Date" has the meaning set forth in the Preamble. "Commission" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Common Stock" means the common stock, par value $0.01 per share, of the Company or any other Capital Stock of the Company into which such stock is reclassified or reconstituted. "Company" has the meaning set forth in the Preamble. "Convertible Securities" means evidences of indebtedness, shares of stock or other securities (including, but not limited to options and warrants) which are directly or indirectly convertible, exercisable or exchangeable, with or without payment of additional consideration in cash or property, for shares of Common Stock, either immediately or upon the onset of a specified date or the happening of a specified event. "Distribution" has the meaning set forth in Section 6(a)(ii). "Election to Purchase" has the meaning set forth in Section 2(a). 14 "Exempt Issuances" has the meaning set forth in Section 6. "Exercise Amount" has the meaning set forth in Section 2(a). "Exercise Price" has the meaning set forth in the Preamble. "Expiration Date" has the meaning set forth in the Preamble. "Fair Market Value Per Share" means, per share of Common Stock, the Twenty Day Average of the average closing prices of the Common Stock's sales on all domestic securities exchanges on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ National Market System (including the NASDAQ Small Cap Market) as of 4:00 P.M., New York City time, on such day, or, if on any day the Common Stock is not quoted in the NASDAQ National Market System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the OTC Bulletin Board, or if not so reported, by the Pink Sheets LLC, or any similar or successor organization (and in each such case excluding any trades that are not bona fide, arm's length transactions). If at any time the Common Stock is not listed on any domestic securities exchange or quoted in the NASDAQ National Market System or the domestic over-the-counter market, the "Fair Market Value Per Share" of the Common Stock shall be the fair market value thereof as determined (i) jointly by the Company and the Holder or (ii) if Company and the Holder cannot so agree, by a nationally recognized investment banking firm selected by the Holder and reasonably acceptable to the Company. "Fully Diluted" means, with respect to the Common Stock as of a particular time (taking into account the transaction in respect of which the "Fully Diluted" basis is being calculated at such time), the total number of outstanding shares of Common Stock as of such time as determined by treating all outstanding and then exercisable options, warrants and other rights for the purchase or other acquisition of Common Stock as having been exercised and by treating all outstanding Convertible Securities which at the time of such calculation may be converted as having been so converted. "Holder" or "Holders" means any holder of an interest in the Warrant or the outstanding Warrant Shares. "Junior Secured Term Loan Agreement" means that certain Loan and Security Agreement, dated as July 8, 2004, by and among Chelsey Finance, LLC, Hanover Direct, Inc. and the other borrowers named therein, as the same may be amended, modified, supplemented or restated. "Outstanding Common Stock" of the Company means, as of the date of determination, the sum (without duplication) of the following: (a) the number of shares of Common Stock then outstanding at the date of determination, (b) the number of shares of Common Stock then issuable upon the exercise of the Warrant (as such number of shares may be adjusted pursuant to the terms hereof) and (c) the number of shares of Common Stock then issuable upon the exercise or conversion of Convertible Securities and any warrants, options or other rights to subscribe for 15 or purchase Common Stock or Convertible Securities (but excluding any unvested options and securities not then exercisable for or convertible into Common Stock). "Person" means any individual, firm, corporation, partnership, limited liability company, joint venture, incorporated or unincorporated association, joint stock company, governmental authority, or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Principal Office" means the Company's principal office as set forth in Section 14 hereof or such other principal office of the Company in the United States of America, the address of which first shall have been set forth in a notice to the Holder. "Regulatory Requirement" has the meaning set forth in Section 5(c). "Reverse Stock Split" means the one for ten reverse stock split voted upon by the stockholders of the Company at its August 12, 2004 meeting of stockholders, as the same may be adjourned to a later date which stock split has already been reflected in this issuance. "Securities Act" means the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations thereunder as the same shall be in effect at the time. "Stock Combination" has the meaning set forth in Section 6(a)(i)(C). "Stock Dividend" has the meaning set forth in Section 6(a)(i)(A). "Stock Subdivision" has the meaning set forth in Section 6(a)(i)(B). "Subsidiary(ies)" means, with respect to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. "Transaction" has the meaning set forth in Section 6(b). "Twenty Day Average" means, with respect to any prices and in connection with the calculation of Fair Market Value Per Share, the average of such prices over the twenty Business Days ending on the Business Day immediately prior to the day as of which "Fair Market Value Per Share" is being determined. "Warrant" has the meaning set forth in Section 1(a). "Warrant Securities" means the Warrant and the Warrant Shares, collectively. "Warrant Shares" means (a) the shares of Common Stock issued or issuable upon exercise of this Warrant in accordance with its terms and (b) all other shares of the Company's 16 capital stock issued with respect to such shares by way of stock dividend, stock split or other reclassification or in connection with any merger, consolidation, recapitalization or other reorganization affecting the Company's capital stock. SECTION 31. SURVIVAL OF PROVISIONS. Notwithstanding the full exercise by the Holder of its rights to purchase Common Stock hereunder, the provisions of Sections 5(c), 5(d) and 11 through 21 of this Warrant shall survive such exercise and the Expiration Date. SECTION 32. DELAYS, OMISSIONS AND INDULGENCES. It is agreed that no delay or omission to exercise any right, power or remedy accruing to the Holder upon any breach or default of the Company under this Warrant shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the Holder's part of any breach or default under this Warrant, or any waiver on the Holder's part of any provisions or conditions of this Warrant must be in writing and that all remedies, either under this Warrant, or by law or otherwise afforded to the Holder, shall be cumulative and not alternative. SECTION 33. RIGHTS OF TRANSFEREES. The rights granted to the Holder hereunder of this Warrant shall pass to and inure to the benefit of all subsequent transferees of all or any portion of the Warrant (provided that the Holder and any transferee shall hold such rights in proportion to their respective ownership of the Warrant and Warrant Shares) until extinguished pursuant to the terms hereof. SECTION 34. CAPTIONS. The titles and captions of the Sections and other provisions of this Warrant are for convenience of reference only and are not to be considered in construing this Warrant. SECTION 35. NOTICES. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopy, overnight courier service or personal delivery: (a) if to the Company: Hanover Direct, Inc. 115 River Road, Building 10 Edgewater, New Jersey 07020 Attention: Chief Financial Officer Facsimile No.: (201) 272-3465 with a copy to: Brown Raysman Millstein Felder & Steiner LLP 900 Third Avenue New York, New York 10022 17 Attention: Sarah Hewitt, Esq. Facsimile No.: (212) 895-2900 (b) if to the Holder: Chelsey Direct, LLC 712 Fifth Avenue, 45th Floor New York, New York 10019 Attention: Stuart Feldman Facsimile No.: (212) 765-3112 with a copy to: Swidler Berlin Shereff Friedman, LLP 405 Lexington Avenue New York, New York 10174 Attention: Richard A. Goldberg, Esq. Facsimile No.: (212) 891-9598 All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial overnight courier service; five Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. SECTION 36. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon and inure to the benefit of the parties hereto and their respective successors or heirs and personal representatives and permitted assigns; provided, that the Company shall have no right to assign its rights, or to delegate its obligations, hereunder without the prior written consent of the Holder. SECTION 37. GOVERNING LAW. THIS WARRANT IS TO BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK AND WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE. SECTION 38. JURISDICTION, JURY TRIAL WAIVER, ETC. (a) THE COMPANY AND THE HOLDER HEREBY IRREVOCABLY AGREE THAT ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS WARRANT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND EACH HEREBY EXPRESSLY SUBMITS TO THE PERSONAL JURISDICTION AND VENUE OF SUCH COURTS FOR THE PURPOSES THEREOF AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND ANY CLAIM THAT SUCH COURTS ARE AN INCONVENIENT FORUM. THE COMPANY AND THE HOLDER EACH HEREBY IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN THIS 18 AGREEMENT, SUCH SERVICE TO BECOME EFFECTIVE 10 DAYS AFTER SUCH MAILING. (b) THE COMPANY AND THE HOLDER EACH HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS WARRANT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. THE COMPANY (I) CERTIFIES THAT NO HOLDER OR ATTORNEY OR OTHER REPRESENTATIVE OF THE HOLDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE HOLDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (II) ACKNOWLEDGES THAT THE HOLDER HAS BEEN INDUCED TO PURCHASE THIS WARRANT BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED HEREIN. (c) FINAL JUDGMENT AGAINST THE COMPANY, IN ANY ACTION, SUIT OR PROCEEDING HEREUNDER SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER JURISDICTIONS (I) BY SUIT, ACTION, OR PROCEEDING ON THE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ANY LIABILITY OF THE COMPANY THEREIN DESCRIBED OR (II) IN ANY OTHER MANNER PROVIDED BY OR PURSUANT TO THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED, HOWEVER, THAT ANY HOLDER MAY AT ITS OPTION BRING SUIT, OR INSTITUTE OTHER JUDICIAL PROCEEDING, TO ENFORCE A FINAL JUDGMENT AGAINST THE COMPANY OR ANY OF ITS PROPERTIES IN THE STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE COMPANY OR ITS PROPERTIES MAY BE FOUND. SECTION 39. SEVERABILITY. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. The parties hereto further agree to replace such invalid, illegal or unenforceable provision of this Warrant with a valid, legal and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such invalid, illegal or unenforceable provision. SECTION 40. ENTIRE AGREEMENT. This Warrant contains the entire agreement among the parties with respect to the subject matter hereof and thereby supercedes all prior and contemporaneous agreements or understandings with respect thereto. SECTION 41. HEADINGS. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. SECTION 42. NO STRICT CONSTRUCTION. The Company and the Holder each acknowledge that they have been represented by counsel in connection with this Warrant. The Company and 19 the Holder have participated jointly in the negotiation and drafting of this Warrant. In the event an ambiguity or question of intent or interpretation arises under any provision of this Warrant, this Warrant shall be construed as if drafted jointly by the parties thereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Warrant. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 20 IN WITNESS WHEREOF, the Company has caused this Warrant to be issued and executed in its corporate name by its duly authorized officers as of the date below written. DATED: [______], 2004 HANOVER DIRECT, INC. By: _______________________________ Name: Wayne P. Garten Title: President and Chief Executive Officer ATTEST: By:___________________________ Name: Charles E. Blue Title: Senior Vice President and Chief Financial Officer EXHIBIT A NOTICE OF EXERCISE To: ____________________________ ____________________________ ____________________________ ____________________________ 1. The undersigned, pursuant to the provisions of the attached Warrant, hereby elects to exercise this Warrant with respect to ________ shares of Common Stock (the "Exercise Amount"). Capitalized terms used but not otherwise defined herein have the meanings ascribed thereto in the attached Warrant. 2. The undersigned herewith tenders payment for such shares in the following manner (please check type, or types, of payment and indicate the portion of the Exercise Price to be paid by each type of payment): _____ Exercise for Cash _____ Cashless Exercise 3. Please issue a certificate or certificates representing the shares issuable in respect hereof under the terms of the attached Warrant, as follows: _____________________________________ (Name of Record Holder/Transferee) and deliver such certificate or certificates to the following address: _____________________________________ (Address of Record Holder/Transferee) 4. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. 5. If the Exercise Amount is less than all of the shares of Common Stock purchasable hereunder, please issue a new warrant representing the remaining balance of such shares, as follows: _____________________________________ (Name of Record Holder/Transferee) and deliver such warrant to the following address: _____________________________________ (Address of Record Holder/Transferee) _____________________________________ (Signature) _____________________________________ (Date) 2 EXHIBIT B NOTICE OF EXERCISE To: ________________________________ ________________________________ ________________________________ ________________________________ 1. The undersigned, pursuant to the provisions of the attached Warrant, hereby elects to exercise this Warrant with respect to ________ shares of Series D Preferred Stock (the "Exercise Amount"). Capitalized terms used but not otherwise defined herein have the meanings ascribed thereto in the attached Warrant. 2. The undersigned herewith tenders payment for such shares in the following manner (please check type, or types, of payment and indicate the portion of the Exercise Price to be paid by each type of payment): _____ Exercise for Cash _____ Cashless Exercise 3. Please issue a certificate or certificates representing the shares issuable in respect hereof under the terms of the attached Warrant, as follows: _____________________________________ (Name of Record Holder/Transferee) and deliver such certificate or certificates to the following address: _____________________________________ (Address of Record Holder/Transferee) 4. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. 5. If the Exercise Amount is less than all of the shares of Series D Preferred Stock purchasable hereunder, please issue a new warrant representing the remaining balance of such shares, as follows: _____________________________________ (Name of Record Holder/Transferee) and deliver such warrant to the following address: _____________________________________ (Address of Record Holder/Transferee) _____________________________________ (Signature) _____________________________________ (Date) 2 EX-99.1 7 y98976exv99w1.txt PRESS RELEASE (HANOVER DIRECT LOGO) FOR IMMEDIATE RELEASE CONTACT: Hanover Direct, Inc. The MWW Group Charles Blue Rich Tauberman S.V.P. & Chief Financial Officer Tel: (201) 507-9500 Tel: (201) 272-3389 HANOVER DIRECT ANNOUNCES THE CLOSING AND FUNDING OF A NEW LOAN FACILITY AND AN AMENDMENT OF ITS EXISTING CREDIT FACILITY INCREASING LIQUIDITY BY APPROXIMATELY $25 MILLION EDGEWATER, NJ, July 12, 2004 - Hanover Direct, Inc. (AMEX: HNV) today announced that it has closed and funded into a $20 million junior secured term loan facility with Chelsey Finance, LLC, an affiliate of its controlling shareholder, Chelsey Direct LLC. The Term Loan Facility is for a three-year term, subject to earlier maturity upon the occurrence of a change in control or sale of the Company, and carries an interest rate of 5% above the prime rate publicly announced by Wachovia Bank, N.A., payable currently. The Term Loan Facility is secured by a second priority lien on the assets of the Company. In connection therewith, Chelsey Finance concurrently entered into an intercreditor and subordination agreement with the Company's senior secured lender, Congress Financial Corporation. In consideration for providing the Term Loan Facility to the Company, Chelsey Finance received a closing fee, which was paid in cash, and will receive a warrant to purchase 30% of the fully diluted shares of common stock of the Company. Pending shareholder approval of such issuance, Chelsey Finance received a warrant to purchase a newly-issued series of nonvoting preferred stock of the Company that will be automatically exchanged for such common stock warrant upon the receipt of shareholder approval of the issuance thereof, which is anticipated at the Company's 2004 Annual Meeting of Shareholders scheduled for August 12, 2004. In connection with the closing of the Term Loan Facility, Chelsey Direct received a waiver fee payable in common stock of the Company in consideration for the waiver by Chelsey Direct of its blockage rights over the issuance of senior securities. The terms of the Term Loan Facility with Chelsey Finance were approved by the Company's Audit Committee, all of whose members are independent, and the Company's Board of Directors. Concurrently with the closing of the Term Loan Facility with Chelsey Finance, the Company amended its existing senior credit facility with Congress to (1) release certain existing availability reserves and remove the excess loan availability covenant, increasing availability to the Company by approximately $10 million, (2) reduce the amount of the maximum credit, the revolving loan limit and the inventory and accounts sublimits of the borrowers, (3) defer for three months the payment of principal with respect to the Tranche A Term Loan, (4) modify certain provisions of the Congress Credit Facility with respect to asset sales and the application of proceeds thereof by borrowers, (5) extend the term of the Congress Credit Facility until July 8, 2007, and (6) permit the secured indebtedness to Chelsey Finance arising under the Term Loan Facility and certain other transactions in connection with th Term Loan Facility. The amendment required the payment of fees to Congress. Together, these two arrangements have increased the Company's liquidity by approximately $25 million. Proceeds from the Term Loan Facility with Chelsey Finance have been used to repay the Tranche B Term Loan of approximately $4.9 million under the Congress Credit Facility and to pay fees and expenses in connection with the two transactions and will provide ongoing working capital for the Company. ABOUT HANOVER DIRECT, INC. Hanover Direct, Inc. (AMEX: HNV) and its business units provide quality, branded merchandise through a portfolio of catalogs and e-commerce platforms to consumers, as well as a comprehensive range of Internet, e-commerce, and fulfillment services to businesses. The Company's catalog and Internet portfolio of home fashions, apparel and gift brands include Domestications, The Company Store, Company Kids, Silhouettes, International Male, Scandia Down, and Gump's By Mail. The Company owns Gump's, a retail store based in San Francisco. Each brand can be accessed on the Internet individually by name. Keystone Internet Services, LLC (www.keystoneinternet.com), the Company's third party fulfillment operation, also provides the logistical, IT and fulfillment needs of the Company's catalogs and web sites. Information on Hanover Direct, including each of its subsidiaries, can be accessed on the Internet at www.hanoverdirect.com. -----END PRIVACY-ENHANCED MESSAGE-----